Week 1 – Aral and Weill (2007) – Joe

Aral, S., & Weill, P. (2007). IT assets, organizational capabilities, and firm performance: How resource allocations and organizational differences explain performance variation. Organization Science, 18(5), 763-780.

While the positive effect of IT investments on firm performance has been shown from past evidence, the explanation of substantial variation across firms still remains obscure. Our knowledge of the specific factors driving the differences remains quite limited for both industry and academia. This study by Aral and Weill in 2007 tries to address the following two key questions: 1) what types of organizational characteristics explain this variation in firm performance? 2) why two firms with the same amount of IT capital perform differently?

To answer these two questions, the authors dive into the literature on resource-based theory of the firm (Wernerfelt 1984, Barney 1991) and propose a theoretical model of IT resources by 1) categorizing IT investments of firms into a portfolio of four IT assets disaggregated by strategic purpose: infrastructure, transactional, informational, and strategic assets and by 2) grouping the IT capability(ITC) as a mutually reinforcing system of practices(routines) and competencies(skills). Using data from 147 firms over 4 years and qualitative evidence from a case study of 7-Eleven Japan, the authors empirically investigate the impact of IT assets, IT capabilities, and their combination on four dimensions of firm performance: market valuation, profitability, cost, and innovation. They then find that 1) investments in a particular IT asset class deliver higher performance only when the dimension of the asset consistent with the strategic purpose of it and 2) organizational IT capabilities strengthens the performance effects of IT assets and broadens their impact beyond their intended purpose.

Although the empirical parts remain huge potentials for future researchers to explore, this paper is an easy-to-follow benchmark of behavior IS study. The authors integrate past literature and develop a new conceptual model which complements and extends recent resource-based theories of IT value.