SSRN 882088

CENTER FOR Massachusetts
INFORMATION Institute of
SYSTEMS Technology
RESEARCH
Sloan School Cambridge
of Management Massachusetts
IT Assets, Organizational Capabilities and Firm

Performance: Do Resource Allocations and
Organizational Differences Explain Performance
Variation?
Sinan Aral and Peter Weill
August 2006 (Revised July 2007)
CISR WP No. 360 and MIT Sloan WP No. 4632-06
© 2007 Massachusetts Institute of Technology. All rights reserved.
Research Article: a completed research article drawing on one or

more CISR research projects that presents management frameworks,
findings and recommendations.
Research Summary: a summary of a research project with
preliminary findings.
Research Briefings: a collection of short executive summaries of key
findings from research projects.
Case Study: an in-depth description of a firm’s approach to an IT
management issue (intended for MBA and executive education).
Technical Research Report: a traditional academically rigorous
research paper with detailed methodology, analysis, findings and
references.
CISR Working Paper No. 360
Title: IT Assets, Organizational Capabilities and Firm Performance:

Do Resource Allocations and Organizational Differences Explain
Performance Variation?
Author: Sinan Aral and Peter Weill
Date: August 2006 (Revised July 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 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.
Keywords: Business Value of Information Technology, Information Technology Assets,

Resource Based Theory, Complementarities, IT Infrastructure, IT Capabilities, IT Practices,
Firm Performance.
27 Pages
IT Assets, Organizational Capabilities and Firm
Performance: Do Resource Allocations and Organizational
Differences Explain Performance Variation
Sinan Aral, Phd. Student, MIT Sloan School of Management
Peter Weill, Director, CISR, MIT Sloan School of Management
1. Introduction
For over a decade, research has attempted to untangle the relationship between information
technology (IT), productivity and organizational performance. Early results uncovered a
‘paradox’ in the relationship (Loveman 1994, Strassman 1990) that has subsequently been
explained by both substantive and methodological considerations (Bakos 1991, Dos Santos et al.
1993, Brynjolfsson & Hitt 1996). Recently, more precise measurements have demonstrated a
convincing (albeit varied) positive relationship between IT investments, economic productivity
and business value across distinct measures (Brynjolfsson & Hitt 1996, Dewan & Min 1997,
Bharadwaj, Bharadwaj & Konsynski 1999). While this research provides evidence of a general
relationship between IT and organizational performance, our knowledge of the specific factors
driving these general results remains quite limited. In this paper we address two important
questions that remain unanswered.
First, returns to IT investments exhibit substantial variation across firms. Large sample statistical
evidence demonstrates that nearly half of the productivity benefits originally attributed to IT
capital can be more accurately explained by firm specific factors (e.g. Brynjolfsson & Hitt 1995).
These results imply the existence of a set of organizational characteristics that are simultaneously
positively correlated with IT investment and organizational performance. Some firms simply
derive greater value per IT dollar even when controlling for industry level variation. But, what
types of organizational characteristics explain this variation? To address this question, we open
the black box of the organization to examine what types of organizational factors and
management practices contribute to a firm’s ability to generate business value from IT. Second,
the majority of firm level analysis measures IT in the aggregate. In contrast, we know little about
the relative performance contributions of different types of IT investments, and whether different
IT investments impact different aspects of firm performance. One explanation for why two firms
with the same amount of IT capital perform differently is that they are investing in different
types of technology with different goals. We therefore conceptualize IT as four distinct types of
assets, implemented to achieve different management objectives, and test their relative
performance effects.
We explore these questions using data from 147 firms over 4 years and illustrate the results using
qualitative evidence from a case study of 7-Eleven Japan. We find that investments in a
particular IT asset class deliver higher performance only along dimensions consistent with the
strategic purpose of that asset. For example, investments in transactional IT applications, made to
reduce costs in standard, repetitive processes, are associated with lower costs but not with more
firm-level product innovation. In contrast, investments in strategic IT applications are associated
with more product innovation, but not with lower costs. These results suggest that a monolithic
The authors gratefully acknowledge this research has been generously supported by grants from the CISE/IIS/CSS
Division of the U.S. National Science Foundation (#0085725) and by the MIT Center for Information Systems
Research (CISR). We thank Nils Fonstad, Steve Kahl, George Westerman and seminar participants at Boston
University and MIT for many valuable comments.
© 2007 MIT Sloan—Aral & Weill Page 1
view of IT may obscure the importance of resource allocations within the IT function by
focusing on the performance implications of firms’ total IT capital stock. We also find evidence
for complementarities between IT and a system of organizational IT capabilities (ITC). IT
investments and organizational IT capabilities co-vary significantly in our sample, demonstrating
that firms high in IT intensity develop IT related organizational capabilities and firms with strong
IT capabilities demand more IT. Firms with stronger organizational IT capabilities also derive
greater value per IT dollar. We find that ITC both strengthens intended performance effects, and
broadens the impact of investments in particular IT assets beyond their intended performance
goals. Our findings demonstrate the importance of pursuing more detailed and disaggregated
measures of IT intensity, organizational IT capabilities and firm performance in IS research.
2. Theory and Literature

2.1 The Resource Based Theory of the Firm
Recent research on the relationship between IT and organization describes systems of
organizational practices that complement IT. One theoretical perspective that convincingly
addresses the complementarity of IT and organizational processes, practices, routines and
activities is the resource based theory of the firm (Wernerfelt 1984, Barney 1991). The resource
based theory argues that durable competitive advantage emerges from unique combinations of
resources (Grant 1996) that are economically valuable, scarce and difficult to imitate (Barney
1991). As these resources are imperfectly mobile across firm boundaries and because firms
pursue different strategies in deploying these resources, they are likely to be heterogeneously
distributed across firms. Firm resources are insulated from competitive imitation by path
dependencies, embeddedness, casual ambiguity about the source of competitive advantage and
time diseconomies of imitation (Barney 1991; Mata, Fuerst & Barney 1995). These
heterogeneously distributed and difficult to imitate resources in part drive differences in firm
performance.
From this perspective, there are compelling theoretical reasons for investigating how firms
allocate investments across different types of IT assets. The resource based view separates stocks
of undifferentiated factors of production from resources, defined as the combination of firm
specific assets (Wernerfelt 1984) and organizational capabilities (Richardson 1972, Nelson and
Winter 1982, Dosi, Nelson & Winter 2000). The dynamic capabilities framework (Teece et al.
1997), which extends the resource-based view to incorporate environmental and technological
change, stresses the importance of tangible and intangible “specific asset positions” in shaping
firm resources. Teece et al. (1997: 522-523) argue that “a firm’s previous investments and
repertoire of routines constrain its future behavior;” and that “opportunities for learning will be
‘close in’ to previous activities and thus will be transaction and production specific.” Taken
together, these theoretical treatments of resources, assets and capabilities imply that firms invest
in particular types of resources and learn how to use those resources over time by developing
asset specific skills and accompanying routines (Cohen & Levinthal 1990). Resources are
difficult to imitate in part because firms are unaware of their competitors’ resource allocations
and how they contribute to performance (causal ambiguity), and because capability development
and learning opportunities are tied to firms’ specific asset positions (path dependencies)
(Dierickx & Cool 1989). If learning and behavior inside firms are shaped by specific asset
positions, then firms that spend more heavily on particular assets should display abnormally
higher performance in measures that reflect the goals of those assets as they learn how to deploy

them with complementary organizational processes. We argue that investment allocations and
organizational differences help shape the heterogeneous IT resources firms develop and explain
variation in firm performance. We empirically distinguish assets, defined as investments in
different types of IT, from capabilities, defined as practices and competencies that support the
use of IT.
2.2 The Resource Based Theory of IT

While the resource based view provides a helpful theoretical perspective from which to evaluate
the heterogeneity of firm performance, the existing IT literature suffers from ambiguity in the
definition and conceptualization of IT resources (Wade & Hulland 2004). Most current
conceptualizations of IT resources equate potentially heterogeneous investment allocations
across firms by measuring total IT intensity. Some empirically confound resources with
capabilities by not measuring both investments and organizational factors simultaneously. Others
theoretically distinguish IT infrastructure from non-technical assets (such as human capital and
external relationships), but do not distinguish them empirically or measure firms’ specific dollar
investments in different types of IT assets (Ross et al. 1996, Bharadwaj 2000). Of the
perspectives reviewed by Wade & Hulland (2004) that distinguish different IT resources, none
identifies the strategic purpose of the resource for the firm and none measures investments in
different types of IT assets, implicitly discounting the possibility that investment allocations help
shape firms’ IT resources and performance.
Organizational capabilities moderate the relationship between IT investments and different
measures of firm performance (e.g. Brynjolfsson & Yang 1997, Bharadwaj 2000), but aggregate
measures of IT investment and ambiguous definitions of IT resources produce varied results. For
example, Zhu & Kraemer (2002) identify four metrics that assess the e-commerce capability of
firms and demonstrate that firms with greater e-commerce capabilities perform better on some
dimensions of performance (e.g. supply chain optimization) while performing worse along other
dimensions (e.g. the cost of goods sold). Their results provide convincing evidence of
complementarities between an aggregate measure of IT intensity and organizational capabilities
in e-commerce. However, their aggregate measure of IT intensity also reveals some surprising
results. They argue that inexperience and high learning costs may explain the surprising result
that “the use of e-commerce, together with IT investment, is associated with increased COGS for
traditional manufacturing companies” (Zhu & Kraemer 2002: 288). At the same time, they
acknowledge their data “did not capture enough details of the differences in the nature of [e-
commerce capabilities] and IT resources between [firms]” to test whether different types of IT
resources are driving performance differences (Zhu & Kraemer 2002: 288). An alternative
explanation for this surprising result is that traditional manufacturing firms are investing in
fundamentally different IT resources than the high tech firms in their second sub-sample.
Modernization of the factory floor and trends toward flexible manufacturing are requiring
manufacturing firms to undertake significant investments in new IT infrastructures (Milgrom &
Roberts 1990). Prior empirical work (reviewed below) suggests that investments in IT
infrastructure may cause short term disruptions that increase costs relative to other types of IT
assets, which could explain why traditional manufacturing firms see higher costs with more IT
investment. To test this alternative explanation, more detailed data on how firms allocate
aggregate IT investments is necessary. Our aim is to sharpen the theoretical characterization of
‘IT resources’ by unpacking two major sources of variation in the empirical evidence on

complementarities between IT and organization: heterogeneity in IT investment allocations and
organizational IT capabilities.
2.3 Re-Conceptualizing IT Resources as Combinations of IT Assets and IT Capabilities

