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Melville et al./Review: IT and Organizational Performance MIS Quarterly Vol. 28 No. 2, pp. 283-322/June 2004 283 MISQ REVIEW REVIEW: INFORMATION TECHNOLOGY AND ORGANIZATIONAL PERFORMANCE: AN INTEGRATIVE MODEL OF IT BUSINESS VALUE 1 By: Nigel Melville Wallace E. Carroll School of Management Boston College Chestnut Hill, MA 02467 U.S.A. [email protected] Kenneth Kraemer Center for Research on Information Technology and Organizations Graduate School of Management University of California, Irvine Irvine, CA 92697-3125 U.S.A. [email protected] Vijay Gurbaxani Center for Research on Information Technology and Organizations Graduate School of Management University of California, Irvine Irvine, CA 92697-3125 U.S.A. [email protected] 1 Jane Webster was the accepting senior editor for this paper. Abstract Despite the importance to researchers, managers, and policy makers of how information technology (IT) contributes to organizational performance, there is uncertainty and debate about what we know and dont know. A review of the literature reveals that studies examining the association between information technology and organiza- tional performance are divergent in how they conceptualize key constructs and their interrela- tionships. We develop a model of IT business value based on the resource-based view of the firm that integrates the various strands of research into a single framework. We apply the integrative model to synthesize what is known about IT busi- ness value and guide future research by devel- oping propositions and suggesting a research agenda. A principal finding is that IT is valuable, but the extent and dimensions are dependent upon internal and external factors, including com- plementary organizational resources of the firm and its trading partners, as well as the competitive and macro environment. Our analysis provides a blueprint to guide future research and facilitate knowledge accumulation and creation concerning the organizational performance impacts of infor- mation technology.
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Page 1: EVIEW INFORMATION ECHNOLOGY AND ORGANIZATIONAL …...mainframes, minicomputers, and personal com-puters used primarily for storing and processing information within a single organization.

Melville et al./Review: IT and Organizational Performance

MIS Quarterly Vol. 28 No. 2, pp. 283-322/June 2004 283

MISQ REVIEW

REVIEW: INFORMATION TECHNOLOGY ANDORGANIZATIONAL PERFORMANCE: ANINTEGRATIVE MODEL OFIT BUSINESS VALUE1

By: Nigel MelvilleWallace E. Carroll School of ManagementBoston CollegeChestnut Hill, MA [email protected]

Kenneth KraemerCenter for Research on Information

Technology and OrganizationsGraduate School of ManagementUniversity of California, IrvineIrvine, CA [email protected]

Vijay GurbaxaniCenter for Research on Information

Technology and OrganizationsGraduate School of ManagementUniversity of California, IrvineIrvine, CA [email protected]

1Jane Webster was the accepting senior editor for thispaper.

Abstract

Despite the importance to researchers, managers,and policy makers of how information technology(IT) contributes to organizational performance,there is uncertainty and debate about what weknow and don�t know. A review of the literaturereveals that studies examining the associationbetween information technology and organiza-tional performance are divergent in how theyconceptualize key constructs and their interrela-tionships. We develop a model of IT businessvalue based on the resource-based view of thefirm that integrates the various strands of researchinto a single framework. We apply the integrativemodel to synthesize what is known about IT busi-ness value and guide future research by devel-oping propositions and suggesting a researchagenda. A principal finding is that IT is valuable,but the extent and dimensions are dependentupon internal and external factors, including com-plementary organizational resources of the firmand its trading partners, as well as the competitiveand macro environment. Our analysis provides ablueprint to guide future research and facilitateknowledge accumulation and creation concerningthe organizational performance impacts of infor-mation technology.

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Keywords: Business value, competitive advan-tage, cost reduction, country characteristics, eco-nomic impacts, efficiency, industry characteristics,information technology, IT business value, IT pay-off, macro environment, performance, productivity,resource-based view, trading partners, value

Introduction

IT business value research examines theorganizational performance impacts of informationtechnology. Researchers have adopted myriadapproaches to assessing the mechanisms bywhich IT business value is generated and toestimating its magnitude. Previous research hasshown that information technology may indeedcontribute to the improvement of organizationalperformance (Brynjolfsson and Hitt 1996; Kohliand Devaraj 2003; Mukhopadhyay et al. 1995).Moreover, the dimensions and extent of ITbusiness value depend on a variety of factors,including the type of IT, management practices,and organizational structure, as well as the com-petitive and macro environment (Brynjolfsson etal. 2002; Cooper et al. 2000; Dewan and Kraemer2000). The research also suggests that firms donot appropriate all of the value they generate fromIT; value may be captured by trading partners orcompeted away and captured by end customersin the form of lower prices and better quality(Bresnahan 1986; Hitt and Brynjolfsson 1996).

By and large, our knowledge has resulted from anorganization-centric perspective based on internalbusiness processes, organizational structure, andworkplace practices (Bharadwaj 2000; Lichten-berg 1995; Mata et al. 1995). This approach isconsistent with computing paradigms that domi-nated in pre-Internet eras, typically defined bymainframes, minicomputers, and personal com-puters used primarily for storing and processinginformation within a single organization. Tocontinue advancing knowledge, however, anexpanded conceptualization of IT business valueis required.

In the network era, electronic linkages within andamong organizations are proliferating, altering theways in which firms acquire factor inputs, convertthem into products and services, and distribute theresult to their customers (Hammer 2001; Strauband Watson 2001). This raises new questionsabout how IT can be applied to improve organi-zational performance. For example, how do elec-tronically connected trading partners impact afirm�s ability to execute IT-based strategies forimproved efficiency and competitive advantage?How does the evolving competitive environmentshape IT business value? Although emergingstudies are beginning to examine pieces of thenetwork-era IT business value puzzle (Chatfieldand Yetton 2000; Mukhopadhyay and Kekre2002), our knowledge remains underdevelopedand unsystematic.

The purpose of this review is to add to knowledgeaccumulation and creation in the IS academicdiscipline by summarizing what we know about ITbusiness value and suggesting how we mightlearn more about what we don�t know. Specifi-cally, the objectives of this review are to(1) develop a model of IT business value based intheory and informed by existing IT business valueresearch; (2) use the model to synthesize what isknown about IT business value; and (3) guidefuture research by developing propositions andputting forward a research agenda. The review isunique among other reviews of the IT businessvalue literature in its application of resource-basedtheory to analyze how IT impacts organizationalperformance. This approach enables the inte-gration of research assessing both the efficiencyimplications of IT application as well as its abilityto confer a competitive advantage, heretoforeseparate research conversations. The review isalso unique in its extension of the locus of IT busi-ness value to the external competitive and macroenvironment. Another distinction is the inclusion ofresearch studies spanning the entire range oftheoretical paradigms and research methods.

There is some ambiguity regarding what consti-tutes IT business value research, so we begin by

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introducing terminology and delineating the scopeof the research stream. Next, we review theore-tical paradigms and modeling approaches em-ployed in prior research. We then develop anintegrative model of IT business value using theresource-based view of the firm as a principaltheory base. The model provides a basis forstructuring our review of accumulated knowledge,for identifying gaps in knowledge, and for devel-oping propositions to guide future research. Weconclude by summarizing the findings and limita-tions of our analysis and by proposing an agendafor future research.2

IT Business Value Research: Definition ThroughDistillation

IT business value scholars are motivated by adesire to understand how and to what extent theapplication of IT within firms leads to improvedorganizational performance. Researchers haveadopted diverse conceptual, theoretical, andanalytic approaches and employed various empi-rical methodologies at multiple levels of analysis(Brynjolfsson 1993; Brynjolfsson and Yang 1996;Dedrick et al. 2003; Wilson 1995). Moreover, theliterature includes contributions from severalacademic disciplines in addition to informationsystems, including economics, strategy, ac-counting, and operations research.

Although our knowledge has been enriched bysuch diversity, an ancillary consequence has beenseparate research conversations, hamperingcross-pollination of ideas and findings and makingit difficult for those working outside the area tounderstand what we have learned (Chan 2000).We, therefore, lay the foundation for model devel-opment by analyzing how IT business valueresearchers have conceptualized IT and IT busi-ness value and by defining the research stream,

thereby taking a first step toward unification of thisvast and diverse body of accumulated knowledge.

Conceptualizing InformationTechnology in IT BusinessValue Research

Information systems scholars have adopteddiverse conceptualizations of information techno-logy, extending beyond hardware and software toinclude a range of contextual factors associatedwith its application within organizations (Kling1980; Markus and Robey 1988). As a precisespecification of what we mean by IT businessvalue is dependent upon what we mean by IT, webriefly analyze how IT business value researchershave treated the core construct. The resultexposes how underlying assumptions about whatconstitutes IT shape our accumulated knowledgeof its organizational performance impacts. Under-standing how IT has been conceptualized in priorresearch also provides a firm foundation fromwhich to derive a systematic and theoreticallybased definition of information technology withinour model derivation.

Five conceptualizations of the IT artifact havebeen adopted in IS research: (1) tool view,(2) proxy view, (3) ensemble view, (4) computa-tional view, and (5) nominal view (Orlikowski andIacono 2001). In the first conceptualization, IT isviewed as an engineered tool that does what itsdesigners intended, for example, productivityenhancement and reshaping social relations.Such a view is frequently used within IT businessvalue research, i.e., IT is assumed to be a toolwhose intended purpose is to generate value(Table 1). In the proxy view, IT is conceptualizedby its essential characteristics, which are definedby individual perceptions of its usefulness orvalue, the diffusion of a particular type of systemwithin a specific context, and its investment orcapital stock denominated in financial units. ITbusiness value researchers often adopt thisconceptualization in empirical studies usingmeasures such as capital stock denominated indollars. The ensemble view is the third concep-tualization, focusing on the interaction of people

2Appendix A describes the method used to identify ITbusiness value research articles.

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Table 1. IT Artifact Conceptualizations Used in IT Business Value Research*

ToolIT is a tool intended to generate value, whether productivity enhancement, cost reduction, competi-tive advantage, improved supplier relationships, etc. Specific intention for IT is often unknown.Studies of specific system and implementation contexts enable examination of tool view assump-tions.

