The predictors and leading indicators of financial performance in electronic commerce are likely to be somewhat different from those of traditional commerce. For example, time to market of tailored products based on digitized customer information will be more important in electronic commerce. Econometric analysis of information technology investment and performance has been difficult given the lack of systematic data collected over time. A recent attempt to address this gap was initiated by Brynjolfsson and Hitt who conducted three surveys of over 400 U.S. firms, collecting a rich data set of information on firms' investments in several categories of information technology assets, as well as information about organizational parameters (see Hitt and Brynjolfsson, 1997; Brynjolfsson, Hitt and Yang, 2002; and Bresnahan, Brynjolfsson and Hitt, 1999)
The first wave of these data, collected in 1995 and 1996, provides a crucial "before" baseline for many of the recent Internet-based changes in organizational performance and work. In this project, we will build on and extend this baseline by periodically surveying the organizations in our sample, as well as their emerging competitors. By comparing these results with the baseline obtained in the earlier surveys, we will be able to track and interpret the organizational design and performance changes and implications associated with the use of information technology over time.
Research Sites and Methodology
The initial efforts in the project went toward carefully defining a set of questions that are both interesting and researchable. After defining those questions, which we did with the input of executives at major firms, we
- Developed and fielded two questionnaires—one sent to CIOs and one sent to the head of Human Resources —in a matched sample of approximately 800 large U.S. firms. The third-party data set provided detailed information on IT hardware and software capital stocks for each of the firms in our sample.
- Investigated the influence of new technologies and business models on the ways firms use information technology. To do this, we compared the IT portfolios identified in this study for 2001 with the results of a previous study in 1993-7. Firms can be seen as having portfolios of information technology (IT) investments, just as investors have portfolios of financial investments. We posited that firms invest in IT for four different management objectives:
- strategic (to gain competitive advantage)
- informational (to provide management information)
- transactional (to process transactions and cut costs)
- infrastructural (to provide shared IT capability enabling applications).
Investments with these different objectives behave as different asset classes and are expected to have very different risk-return profiles. Explored the relationship between investments in the different IT asset classes in the IT portfolio and different aspects of firm performance driven by a theoretical model linking asset class and performance metrics and investigated the business practices associated with superior (and inferior) returns from investments in the different IT asset classes in the portfolio.
- Updated measures used in previous research and, using those measures in the context of the 2001 survey datasets, refined the seven principles of the “Digital Organization” and began analysis of the relationship between IT use and HR practices.
- Analyzed a sub-sample of the IT survey data, looking at the results in a specific industry (metal manufacturing). To do this, we constructed a detailed statistical model of the relationship between different IT assets and firm performance measures including market valuation, profitability, operational performance and innovation.
- Constructed and formalized statistically the theoretical model of the organizational capabilities and practices that enable organizations to extract value from IT investments.
- Created six new measures of organizational IT capability from the IT survey data: internal IT use intensity, external IT use intensity, human resource capability, management capability, digital transaction intensity and internet capability. Analyzed the IT survey data testing the interactions between the six types of organizational capabilities and the four different asset classes of IT investment. We tested these interactions in predicting several measures of firm performance including market valuation, profitability, operational performance and innovation, over four years.
- Collected two panels of IT investment data from a sample of over 600 companies via a survey, and matched company observations in this survey sample to previously collected IT survey data and company financial data.
- Used the panel data to begin studying the changes in IT investment portfolios across three time periods: 1) 1984-1987, 2) 2001-2002, 3) 2005 and 4) 2006
- Thinking of business practices as a kind of “organizational capital” provided a powerful organizing framework for our study. In particular, this approach enabled us to draw on a theoretically-grounded set of conceptual and empirical techniques from finance, accounting and economics.
- A set of emerging business practices used in conjunction with Internet-based business processes were frequently mentioned in the academic and practitioner literature, and were also evident in our case study analysis of Cisco’s Internet-based enterprise. A cluster of firms, called the “Digital Organization,” was more likely to use the following business practices:
- A policy of open information access and communication
- Distributed decision rights and “empowerment” of line workers
- Strong performance-linked incentives
- Active investment in corporate culture
- Regular communication of strategic goals throughout the organization
- An emphasis on recruiting and hiring top employees
- Heavy investment in training, including online training, once employees were hired
A second cluster of firms (the “Traditional Organization”) was characterized by the opposite of the above business practices.
- The “Digital Organization” used all types of IT significantly more intensively than the “Traditional Organization” (controlling for other factors) and had significantly higher than average productivity (controlling for other factors), and significantly higher than average market value (controlling for other factors). Our analysis also suggested that more productive firms:
- had a higher percentage of employees who use the Internet, e-mail and computers daily.
- fostered open information access.
- foster vertical communication.
- did not restrict Internet access for their employees (this result was not significant for Internet-intensive firms).
