Bharadwaj ResourceBasedPerspectiveInformation 2000

A Resource-Based Perspective on Information Technology Capability and Firm
Performance: An Empirical Investigation

Author(s): Anandhi S. Bharadwaj
Source: MIS Quarterly , Mar., 2000, Vol. 24, No. 1 (Mar., 2000), pp. 169-196
Published by: Management Information Systems Research Center, University of
Minnesota
Stable URL: https://www.jstor.org/stable/3250983
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Bharadwaj/IT Capability and Firm Performance
Q rMIS
~ E r rr
Qrterjy
A RESOURCE-BASED PERSPECTIVE ON
INFORMATION TECHNOLOGY CAPABILITY
AND FIRM PERFORMANCE: AN
EMPIRICAL INVESTIGATION1
By: Anandhi S. Bharadwaj Keywords: IT capability, IT resources, resource-

Goizueta Business School based theory, firm performance
Emory University
Atlanta, GA 30322 ISRL Categories: AF0401, A10104, E10201,
U.S.A. GA01
[email protected]
Introduction
Abstract
Despite the widely held belief that information
The resource-based view of the firm attributes
technology (IT) is fundamental to a firm's survival
superior financial performance to organizational
and growth, scholars are still struggling to specify
resources and capabilities. This paper develops
the underlying mechanisms linking IT to financial
performance. Anecdotal evidence and case
the concept of IT as an organizational capability
and empirically examines the association betweenstudies indicate that effective and efficient use of
IT capability and firm performance. Firm specific
IT is a key factor differentiating successful firms
IT resources are classified as IT infrastructure,
from their less successful counterparts. For
human IT resources, and IT-enabled intangibles. example, IT capabilities were found to be an
A matched-sample comparison group metho- important differentiator of banks that were doing
dology and publicly available ratings are used to in the mid-1980s, as compared to those that
well
assess IT capability and firm performance. were less profitable (Nolan 1994). Widely publi-
Results indicate that firms with high IT capability cized IT programs in firms such as American
tend to outperform a control sample of firms on a Airlines, Merrill-Lynch, and Frito-Lay have been
variety of profit and cost-based performance associated with superior business performance.
measures. At the same time, there is also evidence that
many firms, concerned about falling behind on the
technology curve, engage in high IT investments
without deriving any benefits from IT (Nolan 1994).
This study focuses on the performance effects of

IT, an issue that has provoked much debate over
'Sirkka Jarvenpaa was the accepting senior editor for
this paper. the last decade. Dubbed the "productivity para-
MIS Quarterly Vol. 24 No. 1, pp. 169-196/March 2000 169

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dox," the controversy over the business value of copy attributes of a firm which are seen as the
computer investments continues to rage even in fundamental drivers of performance (Conner
the face of more encouraging evidence about 1991; Rumelt 1984, 1987; Schulze 1992).
payoffs from IT (Brynjolfsson 1993; Brynjolfsson Adopting a resource-based perspective of IT,
and Hitt 1993, 1996; Hitt and Brynjolfsson 1996) researchers have argued that since investments
For example, in his most recent book, The in IT are easily duplicated by competitors, invest-
Squandered Computer, Strassman (1997) argues ments per se do not provide any sustained
that there is no discernible relationship between IT advantages. Rather, it is how firms leverage their
investments and any measure of firm profitability investments to create unique IT resources and
including return on assets, return on equity, and skills that determine a firm's overall effectiveness
economic value added. Other empirical studies (Clemons 1986, 1991; Clemons and Row 1991;
that have investigated the relationship have also Mata et al. 1995). Thus, despite uniformly high
yielded mixed results. These results have been investments in technology, IT resources and skills
extensively cited and summarized elsewhere (c.f. tend to be heterogeneously distributed across
Brynjolfsson 1993; Hitt and Brynjolfsson 1996; firms, leading to different patterns of IT use and
Lucas 1993; Wilson 1993). The findings of past effectiveness. However, only a limited number of
studies have however been questioned on studies have explored the resource-based view of
methodological grounds such as (1) use of IT, and the analyses to date have been mostly
inappropriate measures of IT intensity, (2) failure conceptual. Clearly there is a need for further
to control for other factors that drive firm profits, review and testing of the resource-based view of
and (3) problems related to sample selection and IT (c.f. Jarvenpaa and Leidner 1998; Mata et al.
sample size (Dos Santos et al. 1993; Hitt and 1995).
Brynjolfsson 1996; Lucas 1993; Mooney et al.
1995). The purpose of this paper is to employ the
resource-based view to develop the theoretical
Attributing the inconclusiveness to conceptual links and empirically examine the association
limitations, several studies have stressed the need between IT capability and business performance.
for better theoretical models that trace the path Since the resource-based view explicitly recog-
from IT investments to business value (c.f. Beath nizes the importance of intangibles such as
etal. 1994; Grabowski and Lee 1993; Lucas 1993; customer orientation and organizational know-
ledge, it offers a significant opportunity to explore
Markus and Soh 1993; Sambamurthy and Zmud
1994). For example, some recent studies have these theoretical complimentarities in examining
adopted a "process-oriented" view that examines the relationship between IT resources and firm
the effects of IT on intermediate business performance. The remainder of this paper is
organized
processes (Barua et al. 1995; Mooney et al. 1995; as follows. The next section presents
Soh and Markus 1995). Theoretical developments a brief outline of the resource-based theory of the
in process innovation and business process firm followed by an examination of the links
engineering (Davenport 1993; Hammer and between IT resources and firm performance. This
Champy 1993) have provided additional support is followed by the empirical analysis, describing
for the process-oriented view which attempts to the data sources and the methodology used to
link the intermediate process variables to firm address the research questions. Finally, the
level performance variables. results and the implications of the study are
presented and some concluding comments
offered.
A potential framework for augmenting the con-
ceptual analysis of IT's effects on firm perfor-
mance is the resource-based view (RBV) of the
firm which links the performance of organizations A Resource-Based View of
to resources and skills that are firm-specific, rare,
IT and Firm Performance
and difficult to imitate or substitute (Barney 1986,
1991). The resource-based view is presently the
dominant theoretical perspective in strategic Rooted in management strategy literature, the
management literature, and focuses on costly-to- resource-based view of the firm posits that firms
170 MIS Quarterly Vol. 24 No. 1/March 2000

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compete on the basis of "unique" corporate Capabilities subsume the notion of organizational
resources that are valuable, rare, difficult to
competencies (Prahalad and Hamel 1990) and
are rooted in processes and business routines.
imitate, and non-substitutable by other resources
(Barney 1991; Conner 1991; Schulze 1992). The Grant (1995) describes a hierarchy of organi-
resource-based theory operates under the zational capabilities, where specialized capa-
assumptions that the resources needed to con- bilities are integrated into broader functional
ceive, choose, and implement strategies are capabilities such as marketing, manufacturing,
heterogeneously distributed across firms and that and IT capabilities.3 Functional capabilities in turn
these firm differences remain stable over time integrate to form cross-functional capabilities such
(Barney 1991). Resources tend to survive com-as new product development capability, customer
petitive imitation when protected by isolating support capability, etc. For example, a firm's
mechanisms (Rumelt 1984) such as time- customer support capability may derive from the
compression diseconomies, historical uniqueness, cross-functional integration of its marketing, IT,
embeddedness and causal ambiguity2 (Barney and operations capabilities.
1991; Dierickx and Cool 1989; Peteraf 1993).
Although proponents of the resource-based view

IT and the Resource-Based View
generally tend to define resources broadly, to
include assets, knowledge, capabilities, and
Adopting a resource-based perspective, inform
organizational processes, Grant (1991) distin-
tion systems researchers have identified vario
guishes between resources and capabilities and
IT related resources that serve as potential
provides a classification of resources into tangible,
sources of competitive advantage. For example,
intangible, and personnel-based resources.
Mata et al. (1995) argue that managerial IT skills
Tangible resources include the financial capital
are rare and firm specific and therefore likely to
and the physical assets of the firm such as plant,
serve as sources of sustained competitive advan-
equipment, and stocks of raw materials. Intan-
tage. Along with competent IT skills (human IT
gible resources encompass assets such as
asset), Ross et al. (1996) point out that a reusable
reputation, brand image, and product quality,
technology base (technical asset) and a strong
while personnel-based resources include technical
partnering relationship between a firm's IT and
know-how and other knowledge assets including
business unit management (relationship asset)
dimensions such as organizational culture, em-
influence a firm's ability to deploy IT for strategic
ployee training, loyalty, etc. While resources
objectives. Likewise, in a case study of Japan
serve as the basic units of analyses, firms create
Airline's competitive position, Chatfield and Bjorn-
competitive advantage by assembling resources
Andersen (1997) describe the airline's inter-
that work together to create organizational
organizational system (a physical capital
capabilities. Capabilities, thus, refer to an
resource) and its people (human capital resource)
organization's ability to assemble, integrate, and
as the primary sources of its business growth and
deploy valued resources, usually, in combination
improved competitiveness.
or copresence (Amit and Schoemaker 1993;
Russo and Fouts 1997; Schendel 1994).
Extending the traditional notion of organizational
capabilities to a firm's IT function, a firm's IT
capability is defined here as its ability to mobilize
2Time compression diseconomies refers to the time and deploy IT-based resources in combination or
needed to acquire the resource through leaming,
experience, firm-specific knowledge, or trained copresent with other resources and capabilities.
proficiency in a skill; historical uniqueness refersAdopting
to Grant's classification scheme for
advantages that accrue due to unique resources suchresources,
as key IT-based resources are classified
distinctive locations or due to first mover advantagesin the following order: (1) the tangible resource
such as reputation, brand loyalty, etc.; embeddedness of
resources refers to the value of a resource being comprising the physical IT infrastructure compo-
inexplicably linked to the presence of another
complementary or cospecialized resource; causal
ambiguity refers to the ambiguity surrounding the
connection between a firm's resource portfolio and its 3Grant (1995, p. 131) refers to an IT-related functional
performance. capability as an MIS capability.
MIS Quarterly Vol. 24 No. 1/March 2000 171