ProxyIT is operationalized via proxies such as capital stock denominated in dollars. Wide range of poten-tial proxies exists, but few have been adopted. Adoption of diverse proxies enables triangulation andenhances accumulated knowledge.

Ensemble Assessment of IT business value generation in rich contexts, often using case or field studies.Organizational structure and co-innovations such as workplace practices may be included asmoderators or mediators of value.

NominalIT is not conceptualized and appears in name but not in fact. Abstraction enables model precisionat the expense of generality.

*Adapted from Orlikowski and Iacono (2001). Computational conceptualization is not applicable to IT business valueresearch and is omitted from the table.

and technology in both the development and useof IT. Case studies examining IT business valuewithin specific organizations often adopt theensemble view (Kraemer et al. 2000; Williams andFrolick 2001). In addition, as quantitative IT busi-ness value research has evolved beyondexamining the productivity paradox�low aggre-gate productivity growth during a period of high ITspending�to explore how firms use IT to generatevalue, researchers have begun to incorporate therole of organizational co-innovations such asworkplace practices (Brynjolfsson et al. 2002). Asthe emphasis of the fourth view is on algorithmand systems development and testing as well asdata modeling and simulation, it is less applicableto IT business value research. Finally, studiesadopting the nominal view invoke technology inname but not in fact. An example is the derivationof a two-stage game analyzing the impact of ITapplication on total factor productivity in thecontext of oligopolistic competition, which intro-duces IT solely via its posited impact on costreduction and product differentiation (Belleflamme2001).

Examining conceptualizations of IT by IT businessvalue researchers reveals that prevailing assump-tions have delimited accumulated knowledge inthree principal respects. First, IT is frequentlyoperationalized using aggregate variables mea-sured in dollars or counts of systems (proxy view),limiting our understanding of the differential im-pacts of alternative types of IT as well as the roleof usage (Devaraj and Kohli 2003). Furthermore,software is often treated implicitly via assumptivemeasures or sometimes omitted entirely from theanalysis. Given evidence of its association withfirm performance (Hitt et al. 2002), there is a needto incorporate software when conceptualizing IT.Second, IT is frequently assumed to lead to anoutcome intended by managers (tool view),limiting our understanding of unintended conse-quences (Markus and Robey 2004). Third, thetreatment of the role of IT employees is unsys-tematic and often excluded from the analysis(ensemble view), hindering our understanding ofthe role of IT management and technical expertisein generating IT business value. When included,IS employees have been incorporated in an

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additive fashion with IT stock (Hitt and Bryn-jolfsson 1996), as a separate construct that iscomplementary to IT (Black and Lynch 2001;Brynjolfsson et al. 2002), or conceptualized asbeing inextricably intertwined with IT within busi-ness processes (Kraemer et al. 2000). Theproblem is exacerbated by increasing adoption ofnetworked systems spanning multiple organiza-tions�and hence multiple IS stakeholder groups.

To summarize, IT business value research ischaracterized by diverse treatment of the ITconstruct, which has bounded and shapedaccumulated knowledge. A systematic explicationand definition based on theory is a necessary firststep toward knowledge advancement and modelbuilding (undertaken shortly). We now turn to thesecond core construct of the research stream: ITbusiness value.

Defining IT Business Value Research

The term IT business value is commonly used torefer to the organizational performance impacts ofIT, including productivity enhancement, profit-ability improvement, cost reduction, competitiveadvantage, inventory reduction, and other mea-sures of performance (Devaraj and Kohli 2003;Hitt and Brynjolfsson 1996; Kriebel and Kauffman1988). For example, Mukhopadhyay et al. (1995,p. 138) refer to the �business value of IT� as the�impact of IT on firm performance.� Based on ouranalysis of the IT business value literature(Appendix A), there is no convention regarding theincorporation of costs of system development andimplementation. Moreover, researchers haveused the term performance to denote both inter-mediate process-level measures as well asorganizational measures. Emphasizing thesalience of this distinction, Barua et al. (1995,p. 7) develop a model incorporating both �first-order effects on operational level variables� suchas inventory turnover, as well as �higher levelvariables� such as market share.

Our analysis also revealed the existence of twoformulations of performance: efficiency and effec-tiveness. The former emphasizes an internal per-

spective employing such metrics as cost reductionand productivity enhancement in the assessmentof a given business process, or �doing things right�(Drucker 1966). In contrast, effectiveness de-notes the achievement of organizational objec-tives in relation to a firm�s external environmentand may be manifested in the attainment ofcompetitive advantage, i.e., effecting a uniquevalue-creating strategy with respect to competitors(Barney 1991). To emphasize, IT may enable afirm to improve efficiency regardless of whethermimicked by competitors, or may yield perfor-mance impacts unique to a particular firm relativeto its competitors, i.e., competitive impacts.Synthesizing these observations, we define ITbusiness value as the organizational performanceimpacts of information technology at both theintermediate process level and the organization-wide level, and comprising both efficiency impactsand competitive impacts.

Several reviews of the literature focus on studiesusing quantitative empirical methodologies (Bryn-jolfsson and Yang 1996; Dedrick et al. 2003;Dehning and Richardson 2002).3 Based on ourdefinition of IT business value, the scope of ITbusiness value research includes conceptual,theoretical, analytic, and empirical studies.Conceptual and theoretical studies apply theoryand grounded observation to explicate IT businessvalue (Mata et al. 1995; Porter 2001; Soh andMarkus 1995). Analytic studies utilize game theo-retic and other modeling techniques to developmodels of IT business value whose solutionsinform our understanding of the organizationalperformance implications of alternative IT invest-ment and ownership regimes as well as the role ofthe competitive environment (Bakos and Nault1997; Belleflamme 2001; Clemons and Kleindorfer1992). Finally, empirical studies include quali-tative research�case studies and field studies(Clemons and Row 1988; Cooper et al. 2000)�and quantitative studies estimating IT businessvalue at the process, business unit, firm, industry,and country levels of analysis (Alpar and Kim

3See Kohli and Devaraj (2003) for a meta-analysis ofquantitative empirical IT business value studies.

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1990; Dewan and Kraemer 2000; Siegel 1997).Combining these observations, we define ITbusiness value research as any conceptual, theo-retical, analytic, or empirical study that examinesthe organizational performance impacts of IT.

Having demonstrated how prevailing assumptionsabout the IT artifact in IT business value studieshave delimited what we know and defined theresearch stream, we now turn to the derivation ofour integrative model.

Integrative Model ofIT Business Value

The organizational application of information tech-nology may improve, reduce, or have no effect onfirm performance. Our objective is to develop adescriptive model of the value generating process.The primary theory base is the resource-basedview (RBV) of the firm, which combines therationale of economics with a management per-spective. As trading partners and the competitiveenvironment shape the degree to which IT mayimprove organizational performance, we alsoappeal to secondary theory bases, includingmicroeconomics and the related industrial organi-zation literature. To motivate the selection of RBVas our primary theory base, we begin by sum-marizing the theoretical paradigms that have beenused in prior studies.

Theoretical Paradigms Used inIT Business Value Research

Researchers have employed several theoreticalparadigms in examining the organizational perfor-mance impacts of IT, including microeconomics,industrial organization theory, and sociology andsocio-political paradigms.

Microeconomic Theory

Microeconomic theory provides a rich set of well-defined constructs interrelated via theoretical

models and mathematical specifications. Thetheory of production has been particularly usefulin conceptualizing the process of production andproviding empirical specifications enabling esti-mation of the economic impact of IT (Brynjolfssonand Hitt 1995; Dewan and Min 1997; Lichtenberg1995). Researchers have also employed growthaccounting (Brynjolfsson and Hitt 2003; Jorgensonand Stiroh 1999), consumer theory (Brynjolfsson1996; Hitt and Brynjolfsson 1996), data envelop-ment analysis (Lee and Barua 1999), and Tobin�sq (Bharadwaj et al. 1999; Brynjolfsson and Yang1997). To account for the inherent risk and uncer-tainty of IT investments, option pricing modelshave been applied to the IT context. Conducting areal-options analysis of point-of-sale (POS) debitservices by an electronic banking network,Benaroch and Kauffman (1999, p. 84) describe�the logic of option pricing� as �how it can handlegetting the timing right, scaling up or even aban-donment, as the organization learns about itsbusiness environment with the passage of time.�Although the assumptions of microeconomictheory must be carefully assessed within the spe-cific research context, its application within ITbusiness value research has enhanced our under-standing of wide-ranging phenomena.

Industrial Organization Theory

IT business value researchers have drawn fromthe industrial organization literature to examinehow firms jointly interact in IT investment deci-sions and how the resulting benefits are divided.Game theory has been used to examine the roleof strategic interaction among competitors in ITbusiness value generation and capture. Belle-flamme (2001) constructs a two-stage game of ITinvestment and production choice under oligopo-listic competition. Other researchers have drawnfrom agency theory and the incomplete contractsliterature (Bakos and Nault 1997; Clemons andKleindorfer 1992). Transaction cost theory hasalso informed understanding of the role of IT inreducing transaction costs (Clemons and Row1991b; Gurbaxani and Whang 1991).

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Sociology and Socio-Political Perspectives

Although the system rationalism perspective�maximization of organizational efficiency andeffectiveness through IT as the common goal of allorganizational stakeholders (Kling 1980)�is wide-spread within IT business value research, otherperspectives have also informed understanding.Economic activity is embedded in social networks(Granovetter 1985); according to Uzzi (1997, p.35) �embeddedness is a logic of exchange thatpromotes economies of time, integrative agree-ments, Pareto improvements in allocative effi-ciency, and complex adaptation.� IT researchershave applied the theory of embeddedness toinform understanding of how interorganizationalrelationships impact IT business value in thecontext of EDI (Chatfield and Yetton 2000). Thesocio-political perspective has been used toexamine the relationship between IT investmentand firm performance (Hoogeveen and Oppelland2002). Kumar et al. (1998) propose a rationality ofinformation systems that stresses relationshipsand trust within and across organizations andapply it to explain the failure of aninterorganizational information system imple-mented in the textile industry.4

The complex problem of linking IT to organi-zational performance is informed by the insights ofmultiple theoretical paradigms. However, theabsence of a unified theoretical framework has ledto a fractured research stream with many simul-taneous but non-overlapping conversations (Chan2000). We thus seek to develop a conceptualmodel that is not only based in theory, but rootedin one that is inherently suitable for analyzing thecomplexity of IT and firm performance. Ideally, itwould have a robust logical formulation, whileenabling study of the rich contextual processesassociated with managing IT for business value.