In our theoretical model, IT resources are combinations of investment allocations and a mutually
reinforcing system of competencies and practices that together represent organizational ITC.
Figure 1 depicts our model based on theoretical concepts drawn from reviews of the IT and
organizational capabilities literatures and the resource based theory of the firm, and supported by
five qualitative case studies conducted in conjunction with our quantitative analysis.
Firms make heterogeneous investment allocations in pursuit of different goals (e.g. cost
leadership or innovation) resulting in a varying landscape of IT resources across firms. For
example, firms with cost leadership strategies will likely allocate investments toward
transactional IT systems designed to cut costs, while firms pursuing innovation strategies will
likely invest more in IT systems that support product and process innovation. Strong IT
resources are scarce and difficult to imitate because developing effective combinations of IT
assets and IT capabilities takes time spent learning and optimizing. This heterogeneity, in both
investment allocations and capabilities, drives performance variation across differentiated
dimensions that reflect firm strategies. Differentiated investment allocations will enable some
firms to cut costs and others to innovate, while strong ITC will increase the return per IT dollar
invested. The next two sections present the theoretical development of our framework for
measuring IT assets and ITC as the building blocks of IT resources.
2.4. Disaggregating Total IT Capital into IT Asset Classes

Most empirical examinations of IT business value consider IT as an aggregate, uniform asset
(Bharadwaj, Bharadwaj & Konsynski 1999), divide IT investments into capital and labor stock
(Brynjolfsson & Hitt 1996, Hitt & Brynjolffson 1996, Bharadwaj 2000) or examine particular
technologies, such as ATMs or production control technologies (Kelly 1994, Dos Santos &
Peffers 1995). Bharadwaj, Bharadwaj & Konsynski (1999: 1020) argue “it appears that firms
benefit unequally from their different IT investments. Thus it would be interesting to examine
the impact of different types of IT investments such as innovative versus noninnovative, strategic
versus nonstrategic, and internally focused (e.g. process control, coordination, etc) versus
externally focused investments (customer satisfaction, relationship management, etc) ...”
Although IT investment allocations are likely to reflect firm strategy and affect firm performance
(Floyd and Wooldridge 1990, Dos Santos, Peffers & Mauer 1993), few studies disaggregate IT
investments by asset type. To address this gap, we apply a framework developed by Weill (1992)
and extended by Weill and Broadbent (1998), which categorizes firms’ IT investments into a
portfolio of four IT assets disaggregated by strategic purpose: infrastructure, transactional,
informational and strategic assets. This framework has been validated and empirically tested in
previous work and we hypothesize that investments in each asset class are associated with gains
along performance dimensions consistent with their strategic purpose.
Hypothesis 1. Investments in IT assets are associated with higher firm performance only
along dimensions consistent with the strategic purpose of the asset.

We measure IT investment allocations according to how firms’ senior managers characterize
spending across the four IT asset classes:
1. IT Infrastructure provides the foundation of shared IT services (both technical and human -
e.g. servers, networks, laptops, shared customer databases, help desk, application
development) used by multiple IT applications (Keen 1991, Weill & Broadbent 1998).
Infrastructure investments are typically made to provide a flexible base for future business
initiatives and thus made in anticipation of future business needs. The disruptive nature of
enterprise wide infrastructure implementations creates high up front costs and long benefit
time horizons (Duncan 1995, Weill & Broadbent 1998). However, infrastructure investments
also enable new applications and functionality, and lay the groundwork for significant long
term performance improvements (Duncan 1995, Broadbent, Weill & Neo 1999). We
therefore expect infrastructure investments are positively associated with higher short term
costs, lower short term profitability and higher profitability and operational performance in
the long run. In addition, if infrastructure investments are transparent to the market we will
likely see a positive impact on firm market value, which reflects the market’s assessment of
firms’ future value.
2. Transactional Investments are made to automate processes, cut costs or increase the volume
of business a firm can conduct per unit cost (e.g. order processing, point of sale processing,
bank cash withdrawal, billing statement production, insurance renewal and other repetitive
transaction processing functions). We expect transactional investments are associated with
immediate reductions in cost.
3. Informational Investments provide information for managing, accounting, reporting and
communicating internally and with customers, suppliers and regulators. Examples include
decision support, sales analysis, planning, six sigma programs and Sarbanes Oxley reporting
systems. These investments can support the responsiveness, control, reliability and
adaptability of firms and enable more effective decision making. Sales analysis and data
mining of customer reactions to products and services can help optimize products and
pricing, enabling more efficient and profitable operations. We expect informational
investments tighten reporting and control functions and improve data collection and decision
making, thereby reducing costs, identifying new opportunities for revenue generation and
improving profitability.
4. Strategic Investments re-position firms in the marketplace by supporting entry into a new
market or the development of new products, services or business processes. Successful
strategic investments typically change the nature of service delivery or organizational
processes in an industry, but become non-strategic when competitors commoditize the
capability. When ATMs were introduced in the banking industry, they changed the nature of
service delivery and garnered competitive benefits for early adopters (Dos Santos & Peffers
1995), but became non-strategic and transactional as they were universally adopted. We
expect strategic investments contribute directly to product innovation (Samabmurthy,
Bharadwaj & Grover 2003). Table 1 describes expected performance gains by asset class.
2.5. IT Capabilities as a Mutually Reinforcing System of Practices and Competencies

A variety of individual capabilities, practices and processes may complement IT, however, we
expect systems of practices and competencies working in concert to enable greater business
value generation per IT dollar. Milgrom & Roberts (1990) formally demonstrate that non-

convexities exist in a firm’s decision to adopt any or all of a set of organizational characteristics
that together complement new technology. As the marginal benefit of adopting any one of a
complementary set of activities increases with the adoption of the others, adoption of systems of
practices (what Milgrom & Roberts (1990) call ‘groups of activities’) “may not be marginal
decision[s].” They argue: “Exploiting such an extensive system of complementarities requires
coordinated action between traditionally separate functions…” (Milgrom & Roberts 1990: 515).
We use prior research and our own case studies to identify a group of interlocking organizational
characteristics that together support firms’ ability to derive value from IT. Complementarity
theory predicts both the clustering of these IT capabilities and their moderating effects on firm
performance as a system. To validate the systematic nature of IT complements, we identify and
measure capabilities separately, test the degree to which they co-vary in our sample and
subsequently examine their performance implications as an interlocking system, or cluster, as
depicted in Figure 1.
While Milgrom and Roberts (1990) adopt a narrow theoretical perspective focused on
complementary groups of activities, the conceptualization of organizational complements to IT
in theories drawn from evolutionary economics and the resource based view of the firm take a
broader view. These theories address not only the activities organizations engage in, but also the
skills and competencies they develop in using assets to accomplish organizational tasks. At least
two fundamental conceptual building blocks useful for identifying characteristics of firms that
complement IT emerge from these theories: competencies (or skills) and practices (or routines)
(Nelson & Winter 1982). Competencies refer to skills embodied in individuals or groups that
actively manage or accomplish organizational tasks (Prahalad & Hamel 1990, Dosi, Nelson &
Winter 2000). Competencies are developed through learning and the repeated performance of
contextual activities. As individuals and groups interact with IT for particular purposes, they
learn, build skills and develop competence toward effective use. Practices on the other hand
refer to recurring sets of activities or routines that serve both as a means of accomplishing
organizational tasks and as mechanisms for socially storing and accessing knowledge about the
most effective ways to accomplish those tasks (Cohen & Levinthal 1990). Practices and
competencies support and complement each other. Practices help individuals and groups develop
competence or skill with particular ways of working (Dosi, Nelson & Winter 2000), while skills
are necessary for the effective execution of organizational practices toward specified goals
(Nelson & Winter 1982).
To develop the construct of organizational IT capabilities (ITC) we first identified candidate
constructs in the literature that were supported by our case evidence. We then developed a
coherent conceptualization by excluding elements unrelated to the system of characteristics
identified across all cases. We use case studies to inform our construct development and
measurement, and to illustrate and inform the conclusions we draw from quantitative results.
Case studies were conducted in two medium sized manufacturing firms, one large and one
medium sized financial services firm and 7-Eleven Japan, a large Japanese retailer (see Weill &
Aral 2005, Nagayama & Weill 2004 for published case material).1 In this paper, we use
illustrative examples exclusively from 7-Eleven Japan to coherently describe distinctions
between different IT assets and the systematic and mutually supportive nature of individual
1
The case studies were developed using unstructured and semi-structured interviews with upper level IT management employees, examination of
archival data, historical data from the press and unpublished firm documents, publicly available performance data, and the firms’ web sites.