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nents, (2) the human IT resources comprising the functional processes, and cross-selling oppor-
technical and managerial IT skills, and (3) the tunities (Sambamurthy and Zmud 1992; Weill and
intangible IT-enabled resources such as know- Broadbent 1998). As Keen (1991, p. 184) notes,
ledge assets, customer orientation, and synergy. "it is the IT platform that determines the business
The notion of IT as an organizational capability is degrees of freedom a firm enjoys in its business
well illustrated by the example of Provident plans." A non-integrated IT infrastructure domi-
National Bank of Philadelphia. When its chief nated by system incompatibilities severely
competitor announced a free checking service, restricts an organization's business choices.
Provident was able to immediately announce a Creating an integrated IT infrastructure, however,
similar service to its customers, based on the IS requires both considerable time and expertise.
management's guarantee that the required appli- As firms develop IT infrastructures that span entire
cations would be implemented before the next organizations, linking key suppliers and custo-
billing cycle (Duncan 1995). Providing such a mers, they evolve elaborate rules regarding the
guarantee meant that Provident had (1) a flexible distribution and management of hardware, soft-
IT infrastructure on which a new application could ware, and other support services (Ross et al.
be launched in a very short time; (2) competent IT 1996). Although the individual components that
skill base that allowed them to envision the go into the infrastructure are commodity-like, the
process of integrating the components to develop
strategic benefits of countering the competitor's
an infrastructure tailored to a firm's strategic
strategy and deliver a critical application within
context is complex and imperfectly understood
one billing cycle; and finally (3) a strong customer
(Weill and Broadbent 1998). Successful firms
orientation, an intangible organizational resource,
also learn to redesign their products and services
enabled by the strength of their IT infrastructure
and IT skill base. In the following paragraphs,inthe
a manner that exploits their infrastructure capa-
bilities. For example, developing a new order
identification of IT as an organizational capability
created by the interaction of IT infrastructure,
processing system may require the infrastructure
human IT resources, and IT-enabled intangibleservices of mainframe processing, customer
resources are explicated. Hypotheses linking databases,
a personal computers, local area and
firm's IT capability to financial performancenational
are communication networks. Having these
then presented. components in place will significantly reduce the
time and cost to build the system (Weill and
Broadbent 1998).
IT Infrastructure
The physical IT assets which form the core of aResource-based theorists contend that physical
firm's overall IT infrastructure comprise the assets, in and of themselves, can serve as
computer and communication technologies andsources of competitive advantage only if they "out-
the shareable technical platforms and databasesperform" equivalent assets of competitors (Barney
(Ross et al. 1996; Weill et al. 1996). The IT infra-1991; Rumelt 1984). Due to the fact that IT
structure is a shared information delivery base,systems can be purchased or duplicated fairly
the business functionality of which has been easily by competitors, it is often argued that
defined in terms of its reach and range (Keenphysical IT resources are unlikely to serve as
1991). While the reach determines the locationssources of competitive advantage (Mata et al.
that the platform can access and to which it can 1995). Such a reductionist view of technology,
link, its range defines the kind of information thathowever, seeks to value the infrastructure solely
can be seamlessly and automatically shared in terms of its individual components, assumes
across systems and services. the separability of the IT assets, and ignores the
synergistic benefits of integrated systems. How-
A firm's IT infrastructure has been described as a ever commodity-like the technology components
major business resource and a key source for may be, the architecture that removes the barriers
attaining long-term competitive advantage (Keen of system incompatibilities and makes it possible
1991; McKenney 1995). The infrastructure under- to build a corporate platform for launching busi-
pins a firm's competitive position by enabling ness applications is clearly not a commodity
initiatives such as cycle time improvement, cross- (Keen 1991). Building such integrated infrastruc-

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Bharadwaj/lT Capability and Firm Performance
tures takes time and effort4 and involves experien- resources include: (1) technical IT skills, such as
tial learning. Neo (1988), for example, found that programming, systems analysis and design, and
the most successful IT implementers were the competencies in emerging technologies, and
ones that had already implemented similar (2) the managerial IT skills, which include abilities
systems and had accumulated experience. Time such as the effective management of IS functions,
compression diseconomies (Deirickx and Cool coordination and interaction with user community,
1989) make it difficult for newcomers to catch up and project management and leadership skills
by simply "throwing money" and purchasing the IT (Capon and Glazer 1987; Copeland and
systems. A case in point: when Kaiser Perma- McKenney 1988).
nante embarked on a plan to develop an
integrated IT architecture, it reversed its Firms with strong human IT resources are able to
longstanding policy of regional autonomy for IT (1) integrate the IT and business planning pro-
decisions. As the program evolved within Kaiser, cesses more effectively, (2) conceive of and
the firm had to deal with major logistic challenges develop reliable and cost effective applications
and overcome huge cultural clashes. Other firms that support the business needs of the firm faster
cannot simply copy Kaiser without experiencing than competition, (3) communicate and work with
similar upheavals. business units more efficiently, and (4) anticipate
future business needs of the firm and innovate
Viewed from the RBV perspective, the IT infra- valuable new product features before competitors.
structure provides the resources that make The managerial ability to coordinate the multi-
feasible innovation and continuous improvement faceted activities associated with the successful
of products (Duncan 1995; Venkatraman 1991). implementation of IT systems has been found to
The unique characteristics of the IT infrastructure be a key distinguishing factor of successful firms
that enable firms to implement the right applica- (Sambamurthy and Zmud 1992).
tions at the right time render the cost and value of
technological innovation different for different
Technical and managerial IT skills typically evolve
firms. Indeed, IT infrastructures that enable firms
over long periods of time through the accumu-
to (1) identify and develop key applications
lation of experience (Katz 1974). Furthermore,
rapidly, (2) share information across products,
managerial IT skills are often tacit, dependent on
services, and locations, (3) implement common
other interpersonal relationships which may take
transaction processing and supply chain manage-
years to develop (Chatfield and Bj0rn-Andersen
ment across the business, and (4) exploit oppor-
1997; Mata et al. 1995), and tend to be highly
tunities for synergy across business units
local or organization specific (Sambamurthy and
represent the type of causally ambiguous
Zmud 1997). For example, creating a user com-
resources (Reed and DeFillipi 1990) that are
central to the resource-based view. Such infra- munity that welcomes technological change and
structures, however, evolve over time and in a embraces new systems takes several years over
which the IS group has to engage in mutual trust
manner that make their value and description
building and commitment to shared goals. Like-
difficult to define even for their developers (Cash
wise, application development skills such as those
et al. 1992).
needed for large software development projects
often require interactive teams of IT staff that are
far more immobile than individual members.
Human IT Resources
These teams develop distinctive styles and coordi-
Organizational human resources generally com- nation mechanisms, which are perfected overtime
prise the training, experience, relationships,through
and learning-by-doing and repetition. Nelson
insights of its employees (Barney 1991; Grant and Winter (1982) use the term "organizational
1995). The critical dimensions of human IT routines" to describe the regular and predictable
patterns of activity that govern coordinated
activities within organizations. Firms that have de-
veloped and perfected sophisticated IT develop-
4Weill and Broadbent estimate a lead time of five to
seven years to develop IT infrastructures. ment routines such as JAD (joint application