Chosen Theory Base: Resource-Based View of the Firm

The resource-based view of the firm (RBV)emphasizes heterogeneous firm resourceendowments as a basis for competitive advantage(Table 2). It is grounded in the seminal work ofeconomists concerned with firm heterogeneity andimperfect competition (Chamberlin 1933; Robin-son 1933). These early theorists emphasize theimportance of firm heterogeneity�as againstmarket structure�in conferring above normal pro-fits and in driving imperfect competition. In hertheory of firm growth, Penrose (1959) refinesthese ideas by conceptualizing the firm as abundle of resources within an administrativeframework. Evolutionary economists combiningSchumpeterian competition with tacit processesand routines further extend thinking away fromstatic equilibrium models of classical micro-economics (Nelson and Winter 1982). A seminalcontribution to resource-based theory is providedby Wernerfelt (1984), who proposes the notion ofresource position barriers, i.e., barriers to imita-tion, and links resource attributes to profitability.Subsequent research studies examine howresource attributes lead to competitive advantage(Amit and Schoemaker 1993; Dierickx and Cool1989; Peteraf 1993) and extend the RBV invarious ways, including the analysis of resourcesin the context of interconnected organizations(Dovev 2002).

In contrast to undifferentiated factor inputs withwell-defined property rights, resources are firm-specific, difficult to imitate, and often valuable, i.e.,they enable the firm to improve efficiency (Teeceet al. 1997). Barney (1991) specifies the condi-tions required for a resource to confer a competi-tive advantage. If the valuable resource is rare,i.e., few firms have access to it, it confers a tem-porary competitive advantage. If it is also imper-fectly imitable�for example, competitors don�tknow what factors lead to success and thereforewhat to imitate�and there are no readily availablesubstitutes, the resource confers a sustainedcompetitive advantage. In this case, the firm isusing the resource to implement �a value creatingstrategy not simultaneously being implemented by

4For a summary of the positivism, realism, critical theory,and constructivism paradigms as they relate to ITbusiness value, see Cronk and Fitzgerald (2002).

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Table 2. Resource-Based Theory: Intellectual Foundations and Theory Development

Intellectual Foundations

� Theory of imperfect competition (Robinson 1933)Industries are neither perfect monopolies nor do they operate under perfect competition. Critique of neoclassical economic theory�each of many competing firms has some monopolypower.

� Theory of monopolistic competition (Chamberlin 1933; Chamberlin 1937)Merges theory of monopoly (but no free entry) and perfect competition (but allows for productdifferentiation) in a model of monopolistic competition. Supplier has some control over price.

� Theory of firm growth (Penrose 1959).Distinction between services rendered by inputs to production upon purchase versus the largerset of resulting services when integrated in the firm. The speed of accumulation and assimila-tion of resources is key to firm growth, as are opportunities arising from underutilization of itsresources. Firms continually search for new ways to increase productivity and efficiency. Newknowledge yields new ways of using existing resources or new ways of combining sets ofresources. The firm thus �is basically a collection of resources� (Penrose 1959, p. 77).

Theory Development

� Resource-based view of the firm (Wernerfelt 1984)Resources are anything that can be viewed as a strength or weakness of a firm. Resourceposition barriers, i.e., imitation barriers, can lead to above-normal profit. Strategy comprisescurrent resource exploitation and new resource development, emphasized in the resource-product matrix that contrasts a firm�s resources with its products.

� Resource heterogeneity and above normal firm performanceResource factors differ in the extent to which they can be identified and their monetary valueassessed via strategic factor markets (Barney 1986b). Through isolating mechanisms, oncehomogenous firms become differentiated and in possession of difficult to imitate resources(Rumelt 1984). Economic rent is derived from time compression diseconomies in trying toimitate resources of other firms as well as in limited substitutability (Dierickx and Cool 1989).

� Identification of resources that confer a sustained competitive advantageProposed sets of conditions for a resource to confer a sustained competitive advantage include(1) value, rareness, inimitability, and non-substitutability (Barney 1991) and (2) heterogeneity ofefficiency in industry, ex post limits to competition, ex ante limits to competition, and immobility(Peteraf 1993). Specific resources examined include entrepreneurship (Rumelt 1987), culture(Barney 1986a), routines (Nelson and Winter 1982), invisible assets (Itami 1987), humanresources (Amit and Schoemaker 1993), and information technology (Bharadwaj 2000; Mata etal. 1995).

� Bundling of resourcesDistinction between resources and the capability to deploy groups of resources successfully(Grant 1991; Teece et al. 1997).

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any current or potential competitors� and one thatits rivals are unable to duplicate (Barney 1991, p.102). In summary, the four conditions necessaryfor a resource to confer a sustainable competitiveadvantage are value, rareness, inimitability, andnon-substitutability. We adopt Barney�s formula-tion as it is readily applicable to analyzing thefundamental questions of IT business value.

RBV and IT Business Value

The resource-based view has been used toexamine the efficiency and competitive advantageimplications of specific firm resources such asentrepreneurship (Rumelt 1987), culture (Barney1986a), and organizational routines (Nelson andWinter 1982). It is also useful in the IT context,providing a robust framework for analyzingwhether and how IT may be associated with com-petitive advantage. Strategy researchers haveapplied RBV to theoretically analyze the compe-titive advantage implications of information techn-ology (Mata et al. 1995) and to assess empiricallythe complementarities between IT and other firmresources (Powell and Dent-Micallef 1997). ISresearchers have also begun to employ theresource perspective to expand and deepen ourunderstanding of IT business value (Bharadwaj2000; Caldeira and Ward 2003; Clemons 1991;Jarvenpaa and Leidner 1998; Santhanam andHartono 2003). Such research provides a firmfoundation from which to derive our integrativemodel. Thus, due to its firm roots in micro-economics, its focus on resource attributes, andits usefulness in examining the IT resource, wechoose the resource-based view of the firm as theprimary theoretical foundation. Its �integration ofa management perspective with an economicsperspective� (Peteraf and Barney 2003, p. 309)provides the balance that we require for thedevelopment of an integrative IT business valuemodel.5

A limitation of the conventional resource-basedview is that it assumes that resources are alwaysapplied in their best uses, saying little about howthis is done. In effect, the RBV provides a set ofnecessary conditions to the attainment of sustain-able competitive advantage via a firm resource,but does not specify the underlying mechanismsby which this is accomplished. We, therefore, relyon secondary theory bases such as micro-economics as well as accumulated IT businessvalue knowledge to inform understanding of howthe IT resource is applied within business pro-cesses to improve performance. Having describedour chosen theory base, we begin derivation ofthe model by examining how other researchershave modeled IT business value.

Prior Models. An examination of IT businessvalue models employed in prior research informsour choices concerning which constructs toinclude and how to model their interrelationships.The widely used production function approachrelates production inputs such as labor, IT, andother capital to output via mathematical specifi-cations derived from microeconomic theory.Other researchers have developed process-oriented models linking IT to organizational perfor-mance. Barua et al. (1995) argue that the asso-ciation between IT investment and performanceattenuates as the distance between cause andeffect widens. The authors develop a model of ITbusiness value in which the impact of IT on firmperformance is mediated by intermediate pro-cesses. A similar perspective is adopted by Weill(1992), who focuses on the ability of firms toconvert IT assets into organizational performance,identifying several conversion effectivenessfactors that mediate the IT-performance relation-ship. Francalanci and Galal (1998) propose thatmanagerial choices regarding the mix of clerical,managerial, and professional employees mediatethe relationship between IT and firm performance.In a synthesis of process models, Soh and Markus(1995) develop a conceptual framework whichposits that IT investment leads to IT assets (ITconversion process), IT assets to IT impacts (ITuse process), and IT impacts to organizationalperformance (competitive process).

5For a debate of the merits of the resource-based view,see the critique of Priem and Butler (2001) and responseby Barney (2001).

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Production function and process-oriented modelsdescribe the relationship between IT investmentand firm performance via an input-output per-spective that sometimes includes intermediatefactors such as managerial choices and organi-zational structure. However, the external environ-ment of trading partners, industry characteristics,and socio-political conditions is also important, butrarely incorporated (cf. Chatfield and Yetton 2000;Jarvenpaa and Leidner 1998). Moreover, produc-tion function and process models typically treatthe IT artifact in a stylized fashion.

Other researchers have taken an alternative ap-proach in modeling IT business value by focusingon the attributes of IT and other organizationalresources that together may confer a competitiveadvantage. Bharadwaj (2000) models three keyIT resources and their relationship to a firm�scapability to deploy IT for improved performance:IT infrastructure, human IT resources, and IT-enabled intangibles. Clemons and Row (1991b)argue that IT is widely available to all firms andcan only confer a sustainable competitive advan-tage if applied to leverage differences in strategicresources. Mata et al. (1995) derive a resource-based conceptual framework mapping the attri-butes of IT to competitive advantage. Accordingto the framework, the extent to which IT isvaluable, heterogeneous, and imperfectly mobiledetermines the level of competitive advantage. IfIT is valuable in lowering costs or enhancingrevenue for all firms, then competitive parityresults. If it is also heterogeneous, i.e., if one firmpossesses it and others do not, then the firmreceives a temporary competitive advantage.Finally, if IT is also imperfectly mobile�firmswithout the resource face a cost disadvantage inacquiring it, the sources of which may include therole of history, causal ambiguity, and social com-plexity�then IT confers a sustained competitiveadvantage. Although Mata et al. conclude thatonly IT management skills may lead to sustainedcompetitive advantage, they acknowledge that�there may be other attributes of IT whose compe-titive implications have not been fully evaluated�(p. 500).