competencies and practices in a single organization. We further refined our inclusion and
exclusion criteria by testing the degree to which our candidate constructs worked together as a
‘system’ as evidenced by their covariance across firms in our larger sample and the results of
factor analysis conducted using the broader set of eighteen factors. Using this process, we
identified two competencies and three practices.2 Table 2 presents a summary of the five
competencies and practices, their theoretical justification and supportive examples from case
data.
2.5.1. Competencies (Skills)

IT competencies exist across two organizational dimensions in our data: the IT skills of
employees at all levels (both technical and business skills) and IT management competence.
Shifts in labor demand over the last twenty five years favoring more skilled and educated
workers have been driven in large part by “skill biased technical change” or technical progress
that shifts demand toward more skilled workers (Autor, Katz & Kreuger 1998). Unlike shifts in
labor demand during the industrial revolution, which favored unskilled factory labor (Goldin &
Katz 1998), today’s technology complements greater autonomy, flexibility and skilled
employees. A strong empirical relationship between IT use and skill at the worker (Kreuger
1993), firm (Dunne, Haltiwanger & Troske 1997), and industry (Autor, Katz & Kreuger 1998)
levels, demonstrates that firms with significant amounts of IT tend to hire more skilled workers.
But, few studies examine the performance implications of the co-presence of IT and highly
skilled labor (for an exception see Breshnahan, Brynjolfsson & Hitt 2002). We estimate the
Human Resource Competency (HR) of firms by assessing a) the technical and business skills of
IT staff, b) the IT skills of business users, and c) the relative ability of firms to satisfy their
demand for highly skilled IT labor. In addition, senior management championing of IT initiatives
is consistently shown to improve the value created by IT investments (Weill 1992, Brynjolffson
& Hitt 2000) and disconnects between business units and the IT function typically hinder firms’
ability to generate returns from IT (Rockart et al. 1996). Our measure of Management
Competency (MC) therefore assesses both the degree of senior management commitment to IT
projects and business unit involvement in IT decisions (Weill & Ross 2004). Table 2 provides
qualitative examples of Human Resource Competency and Management Competency found at 7-
Eleven Japan.
2.5.2 Practices (Routines)

We identified three key organizational practices that support value creation from IT. The first
two practices relate to two fundamental activities of IT enabled organizations: communication
and transaction, while the third involves active use of the Internet, one of the most fundamental
socio-technical innovations in recent history.
IT Use Intensity for Communication. Devaraj & Kohli (2003) make a convincing case for the
measurement of IT use as a missing link in the relationship between IT investments and firm
performance. Brynjolfsson & Yang (1997) also demonstrate that firms using more digital work
practices obtain higher performance benefits from their IT investments. We therefore measure
the intensity of IT use - both internal and external. Internal IT Communication Intensity (IIT)
2
Before constructing measures of the practices and capabilities, we asked managers in research workshops to examine our framework to make
sure our theory reflected their experiences. Based on these discussions and our case data, we identified eighteen indicators of the competencies
and practices. Definitions of the variables and their operationalization appear in Appendix A.

describes the degree to which internal communications and work practices are conducted
electronically and measures the use of electronic communication media such as email, Intranets
and wireless devices for internal communications. Supplier Facing IT Communication Intensity
(SIT) describes the degree to which information exchanges with suppliers are conducted
electronically via email, remote wireless connections, Internet, and non-Internet electronic data
interchange (EDI) connections.
Digital Transaction Intensity (DT) measures the degree to which both internal and external
transactions are conducted electronically. Distinct from internal or external communication
intensity, transaction intensity measures the relative digitization of the transactions firms execute
with suppliers and customers and is a linear combination of two ratios: electronic purchase
orders to total purchase orders and electronic sales to total sales. Process digitization in
relationships with suppliers can reduce input costs by reducing procurement time and supply
uncertainties that necessitate stockpiles of inventories, by reducing prices through greater market
transparency, and by reducing the costs of purchase order and invoice processing. More digital
transactions with suppliers can also reduce coordination costs (Malone 1987), transaction costs
(Williamson 1975) and agency costs by increasing transparency and mutual monitoring (Jensen
& Meckling 1976). Today, firms with more IT capital are smaller (Brynjolfsson, Malone,
Gubaxani & Kambil 1994) and less vertically integrated (Hitt 1999), indicating that process
digitization in the supply chain is enabling increased performance by pushing key functions
outside the firm boundary. IT also has the potential to transform relationships with customers.
Digitization of the customer experience can enable greater customization and a shift from build-
to-stock to build-to-order processes, increasing customer satisfaction (Mithas, Krishnan &
Fornell 2005) and reducing the cost of selling (Brynjolfsson & Hitt 2000).
Finally, open Internet Architectures (IA) can reduce internal and external integration costs. In
contrast, proprietary architectures are more complex to connect and maintain, making backend
legacy system integration less efficient. The Internet also allows firms to broaden interactions
with customers by collecting systematic data on purchasing decisions and the responsiveness of
post sales customer service operations. The ability to deliver online product support, technical
assistance, merchandise tracking and customer feedback all enhance the value of products
supported by Internet based applications (Zhu & Kraemer 2002). We measure the degree to
which firms employ Internet architectures in sales force management, employee performance
measurement, training and post-sales customer support, all of which were shown to benefit from
IT adoption (Brynjolfsson & Hitt 2000, Brynjolfsson 1996) and were important factors in our
case studies (see Table 2).
Our case study evidence supports the theoretical conceptualization of IT capabilities as systems
of interlocking practices and competencies and demonstrates that investment allocations, driven
by strategy, shape and are shaped by firms’ practices and skills. For example, we found that
informational investments are critical to 7-Eleven Japan’s business strategy which is designed to
make stores responsive to even small changes in customer demand and environmental conditions
(Nagayama & Weill 2004). 7-Eleven’s “total information system” connects 70,000 computers in
stores, at headquarters, and at supplier sites providing transparency across the entire value chain.
Recent sales, weather conditions and product range information are provided graphically to each
store to assist in ordering fresh food, which is ordered and delivered three times per day. The
result is that on hot days Tokyo’s 7-Eleven stores have plenty of cold Bento boxes while on cold
days there are lots of hot noodles for sale. The total information system also reduces missed

opportunities from out of stock items and the need for large inventories, which in Japanese retail
are space and cost prohibitive. 7-Eleven CEO Toshifumi Suzuki, explains their information
intensive strategy: “To produce the best original products with higher quality than any
competitors, we continue to create a hypothesis, test it, make another hypothesis, and examine it
over and over… ” But these organizational practices alone are not enough. 7-Eleven Japan
works hard to develop firm-wide IT skills and business management involvement to enable and
reinforce these practices. 7-Eleven Japan “counselors” visit each store at least twice a week to
work with the store franchisees to improve their skills in using data from their information
systems to manage and order more effectively. Counselors train employees to use Point of Sale
(POS), inventory and weather tracking systems to strategically stock and price goods. The POS
and weather tracking systems are examples of transactional and informational applications that
exploit the IT infrastructure. The tight relationship between company counselors and stores
increases the IT skills of store operators while reinforcing critical IT practices at the store level,
demonstrating the synergy between skills and practices.
7-Eleven Japan’s ‘total information strategy,’ uses information to make more effective business
decisions. The information is extracted and summarized using transactional IT systems which
process 35 million sales transactions and 5 million order transactions per day. Each day, these
transactions are sent to the 7-Eleven Japan information systems center where they are integrated,
analyzed and shared, via informational IT, with all store owners and workers at registers in real
time. In addition, as CEO Suzuki explains, the business skills of IT employees are critical: “[We]
don’t rely on the POS system. IT is merely a tool to achieve business strategy. We shouldn’t use
the technology unless we can understand what the information means on paper.” These examples
of human resource competency, management competency and digital transactions illustrate how
organizational IT capabilities support transactional and informational IT assets at 7-Eleven
Japan.
Testing Complementarity. While qualitative examples illustrate how IT assets and organizational
IT capabilities complement one another in a single firm, empirical demonstrations of
complementarity in larger samples require evidence of the covariance or ‘clustering’ of
complementary elements across firms, and positive effects of the co-presence of complements on
performance (Milgrom & Roberts 1990, Bresnahan, Brynjolfsson & Hitt 2002). We therefore
test whether IT assets and organizational capabilities co-vary and whether they exhibit
reinforcing interaction effects on firm performance (Athey & Stern 1998). If IT investment and
organizational IT capabilities are complementary we expect:
Hypothesis 2. Organizational ITC and IT investment intensity are positively correlated.
We also expect that firms with both more IT investments and stronger organizational IT
capabilities perform better. Thus:
Hypothesis 3. Variables interacting an aggregate measure of organizational ITC with IT
investment intensity by asset class are positively associated with firm performance.
2.6. Dependent Variables: Distinguishing Different Dimensions of Firm Performance

Different assessments of IT value have different theoretical foundations and empirical results
depend heavily on what questions are asked and how data are modeled (Hitt & Brynjolfsson
1996, Kohli & Devaraj 2003). The literature on IT value relates IT investments to a variety of
performance measures including productivity (Brynjolfsson 1996), consumer welfare (Hitt &

