I.T. Assets, Organizational Capabilities and Firm Performance: Do Resource Allocations and Organizational Differences Explain Performance Variation?

Organization Science, Forthcoming

MIT Sloan Research Paper No. 4632-06

30 Pages Posted: 16 Feb 2006 Last revised: 24 Feb 2015

Sinan Aral

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Peter Weill

Massachusetts Institute of Technology (MIT) - Center for Information Systems Research (CISR)

Date Written: July 1, 2007

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 variation: differences in firms' IT investment allocations and IT capabilities. We develop 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 hypothesize that firms derive additional value per IT dollar through a mutually reinforcing system of organizational IT capabilities built on complementary practices and competencies. 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 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 returns to IT capital across firms and expand our understanding of alignment between IT and organizations. We illustrate our findings with examples from a case study of 7-Eleven Japan.

Keywords: Business Value of Information Technology, Information Technology Assets, Resource Based Theory, Complementarities, IT Infrastructure, IT Capabilities, IT Practices, Firm Performance

Suggested Citation

Aral, Sinan and Weill, Peter, I.T. Assets, Organizational Capabilities and Firm Performance: Do Resource Allocations and Organizational Differences Explain Performance Variation? (July 1, 2007). Organization Science, Forthcoming; MIT Sloan Research Paper No. 4632-06. Available at SSRN: https://ssrn.com/abstract=882088

Sinan Aral (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States

Peter Weill

Massachusetts Institute of Technology (MIT) - Center for Information Systems Research (CISR) ( email )

Sloan School of Management
5 Cambridge Center, NE25-775
Cambridge, MA 02142
United States
617-253-2930 (Phone)
617-253-4424 (Fax)

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