As with production function and process-orientedmodels, models analyzing the attributes of IT and

complementary firm resources typically do notincorporate the external environment of tradingpartners, industry characteristics, and countrycharacteristics. Moreover, based on an analysisof emergent research, there is no consensusregarding approaches to modeling such factors.For example, Mukhopadhyay et al. (1995) relateEDI penetration, EDI program launching, and EDIpenetration volume to inventory turnover, obsoleteinventory, and premium freight. In contrast, Chat-field and Yetton (2000) extend the MIT 90s model(Scott Morton 1991) to explore the relationshipbetween EDI imitator and EDI adopter.

In summary, analyzing prior IT business valuemodels reveals that (1) IT impacts organizationalperformance via intermediate business processes;(2) other organizational resources such as work-place practices interact with IT, whether as media-tor or moderator, in the attainment of organiza-tional performance impacts; (3) the externalenvironment plays a role in IT business valuegeneration; and (4) it is important to disaggregatethe IT construct into meaningful subcomponents.The received wisdom of IT business value modelscan thus be summarized as follows: if the right ITis applied within the right business process, im-proved processes and organizational performanceresult, conditional upon appropriate complemen-tary investments in workplace practices andorganizational structure and shaped by thecompetitive environment. Although a compellingnarrative, as evidenced by the wide array ofmodeling approaches, we lack a systematic ap-proach supported by theory for examining asso-ciated questions. What is meant by IT? What ismeant by business process? What is the right ITfor the right business process? What is the role ofother firm resources, trading partners, and thecompetitive environment? We develop a theore-tically based model of IT business value thatsystematizes and extends accumulated knowl-edge and addresses these questions.

Model Derivation. Based on our analysis of howother researchers have modeled IT businessvalue, we conclude that the locus of IT businessvalue generation is the organization that invests in

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Complementary External Organizational

IT Resources:Technology (TIR) & Human (HIR)

OrganizationalPerformance

Complementary Organizational

Resources

Industry Characteristics

I. Focal Firm

IT Business Value Generation Process

Business Process

Performance

III. Macro Environment

Trading Partner Resources &

Business Processes

CountryCharacteristics

II. Competitive Environment

Business ProcessesComplementary External Organizational

IT Resources:Technology (TIR) & Human (HIR)

OrganizationalPerformance

Complementary Organizational

Resources

Industry Characteristics

I. Focal Firm

IT Business Value Generation Process

Business Process

Performance

III. Macro Environment

Trading Partner Resources &

Business Processes

CountryCharacteristics

II. Competitive Environment

Business Processes

Figure 1. IT Business Value Model

and deploys IT resources, which we call the focalfirm. But external factors also play a role inshaping the extent to which IT business value canbe generated and captured. In particular, thecompetitive environment, including industry char-acteristics and trading partners, as well as themacro environment are salient to IT businessvalue generation. We thus derive an integrativemodel of IT business value that comprises threedomains: (1) focal firm; (2) competitive environ-ment; and (3) macro environment. Using theresource-based view as a primary theoretical lens,the model describes how phenomena residentwithin each domain shape the relationship be-tween IT and organizational performance(Figure 1).

Focal Firm

The first domain is the organization acquiring anddeploying the IT resource�the focal firm. Withinthe focal firm, IT business value is generated bythe deployment of IT and complementary organi-zational resources within business processes. Asillustrated in Figure 1, application of IT and com-plementary organizational resources may improvebusiness processes or enable new ones, whichultimately may impact organizational performance(Brynjolfsson and Hitt 2000). The focal firmdomain thus comprises the IT resource, comple-mentary organizational resources, business pro-cesses, business process performance, andorganizational performance.

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Information Technology Resource. Based onthe analysis of how IT business value researchershave treated the IT artifact, the predominantapproach has been either (1) to use aggregatevariables such as IT capital or counts of systemsin quantitative empirical studies, or (2) to take aholistic approach in exploring the interdepen-dencies between IT and human resources in thecreation of business value within case and fieldstudies. Other researchers have attempted todevelop a more generalized view of IT. Forexample, in their review and synthesis of quan-titative empirical IT business value research,Dehning and Richardson (2002) identify threedifferent formulations of IT: IT spending, IT stra-tegy (type of IT), and IT management/capability.Likewise, Bharadwaj (2000) derives IT infrastruc-ture, human IT resources, and IT-enabled intan-gibles such as customer orientation and knowl-edge as principal IT-based resources. Based ona survey of top IT executives at 50 firms, Ross etal. (1996) identify three IT assets underlying afirm�s IT capability: human, technology, andrelationship.

To operationalize the IT resource, we meld theseformulations with Barney�s (1991) classification offirm resources into physical capital, humancapital, and organizational capital resources, theformer two containing components of the ITresource, while all three contain components ofcomplementary organizational resources.

Physical capital resources comprise plant andequipment, geographic location, access to rawmaterials, and physical technology, a subset ofwhich is the technological IT resource (TIR). TIRcan be further categorized into (1) IT infra-structure, i.e., shared technology and technologyservices across the organization, and (2) specificbusiness applications that utilize the infra-structure, i.e., purchasing systems, sales analysistools, etc. (Broadbent and Weill 1997). TIR thusincludes both hardware and software (Table 3).The separation of TIR into infrastructure andbusiness applications is consistent with howcompanies view their physical IT assets, animportant consideration as firms view the two in

different ways when making investment decisionsand setting performance expectations (Weill et al.2002).

The second resource is the firm�s human capital,which refers to expertise and knowledge (Barney1991), and we thus call the second component ofthe IT resource the human IT resource (HIR).Similar to prior characterizations (Bharadwaj2000; Dehning and Richardson 2002; Ross et al.1996), HIR denotes both technical and managerialknowledge. Examples of technical expertiseinclude application development, integration ofmultiple systems, and maintenance of existingsystems; managerial skills include the ability toidentify appropriate projects, marshal adequateresources, and lead and motivate developmentteams to complete projects according tospecification and within time and budgetaryconstraints. Although technical and managerialexpertise are often intertwined, they are none-theless distinct concepts, and their conceptual-ization as such is necessary for precision indescribing IT investment impacts. Human ITexpertise may be associated with the entiretechnological infrastructure of the organization ormay reside locally within business units and beassociated with specific business applications.

Complementary Organizational Resources.Although it is possible to apply IT for improvedorganizational performance with few organi-zational changes (McAfee 2002), successfulapplication of IT is often accompanied by signi-ficant organizational change (Brynjolfsson and Hitt2000; Brynjolfsson et al. 2002; Cooper et al.2000), including policies and rules, organizationalstructure, workplace practices, and organizationalculture. When synergies between IT and otherfirm resources exist, we call the latter comple-mentary organizational resources. The RBVliterature provides guidance regarding the classifi-cation of complementary organizational resources.Returning to Barney�s (1991) classification of firmresources, complementary organizational re-sources may include non-IT physical capitalresources, non-IT human capital resources, andorganizational capital resources, e.g., formal

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Table 3. Model Constructs

I. Focal Firm

IT ResourcesTechnological ITresources (TIR)

Human IT resources(HIR)

Infrastructure: shared technology and technology services acrossthe enterprise.Business applications: utilize the infrastructure, e.g., purchasing,sales, etc.

Technical skills: programming, systems integration, databasedevelopment, etc.Managerial skills: collaboration with business units and externalorganizations, project planning, etc.

Complementary Organi-zational Resources

Organizational resources complementary to IT, categories of whichinclude non-IT physical resources, non-IT human resources, andorganizational resources (Barney 1991), including organizationalstructure, policies and rules, workplace practices, culture, etc.

Business Processes Activities underlying value generating processes (transforminginputs to outputs). Inbound logistics, manufacturing, sales,distribution, customer service, etc.

PerformanceBusiness processperformance

Organizationalperformance

Operational efficiency of specific business processes, measures ofwhich include customer service, flexibility, information sharing, andinventory management.

Overall firm performance, including productivity, efficiency,profitability, market value, competitive advantage, etc.

II. Competitive Environment

Industry Characteristics Industry factors shaping the way in which IT is applied within focalfirm to generate business value, including competitiveness,regulation, clockspeed, etc.

Trading Partner Resourcesand Business Processes

IT and non-IT resources and business processes of tradingpartners such as buyers and suppliers.

III. Macro Environment

Country Characteristics Macro factors shaping IT application and IT business valuegeneration, including the level of development, basic infra-structure, education, research and development investment,population growth rate, culture, etc.

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reporting structures and informal relationshipswithin and among firms.6

Business Processes. According to Davenport(1993, p. 5), a business process is �the specificordering of work activities across time and space,with a beginning, an end, and clearly identifiedinputs and outputs.� In essence, business pro-cesses are the activities residing in the black boxof microeconomic production theory that transforma set of inputs into outputs. From the perspectiveof resource-based theory, business processesprovide a context within which to examine thelocus of direct resource exploitation. Examples ofbusiness processes include order taking, PCassembly, and distribution. A single firm executesnumerous business processes to achieve itsstrategic objectives, thereby providing a range ofopportunities for the application of informationtechnology to improve processes andorganizational performance (Porter and Millar1985). In the net-enabled organization (Strauband Watson 2001), IT not only may improveindividual processes, but also may enable processsynthesis and integration across disparatephysical and organizational boundaries (Basu andBlanning 2003).

Performance. Performance comprises businessprocess performance as well as organizationalperformance. The former denotes a range ofmeasures associated with operational efficiencyenhancement within specific business processes,such as quality improvement of design processesand enhanced cycle time within inventory man-agement processes. Examples of business pro-cess performance metrics used in prior IT busi-ness value research include on-time shipping(McAfee 2002), customer satisfaction (Devarajand Kohli 2000), and inventory turnover (Barua etal. 1995). In contrast, organizational performancedenotes aggregate IT-enabled performance im-pacts across all firm activities, with metrics cap-turing bottom-line firm impacts such as costreduction, revenue enhancement, and competitive

advantage. IT business value researchers haveoperationalized these measures via operationsmeasures (cost reduction, productivity enhance-ment, etc.) and market-based measures (stockmarket valuation, Tobin�s q, etc.) (Dehning andRichardson 2002). However, the range of potentialmeasures is not limited to financial metrics, andmay include perceptual measures, usage metrics,and others (Tallon et al. 2000).