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development) and RAD (rapid application economic benefits that companies gain from I
development) are able to significantly reduce bothhas been attributed largely to their managerial I
development costs and development time. For resources (Keen 1993; Mata et al. 1995). For
example, Cambridge Technology Partners, a soft-example, Keen (1993) attributes Federal
ware company, uses a multifunctional organiza-Express's commitment to high levels of customer
service as a strategy rooted in their managerial IT
tional routine called Co-RAD (for cooperative rapid
application development) that is specifically capability.
designed to bring together the diverse resources
and skills necessary for successful software
development (LaPlante 1997). When new em- IT-Enabled Intangibles
ployees join the firm, they are trained not only in A major contribution of the resource-based theory
software systems but also in development is its explicit recognition of the value of intangible
methodologies unique to the firm. Thus there are organizational resources. Several key organiza-
increasing returns to the firm as they add qualified tional intangibles such as know-how (Teece
professionals to an existing network of pro- 1998), corporate culture (Barney 1991), corporate
grammers. Such team-embodied knowledge also reputation (Vergin and Qoronfleh 1998), and
suffers a slower decay rate as it is passed on with- environmental orientation (Russo and Fouts 1997)
out much degradation to successive generations have been recognized as key drivers of superior
of team members (Dierickx and Cool 1989). performance. In general, firm-specific intangibles
There is no known way to short circuit these path tend to be tacit, idiosyncratic, and deeply em-
dependent processes. bedded in the organization's social fabric and
history (Winter 1987). In the context of a firm's IT
The adaptability of employees to organizational capability, a question that is becoming in-
change is another factor that determines the creasingly important for ClOs and other senior
strategic flexibility of the firm (Grant 1991). Clark managers is "how do investments in technology
et al. (1997) characterize an organization's ability create superior intangible resources for the firm?"
to rapidly develop and deploy critical IT systems In fact, according to a recent survey, highly
as its change-readiness capability and attribute it effective IT users tend to pay greater attention to
primarily to the availability of a skilled internal IS the intangible benefits of IT such as improved
workforce. Organization architectural elements customer service, enhanced product quality,
(Nadler and Tushman 1997), such as empowered increased market responsiveness, and better co-
and autonomous systems design teams, enriched ordination of buyers and suppliers in evaluating IT
and shared jobs, team processes, and incentives systems (Brynjolfsson and Hitt 1997).
for collaborative learning and sharing of work
practices, serve as key levers in building such Skeptics of IT's direct effects on firm performance
organizational resources. These organization have long argued that firms benefit from IT only
design elements serve to create an environment
when they embed IT in a way that produces
in which IT personnel can leverage not only their
valuable, sustainable resource complementarity
own technical and managerial skills but can also
(Clemons 1986, 1991; Clemons and Row 1991;
effectively bring to bear the assets of the entire
Powell and Dent-Micallef 1997). IT is a resource
socio-technical network to which the member
that generates competitive value only when it
belongs. For example, Citibank recently incor-
leverages or enables pre-existing firm resources
porated an organizational routine for launching
and skills. Although the enabling role of IT with
web-based applications that requires managers to
respect to several organizational intangibles such
specify how they think the project should evolve
as product quality, customer service, market
and predict unexpected developments (Hibbard
orientation, knowledge assets, organizational
1998). Viewed from a resource-based perspec-
memory, organizational learning, synergy, etc. has
tive, it is clear that human IT resources are difficult
been indicated in the business literature (c.f.
to acquire and complex to imitate, thereby serving
Quinn and Baily 1994), due to constraints of
as sources of competitive advantage. In fact the IT's enabling role is illustrated here by
space,
wide difference in competitive organizational and
utilizing three key organizational intangibles:

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customer orientation, knowledge assets, and Knowledge Assets. A key aspect of a firm's
synergy. intangible resources is its intellectual capital or
knowledge assets. This is embedded in the skills
Customer Orientation. The emphasis on custo- and experience of its employees, as well as in its
mer orientation is apparent in virtually every processes, policies, and information repositories.
industry, and the positive impact of customer A firm's knowledge capital is widely recognized as
orientation on firm performance has been widely a unique, inimitable, and valuable resource
documented (c.f. Jaworski and Kohli 1993; Narver (Matusik and Hill 1998; Prahalad and Hamel
and Slater 1990). In achieving high levels of 1990). The relationship between organizational
customer orientation, firms have found IT to be an knowledge and competitive advantage is mode-
indispensable factor. In fact, customer orientation rated by the firm's ability to integrate, transfer, and
strategies such as customer relationship manage- apply knowledge (Matusik and Hill 1998).
ment are rooted in the core IT capability of the According to Nonaka and Takeuchi (1995), know-
firm. For example, Prudential recently invested in ledge management requires a commitment to
an IT system designed to improve its knowledge create new task-related knowledge, disseminate
of customers across all business units. According it throughout the organization, and embody it in
to Prudential's CIO, products, services, and systems. IT is critical to
knowledge management as technologies such as
a customer who has a low business value groupware and multimedia systems assist in
clarifying assumptions, speeding up communi-
with one unit might have a very valuable
cations, eliciting tacit knowledge, and constructing
relationship if you look at it across the entire
enterprise. So we're building an information histories of insights and cataloging them (Brown
warehousing capability that allows us to and Duguid 1991; Dodgson 1993; Grantham and
recognize those relationships (Janah 1998). Nichols 1993). Increasingly, the extent to which a
firm's knowledge is embedded in its databases
and decision support systems is determining its
A key capability for superior customer orientation
ability to respond to environmental changes
is the ability to track and predict changing custo-
(Sabherwal
mer preferences, especially in volatile markets. IT and King 1991). Embedding know-
enables firms to track shifts in customer choices ledge in such systems also enables its rapid
much more rapidly. At National Semiconductor, a transfer to novices and other new members. For
web-based broadcasting system is used to example, Hughes Space and Communications
capture customer information online and present has built a "lessons learned" database that
it immediately to managers. This has resulted in captures the unstructured knowledge of its desi
more accurate forecasts of product demand and team in the form of wisdom, experience, and
boosted the sales of key components (Cronin stories. The database aids in the design of ne
1997). satellites by providing access to reports of pa
defects. While other firms can make similar
Although customer management systems are investments, they would be hard pressed to
widely available, few firms are able to achieve the emulate the structure for categorizing and
tight integration and coordination of the functional searching the knowledge bases and to sustain the
units required for efficient processing of informa- level of ongoing support needed for the main-
tion. In these firms, the information systems are tenance of knowledge bases (Davenport 1996).
tightly integrated with management decision
making, the IS personnel have close working
IT systems thus enable knowledge formalization
relationships with line managers, and the
and consolidation of previous knowledge gains
management information system becomes a vital
and their leverage across the organization.
tool in the day-to-day running of the firm. Merely
purchasing IT systems will not ensure competitive
Technologies such as groupware and expert
parity, because it is the socially complex link systems, when populated with firm-specific
between IT and other parts of the organization that knowledge and insights, are transformed into
serves as the source of the advantage (Barney specialized assets that are almost impossible to
1997). imitate by competitors. Furthermore, effective

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knowledge management is an inherently social reciprocity inherent in shared practice. This

process that requires tremendous organizational interaction of IT with other socially complex
change. Creating a culture for knowledge organizational intangible resources is at the heart
management entails changes to the organization of many of the difficulties that firms have when
structure, control and communication systems, trying to imitate their more successful
and rewards structures. Few organizations are counterparts.
able to manage effectively both the technological
and social aspects of knowledge management for
competitive advantage (Marshall et al. 1996).
IT Capability and Firm Performance
Synergy. Synergy refers to the sharing of
In summary, the resource-based view of IT
resources and capabilities across organizational
suggests that firms can and do differentiate
divisions. Beyond operational efficiencies, know-
themselves on the basis of their IT resources. A
ledge and information sharing across functional
firm's IT infrastructure, its human IT skills, and its
units enables firms to be more flexible and to
ability to leverage IT for intangible benefits serve
respond faster to market needs. As Brown and
as firm-specific resources, which in combination
Duguid (1998) point out, information technologies
create a firm-wide IT capability. While each of the
geared toward creating organizational synergies
individual IT resources are complex to acquire and
can aid in the delivery of needed resources by
difficult to imitate, firms that achieve competitive
removing the physical, spatial, and temporal
advantage through IT have also learned to
limitations to communication. For example,
combine effectively their IT resources to create an
Andersen Consulting's "Knowledge Exchange"
overall IT capability. For example, a flexible IT
connects over 20,000 consultants around the
infrastructure when combined with strong human
world and consists of over 2,000 databases into
IT skills becomes a potent organizational
which consultants can tap. As a result, problems
that once took two weeks to solve are now solved capability. Likewise, successful firms employ their
technology base and human IT skills for
overnight. Technologies such as CAD/CAM permit
developing IT-enabled intangibles such as custo-
inter-organizational design teams to share engi-
mer orientation, synergy, and superior organiza-
neering drawings and foster greater cooperation
tional knowledge. Knowledge about the produc-
in buyer-supplier relationships (Bensaou 1997).
tive application of IT and the manner in which
Ives et al. (1993) cite several examples of firms
individual IT resources must be combined to
that have globally coordinated their functions of
create superior applications become embedded in
procurement, logistics, and inventory manage-
these organizations in the form of organizationa
ment through systems running at the corporate
routines (Nelson and Winter 1982) further
headquarters.
bolstering the IT skill base of the firm. Firms that
are successful in creating superior IT capability in
Flexible IT systems also enable firms to realize
turn enjoy superior financial performance by
cost and demand synergies by marketing new
bolstering firm revenues and/or decreasing firm
products and services with little added costs. costs. Firms that incur the costs of IT without
However, competitive advantages associated with
developing an IT capability will be at a compara-
synergy are less likely to be imitated, as they are
tive disadvantage. This directly leads us to the
often achieved under a unique set of circum-
two main hypotheses:
stances and on the basis of firm-specific
resources (Bharadwaj et al. 1993). IT has a great H,: Superior IT capability will be associated
enabling capacity for making other organizational with significantly higher profit ratios.
resources more easily accessible and shareable.
However, to derive competitive benefits from H2: Superior IT capability will be associated
synergy, firms need to create a social context and with significantly lower cost ratios.

