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

Despite evidence of a positive relationship between information technology (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 their 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 to 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 JapanNYU, Stern School of Business, IOMS department, Center for Digital Economy Researc

State Street Corporation: Evolving IT Governance

State Street, a world leader in financial services, has more than 20 entrepreneurial business units which continually identify customer needs and create new products and services, usually heavily IT dependent, often leading their industry in time to market. To enable these businesses, State Street invests between 20 and 25% of total operating expenses in technology and technologists. To maximize the business value from these IT investments requires the creation of an IT governance framework that harmonizes all IT governance mechanisms (e.g., committees, IT organization structure, approval processes) to maximize return from the IT investment. This case explores how State Street redesigned its IT governance to enable a major change in the firm's strategy

THE USE OF STRATEGIC INFORMAT[ON TECHNOLOGY BY ENTREPRENEURIAL FIRMS

This paper reports the findings of an exploratory study of sixty-five firms investigating the relationship between entrepreneurial firms and their use of strategic information technology. Younger, smaller, more entrepreneurial firms tended to focus on niche markets and were more concerned with sales growth and technical excellence than profitability. There was weak evidence that the more entrepreneurial firms adopted strategic information technology earlier than other firms and used the technology more consistently over the six years studied

AN EMPIRICAL INVESTIGATION OF THE RELATIONSHIP BETWEEN FIRM PERFORMANCE AND SYSTEM SUCCESS

This study investigates the relationship between system success as operationalized by user information satisfaction (UIS) and various economic measures of firm performance. The findings indicate a significant positive but complex relationship between firm performance and UIS. In particular, we found that it is inappropriate to aggregate UIS scores across individuals within a firm. The CEO, Controller, and Production Manager within a firm tended to have quite different UIS scores, resulting in low interrater reliabilities. We also found, that the association between a respondent's UIS score and the measures of firm performance depended heavily on the position of the respondent and the particular performance measure employed.Information Systems Working Papers Serie

AN ASSESSMENT OF THE CONTINGENCY THEORY OF MIS

The purpose of this paper is to define and critique the use of contingency theory in the field of Management Information Systems (MIS). The existence of such a theory is demonstrated through a detailed review of the MIS literature. The development of contingency theory in MIS is compared to the development of Organization Theory. The developments in the two fields have been remarkably similar and the field of MIS can benefit from the experiences of organization theorists. We argue that since MIS is at an early stage of development, it is now repeating some of the unproductive assumptions and lines of development of contingency theory. The conclusion from this analysis is that the contingency theory implicit in MIS research is inadequate. Progress in the field has been hampered by the adoption of a naive meta-theory and a narrow research perspective. This has resulted in highly mixed empirical results, a premature quantification strategy, and ill-defined concepts of performance and fit. A series of recommendations for improving the theoretical basis of MIS are given. These recommendations include relaxing the assumptions that constitute the naive meta-theory of a contingency theory in MIS. A more subjectivist, less functional, less unreflexive and less deterministic approach is advocated. In addition, changes in research methodologies are recommended. An increased emphasis on training in case study methodologies, longitudinal research and ethnographic approaches is suggested.Information Systems Working Papers Serie

ON THE STATE-OF-THE-ART: METHODS FOR EVALUATING THE PERFORMANCE EFFECTS OF INVESTMENTS IN INFORMATION TECHNOLOGY

IT creates impacts at several levels in the firm and often indirectly contributes to firm profitability. The problem IS researchers face is identifying robust methods that give reliable results. This paper reports on state-of-the-art methods in IT value research, reviews eleven major empirical studies and suggests three fundamental classes of considerations for conducting successful IT value research. To illustrate methodological advance, new results are presented from two recently completed IT value studies in financial services and manufacturing. The paper concludes by suggesting untapped theory bases that have the most to offer IT value research.Information Systems Working Papers Serie

INVESTMENT IN INFORMATION TECHNOLOGY AND ORGANIZATIONAL PERFORMANCE

Information technology (IT) is essential to many businesses, but there are few guidelines for determining the adequate level of investment in IT. The purpose of this paper is to further understanding of the mechanism of IT investment. Previous studies on IT investment are briefly presented. The authors performed six-mini case studies of large companies in five different industries; these studies addressed the questions of how firms define IT and how they manage their investment in IT. Our goal was to formulate a model of the relationship between IT investment and organizational performance. We present the model and pose questions for investigating this important relationship more closely. Findings of interest relate to the definition of IT, the importance of political considerations, the concept of an industry-based threshold investment, the conversion effectiveness of IT investment, and the concept of productive capacity. The most important finding relates to the separation of different types of IT investment and their logical matching to particular performance measures.Information Systems Working Papers Serie

AN EVALUATIVE FRAMEWORK FOR RESEARCH ON THE PERFORMANCE EFFECTS OF INFORMATION TECHNOLOGY INVESTMENT

Firms today invest enormous resources in information technology with the hope of gaining significant returns which will impact their performance. A growing body of research into the firm performance effects of IT investment has emerged and is sometimes referred to as IT business value reseakh. The problem researchers face is identifying robust methods to gain insight into how IT business value is created. This paper reports on the state of IT business value research by reviewing thirteen empirical studies. It also proposes a new evaluative framework to identify strengths and weaknesses in this research. The paper concludes with a series of recommendations to improve the quality of future IT business value research

Management Commitments that Maximize Business Impact from IT

A long-standing question for both IT research and management practice has been: how can IT be used in organizations to increase firm performance? IT researchers have provided many candidate capabilities that impact business and financial performance, including enterprise architecture, IT governance, IT metrics, top management engagement, IT-business alignment, and business and IT unit capabilities. However, based on a series of case studies, we propose that a limited number of enterprise commitments are key to maximizing business value from IT. We demonstrate, via a survey of 221 respondents in publicly traded firms, that these commitments are positively correlated to Business Impact from IT, which in turn correlates with higher financial performance