Brynjolfsson 1996, Brynjolfsson 1996), accounting profit (Weill 1992, Bharadwaj 2000), market
valuation (Dos Santos & Peffers 1993, Brynjolfsson & Yang 1997, Bharadwaj, Bharadwaj &
Konsynski 1999) and operational performance (Barua, Kriebel & Mukhopadhyay 1995, Zhu &
Kraemer 2002). These performance dimensions are distinct (Hitt & Brynjolfsson 1996) and trade
off with each other. Anderson, Fornell & Rust (1997) find that productivity, profitability and
customer satisfaction trade off and that firms’ strategies and industries change the nature of the
trade-offs. Quantitative empirical results concerning IT and organizational performance vary in
part because measures of performance are multidimensional while measures of IT are typically
unidimensional.
To measure associations between IT investments and the performance of firms that are
potentially strategically differentiated, we regressed four categories of firm performance –
profitability, market valuation, operational performance and innovation – on total IT intensity, IT
intensity by asset class and the interaction between IT assets and organizational IT capabilities.
Profitability is measured by Net Margin and ROA (Bharadwaj 2000), market valuation by
Tobin’s q (Hitt & Brynjolfsson 1996; Bharadwaj, Bharadwaj & Konsynski 1999; Brynjolfsson &
Yang 1997), operational performance by the Cost of Goods Sold (Barua, Kriebal &
Mukhopadhyay 1995, Zhu & Kraemer 2002), and product innovation by revenues from new and
modified products.
3. Methods
3.1 Data & Metrics
While previous researchers have coded types of IT investments according to language used in
media descriptions (Dos Santos, Peffers and Mauer 1993), we asked senior IT executives to
subdivide their total IT budgets according to descriptions of the asset classes to better understand
the management intention for IT investments in each firm. Descriptions of the asset classes and
examples of IT assets were used to guide managers in categorizing their IT investments. All 147
respondents were from large, publicly traded U.S. firms and Compustat was used to obtain
performance and other relevant data during 1999-2002. Our sample is composed of 58%
manufacturing and 42% services firms, which mirrors the composition of the S&P 500 and the
Fortune 1000. The sample includes 147 firms over 4 years for a panel of 588 firm years between
1999 and 2002, accounting for $448 billion in output in 2001. The survey instrument was
designed and pilot tested as part of the NSF funded MIT SeeIT Project. Using the MIT SeeIT
instrument, data collection was conducted by Harte Hanks via a random sample of companies in
their database, which has been used in previous research (e.g. Brynjolfsson & Hitt 1996). Survey
questions and descriptions of the asset classes and capability metrics appear in Appendix A.
We used confirmatory factor analysis to validate our grouping of the eighteen indicators of ITC
into the six variables described in § 2.5. Following Straub (1989), Boudreau et al. (2001) and
Zhu & Kraemer (2002) we considered the reliability, content validity and construct validity of
our measures. We tested both the internal consistency and the construct reliability of our IT
capability metrics. The average factor loading for indicators used to construct the six capability
variables was 0.70 and all factor loadings were positive, significant and above the cutoff of 0.4

(Gefen et al. 2000).3 The content validity of the instruments was based on a review of the
literature, our case studies and discussions with more than 100 IT managers in a variety of
industries at MIT Center for Information Systems Research workshops. Following Straub
(1989), we tested the convergent and discriminate validity of our measures to ensure their
construct validity. When examining the t-statistics of individual factor loadings all independent
indicators displayed highly significant contributions to the constructs they were intended to
measure providing confidence in their convergent validity. We tested the discriminate validity of
our constructs by analyzing their internal (within measure) and external (across measure)
correlations in a correlation matrix containing all independent indicators (Campbell and Fiske
1959, Straub 1989), and found correlations within measures to be higher than correlations across
measures in sixteen of eighteen cases, indicating strong discriminant validity.4 The factor
loadings and t-statistics of convergent validity are reported in Table 4.5
3.2 Reliability of the Data

We conducted several tests of the reliability of our data. First, as with any self-reported survey
data, accuracy depends on the reliability of responses from the IS managers. To improve the
accuracy of responses, all surveys were conducted in person or over the telephone and efforts
were made to ensure that respondents were in management positions responsible for IT
investments and had detailed knowledge of their firms’ IT practices.6 Second, in testing for
response bias, we found our sample was no different from the largest 3500 firms in the U.S. in
terms of total output measured by total sales (t-statistic = 0.8), the number of employees (t-
statistic = 1.1), total advertising expenditures (t-statistic = .1), total R&D expenditures (t-statistic
= .9) and the cost of goods sold (t-statistic = .8). Also, the performance of firms in our sample (as
measured by ROA) does not differ from the population of the 3500 largest companies (t-statistic
= .5), indicating little chance of a systematic response bias along the performance dimension.
3.3 Control Variables

Three firm level variables were used to control for their effects on performance: R&D
expenditure, advertising expenditure, and firm size. Many previous studies demonstrate that
R&D expenditures are strongly correlated with firm performance and are particularly influential
in market valuation metrics such as Tobin’s q (Montgomery & Wernerfelt 1988, Capon et al.
1990). In addition, advertising expenditures are positively related to firm performance and are
associated with market valuation and profitability in particular (Montgomery & Wernerfelt 1988,
Capon et al. 1990).7 Firm size is controlled for by ln employees and expenditure variables (IT,
R&D, Advertising) are operationalized as ratios of expenditures to sales to control for the
relative production size of firms. We used industry dummy variables from 2 digit Standard
3
As our metrics are designed to measure multiple components or dimensions of a construct rather than multiple measures of the same underlying
construct, Cronbach’s α estimates are less useful in assessing internal consistency. However, α estimates ranged from .44 to .73. The alpha for
Internal IT Use intensity was significantly lower than the rest of our constructs (.44). This may be due to its considerably high mean (4.4) and low
variance (S.D. = 0.8) indicating that Email Intensity was high for most firms in our dataset.
4
External Email Intensity and Internal Email Intensity were more highly correlated with each other than with their respective constructs (Internal
IT Use Intensity and External IT Use Intensity) indicating that internal and external email use are high for most firms in concert.
5
Factors 2 (Management Capability) and 5 (Digital Transaction Intensity) are excluded from Table 4 because they are two item factors to which
these statistics do not readily apply.
6
All respondents reported intimate knowledge of their firms’ IT practices and close proximity to IT investment decisions. If a respondent was
unfamiliar with IT assets and budgeting, the interview was terminated and a replacement respondent was sought. 59% of respondents were the
CIO of the firm, 25% were CTOs, 13% were IT budget analysts or administrators of IT systems, and 3% were CFOs.
7
Not all firms report R&D and advertising expenditures. After filling in data from other available sources, following Bharadwaj, Bharadwaj &
Konsynski (1999) and Montgomery & Wernerfelt (1988), we inputted industry average values for each firm for which data remained missing.

Industry Codes and separately inputted the 2 digit SIC industry average for each dependent
variable into regressions to control for industry level variation. Both specifications produced
similar results for all regressions. We report results based on the second approach to preserve
degrees of freedom.
3.4 Model Specification

We first tested two model specifications of the relationship between total IT investment intensity
and the six performance variables Ps (s = 1,…,6): a fixed effects model with controls for year
and firm effects,
Pst = α + ∑i β i Yeari + β 5 s ITst + ε st
[1],
and an OLS model in each year regressing performance (lagged by one year) on IT intensity
( IT ), organizational ITC , and the interaction of IT intensity and ITC ( IT * ITC ):8
Pst = α s + ∑ j β sj C jst + β 5 s ITst −1 + β 6 ITC s + β 7 ( ITst −1 * ITC s ) + ε st
[2],
where C j ( j = 1,...,4) represents the three firm level control variables (ln employees, R&D
Intensity, and Advertising Intensity), and the industry control, and ε represents the error term.
We then examined relationships between IT investments in each of the four asset classes
AC sk ( s = 1,...,6; k = 1,...,4) in 2001 and performance in 2001 and 2002 in OLS analysis as
follows:
Pst = α s + ∑ j β sj C jst + ∑k β ks AC skt −1 + ε st
[3],
Finally, having analyzed the contributions of different IT asset classes, we included an
interaction term testing the influence of ITC on the performance contributions of each IT asset
class:
Pst = α s + ∑ j β sj C jst + ∑k β ks AC skt −1 + β 9 s ITC s + β10 s ( AC skt −1 * ITC s ) + ε st
[4],
where AC * ITC represents the term interacting each asset class with the aggregate measure of
ITC . We were unable to reject the hypothesis of no heteroscedasticity according to Breusch-
Pagan (1979) tests and have reported standard errors according to the White correction (White
1980). We tested for multicollinearity by examining a correlation matrix of all independent
variables and discovered no variables entered simultaneously into any regression with a
correlation coefficient greater than .70.
4. Results
Our results demonstrate that different IT assets are associated with different types of
performance benefits for firms that are generally consistent with their strategic goals. For
example, strategic IT investments are associated with product innovation (and not with other
measures of performance), while only transactional investments are associated with lower costs.
8
We also tested a pooled OLS model with panel corrected standard errors, with corrections for both autocorrelation and heteroscedasticity, where
the error term was modeled as an AR1 process with ρ diminishing uniformly over time and robust estimation of standard errors. The results were
qualitatively unchanged.