117.193.124.98 on Wed, 02 Oct 2024 02:15:19 UTC
Methodology leaders are determined by a select group of

industry analysts, IT executives, IS researchers,
The "matched sample comparison group" method- and other practitioners who are asked to vote for
ology is employed to empirically assess the the firms they consider to be most effective and
relationship between superior IT capability and efficient in use of IT. Within each industry group,
firm performance. This is a popular methodology the firms receiving the highest number of votes
that has been used in several research studies in are selected as the IT leaders5. While the IT
leaders are not ranked on specific IT resources
the accounting, finance, and marketing literatures
skills, firms are peer-ranked on the basis of th
(c.f. Balakrishanan et al. 1996; Jain and Kini 1995;
Kalwani and Narayandas 1995) to compare the overall IT strengths. Thus, firms that are known
levels of interest variables across two samples:
have successfully launched innovative or strate
the treatment sample, in this case, a sample applications
of or who have a strong reputation f
firms with high IT capability, and a carefullybeing a technology leader tend to be ranked
the leaders. For example, Wal-Mart Stores, whi
selected control sample of firms matched to the
treatment sample by size and type. The has been widely recognized for its intensive use
performance of the matched control sample of IT, was ranked consistently as an IT leader in t
firms serves as a benchmark and helps removeretailing industry. The peer rankings of IT lead
were used as a measure of a firm's overall IT
the confounding effects of extraneous variables
and market forces that could influence firm capability. In other words, the IT leaders of eac
performance. A variety of profit and cost year are deemed to be the firms with high levels
measures are used to compare the financial IT capability. Industry experts tend to rank fir
performance of the two groups. Details about on the basis of their manifested IT capabilit
sample selection, methods, and measures used which, as argued earlier, can only result fr
follow. underlying strengths in IT resources and skil
The IT leaders are the firms that have successfu
combined their IT resources and skills to create
superior IT capability.
Sample Selection
Using the rankings of IT leaders from 1991
To identify firms with superior IT capability within through 1994,6 a sample comprising of all firms
an industry, the rankings provided by Informa- that were ranked as IT leaders in any of the four
tionWeek (IW) in their annual special issue were years was created first. This yielded a list of 149
used. Each year, since 1989, IW has published a firms, of which 34 firms were ranked as IT leader
special issue listing various items of data related in two of the four years, 16 firms in three of the
to IT such as IT budgets, size of IT staff, and four years, and six firms in all four years. In order
percentages of IT budget devoted to various to develop a more robust sample of IT leaders, the
technologies such as client-server computing, sample was further restricted to firms that were
telecommunications, and other hardware and selected as IT leaders in at least two of the four
software classifications. IW and ComputerWorld years. This reduced the sample to 56 firms, but
are the only two publicly available sources of data resulted in a sample with a more enduring IT
on corporate IT spending and other measures of capability. The next step was to create a
IT use in the U.S. Data from both sources have
matching set of control firms drawn from the
been used in a number of studies in the past Compustat
(c.f. database. The following procedure
Bharadwaj et al. 1999; Brynjolfsson and Hitt 1996;
Hitt and Brynjolfsson 1996; Lichtenberg 1995).
Lichtenberg (1995) also showed that there is a
51W, September 21, 1992, p. 154; September 27, 1993,
high correlation between the estimates of IT p.
data
25; October 10, 1994, p. 30; September 18, 1995, p.
from the two sources. 38.
Since 1991, IW has identified about 40 to 50 firms61n 1995, IW changed its procedure for ranking IT
(out of the 500) each year as the "leaders" of leaders by tying it to financial and operating performance
measures. We therefore use data only up to 1994, since
technology in their respective industries. The ITincluding data beyond that would be tautological.

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was used for selecting the control sample. First, such. The two groups were also compared using
the IT leaders were grouped into different industry commonly employed measures of firm size such
categories based on their four digit primary SIC. as sales, total assets, and number of employees.
A two-step process was then used to identify a A t-test carried out to check if there were any
matching firm for each firm in the IT leaders differences between the two groups on the various
sample. First, for each firm in the IT leaders size measures did not reveal any significant
sample, the choice was narrowed to a set of only differences between the groups. Table 1 provides
those firms with the same primary four-digit SIC descriptive statistics for the two groups. The mean
code as the leader firm. Next, from the set of (median) sales figure for the effective IT users and
potential control firms, the matching control firm the control samples were $17.9b ($10.4b) and
chosen was one that reported a five-year average $16.1b ($10.1b) billions of dollars respectively.
sales level that was closest to the level reported The two samples appear to be well matched on
by the leader firm. Following Barber and Lyon's size, since the means test (t-test) did not reveal
(1996) specification for defining industry any significant differences between the two
comparison groups, a specification was made that groups. The median (sign) test, however,
the average sales of the control firm must lie indicated that the control group differed from the
within 70% to 130% of the leader firm.7 Addi- IT leaders group on the number of employee
tionally, there was assurance that none of the measure (at the 10% level of significance).
control firms were ranked as an IT leader in any of Finally, as both the treatment and control samples
the years. are skewed toward larger firms, it is likely that the
firms are highly diversified. In order to verify if the
The process outlined above helped us match pairs extent of diversification for the two groups was
of firms on two dimensions. The firms in each pair significantly different, the entropy measure of
are drawn from the same industry and are of related diversification (Davis and Duhaime 1992;
equal size. Several recent studies of operating Robins and Weirsema 1995) was calculated for
performance have used a similar procedure of both groups. The mean related component of
matching sample firms to similar-size firms in the total entropy for the IT leaders sample was 0.85
same industry (c.f. Denis and Denis 1993; Kaplan and for the control sample was 0.93 across all four
1989). The underlying assumption is that oper- years. A t-test did not reveal any significant
ating performance varies by industry and firm size difference between the two groups for any of the
and that some of the cross-sectional variation inyears. A complete list of the firms that were
operating performance can be explained by an included in each group is shown in Appendix A.
appropriate industry benchmark. Further, litera-
ture in accounting has acknowledged that firm
size and industry type are strong predictors of the
choice of accounting methods and procedures Data Quality Assessment
used to compute costs such as depreciation and
amortization (Holthausen and Leftwich 1983; Large-scale surveys similar to the one published
Pincus 1993). Hence, there is reason to believe in IW that purport to rank companies based on
that the firms in each pair have used similar direct effectiveness measures are periodically
accounting methods and therefore their pro- reported in several business publications. For
fitability and cost ratios are directly comparable. example, Fortune publishes an annual reputation
The primary difference between the two firms in survey that ranks companies based on attributes
each pair is that the target firm in the treatment such as quality of management, product quality,
sample was ranked as a leader in IT use whereas innovativeness, social responsibility, use of cor-
the firms in the control group were not ranked as porate assets, etc. Results from such surveys are
often circulated widely and also cited in several
other press outlets. Although problems related to
data reliability and validity exist with such data, it
7For leader firms that did not have any matching control has several advantages as well. First, these
firm within 70% to 130% of sales level at the four digit
surveys provide a longitudinal database for com-
SIC, we identified a corresponding control firm at the
two or three digit SIC. paring firms on various constructs for which, often,

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.6 61 iE II )I~
Sign Test
T-test for
IT Leaders for
Descriptive Variables Control Sample Difference of
Sample Difference
Means
of Medians
Mean Median Mean Median T Z
Sales (billion $) 17.91 10.45 16.12 10.10 -0.93 -.053