Resource-based theory informs understanding ofthe linkage between the type of IT and the natureof business process and organizational perfor-mance impacts. For example, upon its introduc-tion, the SABRE airline computerized reservationsystem was valuable and rare, thus conferring atemporary competitive advantage (Hopper 1990).However, imitation over time and diminishedrareness weakened such advantages. Regardingthe conversion of business process performanceimpacts to improved organizational performance,several factors are salient, including the scope ofthe business process, the extent to which it is coreto the organization, the rareness of the particularIT in question, as well as the competitive environ-ment (Kohli 2003).

Competitive Environment

The second domain in the integrative model is thecompetitive environment in which the focal firmoperates, which we separate into two compo-nents: industry characteristics and trading part-ners. Industry characteristics include competitive-ness, regulation, technological change, clock-speed, and other factors that shape the way inwhich IT is applied within the focal firm togenerate business value (Devaraj and Kohli 2003;Hill and Scudder 2002; Jorgenson et al. 2003;Kettinger et al. 1994; Kraemer et al. 2000). Inaddition to industry characteristics, the competitiveenvironment also includes the focal firm�s tradingpartners. When IT spans firm boundaries, thebusiness processes, IT resources, and non-ITresources of trading partners play a role in the ITbusiness value generation of the focal firm(Chatfield and Yetton 2000; Mukhopadhyay andKekre 2002; Williams and Frolick 2001). We thus

6Similarly, Grant (1991) classifies non-IT resources intofive categories: (1) physical, (2) human, (3) organi-zational, (4) reputation, and (5) financial.

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include industry characteristics and trading part-ners in the competitive environment domain.

Industry Characteristics. The organization ofindustries�concentration, supply chain configura-tion, etc.�as well as their salient features�technological change, regulation, IT standards,etc.�can shape how IT is used within focal firmbusiness processes to create IT business value.For example, the competitive characteristics ofstrategic factor markets, including the IT resource,affect the degree to which a firm can enjoy above-normal returns (Barney 1986b). Another exampleis the high degree of unionization in such indus-tries as telecommunications and auto manu-facturing that may hamper a firm�s ability to substi-tute IT for labor or to implement complementarywork practices such as cross-functional workteams. The resulting suboptimal application of ITmay limit IT business value generation. Alterna-tively, in time-sensitive industries such aspersonal computers and apparel, there is ampleopportunity to apply IT to reduce cycle times,better manage inventory, and improve customersatisfaction (Ghemawat and Nueno 2003;Kraemer et al. 2000). The findings of quantitativeempirical studies that certain industries attainhigher IT productivity impacts and greater costreduction than others provide further support forthe inclusion of industry characteristics in ourmodel (Lewis et al. 2002; Morrison 1997).

Industry characteristics apply to all firms in anindustry. However, the response of industrycompetitors vis-à-vis information technology is notnecessarily uniform. It is thus necessary toaccount for heterogeneity across industries aswell as alternative response strategies amongindustry competitors to the same set of industrystimuli when examining the role of industrycharacteristics on IT business value.

Trading Partner Resources and BusinessProcesses. Information technology increasinglypermeates organizational boundaries, linkingmultiple firms via electronic networks and softwareapplications and melding their business processes(Basu and Blanning 2003; Hammer 2001;Mukhopadhyay and Kekre 2002; Straub and

Watson 2001). As a result, trading partnersincreasingly impact the generation of IT businessvalue for the focal firm (Bakos and Nault 1997;Chatfield and Yetton 2000; Clemons and Row1993). For example, inefficient business pro-cesses and antiquated technology within tradingpartner firms may inhibit the attainment of ITbusiness value of an interorganizational systeminitiated by the focal firm. In some cases, this maygive rise to incentives for the focal firm to teamwith the trading partner for joint improvement(Williams and Frolick 2001). We, therefore, adaptour formulation of IT, business processes, andorganizational complements to the focal firm�strading partners, which provides the conceptualfoundation for understanding their impact on focalfirm IT business value generation. For example,the ability to partner with external IT units in devel-opment and implementation would be included inthe human IT resource of both the focal andexternal organization. Another example is poorwork practices within a supplier firm that inhibit itsfull use of a procurement system introduced bythe focal buyer firm.

Macro Environment

The third and final layer in the integrative model isthe macro environment, denoting country- andmeta-country specific factors that shape IT appli-cation for the improvement of organizationalperformance. Examples include government pro-motion and regulation of technology developmentand information industries, IT talent, and infor-mation infrastructure, as well as prevailinginformation and IT cultures. As an example, firmsin developing countries face constraints inapplying information technology in the areas ofeducation, expertise, infrastructure, and culture(Jarvenpaa and Leidner 1998). Inclusion ofcountry factors in our model emphasizes their rolein shaping the attainment of IT business value,especially salient to public policy makers. It alsohighlights the need to better understand thespecific elements that apply in differing political,regulatory, educational, social, and cultural con-texts (Dewan and Kraemer 2000; Jelassi andFigon 1994; Kumar et al. 1998; Lee et al. 2000;Tam 1998; Teo et al. 1997).

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Table 4. IT Business Value Research Questions

Question Domain

1. Is the IT resource associated with improved operational efficiencies orcompetitive advantage?

Focal firm

2. How does the IT resource generate operational efficiencies and competitiveadvantage?

Focal firm

3. What is the role of industry characteristics in shaping IT business value? Competitiveenvironment

4. What is the role of the resources and business processes of electronicallylinked trading partners in impacting the value generated and captured by thefocal firm?

Competitiveenvironment

5. What is the role of country characteristics in shaping IT business value? Macroenvironment

Summary

The integrative model of IT business value is thefirst step toward a systematic theory of ITbusiness value. The model is grounded in theresource-based view of the firm, chosen for itstenet that strategic resources, such as informationtechnology, are not distributed equally amongfirms as well as its explication of the resourceattributes required to achieve competitive advan-tage. The integrative model builds upon accu-mulated modeling knowledge to disaggregate thelocus of IT business value into three domains:focal firm, competitive environment, and macroenvironment. Further development of a systematictheory is provided in the next section, in which wesynthesize existing knowledge and develop propo-sitions based on theory.

Literature Synthesis andProposition Derivation

Using the integrative model as a lens throughwhich to interpret the objectives and findings ofmore than 200 reviewed IT business value articles

(Appendix A), we identified five research ques-tions corresponding to the three domains of themodel (Table 4). Studies emphasizing focal firmphenomena fall into two groups. The first groupcomprises studies examining whether and to whatextent IT is associated with organizational perfor-mance, leading to research question 1: Is the ITresource associated with improved operationalefficiencies or competitive advantage? Thesecond group of studies in the focal firm domainanalyzes how business value is generated via ITapplication. These studies incorporate the largerorganizational context within which IT is applied,stated as research question 2: How does the ITresource generate operational efficiencies andcompetitive advantage? Studies in the seconddomain extend the scope of IT business valuegeneration to incorporate the role of thecompetitive environment in shaping IT businessvalue. The first group in this domain emphasizesindustry characteristics, leading to researchquestion 3: What is the role of industry charac-teristics in shaping IT business value? Thesecond group in the competitive environmentdomain examines the role of trading partnerresources and business processes in shaping thefocal firm�s ability to generate value from ITapplications, stated as research question 4: What

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is the role of the resources and business pro-cesses of electronically linked trading partners inimpacting the value generated and captured bythe focal firm? Finally, studies in the third domainexplore the cultural, economic, political, social,legal, technical, educational, and other charac-teristics associated with countries and how theyshape the organizational application of IT forperformance improvement. Correspondingly, re-search question 5 is stated as: What is the roleof country characteristics in shaping IT businessvalue?

Two sets of propositions are developed (seeTables 5, 6, and 7). Assessment of what we knowwithin each research question leads to a set ofprincipal propositions summarizing knowledgeaccumulation. Instantiation of principal propo-sitions leads to a second set of propositions illus-trating how the model can be used to facilitateknowledge accumulation and providing guidancefor future research.

Focal Firm

Research Question 1: Is the IT resource asso-ciated with improved operational efficienciesor competitive advantage?

Studies responding to this question focus onidentifying, measuring, or estimating the rela-tionship between IT and various measures oforganizational performance. We categorize andreview the findings of these articles according twoperspectives: (1) the IT resource and (2) the typeof performance impact.

Many empirical studies using large-sample datasets find support for a positive associationbetween aggregate measures of the technologicalIT resource and organizational performance(Bharadwaj et al. 1999; Lehr and Lichtenberg1997; Lichtenberg 1995; Siegel 1997). In a studyof roughly 400 U.S. firms spanning the years 1987to 1991, Brynjolfsson and Hitt (1996) find that thegross marginal product for computer capital is 81percent and the return on IT investment exceedsthat on non-IT capital investment. The basic

structure of such results�the technological ITresource confers economic value�is preservedwhen considering alternative econometric speci-fications, assumptions, data sets, and time frames(Brynjolfsson and Hitt 1995, 2003; Dewan andMin 1997; Morrison 1997). Although fewer innumber, some studies find mixed or inconclusiveevidence concerning the relationship between thetechnological IT resource and organizationalperformance (Cron and Sobol 1983; Stiroh 1998).

In contrast to studies aggregating diverse techno-logical IT resources into a single measure,researchers have also examined specific infor-mation systems and types of IT. Evidence existsfor IT business value associated with compu-terized reservation systems (Banker and Johnston1995) and ATM networks (Banker and Kauffman1988). Several studies find a positive impact oncost reduction, whether in the context of a produc-tion data management system in the clothingindustry (Tatsiopoulos et al. 2002), supply chainmanagement in the food industry (Hill andScudder 2002), or the jewelry appraisal process(Newman and Kozar 1994). There is also evi-dence for the existence of IT business value forthe application of innovative IT (Dos Santos et al.1993) and transaction processing systems (Weill1992). Enterprise resource planning systems areassociated with higher financial market valuation,although short-term effectiveness is dampenedafter implementation (Hitt et al. 2002).