- used technology-based procedures.
- employed more pay incentives linked to individual performance.
- tended to communicate strategic and financial goals throughout the organization regularly.
- were more likely to weed out marginal or non-core products and service, maintaining their corporate focus.
- were somewhat more likely to use stock options for a broader set of employees.
- Analyses of firms’ decisions to structure dedicated e-commerce business units and to select their leaders found that these choices were empirically independent and had an effect on the reliability of market returns. In particular, choosing an experienced outsider to lead the new business unit and establishing that unit as an internal department or division both increased the reliability of returns.
- Analyses of the consequences for organizational design of investments in retail information technology found five factors (industry structure, organization form, firm-specific characteristics, technological properties, and task characteristics) constituted “indissoluble correlates” operating at different levels of aggregation.
- Analyses of announcements of firms’ investments in exploratory and exploitative technology initiatives strongly predicted both the expected value and the reliability profitability in the year following the investments.
- Analyses on the interactions between IT and geography demonstrated:
- IT intensive firms were more likely to have geographically dispersed operations
- IT intensive firms were more sensitive to small differences in prevailing wage rates when locating call centers and less sensitive to other factors
- Firms with more PCs per employee had a more decentralized allocation of decision rights for several key technology decisions.
- Results from work on IT use, information flows, and individual information-worker productivity indicated:
- Information use was positively correlated with increased revenue and project completion.
- Asynchronous information seeking (such as email and database access) promoted multitasking, while synchronous information seeking (such as phone and face-to-face contact) showed a negative correlation.
- The structure and size of a worker’s communication network, including social network metrics such as between-ness and constraint were highly correlated with performance.
- There was a statistically significant and positive relationship among technology use, social network characteristics, completed projects, and revenues for project-based information workers.
- Compared with the average IT portfolio over the 1993-7 time frame, portfolios in 2002 had less investment in IT infrastructure and more investment in informational and transactional systems. The reduction in infrastructure as a percentage of the portfolio was posited to come from two factors:
- The availability of more open systems and connective technologies (e.g., middleware) reduced the need for dedicated infrastructures for applications thus reducing total infrastructure investment in the firm.
- A sharp increase in the use of shared IT services across multiple business units in large firms reduced the duplication of infrastructures. The reduction in duplication resulted in less investment in infrastructure as a percentage of the total IT portfolio. The percentage of the portfolio invested in strategic systems stayed about the same, indicating there is little impact of changes in the economy or the Internet era on the proportion of the portfolio allocated to this high risk and return asset class.
And an unexpectedly high proportion (approximately 9%) of the investment in the IT portfolio was allocated to management.
- Additional findings on IT investment, organizational capability, and firm performance included:
- The relationship between IT investments and performance was statistically significant when investments were distinguished by strategic purpose or asset class, even though a firm’s total IT investment did not influence the performance measures studied. High performing firms allocate IT investments according to their strategic goals and harmonize particular organizational capabilities with particular IT investments, demonstrating that complementarities between the two are asset and capability specific.
- After controlling for firm and industry level effects, investments in infrastructure were negatively correlated with profit (e.g. ROA and net margin) in the year of the investment and the next year. In subsequent years there was no relationship between infrastructure investments and profitability. The market, however, valued these infrastructure investments positively as demonstrated by a significant relationship between more infrastructure and higher Tobin’s q.
- After controlling for firm and industry level effects, informational systems were positively associated with firms’ market valuation as measured by Tobin’s q, and were positively associated with profit (i.e. ROA, ROI and Net Margin) in the same year as the investment and the next year.
- Investments in relatively riskier strategic IT were associated with increased sale of enhanced products but not associated with any of the four measures of firm financial performance studied.
- Transactional IT investments were not associated with any measures of financial performance.
- Consistent with arguments about the lag time needed to reap benefits from IT investments, we found few relationships between IT investments and accounting measures of profitability measured in the same year as the investment.
- We did see significant relationships between investment allocations and operational performance indictors, and the degree of innovativeness of firms.
- IT investments, distinguished by their strategic purpose, influenced the performance of the firms in our sample in distinct ways.
- Certain organizational characteristics were found to positively interact with different types of IT investments, which were then associated with higher firm performance in the same year and the following year. The organizational characteristics studied were: internal IT use intensity, external IT use intensity, human resource capability, management capability, digital transaction intensity and internet capability. For example:
- Superior human resource capabilities consistently positively interacted with all four types of IT investment and were associated with higher market valuations.
- IT resources and organizational capabilities covary significantly with firms high in IT intensity developing IT-related capabilities and firms with strong IT capabilities demanding more IT.
- The relationship between organizational capabilities and firm performance vary, and depends on the different types of IT assets employed and the different performance measures used.
- Firms with stronger IT capabilities and engaging in particular organizational practices, derive greater value per IT dollar across several different performance measures.