Assets (billion $) 35.82 14.51 35.09 14.86 -0.13 -.04
Related Entropy 0.85 0.86 0.93 1.05 1.29 -2.32a
(Diversification)C
Number of Employees 89,000 49,000 84,000 42,000 -0.46 -.145b

aSignificant at the 1% level
bSignificant at the 10% level'
CFirm diversification (total): The entropy measure of diversification defined as the

diversification (DR) and unrelated diversification (DU), where:
DU = X Xiln1/X1
i-1
DR = Xik InXk/Xl
I- I k-i
where: X = % of sales
i = 1, 2,...G (Industry Groups-two digit SIC code)
k = 1, 2,...S (Segments-four digit SIC code)
research disciplines have a longer tradition of

other secondary sources of data do not exist (e.g.,
using publicly available survey data. For
effectiveness of IT usage, environmental friendli-
example, Fortune magazine's annual survey of
ness, innovativeness, social responsibility, etc.).
Second, the average response rate reported inmost admired corporations has been used in
several management strategy studies (cf.
these surveys is at least comparable to and often
better than most academic studies of this sort. Chakravarthy 1986; McGuire et al. 1988;
For example, IW's response rates tend to beO'Bannon and Preston 1993; Sharfman 1996)
around 60% of all companies surveyed. Third, and other rankings in the business press, such as
knowledgeable industry analysts and executives, Business Week's ranking of top MBA schools,
have been used in organization theory studies
who are often intimately familiar with the industry
(c.f. Elsbach and Kramer 1996; Tracy and
characteristics and trends, carry out the rankings.
Finally, the rankings are often corroborated Waldfogel 1997). Chen et al. (1993) also
through qualitative reports and business case conclude that industry analysts and executives
studies focusing on the best performers. For within an industry are reliable and accurate raters
example, the IW special issue includes case of corporate strategy.
studies describing how the best users deploy IT
more innovatively than their competitors. A major concern with the use of such perceptual
rankings, however, is that the rankings are likely
While the use of such large-scale survey results to be influenced by financial performance
has been minimal in the IS literature, other variables, thereby affecting the validity of the

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results. For example, in the case of Fortune's relative market to book value (RELMV,) =
reputation survey, it has been shown that a firm's (mkt/book valuef,,)/ (mkt /book valueu,,t,,);
rankings are influenced by its previous financial sales = logarithm of the average sales for past
performance. If these errors are pervasive, then five years;
a "financial performance halo" effect is said to growth,= (%change in sales in t, + ...+%change
exist. Brown and Perry (1994) describe a proce- in salest.5)/5;
dure to remove the financial performance halo riskt = debt/equity,.
effects from such large-scale surveys and present
a statistical method for removing a significant The past financial performance measures were
employed as independent variables in regression
portion of the halo if it exists. Their technique is
generalizable to other contexts and is recom- analyses on the IW rankings. The logistic regres-
mended when researchers use measures derived sion procedure was used since the dependent
variable was coded as a binary variable (Y = 1 for
from survey results that may be heavily influenced
IT leader and Y = 0 for control firm). The regres-
by factors extraneous to the construct of interest.
sion equation took the form:
Since it is likely that the respondents' evaluations
of firms for superior IT performance were in-
fluenced by the past financial performance of Y = Bo + B1ROA + B2RELMV + B3SALES +
those firms, the Brown and Perry approach was B4GROWTH + B5RISK + e
used to examine if any such financial performance
halo effect existed in the IW data. As shown in Table 2, the results of the logistic
regression analysis using five-year past data
indicated that the overall model was not signi-
ficant. The model chi-square had non-significant
Testing for Financial p-values, indicating that, taken collectively, the
Performance Halo past financial performance variables did not
account for any significant difference between the
If the selection of IT leaders by industry experts
twoisgroups. The individual tests of significance
in fact influenced by the past financial perfor-
for each of the variables also did not yield any
mance of the firms, then we should expect tosignificant
see values. The IT leaders sample, there-
strong correlation between the IW rankings and
fore,a did not appear to be enjoying any special
number of past financial and operational perfor-
halo effects due to past financial performance.
mance measures. The halo index includes indi-
vidual measures of corporate earnings, returns,
growth, size, and risk, and uses exactly the same
Dependent Variables
set of variables described in Brown and Perry
(1994). The halo index was created using five-
Data related to firm performance measures were
year performance data prior to the period during
collected from Compustat for both the treatment
which the firms were ranked as IT leaders. Since
and the control samples. The profit performance
the sample used rankings data from 1991 throughof the IT leaders and the control samples was
1994, financial performance data from 1985 compared using five profit-based measures
through 1990 were used to construct the halo focusing on net and operating income. The ratios
index, the argument being that if these firms were were scaled by measures of firm size based on
consistent superior financial performers during the sales, assets, and number of employees. The
five years immediately preceding their selection as first two ratios, return on assets (ROA) and return
IT leaders, then a halo effect would influence their on sales (ROS), have been widely used in the IT
business value literature as measures of firm
ranking as IT leaders. The halo index used five
operating and financial performance variables and
profitability (Cron and Sobol 1983; Hitt and
Brynjolfsson 1996; Strassman 1990; Weill 1992).
was computed as follows:
The ROA measure, calculated as the ratio of net
5 income to assets, indicates how profitably a firm
average return on assets (ROA,) = ( ROA,,)15; employs its assets since it reflects how much
i=1
profit a firm is able to generate for each dollar of

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IT Leader Control Standardized