These results support Hypothesis 1 and demonstrate that distinct IT assets help explain variation
in firm performance. In addition, we find evidence of complementarities between IT assets and
organizational IT capabilities. IT assets and ITC co-vary significantly in our sample,
demonstrating that firms with strong ITC demand more IT and vice versa. ITC also displays
positive interaction effects with IT assets on a variety of performance measures. Organizational
IT capabilities strengthen the performance effects of IT investments and also broaden their
impacts to new dimensions of performance. These results suggest two important extensions to
the resource based theory of IT: 1) a move away from monolithic conceptualizations of IT
toward a disaggregated view of IT assets; and 2) a view of organizational IT capabilities as a
mutually reinforcing system of practices and competencies that both strengthens and broadens
the performance impacts of IT.
4.1 IT Assets and Firm Performance

We find no association between total IT intensity and firm performance in fixed effects or OLS
analyses. These results demonstrate that aggregate IT investments, taken alone, provide little
advantage for firms (Bakos 1991, Clemons & Row 1991), and mirror findings that suggest that
while total IT capital stock improves firm productivity, it does not contribute to profitability (Hitt
& Brynjolfsson 1996). Although ITC enhances the performance effects of total IT investment on
all performance dimensions, the interaction effects are not statistically significant except in the
analysis of sales from modified products.9
Firms in our sample allocate IT investments differently. Manufacturing firms spend 6% more on
IT infrastructure than non-manufacturing firms, while financial services firms spend 8% more on
strategic, 2% more on transactional and 8% less on informational IT assets than non-financial
services firms. Significant variation also exists across firms within industries reflecting different
strategic choices.
Table 6 reports estimates of relationships between the four IT asset classes in 2001 and firm
performance in 2001 and 2002. Infrastructure investments made in 2001 are negatively
associated with ROA in 2001 and Net Margin in 2001 and 2002. However, over time, the
negative association with profitability and return diminish. The association between
infrastructure investments made in 2001 and ROA in 2002 is positive but not significant and the
loss of Net Margin is smaller and less significant in 2002. Investments in infrastructure also
disrupt short term efforts at product innovation as measured by revenues from modified products
in 2001. The association between infrastructure investments in 2001 and Tobin’s q in the same
year is positive and significant indicating a positive relationship between infrastructure
investments and market valuation. These findings are consistent with prior research describing
infrastructure investments as disruptive in the short term, producing high up front
implementation and restructuring costs, but effective in improving business performance in the
long term, enabling new applications and reducing long-term costs through integration (Weill &
Broadbent 1998, Duncan 1995).
Informational investments are positively correlated with ROA and Net Margin in both 2001 and
2002, demonstrating a positive association with profitability, although the expected association
9
R&D intensity is positively associated with product innovation measured by revenue from modified products, but negatively associated with
revenue from new products. This may indicate that firms in our sample rely more on incremental innovation than discontinuous changes in their
product lines (e.g. Nelson & Winter 1982, Tushman & Anderson 1986).

between informational investments and lower costs is not observed. Transactional investments
are associated with lower COGS in 2002, supporting the argument that transactional investments
reduce costs. Strategic investments are positively associated with revenues from modified
products, demonstrating strong support for the association between strategic investments and
innovation. As expected, R&D investment is associated with gains in product innovation; but is
(unexpectedly) negatively correlated with Tobin’s q in 2002.10 These results demonstrate that
different IT assets produce different types of performance benefits for firms that are consistent
with their strategic goals as outlined in Table 1. Firms with similar levels of total IT intensity
allocate investments differently in our data. By disaggregating IT investments we observe the
relative performance effects of different types of IT that may be obscured in total IT investment
data.
4.2 Testing Complementarity Between IT Assets and Organizational IT Capabilities

Table 7 presents the spearman partial rank order correlations between total IT investment
intensity, IT investment intensity by asset class and ITC, controlling for firm size (see Table 7,
row 6). The correlations are all positive and significant indicating covariance between assets and
capabilities. These results support Hypothesis 2 - a complementary relationship between ITC and
IT investment intensity.
Table 8 presents the results of independent year OLS regressions assessing the relationships
between specific IT assets, ITC and the interaction between assets and capabilities on
performance.11
ITC both strengthens the performance effects of IT assets on their primary performance
dimensions (those consistent with their strategic purpose) and broadens the impact of IT assets to
other performance dimensions. The results for Net Margin reveal significant positive interaction
effects between ITC and transactional investments, informational investments and strategic
investments. The coefficients on strategic and informational investments are also positive and
significant, as they were in the regressions of IT investments alone. Infrastructure investments
are again negatively associated with profitability, but the interaction effect between infrastructure
and ITC is positive and significant on profit, indicating that firms with higher ITC scores achieve
gains, not losses from infrastructure investments. Firms with higher ITC have greater
profitability when they invest more in informational, strategic and infrastructure assets, relative
to the average firm. We again find a positive relationship between ROA and informational
investments, which reiterates the relationship reported in Table 6.
The interaction effect of infrastructure investments and ITC on Net Margin presents a clear
example of the importance of organizational capabilities in explaining variance in the returns to
IT investments across firms. For a firm with average organizational capabilities, a $1 (sales
adjusted) increase in infrastructure investment is associated with a $366 decrease in Net Margin
10
Bharadwaj, Bharadwaj, & Konsynski (1999) also observe the surprising negative association between R&D investment and Tobin’s q. Citing
other studies that found the same result, they conclude that “the results are consistent with the findings of prior empirical efforts that attempted to
estimate a relationship between [controls for R&D expenditures] and q” (Bharadwaj, Bharadwaj, & Konsynski 1999: 1019). As our coefficient
estimates (-.066) are well within the range of previous estimates (.00 to -.15), we are satisfied that our results are consistent with prior evidence
and reflect the true market value of R&D capital.
11
To facilitate more meaningful interpretations, investment intensities and capability metrics were centered and normalized. The results reported
are of regressions on dependent variables measured in 2002, one year lagged from observations of investment and capability measures. All
control variables and other asset classes are included in the analyses, although their coefficients are not reported. As innovation variables are
derived from our survey, we do not have lagged measures of these variables in relation to investments in particular asset classes.

in the following year ( β = -365.5). For a firm with below average organizational capabilities
(ITC = - 3; ~ 2 standard deviations below the mean), a $1 increase in infrastructure investment is
associated with an $820 decrease in Net Margin, while for a firm with above average
organizational capabilities (ITC = 3; ~ 2 standard deviations above the mean), a $1 increase in
infrastructure investment is associated with a $89 increase in Net Margin the year after the
investment is made.12
The coefficient on transactional investments is again negative and significant on COGS, but the
interaction effect, although negative, is not significant. Infrastructure investments have a
marginal positive association with COGS, but the interaction effect of infrastructure and ITC is
negative and significant on cost. While the average firm sees higher short term costs with more
infrastructure investment, firms with above average ITC see short term cost reductions. All else
equal, firms with strong ITC scores are associated with higher market value when they make
transactional, infrastructure, and strategic investments, and strong ITC enables greater revenues
from new products when transactional, strategic and infrastructure investment intensities are
high. ITC seems to have little enabling effect on revenues from modified products, where
informational IT intensities are negative and significant, and strategic IT intensities return strong
positive associations, as they had in regressions involving the IT investments alone. We find the
inclusion of ITC explains between 2% and 12% more performance variance than our models of
IT assets alone, as seen in increased R2 values in Table 8 compared to Tables 5 and 6.
4.3 Discussion
In our data, the average firm experiences performance benefits from investments in different IT
assets along dimensions consistent with the strategic purpose of the asset. However, firms with
greater ITC experience both stronger performance effects along expected dimensions and a
broadening of performance impacts to other measures.
Infrastructure investments produce high up front implementation and restructuring costs, but
support future business value by enabling new applications and reducing long term costs through
integration, creating a pattern of lagged benefits (Duncan 1995, Weill & Broadbent 1998,
Broadbent, Weill & Neo 1999). Infrastructure benefits are lagged because new applications that
leverage new infrastructure take time to deploy, and important organizational factors mediate
their implementation and use. For example, governance structures in most firms separate
decision making on applications from decision making on infrastructure, with the former
remaining under the authority of the business and the later the IT function (Weill & Ross 2004).
This organizational separation makes building effective applications on top of new infrastructure
challenging. However, firms with strong ITC experience short term gains, not losses from
infrastructure investments and broaden their performance benefits to include innovation, profit
and lower costs (see Table 8). These firms develop skills and enact practices that enable
smoother infrastructure implementations and more effective decision making processes that
govern the integration of infrastructure with new applications. Tight relationships between
business units and the IT function (Management Capability), strong cross functional IT and
business skills (Human Resource Capability) and greater digitization of important business
processes such as ordering and sales (Digital Transactions) support integration of infrastructure
12
The derivation of these results are as follows: Y = α + β1X1 + β2X2 + β3(X1*X2) + ε; = α + X1B2 + (β1 + X2β3)X1 + ε. Therefore, the
coefficient on X1 = β1 + X2β2.

with new applications and enable firms to more quickly and effectively utilize applications to
improve a broader set of performance dimensions beyond market value.
Aggregate measures of IT obscure the performance implications of distinct IT assets. For
example, total IT intensity is not correlated with product innovation in our data, but strategic IT
investments strongly support innovation, while infrastructure investments are negatively
correlated. When evaluated as a monolith, IT seems to have no innovation effect, when in fact
different IT assets have conflicting innovation implications. Performance itself is also
multidimensional. Firms can pursue different strategies with distinct and at times mutually
exclusive performance implications. Cost leadership may be orthogonal to innovation, in terms
of both IT investments and performance.
4.4 Limitations and Future Research