The human IT resource (HIR) has been posited toconfer not only operational performance improve-ments such as productivity but also competitiveadvantage (Mata et al. 1995). The conceptualanalysis by Mata et al. suggests that managerialIT skills, but not technical IT skills, are valuableand able to confer a sustainable competitiveadvantage. Empirically, Brynjolfsson and Hitt(1996) include an IS labor term in a productivityregression and find that the output generated byIS labor spending is many times that generated bynon-IS labor spending and expenses, consistentwith the findings of Lichtenberg (1995). Bharad-waj (2000) includes human IT resources as one ofthree IT-based resources, but does not examinethis dimension by itself. Rather, human IT re-

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Table 5. Focal Firm Propositions

1A The IT resource�including both technology and human expertise�creates economic value fora focal firm by conferring operational efficiencies that vary in magnitude and type dependingupon the organizational and technological context.

1B Human IT expertise complementary to technological IT resources may create temporary com-petitive advantages that underlie performance differences among firms.

2A Certain organizational resources are complementary to the IT resource in the generation of ITbusiness value for the focal firm; the existence and magnitude of the complementarity betweenany two specific instantiations of these resources varies depending upon the organizational andtechnological contexts.

2B The greater the inimitability of rare organizational resources that are complementary to IT andlacking substitutes, the greater the degree to which the focal firm can obtain a sustained com-petitive advantage.

sources are implicitly linked to IT capabilities,which are found to be positively related to firmperformance. The study by Santhanam andHartono (2003) replicates and extends theseresults using a similar data set and methodology.Such results suggest a relationship between HIRand operational efficiency. However, our knowl-edge of which component of HIR�technicalversus managerial IT expertise�may be drivingsuch results and whether they may also underliea competitive advantage is slim.

Thus far we have reviewed the findings from priorliterature according to the two components of theIT resource. Another perspective is examiningperformance impacts themselves, which mayunderlie conflicting empirical results. Many of theempirical IT business value studies finding apositive association between IT and performanceuse productivity or other measures of operationalperformance. A growing number use financialmetrics, and some also find positive impacts(Bharadwaj et al. 1999; Brynjolfsson et al. 2002).However, research also indicates that the formermay not always lead to the latter: operationalimprovements gained from applying IT within theorganization may not translate to financialmeasures of performance (Barua et al. 1995; Hittand Brynjolfsson 1996). One implication is that afirm is not able to capture all of the value itgenerates from IT.

Even if a firm is able to obtain financial perfor-mance improvements from its operationalimprovements, the question of competitive advan-tage via IT remains. One approach to assessingthe implications for competitive advantage is toidentify information technology applied for strate-gic reasons and examine its impact on sustainedperformance and competitive advantage. A studyof the valve manufacturing industry indicates aweakly negative association between strategic ITand performance (Weill 1992). In contrast, anevent study finds that the stock market reactsfavorably to announcements that firms are usingstrategic information systems (Brown et al. 1995).Moreover, in subsequent years those firms tend tobe more productive and more profitable than theirindustry rivals. There is also evidence that firmsmaking investments in strategic informationsystems achieve sustainability via their estab-lished technology base (Kettinger et al. 1994).Another approach is to assess the attributes of ITand their ability to confer competitive advantage�Mata et al. conclude that only managerial IT skillsconfer a competitive advantage.

In summary, abundant empirical evidence sup-ports the claim that in the aggregate, the tech-nological IT resource has economic value (Kohliand Devaraj 2003). Moreover, studies of specificsystems support and extend these findings bydemonstrating the importance of organizational

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and technological context. Evidence linking theTIR to competitive advantage is less conclusive.Although fewer studies have examined the humanIT resource (HIR), emerging research suggeststhat the HIR enables operational efficiencies,although it is not clear whether managerial ortechnical HIR may underlie such results. Wesummarize these findings in the following:

Proposition 1A: The IT resource�including both technology and humanexpertise�creates economic value for afocal firm by conferring operationalefficiencies that vary in magnitude andtype depending upon the organizationaland technological context.

Studies examining the competitive advantageimplications of the technological IT resource aretoo few in number to draw any robust conclusions,although early evidence indicates both a positiveimpact (Brown et al. 1995) and no associationbetween TIR and sustainable performance advan-tages (Powell and Dent-Micallef 1997). In addition,there has been a lack of attention to the human ITresource in IT business value research. An asso-ciation between the two components has beensuggested, but synergies between TIR and HIRremain understudied. We thus specialize Proposi-tion 1A by examining the nature of such synergiesand the implications for competitive advantage.

Both components of the IT resource are valuable.Mata et al. argue that managerial IT skills confera competitive advantage, which implies that thesehuman IT expertise resources are valuable andwhich is consistent with empirical results (Bharad-waj 2000; Brynjolfsson and Hitt 1996; Lichtenberg1995). Based on the abundant empirical researchreviewed above, the technological IT resource isclearly valuable. But what of the competitiveimplications of the synergies between the two?

We do not argue that TIR or HIR confers a com-petitive advantage by itself. Rather, we proposethat competitive advantage can result from theappropriate combination of technological andhuman IT resources. As has been argued by Carr(2003), the TIR is increasingly �commoditized.�

Even application software, once largely customdeveloped, is increasingly sourced as a packageor service. However, customization of standardsoftware and hardware offerings and adaptation tothe business processes of the focal firm is com-plex, often valuable, and difficult to imitate. Thus,when complementarities exist between TIR andHIR, they are likely to lead to temporary compe-titive advantage.

Our argument extends that of Mata et al., whichposits a temporary competitive advantage fromtechnical IT skills but a sustainable advantagefrom managerial IT skills. With the increasingmaturity and institutionalization of IT service mar-kets, even these managerial and technical skillsand capabilities can be sourced externally. Thus,even if competitive advantage is achieved, it is notlikely to be sustainable due to the possibility ofimitation.

This logic is consistent with the co-innovationliterature from economics as well as the literatureon complementarities (Bresnahan et al. 2002;Brynjolfsson and Hitt 2000). However, it differs inthat we specialize prior arguments pertaining to ITand other organizational resources to the twocomponents of the IT resource itself developedherein: technological and human IT resources. Inother words, the physical IT resource must bepresent, and it must be managed well, in order toconfer a temporary competitive advantage.

Proposition 1B: Human IT expertisecomplementary to technological IT re-sources may create temporary competi-tive advantages that underlie perfor-mance differences among firms.

To emphasize, limited attention has been paid tothe human component of the IT resource�ourknowledge of the value of specific capabilities andour understanding of the nature of the comple-mentarity of these capabilities with the TIR is slim.Thus, although Proposition 1B may appear some-what straightforward, it adds to knowledgeaccumulation by emphasizing the salience of thehuman component of the IT resource and byproviding a refutable claim about its synergy withthe technological IT resource.

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Research Question 2: How does the ITresource generate operational efficiencies andcompetitive advantage?

Studies examining the deployment of IT resourceswithin organizations to improve performance arediverse in methodological and conceptual ap-proach, but generally fall within one of twocategories. The first assesses the degree towhich complementary organizational resourcesmoderate organizational performance impacts.These studies use quantitative empirical methodsapplied to large samples of firms. Studies in thesecond strand use case and field studies toanalyze the highly contextual value generationprocess. The two groups offer unique insights intohow IT generates operational efficiencies andcompetitive advantage for organizations, and wenow review each in turn.

The resource-based view of the firm specifies thatresources are valuable firm-specific assets. In thecontext of IT, firms must not only customize tech-nological systems and deploy and maintain them,but also must manage teams of IT and non-ITresources that together generate greater valuethan they do alone (Brynjolfsson and Hitt 2000).The latter include organizational practices andstructures that complement the varied functions ofinformation systems. Empirically, decentralizationof decision authority is found in greater applicationin firms with higher levels of IT investment (Hittand Brynjolfsson 1997). Moreover, firms withgreater use of IT and the use of teams, decen-tralized decision making, and wider breadth of jobresponsibilities are found to have dispropor-tionately higher market valuations (Brynjolfsson etal. 2002). However, synergies between IT andother organizational practices do not always exist.For example, in a study of the impact of the use ofcomputers, TQM, profit sharing, and employeeparticipation on labor productivity, Black andLynch (2001) find synergies among various work-place practices, but no consistent evidence ofsynergies with the use of computers.

Another set of organizational resources that maybe complementary to IT are firm characteristicssuch as worker composition, size, financial con-

dition, and culture. Francalanci and Galal (1998)find that IT business value, as measured by pro-ductivity, differs according to employee category:firms with higher IT investment that have alsodecreased their clerical and professional rankshave higher productivity. In the retail industry,complementarities leading to sustainable perfor-mance advantages exist between IT and humanand business resources such as culture (Powelland Dent-Micallef 1997). Using the event studymethodology, Im et al. (2001) find a negativeassociation between firm size and price reactionto IT investments, hypothesizing two possiblereasons: (1) greater predisclosure information insmaller firms and (2) smaller firms are betterpositioned to reap decreasing price-performanceratios than are larger firms. Another event studyfinds that a firm�s financial condition moderatesthe market�s reaction to an IT investmentannouncement (Oh and Kim 2001).

The few empirical studies discussed above thatexamine the impact of work practices andorganizational structure on the performanceimpacts of IT application indicate the potential forcomplementarities with certain factors. However,such studies say little about which factors areimportant in which settings and the detailedmechanisms by which they combine. We nowreview case and field studies, which are able toprovide a richer picture of the mechanisms bywhich IT improves organizational performance.

In an early case study of the order entry anddistribution system Economost at McKesson DrugCo., Clemons and Row (1988, p. 40) documentwidespread IT-enabled efficiencies at McKessonand its customers, the latter benefitting sub-stantially from �rationalizing operations inpreparation for Economost,� i.e., initiating com-plementary organizational resources in the form ofwork practices. Cooper et al. (2000) describe howa shift in corporate strategy at First AmericanBank drives information requirements, neces-sitating a new IT infrastructure based on a datawarehouse. The data warehousing application isexamined through the lens of a shift in corporatestrategy and IT�s complementarity with radicalorganizational transformation. The authors find

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that a change in organizational thinking accom-panied by appropriate IT investment lead toimproved and transformed business processesand competitive advantage. Similarly, in a studyof how IT supports online buying and build toorder, organization-wide application of IT through-out a range of business processes enablessynergies and competitive advantage (Kraemer etal. 2000). Other case and field studies examiningthe processes by which IT generates operationalefficiencies and competitive advantage examinethe travel industry (Clemons and Row 1991a), thecotton industry (Lindsey et al. 1990), and packagedelivery (Williams and Frolick 2001).