Sample Sample Estimates
~~~~~~~~~~~~~~~~~~~^ F .6 _ /- - ^ NA %_ _ 44 -7 I_ - - C l
Average 0.44
GrowthU.3/ -1.u (p = .J1) u.u0 (p = u.53)
Mean Log 9.32 Sale
9.21 -0.53 (p = 0.59) 0.08 (p = 0.51)
Mean risk 118.70 156.08 0.71 (p = 0.48) -0.09 (p = 0.48)
Mean ROA 5.22 4.59 -0.84 (p = 0.4) 0.00 (p = 0.99)
Mean Relative Market to Book Value 5.82 5.153 -0.14 (p = 0.8) -0.02 (p = 0.85)
Number of firms (N) 56 56
Model -2LOGLX2 1.53

p value for model 0.91
Model degrees of freedom 5
asset invested. It is a broad measure that is Statistical Tests

correlated with several other profitability measures
The general hypothesis tested in this study is
(Grinyer and Norburn 1975). The ROS measure,
which is the ratio of net income to sales, serves as
whether firms with high IT capability tend to enjo
another indicator of a firm's net profit margin. better
The profit and cost performance when
operating income to assets (OI/A) and operating compared with a matched control sample of firms.
income to sales (OI/S) ratios focus on operating One way to test this hypothesis is to compare the
returns only and exclude incomes earned by mean the levels of operational performance variables
firm from other sources such as interest income for the treatment and control samples using a
and income from other extraordinary sources. standard t-test. However, an examination of the
Operating income is, therefore, regarded as a underlying distribution of the variables suggested
more appropriate measure of the direct value of IT that a non-parametric test would be more appro-
(McKeen and Smith 1993, 1996). Finally, the priate. Specifically, the Kolmogorov-Smirnov test,
operating income to employees (OI/E) ratio was which compares sample distributions to a normal
used as a measure of the relative profitability per distribution, rejected the hypothesis that the
employee of the effective IT users and the dependent variables (profit and cost performance
benchmark samples. ratios) are normally distributed in every case.
Therefore, the Wilcoxon Rank Sum Test was used
Three cost related ratios were used to compare to evaluate the differences in the levels of the
the relative performance of the two groups: total target variables for the two groups of firms. This
operating expenses to sales (OEXP/S), cost of test is more resistant to departures from normality
goods sold to sales (COGS/S), and selling and and is considered more powerful than the pairwise
general administrative expenses to sales t-test (Conover 1980).
(SG&A/S). Total operating expenses (defined as
the sum of COGS and SG&A) serve as a proxy for
the firm's total cost of operations. Operating Results
expense was selected because it is the most
general and encompassing measure of a firm's
The results for all four years (1991 through 1994)
total cost of operations (Mitra and Chaya 1996).
are displayed in Table 3. Although both the mean
Cost of goods sold and selling and general
administrative expenses are the generally ac- and median of the performance measures are
cepted accounting measures for the production reported for both samples, the medians are
considered to be better indicators. As the
and overhead costs of a firm. A dummy variable
was used to code the firms in the treatment and accounting data are not normally distributed,
control samples as "1" and "0" respectively. medians are extremely robust to outliers and ot

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deviations from normality. The test results are re- some exemplars from these articles, identifying
ported as Wilcoxon Rank Sum Z-statistics, the underlying IT resources that are indicated in
because the matched pair Wilcoxon test statistic the example. The evidence from these exemplars
serves as additional indicators of the firms'
has a normal distribution for sample sizes greater
than 14. Although the statistic has no sign, it is strengths in the IT related resources identified i
the paper. For example, Amoco's early initiatives
included for interpretation only.8
in ATM technology, long before ATMs proved t
be reliable or robust, is indicative of the firm's
As hypothesized, all of the profit ratios in each of
commitment to strengthen its IT infrastructure
the four years were significantly higher for the IT
Top management at Amoco realized that high-
leaders when compared to the control sample of
firms. In the case of the cost ratios, total oper-
speed and high-capacity networks would be
invaluable for a host of future applications such as
ating expenses to sales (OEXP/S) was signi-
seismologic modeling that would enable them to
ficantly lower for the IT leaders sample in all four
better analyze the voluminous data from oilfields
years. The cost-of-goods to sales (COGS/S)
and help predict the best locations for drilling.
ratios was also lower for the IT leaders sample in
Amoco believed that these applications would
all four years with significance (at the 10% level)
help them lower the operating costs associated
reported in two of the four years. However, con-
with surveying and drilling oil fields and thus have
trary to expectations, the selling and adminis-
a tremendous impact on their bottom line.
trative expenses to sales ratio (SGA/S) turned out
Furthermore, the experience they developed with
to be higher for the IT leaders than for the control
ATM technology put Amoco's network managers
sample, although it did not attain significance in
way ahead on the learning curve as they learned
any of the years. Although contrary to the hypo-
to grapple with the new technology and integrate
thesis, the results for selling and administrative
it with their legacy systems. Other firms that
expenses ratio is in line with the results reported
attempt to mimic Amoco would no doubt have to
in a recent study that examined the association
go through costly trial-and-error learning and face
between IT spending and cost ratios (Mitra and
the time compression diseconomies indicated in
Chaya 1996). The study found that high IT
the resource-based view.
spenders typically incurred higher overhead costs
per unit of output and, therefore, had higher than
average SGA expenses. A case study of Wal-Mart's IT initiatives provides
another illustration of how the firm has honed its
IT capability to the point that today IT is regarded

as its core competency (Brown 1999). Wal-Mart's
Qualitative Evidence of IT Capability
forays into satellite communication systems and
real-time update of sales and inventory informa-
In an attempt to further validate the sample of IT
leaders and to understand the nature of their IT tion led to a retailing revolution and entrenched
them as the clear leader in the industry. Despite
capability, a search of the Dow Jones business
attempts by other retailers to copy Wal-Mart's IT
database was conducted for articles describing
systems, the firm continues its leadership position
the IT initiatives undertaken by the sample firms
during the period 1991 through 1994. Several and remains solidly ahead in the learning curve on
its leverage of IT. For example, while other re-
articles relating to various aspects of the target
firms' IT policies, their introduction of newtailers are currently experimenting with data
technologies, and other general assessments of mining technologies, Wal-Mart started doing so in
the early 1990s and has already built an enor-
their IT capability were found. Table 4 presents
mous database of purchasing information that
enables them to understand what each customer
buys and the relationship between the items in

8The analysis was also repeated using the non
each customer basket. This has led to more effi-
parametric sign-test, testing the null hypothesis that IT
leaders do not show better financial performance when cient product placement in the aisles and to higher
compared with the control group against the alternative
revenues per square footage in its stores (Wal-
that the financial performance of the IT leaders is better.
The results from both tests were consistent. Mart Annual Report 1998).

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i5 i ii i
1991 1992 1993
Mean Median Value Mean Median Z Value Mean Median
ROA-IT Leaders 0.044 0.038 -2.35a 0.027 0.036 -2.19b 0.037 0.035
ROA-control 0.018 0.015 0.003 0.008 0.020 0.018
ROS-IT Leaders 0.052 0.054 -2.76a 0.036 0.035 -2.10b 0.054 0.048
ROS-control 0.022 0.22 0.008 0.016 0.029 0.024
OI/A-IT Leaders 0.137 0.148 -2.20b 0.140 0.150 -2.47a 0.145 0.148
OI/A-control 0.107 0.107 0.104 0.099 0.109 0.14
OI/S-IT Leaders 0.175 0.153 -2.21b 0.182 0.142 -2.21b 0.20 0.16
OI/S-control 0.138 0.110 0.143 0.107 0.151 0.109
OI/E-IT Leaders 37.18 27.17 -1.31c 39.62 31.79 -1.32c 47.18 35.05
OI/E-control 33.51 19.83 33.41 19.82 30.19 21.98
COG/S-IT Leaders 0.67 0.67 1.37c 0.66 0.67 1.16 0.64 0.63
it COG/S-control 0.70 0.72 0.70 0.72 0.69 0.7
o
Q) SGA/S-IT Leaders 0.22 0.22 -0.75 0.23 0.23 -0.85 0.22 0.23
CD SGA/S-control 0.21 0.21 0.21 0.21 0.211 0.1
OPEXP/S-IT Leaders 0.84 0.85 2.16b 0.83 0.86 2.15b 0.814 0.840
OPEXP/S-control 0.874 0.89 0.86 0.897 0.865 0.89
4
RO-return on assets; ROS-return on sales;
employees; COG/S-cost of goods sold to sa
:.3
"1% level
0
b5% level
C10% level
Co

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s Case Exemplars IT Infrastructure Resources Human IT Resource
Cl)
Case Exemplars IT Infrastructure Resources Human IT Resource
0
CD - X ^X iA A _ _ L- _ _ _ _
In 7994 Amoco Corporation * By investing in this technology* Network managers at Amoc

a embarked on a trial of long before ATMs were learned to blend ATM techn
I)
Asynchronous Transfer Mode commercially deployable or with their existing smart hub
9,
(A TM) technology spanning the robust technologies, Amoco routers, and multiplexers, he
gamut from group LAN's to put itself ahead of other firms them unearth the ramifications
global WAN's (Wexler 1994). in the learning curve and could blending older equipment with
move much faster on generation products.
N)
a deploying applications such as* Rapid learning and experience
a
0
0 seismologic modeling that new technologies allowed Am
generated gigabits of data. further build on their IT skills an
hs
launch innovative application
as seismologic modeling. The
applications help Amoco redu
number of crews it deploys to
and survey in the oil field, whi
extremely costly operations in
business.
In 1993 Banc One was the first * Banc One's computer system
bank to introduce a system for became the genesis of a
retail banking (Kindell 1993). steady stream of portable new
services.

117.193.124.98 on Wed, 02 Oct 2024 02:15:19 UTC
REM CaE Exemplar i rs IT I
Case Exemplars IT Infrastructure Resources Human IT Resources
In early 1992, Federal Express * Federal Express' IT * The

Corporation introduced a hand- infrastructure provided the man
held device that allowed its integrated database and high quality
couriers to generate optically speed network transmission serv
scanable zip code labels capabilities required for the sorting