Although our research opens new avenues for explaining IT value creation from a resource based
perspective, it has some limitations. First, our dataset is partly cross-sectional and although we
use lagged measures of performance to control for reverse causality, causal claims cannot be
made about disaggregated IT assets. However, simultaneity is less likely to bias our results given
that observed performance effects match hypothesized IT assets. A similar defense of causality is
used by Bartel, Ichniowski & Shaw (2004) who argue that observation of specific technology
impacts on expected performance measures but not on others supports a causal argument (see
page 221). Although our dataset is the largest we encountered with detailed allocations of IT
investments, we did not have enough data to test the long term effects of IT or to examine path
dependencies over time. As infrastructure and strategic assets may impact firm performance
years after investments are made, and as IT generally requires periods of learning and adjustment
to attain full value, our results may underestimate its effects. In the future, larger longitudinal
datasets will be needed to explore causal relationships between IT investment allocations and
firm performance (Bharadwaj, Bharadwaj & Konsynski 1999: 1020). Second, our assessments of
organizational capabilities are measured with ordinal self reported data from a single respondent.
These measures are vulnerable to respondents’ subjective assessments of their organizations and
to single respondent bias. More objective measures of organizational capabilities could be
collected in future work by logging the dollars spent on technical training, the education and
training backgrounds of IT employees and policies that codify the distribution of decision rights
between business units and the IT function. Third, our division of IT investments into the four
asset classes is but one way to characterize firms’ investment allocations. Other breakdowns
might include aggregations of investments in particular IT projects such as ERP, SCM or CRM
projects, or other theoretical frameworks distinguishing different types of IT. We hope our work
can serve as a useful starting point for these endeavors. Finally, a natural question emerges from
our results: do certain organizational IT capabilities support certain IT assets in particular? While
our work is intended to begin this line of inquiry, we examine organizational IT capabilities as a
system due to their complementarity as a group of practices and skills. Specific asset-capability
synergies could exist however and we encourage the investigation of such relationships in future
work, although larger datasets will be needed to test such nuanced propositions with sufficient
statistical power.
4.5 Conclusion
Many researchers have examined the productivity and business value of firm level IT
investments. However, results have varied across performance measures and significant firm

level variation in the returns to IT investments remained unexplained. We complement and
extend recent resource based theories of IT value by unpacking the measurement of “IT” into
different asset types that explain additional performance variation. We also find firms derive
greater value per IT dollar by having stronger organizational IT capabilities. These results
suggest a move away from monolithic conceptualizations of IT toward a disaggregated view of
IT assets; and a view of organizational IT capabilities as a mutually reinforcing system of
practices and competencies that both strengthens and broadens the performance impacts of IT.
Figure 1: Theoretical Model of IT Resources
IT Resources
IT Assets: IT Investments Allocated IT Capabilities: Interlocking Systems of
For Particular Strategic Purposes Practices and Competencies that
Complement IT
IT Asset Strategic Purpose
Infrastructure Foundation of shared IT services. Provide
flexible base for future business. Competencies Practices
Transactional Automate processes, cut costs, increase (Skills) (Routines)
volume per unit cost.
IT Skills Culture of IT Use
Informational Provide information for: managing,
accounting, reporting, planning, analysis IT Mgmt Quality Digital Transactions
and data mining. Internet Architecture
Strategic Support entry into a new market,
provide a new service, enable a
new product.
Table 1: IT Assets and Expected Performance Benefits

IT Asset Strategic Purpose Expected Performance Benefits
Infrastructure Foundation of shared IT services. Provide • Short term: Greater costs, less
flexible base for future business initiatives. profitability (due to disruption).
• Greater market value
• Long term: Greater profit, lower costs
Transactional Automate processes, cut costs, increase volume • Lower costs
of business per unit cost.
Informational Provide information for: managing, accounting, • Lower costs
reporting, decision support, planning, control, • Greater profitability
analysis and data mining.
Strategic Support entry into a new market, provide a new • More product innovation
service or enable a new product.

Table 2. IT Capability Constructs: Theoretical Development and Examples of Supporting Qualitative Evidence
IT Capability Theoretical Illustrative Examples of Qualitative Evidence From
Construct Justification 7-Eleven Japan Case Data
Competencies
Human • Skill Biased Technical • Immersive training of 200,000 employees in Point of Sale data analysis, including analysis of
Resource Change (e.g., Autor, Katz & information on products, weather conditions, regional demographics and customer purchasing patterns
Competency Kreuger 1998) to improve sales, customer satisfaction and ordering.
• IT-Skill Complementarity • Close contact and coaching of store franchisees by company “counselors” in the use of IT to support
(e.g., Breshnahan, decision making. Twice weekly visits by counselors to stores reinforce practices and support
Brynjolfsson & Hitt) development of skills.
Management • Senior Mgmt. Championing • Strong commitment of senior management to IT projects and IT based processes comes directly from
Competency (e.g., Weill 1992) the CEO, who has been committed to data based decision making and IT based communication since
• Alignment of IT and joining 7-Eleven Japan in 1974.
Business Units (e.g., • Business processes are tightly integrated with and enabled by IT decisions. For a detailed set of
Rockhart et al. 1996) examples see Nagayama & Weill (2004), in particular Exhibit 5.
Practices
IT Use Intensity • Systems-Use Theory (e.g., • “Total Information System” connects 70,000 computers in stores, at headquarters and at supplier sites
For Doll & Torkzadeh 1998) to facilitate internal and external communication and coordination.
Communication • Task-Technology Fit • Quote - Salesperson of 7-Eleven supplier: “[Their] information system is so good that we can instantly
Theory (e.g., Goodhue & find out which goods of ours are selling [in their stores] to what types of customers and how much.”
Thompson 1995) • Quote - 7-Eleven executive: “Even if the POS data is used, it cannot be utilized for the next order
unless the hypothesis of potential demand is shared among all store clerks as well as the store owner.
Therefore we need to establish a system that enables store owners and the ordering clerks to create
their hypotheses and share them among part time workers at the store [even if they cannot
communicate face to face].”
Digital • Transaction Cost Theory • Digital transactions enable order processing three times per day. Time to delivery is reduced, orders
Transaction (e.g., Williamson 1975) are organized for use (e.g., by temperature - frozen, refrigerated, ambient), and costs of order
Intensity • Coordination Theory (e.g., processing are reduced.
Malone 1987) • Digital transactions enable tracking and analysis of Point of Sales (POS) data to inform daily ordering
• Customer Intimacy (e.g., decisions. Each day’s data is analyzed for use the next morning.
Mithas, Krishnan & Fornell • Customer satisfaction goal drives IT enabled business transactions like “Item Control” and “Product
2005) Supply Management” designed to directly address customer needs and increase customer convenience.
Internet • e-Commerce Capability • Internet shopping site (www.7dream.com) is integrated with physical stores to offer payment
Architecture Theory (e.g., Zhu & acceptance, pick-up and/or delivery services for products purchased online.
Kraemer 2002) • Use of multipurpose, Internet enabled store copy machines to provide new services including pre-
ordering, printing and purchasing of airline tickets. Also see Nagayama & Weill (2004), Exhibit 10.

Table 3: Variable Definition and Descriptive Statistics
Variable Computation Source N Mean SD
Natural logarithm of the total number of
Ln Employees Compustat 588 14.2 30.0
employees
Sales (M$) Net Sales Revenue Compustat 588 3442.7 6936.9
Advertising
Advertising Expenditures/Sales Compustat 588 .03 .08
Expenditure Intensity
R&D Expenditure
R&D Expenditures/Sales Compustat 588 .02 .08
Intensity
IT Intensity Total IT$/Sales MIT survey 453 .02 .04
Infrastructure Intensity IT$ spent on Infrastructure/Sales MIT survey 346 .009 .011
Transactional IT
IT$ spent on Transactional Systems/Sales MIT survey 115 .003 .006
Intensity
Informational IT
IT$ spent on Informational Systems/Sales MIT survey 119 .004 .009
Intensity
Strategic IT Intensity IT$ spent on Strategic Systems/Sales MIT survey 118 .002 .002
(Income Before Extraordinary Items/Total
Return on Assets (%) Compustat 564 .54 14.1
Assets)*100
[Market Value of Common Stock + Book
Value of Debt + Book Value of Preferred
Tobin’s q Compustat 569 1.0 1.2
Stock]/[Book Value of Assets and PPE +
Estimated Replacement Cost of PPE]
(Income Before Extraordinary Items/Total
Net Margin (%) Compustat 564 1.1 13.3
Sales)*100
Cost of Merchandise Purchased + Cost of
Cost of Goods Sold Compustat 569 2395.3 5174.3
Goods Manufactured for Goods Sold
Sales from New Sales from New Products from the previous
MIT survey 119 .236 .223
Products year/Total Sales
Sales from Modified Sales from Products Modified or Enhanced
MIT survey 119 .333 .278
Products from the previous year/Total Sales
A demeaned linear combination of capability
variables. TOC = ((Capability Measure 1 –
TOC MIT survey 142 .05 1.5
Mean of Capability Measure 1) + … + (Cap.
Meas. 6 – Mean of Cap. Meas. 6))
Table 4: Reliability and Validity of IT Capability Metrics

IT Capability Metric Indicator Factor Loading Convergent Validity
Internal IT Use Intensity Email .742 -
Intranet .702 18.91***
Wireless .509 24.15 ***
Supplier Facing IT Use
Email .731 -
Intensity
Internet .807 12.66 ***
EDI .511 11.77 ***
Human Resource
Technical Skill .733 11.97 ***
Capability
Business Skill .727 11.34 ***
End User Skill .564 -
Labor Supply .620 10.34 ***
Internet Capability Sales Force Mgmt .698 11.42 ***
Performance Evaluation .769 12.30 ***
Training .857 15.32 ***
Online Customer Support .654 -

