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

Despite evidence of a positive relationship between informationtechnology (IT) investments and firm performance, results still varyacross firms and performance measures. We explore two organizationalexplanations for this variation: differences in firms’ ITinvestment allocations and their IT capabilities. We develop atheoretical model of IT resources, defined as the combination ofspecific IT assets and organizational IT capabilities. We argue thatinvestments into different IT assets are guided by firms’strategies (e.g., cost leadership or innovation) and deliver value alongperformance dimensions consistent with their strategic purpose. Wehypothesize that firms derive additional value per IT dollar through amutually reinforcing system of organizational IT capabilities built oncomplementary practices and competencies. Empirically, we test theimpact of IT assets, IT capabilities, and their combination on fourdimensions of firm performance: market valuation, profitability, cost,and innovation. Our results—based on data on IT investmentallocations and IT capabilities in 147 U.S. firms from 1999 to2002—demonstrate that IT investment allocations and organizationalIT capabilities drive differences in firm performance. Firms’total IT investment is not associated with performance, but investmentsin specific IT assets explain performance differences along dimensionsconsistent with their strategic purpose. In addition, a system oforganizational IT capabilities strengthens the performance effects of ITassets and broadens their impact beyond their intended purpose. Theresults help explain variance in returns to IT capital across firms andexpand our understanding of alignment between IT and organizations. Weillustrate our findings with examples from a case study of 7-Eleven Japan