indicating the destination for hand-held process innovation locat
packages (Hawkins 1992). to succeed. Based on their the nu
infrastructure strength, they
were able to be the pioneer in
the introduction of the hand-
held scanning technology.
Since the late 1980s, Wal-Mart * The Wal-Mart satellite network * "Fo
has been a pioneer in the supporting data, voice, and has bee
introduction and aggressive use video paved the way for real- indust
of IT for competitive advantage. time update of sales and produ
C,,
0 Several unique IT resources inventory information. purpose
have accrued over this time that * The Wal-Mart EDI systems quo
0)
allows Wal-Mart to continue as resulted in electronic issuance "Wal-
s.
an IT leader, despite similar of purchase orders and ahead
p investments in technology by invoices with all of the chain's imp
(o;
other retailers. vendors. replenishment s
The Wal-Mart retail-link stores se
network allows vendors to merch
access POS, forecasting, and custome
Q) inventory management data door" (qu
realtime.
1%)
0
0
co
wl

117.193.124.98 on Wed, 02 Oct 2024 02:15:19 UTC
Discussion Results from this study also serve to inform the

debate about the business value of IT. It suggests
The purpose of this study was to draw that on thethe inconsistent statistical findings about the
resource-based view of the firm to explicate relationship
the between IT and firm performance may
be attributed
nature of a firm's IT capability and its relationship to our incomplete understanding of
to firm performance. This study contributesthe
tonature
the of a firm's IT resources and skills and
to the fact that IT investment dollars serves as a
growing body of literature linking IT and the
resource-based view and provides a framework poor surrogate for assessing a firm's IT inten-
for understanding how IT may be appropriatelysiveness. For example, the finding that IT invest-
viewed as an organizational capability. More ments and firm profitability are uncorrelated, or
importantly, it is one of the first studies to provide even negatively correlated, may be due to the fact
an empirical test of the resource-based view of IT. that despite high investments in IT, not all firms
The study provides a three-fold identification of IT are successful in creating an effective IT capa-
resources in terms of IT infrastructure, human IT bility. Given the complexity associated with
skills, and IT-enabled intangibles and develops creating a firm wide IT capability, in any sample of
the notion of IT as an organizational capability IT spenders, only a small subset of the sample is
created by the synergistic combination of IT likely to have the right IT resources in place for
resources copresent with other organizational achieving competitive advantage. Other firms are
resources and capabilities. The empirical analysis more likely to have incurred the expenses of IT
examines the association between superior IT without comparative parity in IT capability. Mean
returns to IT spending for the total sample may
capability and superior firm performance and finds
therefore be non-significant or even slightly nega-
the relationship to be positive and significant.
tive as reported in Hitt and Brynjolfsson (1996).
Even studies that have employed other measures
Viewed from a resource-based perspective, the
of IT intensiveness such as the total number of
empirical findings indicate that IT capability is rent
systems and number of specific hardware sys-
generating resource that is not easily imitated or
tems such as point-of-sale systems, etc. (c.f.
substituted. Isolating mechanisms such as time
Powell and Dent-Micallef 1996) typically use
compression diseconomies, connectedness of
extent of automation as an indicator of a firm's IT
resources, and social complexity allow firms with
resources. In contrast, this paper argues that IT
high IT capability to achieve and sustain superior
capability is a socially complex organizational
performance. The analysis suggests that IT-
capability that can only be imperfectly imitated by
resources not only take time to acquire and build,
competitors due to isolation mechanisms such as
but also highlights the difficulties raised by com-
time compression diseconomies, causal ambi-
plementary resources and resource-embedded-
guity, and path dependencies. As noted by
ness. As Wal-Mart's CIO points out,
Henderson and Venkatraman (1993), IT capability
is not so much a specific set of sophisticated
[C]ombine these [Wal-Mart's] information
technological functionalities as it is an enterprise-
systems with our logistics, our hub-and- wide capability to leverage technology to differen-
spoke system in which distribution cen- tiate from competition. A firm's IT capability
ters are placed within a day's truck run of derives from underlying strengths in IT infrastruc-
the stores, and all the pieces fall into ture, human IT resources, and IT-enabled
place for the ability to respond to the intangibles. The IT infrastructure provides the
needs of our customer, even before they platform to launch innovative IT applications faster
are in the store. (Wal-Mart Annual than the competition; the human IT resources
enable firms to conceive of and implement such
Report 1998)
applications faster than competition; and a focus
on IT-enabled intangibles enables firms to
Thus, the firm's IT, logistics, and distribution sys- leverage or exploit pre-existing organizational
tems, combined with a strong customer orien- intangibles such as customer orientation and
tation, creates a set of complementary resources synergy in the firm via copresence and compli-
that are not easily matched by rival firms. mentarity.

117.193.124.98 on Wed, 02 Oct 2024 02:15:19 UTC
This study thus contributes to the IT business weaknesses. To identify and appraise a firm's IT
value literature by providing empirical support for capability, managers must look broadly and
the relationship between superior IT capability and deeply. This study has relied on external peer
firm performance. In particular, the finding that IT evaluations of IT capability and used the IW
leaders have significantly higher income ratios ranking as a measure of an organization's IT
when compared to a well-matched control portfolio capability. Perhaps managers would do well to
of firms indicates that IT leader firms do not compare themselves to other firms in their
necessarily have a cost focus, but tend to exploit industry that get ranked as IT leaders and
IT for generating superior revenues. Relatedunderstand to the nature and scope of their IT
this, the finding that the SGA/S ratio is higher resources.
for It is also critical to develop quantifiable
the leader sample provides further evidence that measures of performance that permit inter-firm
an IT capability may be developed and sustained comparisons. For example, Keen's (1991) reach
even at higher costs, if the additional costs and are range framework can be used to develop
more than offset by increased revenues. quantifiable measures of a firm's IT infrastructure.
Likewise, Sambamurthy and Zmud (1992), in a
study of IT management competencies, provide
measures for assessing the managerial IT
Managerial Implications competencies of firms.
By establishing the link between IT capability and

Benchmarking can also play an important role in
superior firm performance, the study servesupgrading
to organizational capabilities. Firms
inform business managers that firms shouldshoulddo identify activities or functions that need
much more than merely invest in IT. They shouldimproving and then identify companies that are
world leaders in those activities. For example, the
identify ways to create a firm-wide IT capability.
Through theoretical arguments and practical Norwegian firm, Compass Analysis, has built
examples, this study shows why building such comparative
a models to measure effectiveness for
a range of IT functions, such as data center
capability is complex and requires time and effort.
For business managers, however, there is littlenetworks,
by application development, and out-
way of guidance for developing IT capability, sourcing. It collects measurements based on
actual results and uses it to generate qualitative
although more recently, an increasing number of
information that can be compared with data from
studies have begun to address this issue. For
other companies (Manchester 1998).
example, Rockart et al. (1996) present eight
imperatives representing a combination of
Finally, the leverage of IT capability for com-
organizational arrangements and target petitive advantage is contingent on the sus-
achievements for IS organizations desirous of tenance and enhancement investments that firms
building an overall IT capability. Similarly Ross have
et to make. Realistically, competing firms are
al. (1996) identify a strong IT staff, a reusable likely to strive to bridge the resource and skill gaps
technology base, and a flourishing partnership that place them at a disadvantage relative to
between IT and business management as competition (Bharadwaj et al. 1993). In practice,
prerequisites for strong IT capability. Feeny andhowever, firms fall into "rigidity traps" and face
Willcocks (1998) identify nine core IS enormous organizational barriers in their efforts to
capabilities-leadership, business systems change. For example, in his study of large
thinking, relationship building, architecturefinancial service companies in the U.K. Watkins
planning, making technology work, informed (1998) found that the established firms felt
encumbered by their massive and rigid techno-
buying, contract facilitation, contract monitoring,
logical infrastructures of the previous decades, but
and vendor development-as the primary core
could not quickly convert to new systems due to
activities that need to be effectively managed for
cost pressures. Additionally, the IT staff in these
overall IT capability.
organizations had a vested interest in preserving
the legacy systems and resisted organizational
change. IT resources that were once valuable to
The first step toward building any strong organi-
zational capability is self-assessment, which these firms had been rendered obsolete and
requires firms to assess their own strengths and created a competitive disadvantage.

117.193.124.98 on Wed, 02 Oct 2024 02:15:19 UTC
Limitations and Future an organizational capability itself needs more

attention and a model for examining and clas-
Research
sifying the IT capability of firms based on the
quality of their IT resources and skills must be
The study uses external rankings of IT leaders as
developed. Such a model can then be related to
an indicator of superior IT capability. An earlier
measures of firm performance and the specific IT
section of the paper discusses some of the
resources and skills most strongly associated with
limitations of such rankings and the steps taken to
superior performance can be identified.
alleviate some of the inherent potential biases.