Table 5: Total IT Intensity, IT Capabilities and Firm Performance
Net Net New Modified
ROA ROA Tobin’s q Tobin’s q COGS COGS
Margin Margin Products Products
Specification FE OLS FE OLS FE OLS FE OLS OLS OLS
-.72 .79 .02 1722.78*** .11 1.22
Employees
(.99) (.69) (.03) (477.99) (1.03) (1.55)
1.02 .46 -.06** 99.78 -1.90** 3.29**
R&D
(1.12) (.65) (.02) (411.47) (.88) (1.32)
-1.60 -2.12* .04 67.22 .30 5.60**
Advertising
(1.06) (1.23) (.04) (316.91) (1.40) (2.38)
-41.77 43.76 -33.36 9.38 -1.06 -2.05 -1993.8 -2133.77 -44.72 -72.62
Total IT
(36.49) (47.05) (34.95) (42.29) (1.73) (1.94) (2636.9) (9427.10) (37.52) (52.81)
-2.97 -1.35 .04 -951.46 4.46 -1.85
ITC
(2.27) (1.95) (.10) (728.72) (3.81) (5.44)
9.50 10.28 2.47 -8299.96 43.32 121.18**
Total IT x ITC
(41.80) (36.65) (1.76) (7389.96) (37.86) (53.94)
6731 *** 1.54 5284 *** -.65 187.3 ** .68*** -.32e6 ** 465.93 24.29 29.64
Cons.
(1477) (2.74) (1413) (1.76) (69.85) (.08) (.12e6) (502.18) (3.47) (4.31)
Industry Controls NO YES NO YES NO YES NO YES YES YES
R2 .08 .05 .06 .05 .03 .04 .05 .34 .02 .08
F Value 10.53 *** .89 7.10 *** 1.02 3.59 ** 4.27 5.45 ** 2.26** 2.71** 11.85***
Obs. 375 84 376 84 376 85 373 85 75 74
FE = Fixed Effects; OLS = Ordinary Least Squares. Total IT Intensity measured at t – 1 in OLS regressions. Robust standard errors under the White correction are reported. ***
p<.001; ** p<.05; * p<.10.

Table 6: IT Investment Allocations by Asset Class and Firm Performance
ROA ROA Net Margin Net Margin Tobin’s q Tobin’s q COGS COGS New Mod. Prod.
2001 2002 2001 2002 2001 2002 2001 2002 Prod. 2001 2001
Controls
.54 -.495 1.01 .94 .001 .002 14.93.1** 1623.5*** -1.22 -.127
Employees
(.80) (1.12) (.97) (.65) (.054) (.021) (503.1) (446.4) (1.34) (1.51)
1.48 1.98 1.63 .70 -.039 -.066** 377.5 -116.67 -1.74 4.61***
R&D
(1.72) (1.27) (2.18) (.60) (.036) (.024) (284.2) (350.45) (.979) (.808)
-4.18 -2.19** -5.17 -2.69** -.021 .022 114.8 493.61 -.104 5.36***
Advertising
(3.84) (.95) (5.31) (1.32) (.061) (.041) (402.4) (406.99) (1.60) (1.52)
Variables
273.49 -192.08 309.77 -104.4 -5.36 -3.02 -8047.5 -160990* 169.02 -836.69
Transactional
(186.82) (212.67) (201.15) (163.79) (14.29) (9.93) (82468) (101,138) (344.58) (557.22)
313.76** 289.74** 269.47* 167.4** 12.00 5.08 -5798.5 17651 -277.72 -1056.56
Informational
(150.98) (92.63) (162.60) (76.3) (10.34) (5.44) (22526) (28104) (214.26) (242.11)
46.99 117.60 332.87 338.8 -43.49 -6.39 38544 19598 -620.59 2891.72***
Strategic
(438.48) (231.35) (330.23) (300.3) (37.85) (18.54) (78713) (90352) (690.90) (905.39)
-224.5** 74.88 -377.59** -179.9* 16.83* -4.24 -30288 43872 341.41 -48.27***
Infrastructure
(112.9) (145.34) (159.98) (95.6) (9.81) (4.47) (34889) (42782) (222.58) (264.77)
Industry Controls? YES YES YES YES YES YES YES YES YES YES
Adj. R2 .10 .07 .14 .13 .09 .04 .34 .34 .06 .17
F Value 1.99** 3.60*** 1.69* 5.18*** 1.14 2.83** 2.30** 2.56** 1.45 14.83***
Obs. 103 95 103 95 104 98 103 98 90 90
OLS Regressions. Robust standard errors under the White correction are reported. *** p<.001; ** p<.05; * p<.10.
Table 7: Correlations Between IT, Organizational Capabilities and Performance

Measure 1 2 3 4 5 6 7 8 9 10 11 12
1. Total IT 1.00
2. Infrastructure .83** 1.00
3. Transactional .55** .32** 1.00
4. Informational .62** .36** .44** 1.00
5. Strategic .49** .34** .47** .39** 1.00
6. TOC .33** .27** .22** .30** .33** 1.00
7. ROA -.15 -.05 .06 -.07 -.03 -.01 1.00
8. Net Margin -.13 -.06 .09 -.08 .03 .03 .83** 1.00
9. Tobin’s q -.01 -.06 .03 .05 -.04 .05 .44** .40** 1.00
10. COGS .13 .22** .14 -.04 -.09 -.05 .00 .07 -.01 1.00
11. Mod. Products .10 .20 -.01 -.03 .06 .10 -.23 -.18 -.04 .16 1.00
12. New Products .15 .04 .06 .03 .01 -.10 -.11 -.07 -.03 .08 .41** 1.00
Spearman partial rank order correlations of Total IT Spending, IT Spending by Asset Class, Organizational IT Capabilities (TOC) in 2001, and
performance measures in 2002 controlling for firm size. * p<.10; ** p<.05

Table 8: IT Investment Allocations and Interactions with IT Capabilities on Firm Performance
ROA Net Margin
Transactional t-1 Asset Capability Interaction Asset Capability Interaction
R2 F β (SE) β (SE) β (SE) R2 F β (SE) β (SE) β (SE)
3.69 -19.5 .48 310.4 86.1 1.2 348.1 *
*TOC .13 .14 6.96 ***
*** (244.5) (.63) (253.8) (179.1) (1.8) (182.0)
Informational t-1 Asset Capability Interaction Asset Capability Interaction
357.8 * .21 117.9 403.7 ** 1.5 353.0 *
*TOC .13 2.79 ** .15 11.3 ***
(211.7) (.98) (239.9) (164.4) (1.7) (194.4)
Strategic t-1 Asset Capability Interaction Asset Capability Interaction
31.4 .27 244.5 297.5 ** .99 428.5 **
*TOC .13 4.84 *** .15 7.78 ***
(216.3) (.53) (217.6) (285.6) (1.7) (205.5)
Infrastructure t-1 Asset Capability Interaction Asset Capability Interaction
3.61 .25 55.2 -365.5 ** .91 151.6 *
* TOC .13 3.29 ** .15 6.97 ***
(208.9) (.94) (95.5) (159.4) (1.7) (92.4)
COGS Tobin’s q
-2.2e5 * -1166.9 -.93e5 5.54 -.20 .09 18.8 **
* TOC .40 2.65 ** .06
(1.3e5) (987.0) (.65e5) *** (11.1) (.08) (8.9)
.52e5 -1186.9 .19e5 5.02 .09 4.23
* TOC .39 2.01 ** .04 2.36 **
(.79e5) (995.7) (1.0e5) (10.1) (.08) (12.8)
-.35e5 -1142.1 -.74e5 -3.4 .08 15.4 *
* TOC .40 2.59 ** .05 3.28 **
(1.1e5) (1002.1) (.62e5) (18.6) (.08) (8.5)
1.3e5 * -999.0 -.78e5 * -4.6 .08 8.6 **
* TOC .40 3.23 ** .07 2.89 **
(.83e5) (967.4) (.46e5) (5.5) (.08) (3.4)
Modified Products New Products
-525.5 -1.3 84.2 734.2 * .76 722.2 **
* TOC .29 20.79 *** .09 3.24 **
(669.7) (1.9) (661.3) (369.3) (1.04) (354.9)
-1471.3 *** -2.9 -371.4 -22.1 -1.04 468.2
* TOC .29 21.45 *** .08 1.74 *
(411.8) (2.5) (577.2) (240.9) (.76) (576.8)
3401.5 *** -2.9 -371.4 -936.1 .79 818.7 **
* TOC .29 23.90 *** .10 4.04 ***
(802.9) (2.5) (577.2) (625.9) (.92) (338.7)
-482.3 -1.5 -7.9 -375.1 2.8 ** 422.4 **
* TOC .29 22.32 *** .11 3.80 ***
(485.0) (2.5) (254.6) (328.8) (1.4) (152.3)
OLS Regressions with robust standard errors. Note: All control variables and other IT assets are included in regressions but not reported.
*** p < 0.001; ** p <0.05; * p < 0.10.