Despite management�s best intentions, however,the co-introduction of IT and complementaryorganizational changes may not result in imme-diate success, due to adjustment costs (Chew1991), learning, and other factors. In a study ofthe introduction of computer integrated manu-facturing at a medical products manufacturer,Brynjolfsson et al. (1997) find that despitemanagement�s introduction of an extensive set oforganizational change initiatives, managerial goalsof improved flexibility and responsiveness are notimmediately attained. At the core of the problemlies difficulty in changing employees� behaviorswhen their tacit knowledge about what worksaccumulated over many years appears tocontradict new managerial edicts intended tocomplement new information systems.

Synthesizing the findings of quantitative andqualitative empirical research, it is clear thatcomplementary organizational resources such asworkplace practices, change initiatives, andculture all interact with IT in the process of valuegeneration. It is unclear, however, which organi-zational practices are most synergistic with whichtypes of information systems in specific organi-zational contexts. We synthesize this finding in thefollowing general proposition.

Proposition 2A: Certain organizationalresources are complementary to the ITresource in the generation of IT businessvalue for the focal firm; the existence

and magnitude of the complementaritybetween any two specific instantiationsof these resources varies dependingupon the organizational and techno-logical contexts.

Proposition 2A is broadly understood. What is notunderstood is the specific nature of comple-mentarities, i.e., what specific resources are com-plementary to one another, under what conditions,and how are the attributes of complementaryresources related to business process andorganizational performance impacts? We take astep toward addressing this knowledge gap byspecializing Proposition 2A. Examining the natureof IT and non-IT resources according to the RBVsheds light on which types of organizationalpractices and structural characteristics are morelikely, when complementary, to provide a com-petitive advantage.

Certain organizational characteristics that may becomplementary to IT, such as firm size andculture, are fixed in the short run, or quasi-fixed.For example, changes in culture and thinkingcomplementary to the data warehouse imple-mentation at First American Corporation tookseveral years to implement (Cooper et al. 2000).Select manufacturing practices are also difficult tochange and require many stops and starts toevolve toward a successful system (Brynjolfssonet al. 1997). Moreover, complex business pro-cesses enabled by IT such as build-to-order atDell also take years to develop (Kraemer et al.2000) and hence years to successfully imitate, ifimitation is indeed possible. In contrast, otherchange initiatives are easier to implement, andhence to imitate.

Barney (1991) proposes three potential sources ofimperfect imitability: (1) firm-specific historicalconditions, i.e., a unique path through time;(2) causal ambiguity pertaining to the associationbetween a firm�s resource bundle and its sus-tained competitive advantage; and (3) sociallycomplex resources such as interfirm relationships.In the case of IT, these factors may either hamperimitability, as is the case with quasi-fixed com-plementary assets, or in the more extreme situa-

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tion, may prevent it entirely. For example,examining how Dell has been able to maintaincompetitive advantage over time suggests thepresence of both historical path dependencies aswell as causal ambiguity in its application of IT(Kraemer et al. 2000). In sum, analysis of theextent to which complementary organizationalassets are imitable informs understanding of thedegree to which the resulting synergies enablesustained competitive advantage.

Formalizing our arguments, complementaryorganizational assets are valuable and may berare. When there are no strategic equivalents,i.e., no substitutes enabling the same strategies tobe implemented, sustained competitive advantagerests on the extent to which such resources areimitable. As argued above, IT application isfraught with uncertainty and a lack of clarity withrespect to the connection between its applicationand competitive advantage. We thus propose that

Proposition 2B: The greater the inimit-ability of rare organizational resourcesthat are complementary to IT and lackingsubstitutes, the greater the degree towhich the focal firm can obtain a sus-tained competitive advantage.

Competitive Environment

Thus far we have reviewed accumulated knowl-edge of IT business value research emphasizingfocal firm dynamics. In this section, we shift ourattention to studies that include factors in thecompetitive environment. Following the integrativemodel, we review those focusing on industrycharacteristics as well as the impact of tradingpartners linked via information systems spanningfirm boundaries.

Research Question 3: What is the role ofindustry characteristics in shaping IT businessvalue?

Industry characteristics shape the extent to whicha firm can acquire IT and apply it successfully.

For example, in a design-driven industry such asapparel, it is critical for firms to rapidly shift withchanging consumer preferences in styles (Ghem-awat and Nueno 2003). The high-clockspeedfashion industry thus dictates the type of IT that isrequired, the way in which it is usefully applied,the dimensions of value that may result, as well asthe extent of value generated. More broadly,technological change in product and factormarkets, competitiveness, regulation, workforcecomposition, and minimum efficient scale havebeen shown in other contexts to impact theperformance of firms (Clark 1984; Datta andNarayanan 1989; Edwards 1977; Primeaux 1977).We now assess what is known regarding the roleof industry characteristics in impacting the abilityof firms to create and capture IT business value.

Empirical studies of IT business value typicallyinclude variables to control for industry effects,whether an industry dummy variable (Lichtenberg1995) or measures of industry structure such ascompetitiveness and regulation (Bharadwaj 2000).By including such controls, researchers are ableto more accurately identify those impacts asso-ciated with IT versus those being driven byindustry factors. However, the use of industry con-trols does not address the issue of how industrycharacteristics constrain or promote the ability ofcompeting firms to apply IT for organizationalimprovement.

Few studies directly examine differential IT busi-ness value across industries. Fewer still attemptto provide a theoretically derived argument for whysuch differences may exist. One strand of suchstudies uses growth accounting at the industrylevel to examine differential multifactor productivity(MFP) growth. Stiroh (1998) finds differences inMFP growth between computer-producing andcomputer-using sectors; recent results indicatethat producers as well as high-IT use industrieshave larger productivity acceleration relative toother industries (Stiroh 2001). In a direct exami-nation of the net marginal benefits of IT invest-ment, Morrison (1997) finds that the IT benefit-cost ratio has generally increased with time but isnot uniformly distributed across industries. Indeed,according to the structure-conduct-performance

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Table 6. Competitive Environment Propositions

3A Industry characteristics moderate the ability of firms to apply IT for improved organizationalperformance and to capture the resulting benefits.

3B The greater the degree of competition in an industry, the greater the extent to which firmsachieve efficiency gains via IT.

3C The greater the degree of competition in an industry, the lower the extent to which firms areable to capture the benefits of efficiency gains and achieve profitability gains via IT.

4A The IT and non-IT resources and the business processes of electronically connected tradingpartners shape the focal firm�s ability to generate and capture organizational performanceimpacts via IT.

4B The greater the degree of focal firm power relative to its trading partners connected via inter-organizational information systems, the greater its share of net value from deployment of thesystems.

paradigm from the industrial organization litera-ture, an industry�s structure directly impacts theperformance of firms within that industry (Bain1951; Mason 1939; Porter 1985).

Another strand of research explores how industrycompetitiveness shapes IT value generation andcapture, specifically, the degree to which the gainsdue to IT application may be competed away andpassed on to business and end customers.Bresnahan (1986) finds spillovers in the capture ofvalue by downstream industrial users of infor-mation technology produced in upstream sectors.Estimation of consumer welfare gains arising fromthe use of IT suggests that a substantial portion ofgenerated IT business value accrues to end con-sumers via improved quality, product variety, etc.(Brynjolfsson 1996). Moreover, the extent of suchappropriation by consumers may be large enoughto significantly dampen performance impacts,although operational efficiencies are large (Baruaet al. 1995; Hitt and Brynjolfsson 1996). Thesestudies suggest that the competitiveness of pro-duct markets may affect the degree to which afirm may capture the benefits that it generates viaapplication of information technology.

In sum, there is evidence for structural differencesacross industries regarding the ability of compe-titors to apply IT for improved performance. Inaddition, there is some evidence that a firm�s

ability to capture such value is moderated by com-petitive product markets. We synthesize thesebasic findings in the following:

Proposition 3A: Industry characteristicsmoderate the ability of firms to apply ITfor improved organizational performanceand to capture the resulting benefits.

Moving from the general to the specific, we knowvery little about particular industry characteristicsand their association with IT business value.Moreover, our theoretical and conceptual under-standing of why such differences exist is limited.We address this theoretical gap by deriving aproposition relating industry competitiveness to ITbusiness value.

In the presence of high industry concentration, thesophisticated pricing mechanism enabling efficientallocation of resources is weakened (Hayek1945). According to the X-inefficiency hypothesis,the absence of competition allows for slack andother inefficiencies that raise costs (Leibenstein1966). In the case of electric power, Primeaux(1977) finds 11 percent lower costs on average infirms facing competition. In banking, higher con-centration is associated with larger staffs andhigher labor expense, controlling for urban size,demand, and branch characteristics (Edwards1977).

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Although in highly competitive markets firms mayapply IT more efficiently, profitability may suffer asgains to IT application are competed away. Con-versely, under less competitive regimes the firmmay achieve profitability without productivity, theformer accruing due to monopoly rents. Our argu-ment refines existing empirical evidence sug-gesting that, in general, there may be productivitywithout profitability (Hitt and Brynjolfsson 1996).To emphasize, increased competitive pressurehas two effects: (1) it drives IT use for increasedefficiency and (2) it lowers the ability of firms tocapture rents due to competitive pressure. Wethus propose that

Proposition 3B: The greater the degreeof competition in an industry, the greaterthe extent to which firms achieveefficiency gains via IT.

Proposition 3C: The greater the degreeof competition in an industry, the lowerthe extent to which firms are able tocapture the benefits of efficiency gainsand achieve profitability gains via IT.

Research Question 4: What is the role of theresources and business processes of elec-tronically linked trading partners in impactingthe value generated and captured by the focalfirm?

In this section we analyze the value implications ofinterorganizational information systems (IOS)connecting the focal firm with its trading partners,including electronic data interchange (EDI),collaborative design systems, extranets, etc. Weexamine the role of trading partners� technologicaland human IT resources, complementary organi-zational resources, and business processes inshaping focal firm IT business value generation.