However, a more critical concern is that the
Studies adopting a more longitudinal focus are
rankings are not based on objective evaluations of
also essential to understand why some firms are
a firm's underlying IT resources. As noted earlier,
better at converting their IT investments into
future research should focus on developing better
superior IT- capability. A search to identify the
metrics for evaluating IT resources. Some of the
most important IT resources and skills is essen-
published IS literature provides a good starting
tially a search to understand the nature of superior
point. For example, Sethi and King's (1994)
IT performance. Such studies will yield insights
CAPITA scale captures the extent to which an
into the exact nature of IT resources, how they
individual IT application confers competitive
develop and evolve in a firm, and how they can be
advantage. Likewise scales such as the
leveraged for superior profit performance.
SERVQUAL (Parasuraman et al. 1988, 1991) help
in determining the quality of information systems
services, an important determinant of overall IT
Acknowledgements
effectiveness (Pitt et al. 1995). Further research
in the development and use of such measures will
I am grateful to the senior editor, associate editor,
aid in inventorying and measuring an organi-
and reviewers whose comments have improved
zation's IT resources and capabilities.
the quality of the paper considerably.
Another limitation that warrants mention is the
selection of the control sample. Despite attempts
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Kinder, Lydenberg and Domini Social Per- Technology on Organizational Performance," in
formance Ratings Data," Journal of Business Strategic Information Technology Management:
Ethics (15:3), March 1996, pp. 287-296. Perspectives on Organizational Growth and
Soh, C., and Markus, M. L. "How IT Creates Competitive Advantage, R. Banker, R. Kauffman,
Business Value: A Process Theory Synthesis," and M. A. Mahmood (eds.), Idea Group Pub-
in Proceedings of the Sixteenth International lishing, Harrisburg, PA, 1993.
Conference on Information Systems, J. I. Winter, S. "Knowledge and Competence as
DeGross, G. Ariav, C. Beath, R. Hoyer, and C. Strategic Assets," in The Competitive Chal-
Kemerer (eds.), Amsterdam, 1995, pp. 29-41. lenge, D. Teece (ed.), Center for Research in
Strassman, P. A. The Business Value of Com- Management, Berkeley, CA, 1987, pp.159-184.
puters, The Information Economics Press, New
Haven, CT, 1990.
About the Author
Strassman, P. A. The Squandered Computer,
The Information Economics Press, New Haven,
CT, 1997. Anandhi Bharadwaj is an assistant professor in
Teece, D. J. "Capturing Value from Knowledge the Goizueta Business School at Emory University.
She conducts research in the area of information
Assets: The New Economy, Markets for Know-
technology and its strategic applications and is cur-
How, and Intangible Assets," California Manage-
rently working on papers that examine the business
ment Review (40:3), Spring 1998, pp. 55-79.
Tracy, J., and Waldfogel J. "The Best Business value of information systems. She is also in-
Schools: A Market-Based Approach," Journal of
terested in the areas of knowledge management
Business (70:1), 1997, pp. 1-31. and knowledge-based systems. Anandhi's re-
Vergin, R. C., and Qoronfleh, M. W. "Corporate search has been published in journals such as
Reputation and the Stock Market," Business Management Science, IEEE Transactions on Engi-
Horizons (41:1), January/February 1998, pp. 19-
neering Management, and Annals of Operations
26. Research, and in national and international con-
ferences such as the International Conference on
Venkatraman, N. "IT Induced Business Reconfi-
Information Systems, the Decision Sciences Insti-
guration," in The Corporation of the 1990s, M.
tute, and the Hawaii International Conference on
S. Scott Morton (ed.), Oxford University Press,
New York, 1991, pp. 122-158. Systems Sciences.

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to
(0
4
Appendix A
List of IT Leaders and Control Sample of Firms
55
NO
ILb
0
o
COMPANY SIC INDUSTRY DESCRIPTION COMPANY SIC INDUS
MINNESOTA MINING & MFG 2670 CONVRT PAPR INTL PAPER CO 2600 PAP
0
N3
GANNETT CO 2711 NEWSPAPER PUBG TIMES MIRROR COMPANY 2711 N
0
MONSANTO CO 2800 CHEMICALS & ALLIED PRODUCTS BAYER A G -SPON ADR 2800
DU PONT (E I) DE NEMOU 2820 PLASTICS AKZO NOBEL NV -ADR 2800 CHE

DOW CHEMICAL 2821 PLASTICS RHONE-POULENC SA -ADR 2800 CHEM
LILLY (ELI) & CO 2834 PHARMACEUTICAL IMPERIAL CHEM INDS PLC 2800 CH
PREPARATIONS
ABBOTT LABORATORIES 2834 PHARMACEUTICAL ROCHE HOLDINGS LTD -S 2834

PREPARATIONS PREPAR
MERCK & CO 2834 PHARMACEUTICAL WARNER-LAMBERT CO 2834 P

PREPARATIONS PREPAR
PROCTER & GAMBLE CO 2840 SOAP AMERICAN HOME PRODUCTS 2834 P
USX CORP-CONSOLIDATED 2911 PETROLEUM REFINING ATLANTIC RICHFIELD CO 291
AMOCO CO 2911 PETROLEUM REFINING SHELL OIL CO 2911 PETR
CHEVRON CORP 2911 PETROLEUM REFINING TEXACO INC 2911 PET
CORNING INC 3220 GLASS OWENS-ILLINOIS INC 3221 GLAS
DEERE & CO 3523 FARM MACHINERY AND DRESSER INDUSTRIES INC 3510 E
EQUIPMENT

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Appendix A. Continued
CATERPILLAR INC 3531 CONSTRUCTION MACHINERY & EQ DEERE & CO-PRE FASB 352
BLACK & DECKER CORP 3540 METALWORKING MACHINERY & KOMATSU LTD -ADR 353
EQ EQ
HEWLE
INTL BU
SUN MICROSYSTEMS INC 3571 ELECTRONIC COMPUTERS HITACHI LTD -ADR 3570
GENERAL ELECTRIC CO 3600 ELECTRICAL SIEMENS A G -ADR 3600
TEXAS INSTRUMENTS INC 3674 SEMICONDUCTOR NORTHERN TELECOM LTD 3661 T
FORD MOTOR CO 3711 MOTOR VEHICLES & CAR BODIES GENERAL MOTORS CORP-PR 371
ALLIEDSIGNAL INC 3724 AIRCRAFT ENGINE UNITED TECHNOLOGIES CO 3724
LOCKHEED MARTIN CORP 3760 GUIDED MISSILES & SPACE VEHC THOMSON CSF -ADR 38
Cl,
NORTHROP GRUMMAN 3812 NAVIGATION EQUIPMENT RAYTHEON CO 3812
CORP
UNION PACIFIC CORP 4011 RAILROADS BURLINGTON NORTHERN RR 401

CSX CORP 4011 RAILROADS CANADIAN PACIFIC LTD 4011 R
C:
o UNITED PARCEL SERVICE 4210 TRUCKING CALIBER SYSTEMS INC 4210
2
ROADWAY EXPRESS INC/DE 4213 TRUCKING YELLOW CORP 4213
FEDERAL EXPRESS CORP 4513 AIR COURIER SERVICES NORTHWEST AIRLINES COR 45
SPRINT CORP 4813 PHONE COMM EX U S WEST -CONSOLIDATE 4813 P
RADIOTELEPHONE RADIOT
N) MCI COMMUNICATIONS 4813 PHONE COMM EX AMERITECH CORP 4813

0 RADIOTELEPHONE RADIOT
(0
(is

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(0
C)
CO
Appendix A. Continued
BELL ATLANTIC CORP 4813 PHONE COMM EX NYNEX CORP 4813 P

AT&T CORP 4813 PHONE COMM EX NIPPON TELEGRPH & TELE 4813 P
ENTERGY CORP 4911 ELECTRIC SERVICES POWERGEN PLC -SPON AD 4911
SOUTHERN CO 4911 ELECTRIC SERVICES EDISON INTERNATIONAL 4911

0
PG&E CORP 4931 ELECTRIC & OTHER SERV COMB COASTAL CORP 4922 NA
Cz
HOME DEPOT INC 5211 LUMBER & OTH BLDG MATL-RETL LOWES COS 5211 LU
DILLARDS INC -CL A 5311 DEPARTMENT STORES MONTGOMERY WARD HLDG 531
DAYTON HUDSON CORP 5331 VARIETY STORES PENNEY (J C) CO 5311 D

K MART CORP 5331 VARIETY STORES ITO YOKADO CO LTD -AD 5311 D
WAL-MART STORES 5331 VARIETY STORES SEARS ROEBUCK & CO 5311 D
WALGREEN CO 5912 DRUG & PROPRIETARY STORES RITE AID CORP 5912 DR
TOYS R US INC 5945 HOBBY CVS CORP 5912 DRUG & P
WACHOVIA CORP 6021 NATIONAL COMMERCIAL BANKS FIRST CHICAGO NBD CORP 602
BANC ONE CORP 6021 NATIONAL COMMERCIAL BANKS BANKBOSTON CORP 6021 N
NORWEST CORP 6021 NATIONAL COMMERCIAL BANKS WELLS FARGO & CO 6021 N
BANKAMERICA CORP 6021 NATIONAL COMMERCIAL BANKS NATIONSBANK CORP 6021
CITICORP 6021 NATIONAL COMMERCIAL BANKS BANK TOKYO-MITSUBISHI 6029
MERRILL LYNCH & CO 6211 SECURITY BROKERS & DEALERS SHEARSON LEHMAN BROS H 6
AETNA INC 6321 ACCIDENT & HEALTH INSURANCE BAT INDS PLC -SPON AD 631
TRAVELERS CORP 6331 FIRE,MARINE&CASUALTY INS. CNA FINANCIAL CORP 6331
CIGNA CORP 6331 FIRE,MARINE&CASUALTY INS. AMERICAN INTERNATIONAL 6331

117.193.124.98 on Wed, 02 Oct 2024 02:15:19 UTC

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A Resource-Based Perspective on Information Technology Capability and Firm

Performance: An Empirical Investigation

Stable URL: https://www.jstor.org/stable/3250983

Management Information Systems Research Center, University of Minnesota is collaborating

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By: Anandhi S. Bharadwaj Keywords: IT capability, IT resources, resource-

This study focuses on the performance effects of

MIS Quarterly Vol. 24 No. 1, pp. 169-196/March 2000 169

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170 MIS Quarterly Vol. 24 No. 1/March 2000

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Although proponents of the resource-based view

MIS Quarterly Vol. 24 No. 1/March 2000 171

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172 MIS Quarterly Vol. 24 No. 1/March 2000

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MIS Quarterly Vol. 24 No. 1/March 2000 173

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174 MIS Quarterly Vol. 24 No. 1/March 2000

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MIS Quarterly Vol. 24 No. 1/March 2000 175

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knowledge management is an inherently social reciprocity inherent in shared practice. This

176 MIS Quarterly Vol. 24 No. 1/March 2000

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Methodology leaders are determined by a select group of

MIS Quarterly Vol. 24 No. 1/March 2000 177

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178 MIS Quarterly Vol. 24 No. 1/March 2000

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Mean Median Mean Median T Z

Sales (billion $) 17.91 10.45 16.12 10.10 -0.93 -.053

Number of Employees 89,000 49,000 84,000 42,000 -0.46 -.145b

bSignificant at the 10% level'

CFirm diversification (total): The entropy measure of diversification defined as the

research disciplines have a longer tradition of

MIS Quarterly Vol. 24 No. 1/March 2000 179

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180 MIS Quarterly Vol. 24 No. 1/March 2000

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IT Leader Control Standardized

Model -2LOGLX2 1.53

asset invested. It is a broad measure that is Statistical Tests

MIS Quarterly Vol. 24 No. 1/March 2000 18

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IT capability to the point that today IT is regarded

buys and the relationship between the items in

182 MIS Quarterly Vol. 24 No. 1/March 2000

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Mean Median Value Mean Median Z Value Mean Median

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In 7994 Amoco Corporation * By investing in this technology* Network managers at Amoc

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Case Exemplars IT Infrastructure Resources Human IT Resources

In early 1992, Federal Express * Federal Express' IT * The

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Discussion Results from this study also serve to inform the

186 MIS Quarterly Vol. 24 No. 1/March 2000

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