Appendix A: Definition and Construction of IT Capability Indicators and IT Investment Asset Classes
Variable Description Construction
1. Human Resource Technical skills of IT staff Given a scale of 1 to 5 with one being “inhibits significantly,” 3 being “no effect” and 5
Capability (HR) being “facilitates significantly,” please rate whether the Technical Skills of IT Staff
facilitates or inhibits new technology investments at your company.
Business skills of IT staff … please rate whether the Business Skills of IT Staff facilitates or inhibits new technology
investments at your company.
IT skills of end users … please rate whether the IT Skills of End Users facilitates or inhibits new technology
investments at your company.
Ability to satisfy demand for highly skilled … please rate whether the Ability to Hire New IT Staff facilitates or inhibits new
IT labor technology investments at your company.
2. Internal IT Use Intensity of electronic communication … please rate how important the following methods are for internal communications: a)
(IIT) media such as email, Intranets and wireless Email, b) Company Intranets, c) Wireless Devices.
devices for internal communications.
3. Supplier Facing Intensity of electronic communication … please rate how important the following methods are for communications with suppliers:
IT Use (SIT) media such as email, Intranets and wireless a) Email, b) Company Intranets, c) Wireless Devices.
devices for communications with suppliers
and supplier facing work practices.
4. Digital Degree of digitization in purchasing Electronic Purchase Orders/Total Purchase Orders
Transaction s (DTI)
Degree of digitization in sales to customers Electronic Sales/Total Sales
5. Management Degree of senior management commitment … please rate whether the Degree of Senior Management Support for IT Projects facilitates
Capability (MC) to IT projects or inhibits new technology investments at your company.
Degree of business unit involvement in IT … please rate whether the Degree of Business Unit Involvement in IT Projects facilitates or
decisions inhibits new technology investments at your company.
6. Internet Degree to which firms use Internet Given a scale of 1 to 5 with 1 being “no use of the Internet” and 5 being “fully automated
Capability (IC) architectures in sales force management via the Internet,” please identify to what extent your company uses Internet technology to
perform sales force management.
… in employee performance measurement … please identify to what extent your company uses Internet technology to perform
employee performance measurement.
… in training … please identify to what extent your company uses Internet technology to perform
employee training.
… in post sales customer support … please identify to what extent your company uses Internet technology to perform post
sales customer support.
IT Investments Variables:
Total IT $ What were the total expenditures on information technology (IT) in millions of dollars for the entire Company, including both internal and outsourced
expenditures? Please assume that IT includes all computers, software, data communications (including via phone line), and people dedicated to providing IT
services.
Infrastructure Of the firm-wide IT expenditure identified in Question A2, what percentage would you classify as IT Infrastructure? Please consider IT Infrastructure as: the base
foundation of IT capability budgeted for and provided by the I/S function and shared across multiple applications or business units. This infrastructure usually
includes the network, helpdesk, data centers, etc. but excludes applications.
Transactional Please consider Transactional IT as investments in IT made to cut operating costs (e.g., reduce costs of preparing & sending invoices)
Informational … to increase or protect your sales or market share by providing improved customer service or products (e.g., online product catalog)
Strategic … to provide information. This would include information for accounting, managing quality, EIS, performance management, etc.

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About the Center for Information Systems Research
CISR MISSION CISR RESEARCH PATRONS

CISR was founded in 1974 and has a strong track record BT Group
of practice based research on the management of The Boston Consulting Group, Inc.
information technology. As we enter the twenty-first Diamond Management & Technology Consultants
century, CISR’s mission is to perform practical empirical Gartner
research on how firms generate business value from IT. IBM Corporation
CISR disseminates this research via electronic research Microsoft Corporation
briefings, working papers, research workshops and Tata Consultancy Services—America
executive education. Our research portfolio includes:
Managing the IT Resource CISR SPONSORS
What the CEO wants from IT Aetna, Inc.
The Future of the IT Organization Allstate Insurance Co.
IT Governance in Top Performing Firms American Express Corp.
Enterprise Architecture as Strategy AstraZeneca Pharmaceuticals, LP
IT Portfolio Investment Benchmarks & Links to Firm Banco ABN AMRO REAL S.A. (Brazil)
Performance Biogen Idec
Reducing IT-Related Risk Campbell Soup Company
IT and Business Strategy CareFirst BlueCross BlueShield
Business Models and IT Investment and Capabilities Care USA
IT-Enabling Business Innovation and Transformation Caterpillar, Inc.
How IT Can Enhance Business Agility Celanese
Managing Across Boundaries Chevron Corporation
Effective Governance of Outsourcing Chubb & Sons
Building Effective Relationships Between Business & Commonwealth Bank of Australia
IT Leaders Det Norske Veritas (Norway)
Effective Distributed Collaboration Direct Energy
Effective IT Engagement Inside and Outside the Firm EFD
Since July 2000, CISR has been directed by Peter Weill, EMC Corporation
formerly of the Melbourne Business School. Drs. Jeanne Family Dollar Stores, Inc.
Ross, George Westerman and Nils Fonstad are full time The Guardian Life Insurance Company of America
CISR researchers. CISR is co-located with the MIT Information Services International
Center for Digital Business and Center for Collective ING Groep N.V. (Netherlands)
Intelligence to facilitate collaboration between faculty and Intel Corporation
researchers. International Finance Corp.
Liberty Mutual Group
CISR is funded in part by Research Patrons and Sponsors Merrill Lynch & Co., Inc.
and we gratefully acknowledge the support and MetLife
contributions of its current Research Patrons and Mohegan Sun
Sponsors. News Corporation
Nissan North America, Inc.
CONTACT INFORMATION Nomura Research Institute, Ltd. (Japan)
Center for Information Systems Research Northrop Grumman Corp.
MIT Sloan School of Management PepsiAmericas, Inc.
3 Cambridge Center, NE20-336 PepsiCo International
Cambridge, MA 02142 Pfizer, Inc.
Telephone: 617/253-2348 PFPC, Inc.
Facsimile: 617/253-4424 Procter & Gamble Co.
http://mitsloan.mit.edu/cisr Quest Diagnostics
Raytheon Company
Peter Weill, Director pweill@mit.edu Renault (France)
Christine Foglia, Center Manager cfoglia@mit.edu Standard & Poor’s
Jeanne Ross, Principal Res. Scientist jross@mit.edu State Street Corporation
George Westerman, Res. Scientist georgew@mit.edu TD Banknorth
Nils Fonstad, Research Scientist nilsfonstad@mit.edu Telenor ASA (Norway)
Stephanie Woerner, Res. Scientist woerner@mit.edu Time Warner Cable
Jack Rockart, Sr. Lecturer Emeritus jrockart@mit.edu Trinity Health
Chuck Gibson, Sr. Lecturer cgibson@mit.edu TRW Automotive, Inc.
David Fitzgerald, Asst. to the Director dfitz@mit.edu Unibanco S.A. (Brazil)
Tea Huot, Administrative Assistant thuot@mit.edu United Nations — DESA
The Walt Disney Company

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CENTER FOR Massachusetts

IT Assets, Organizational Capabilities and Firm

Sinan Aral and Peter Weill

August 2006 (Revised July 2007)

CISR WP No. 360 and MIT Sloan WP No. 4632-06

© 2007 Massachusetts Institute of Technology. All rights reserved.

Research Article: a completed research article drawing on one or

Title: IT Assets, Organizational Capabilities and Firm Performance:

Author: Sinan Aral and Peter Weill

Date: August 2006 (Revised July 2007)

Abstract: Despite evidence of a positive relationship between IT investments and firm

Keywords: Business Value of Information Technology, Information Technology Assets,

2. Theory and Literature

© 2007 MIT Sloan—Aral & Weill Page 2

2.2 The Resource Based Theory of IT

© 2007 MIT Sloan—Aral & Weill Page 3

2.3 Re-Conceptualizing IT Resources as Combinations of IT Assets and IT Capabilities

2.4. Disaggregating Total IT Capital into IT Asset Classes

© 2007 MIT Sloan—Aral & Weill Page 4

2.5. IT Capabilities as a Mutually Reinforcing System of Practices and Competencies

© 2007 MIT Sloan—Aral & Weill Page 5

© 2007 MIT Sloan—Aral & Weill Page 6

2.5.1. Competencies (Skills)

2.5.2 Practices (Routines)

© 2007 MIT Sloan—Aral & Weill Page 7

© 2007 MIT Sloan—Aral & Weill Page 8

2.6. Dependent Variables: Distinguishing Different Dimensions of Firm Performance

© 2007 MIT Sloan—Aral & Weill Page 9

© 2007 MIT Sloan—Aral & Weill Page 10

3.2 Reliability of the Data

3.3 Control Variables

© 2007 MIT Sloan—Aral & Weill Page 11

3.4 Model Specification

© 2007 MIT Sloan—Aral & Weill Page 12

4.1 IT Assets and Firm Performance

© 2007 MIT Sloan—Aral & Weill Page 13

4.2 Testing Complementarity Between IT Assets and Organizational IT Capabilities

© 2007 MIT Sloan—Aral & Weill Page 14

© 2007 MIT Sloan—Aral & Weill Page 15

4.4 Limitations and Future Research

© 2007 MIT Sloan—Aral & Weill Page 16

Figure 1: Theoretical Model of IT Resources

Table 1: IT Assets and Expected Performance Benefits

© 2007 MIT Sloan—Aral & Weill Page 17

© 2007 MIT Sloan—Aral & Weill Page 18

Table 4: Reliability and Validity of IT Capability Metrics

© 2007 MIT Sloan—Aral & Weill Page 19

© 2007 MIT Sloan—Aral & Weill Page 20

Table 7: Correlations Between IT, Organizational Capabilities and Performance

© 2007 MIT Sloan—Aral & Weill Page 21

© 2007 MIT Sloan—Aral & Weill Page 22

© 2007 MIT Sloan—Aral & Weill Page 23

© 2007 MIT Sloan—Aral & Weill Page 24

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© 2007 MIT Sloan—Aral & Weill Page 26

© 2007 MIT Sloan—Aral & Weill Page 27

CISR MISSION CISR RESEARCH PATRONS

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