Skip to content

IT Assets, Organizational Capabilities and Firm Performance: Do Resource Allocations and Organizational Differences Explain Performance Variation?

Title Author(s) Type Topic(s) Comments Date
IT Assets, Organizational Capabilities and Firm Performance: Do Resource Allocations and Organizational Differences Explain Performance Variation?Aral, Sinan
Weill, Peter
Working PaperIT Investment and Portfolio Management02006-08-16
Abstract: Despite evidence of a positive relationship between IT investments and firm performance, results still vary across firms and performance measures. We explore two organizational explanations for this performance variation: differences in firms' IT investment allocations and IT capabilities. Using five case studies, we build a theoretical model of IT resources, defined as the combination of specific IT assets and organizational IT capabilities. We argue that investments into different IT assets are guided by firms' strategies (e.g., cost leadership or innovation), and deliver value along performance dimensions consistent with their strategic purpose. We also hypothesize that firms derive additional value per IT dollar by having specific organizational IT capabilities. Empirically, we test the impact of IT assets, IT capabilities and their combination on four dimensions of firm performance: market valuation, profitability, cost and innovation. Our results, based on firm-level data on IT investment allocations and IT capabilities in 147 U.S. firms from 1999-2002, demonstrate that IT investment allocations and organizational IT capabilities drive differences in firm performance. Firms' total IT investment is not associated with performance, but investments in specific IT assets explain performance differences along dimensions consistent with their strategic purpose. In addition, a system of organizational IT capabilities strengthens the performance effects of IT assets and broadens their impact beyond their intended purpose. The results help explain variance in the returns to IT capital across firms and expand our understanding of alignment between IT and organizations. We illustrate our findings with examples from our case study of 7-Eleven Japan.

Log in to download this publication.

Search all publications.

Discussion

Post your comment

No comments yet.

RSS feed for comments on this post.

You must be logged in to post a comment.