Electronic integration of business processesacross organizations requires the development ofIT resources by both the focal firm and its tradingpartners. Although standardization on Internetprotocols is growing, electronic data interchange(EDI) is still a mainstay, requiring investment intranslation and mapping software and service

arrangements with value-added networks (VANs).Even in basic implementations, electronic inte-gration requires some investment by tradingpartners (Unitt and Jones 1999; Williams andFrolick 2001).

In the context of electronic marketplaces linkingmany buyers and sellers, traditional micro-economics stresses the reduction of search costsand enhancement of economies of scope andscale (Bakos 1991). Transaction-cost economics(TCE) informs understanding of how IT affects thefirm-market boundaries by (1) reducing marketcoordination costs, including searching, con-tracting, scheduling, budgeting, etc.; (2) facilitatingthe processing and communicating of complexproduct descriptions, thereby making them lesscomplex; and (3) making some asset-specificcomponents less specific (Gurbaxani and Whang1991; Malone et al. 1987).

Regarding basic efficiencies accruing to the focalfirm by connecting to a trading partner, costreduction is well documented in the literature.FedEx uses EDI for billing and invoices to lowercosts associated with specialized printing andmailing as well as for rapid matching of purchaseorders, receipts, and invoices (Williams andFrolick 2001). Cost reduction results from theelimination of errors, reduction of inventory, andbilling cycle efficiencies which may reduce floattimes and improve cash flow (Mukhopadhyay etal. 1995, Teo et al 1997).

These and other studies indicate that technolo-gical IT resources dedicated to integrating busi-ness processes enable firms to gain efficiencies insupply chain operations. However, they do notaccount for the complexities of interorganizationalrelationships and the potential for competitiveadvantage in the strategic implementation ofshared resources that may be valuable, scarce,and difficult to implement.

Dyer and Singh (1998) argue that inter-organizational relationships, whether electronicallymediated or not, can be a source of competitiveadvantage. The authors propose four sources ofpotential competitive advantage: (1) relation-

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specific assets; (2) knowledge sharing routines;(3) complementary resources; and (4) effectivegovernance. Although the resource-based view isconventionally limited to analyzing the attributes ofassets owned and controlled by a single firm, ithas been extended to the multi-organizationalcontext to incorporate the shared resources ofmultiple trading partners. Dovev (2002) developsa model assuming that the competitive advantageof the focal firm is a function of the value and rarityof resources of both the focal firm and its tradingpartners. Building upon Dyer and Singh�s notionof relational rents, Dovev identifies three mech-anisms by which the focal firm�s competitiveadvantage is impacted by shared resources:(1) complementarities across organizationalresources may create synergies or dissonance;(2) relational rents generated are not appropriatedproportionally between the focal firm and itstrading partners; (3) the benefits captured by thefocal firm may not outweigh the costs ofopportunistic trading partners in their use ofshared information.

Few quantitative empirical studies have directlyexamined the impact of trading partners on focalfirm IT business value generation and capture.However, emerging research indicates severalsources of operational efficiencies and compe-titive advantage. One study adapts the notion ofembeddedness from social network theory as alens through which to examine strategic payoffs ofEDI (Chatfield and Yetton 2000). Embeddednessis defined as how central an EDI network is tomanaging interfirm interdependence, as indicatedby people links, mutual exchange of information,and joint problem solving. Firms with deeplyembedded EDI are found to be more likely able togain strategic benefits versus those with lowerembeddedness. Mukhopadhyay and Kekre (2002)examine the EDI-based order processing systemof a large industrial supplier of tools, toolingsystems, and services. The authors examine thebenefits to both the supplier as well as its networkof trading partner customers. Results indicate thatboth parties derive value but that the capture ofsuch value depends on who initiates the systemand whether it has basic or enhanced function-ality. In a study of the IT business value accruing

to smaller firms within a network led by a largeretailer, Subramani (1999) finds that IT mayprovide operational and strategic benefits in thepresence of investment in relationship-specificinvestments.

Such studies suggest how operational andstrategic benefits might result in the context ofIOS, but they say less about the appropriation ofsuch benefits. Another strand of research, pri-marily using analytic methods, focuses on howbenefits are distributed. Using an economicmodel of cooperative investment in IT amongmultiple firms, Clemons and Kleindorfer (1992)deduce that the generated economic surplus isshared by participants in proportion to their bar-gaining power, which is related to alternativeinvestment opportunities and asset specificity.Bakos and Nault (1997) model ownership andinvestment of electronic networks and find that theindispensability of stakeholders�the degree towhich trading partners possess unique, specificskills�is critical to network ownership.

Synthesizing the diverse strands of researchexamining IT business value in the trading partnercontext, we conclude that trading partnerresources, including IT and non-IT resources, andbusiness processes are an important driver of thefocal firm�s ability to implement IOS successfully(Riggins and Mukhopadhyay 1994). In particular,relationships among organizations may be a keyinterorganizational resource complement tointerorganizational IT, and may help to explaindifferences in benefits among trading partners.Other salient dimensions include knowledge andinformation sharing as well as the degree to whichthe interconnections are valuable and idio-syncratic to the relationship. We summarize thisfinding in the following:

Proposition 4A: The IT and non-IT re-sources and the business processes ofelectronically connected trading partnersshape the focal firm�s ability to generateand capture organizational performanceimpacts via IT.

Beyond generalities, many complex questionsremain. It is not clear how differences in the

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human IT resource across organizations mayshape the degree of value generated andcaptured by the focal firm. Moreover, we do notunderstand the extent to which complementaryresources of trading partners, for example,workplace practices and organizational structure,impact focal firm benefits. Finally, value is notdistributed equally, and may depend on a varietyof factors including the role of the system initiator,the features of the system, and power.

We build on existing literature to examine theimpact of a single trading partner resource�power�on the ability of the focal firm to generateand capture benefits from an interorganizationalinformation system. Although power has manyconceptualizations, in the context of tradingpartner relationships, we interpret power as equi-valent to market power based on the control ofresources and information. As argued by Horton(2003), power is critical to strategy and infor-mation systems.

In a review of power and IT research, Jaspersonet al. (2002) identify three conceptualizations ofpower: technological imperative, organizationalimperative, and emergent perspective. Viewingpower through these alternative lenses, theauthors develop metaconjectures relating powerand IT impacts. Jasperson et al. posit that �IT canmoderate the relationship between external power(power that derives from social structures outsidethe immediate context of formal authority) and theinternal exercise of power� (p. 417). We build onthis concept in the context of multiple organi-zations.

According to the reinforcement politics argument(Kraemer and Dutton 1979), computerizationreflects existing structures. IT is a malleable tech-nology controlled by those in power to enhancetheir level of control. The initiators of interorgani-zational information systems are often largeincumbents who are industry leaders, i.e., theyhold a great deal of power over their suppliers(Unitt and Jones 1999; Williams and Frolick2001). As power may involve �manipulation ofinformation that protagonists employ in the powergame� (Fincham 1992, p. 743), those with rela-

tively greater power can utilize it to appropriate agreater portion of the benefits, and hencereinforce their power.

Our argument that power is reinforced withinelectronically mediated networks and used by thepowerful partner to extract a disproportionate levelof benefits is related to the literature on modularproduction networks. Sturgeon (2002) definescaptive production networks as hierarchical,relying on powerful firms to organize multiple tiersof smaller, less powerful suppliers. The power oflead firms in captive networks forces suppliers tocut costs, change output, or make new invest-ments.

As a logical extension, the power of lead firms incaptive networks is also likely to lead to theirorchestration of benefits resulting from the systemto be skewed to their own interests. The root ofthis ability lies in the bargaining power of thepowerful over the powerless. Bowman andAmbrosini (2000) argue that value capture is afunction of the perceived bargaining power oftrading partners. The bargaining power of thefocal firm customer is enhanced by its financialposition as well as the availability of substitutesand low switching costs (Porter 1980, 1985).According to Jasperson et al. (p. 427), �the crea-tion and introduction of IT can be seen as aprocess that involves interested parties inten-tionally using their power to affect the nature ofthe systems that are put in place.� IT may notonly reinforce but strengthen power differentials.In a study of IT-based interorganizational rela-tionships in the consumer packaged goodsindustry, Clemons and Row (1993) find thatretailers resist new IT and processes due to theirexpectation of lower bargaining power and lesssharing of economic benefits. We thus proposethat

Proposition 4B: The greater the degreeof focal firm power relative to its tradingpartners connected via interorganiza-tional information systems, the greater itsshare of net value from deployment ofthe systems.

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Table 7. Macro Environment Propositions

5A The macro environment shapes the degree to which firms can apply IT for organizationalimprovement.

5B Telecommunications infrastructure�a complementary and potentially co-specialized asset withthe IT resource�moderates the economic value of an interorganizational information system tothe focal firm and its trading partners; the extent of moderation varies depending on theorganizational and technological context.

Macro Environment

Research Question 5: What is the role ofcountry characteristics in shaping IT businessvalue?

The structure and institutions of economies andthe increasingly interconnected global businessenvironment affect firms� IT choices and resultingorganizational performance outcomes (Van DenEnde et al. 2001). Certain macro factors mayconstrain firms� choices; for example, a poortelecommunications infrastructure inhibits Web-based supply chain integration. In contrast, tradeliberalization, financial safeguards for onlinetransactions, and tax subsidies may support andpromote the application of IT for operationalefficiencies and competitive advantage. However,beyond casual observation we know very littleabout the association between macro charac-teristics and IT business value.

Two factors have inhibited knowledge accumu-lation concerning macro characteristics and ITbusiness value: (1) emphasis on U.S. firms and(2) lack of cross-country studies. IT businessvalue researchers have focused on U.S. firms. Assuch, results are conditional on the characteristicsof the U.S. business environment, includingrelatively liberal trade policies, an advanced infor-mation infrastructure, a relatively well-educatedworkforce, and relatively competitive markets.The second reason for a paucity of knowledgerelated to the international perspective of ITbusiness value is that very few studies haveexplored IT business value using cross-countrysamples. Thus, although several studies haveexamined firms outside the U.S., including Brazil

(Tigre and Botelho 2001), France (Jelassi andFigon 1994), Mexico (Jarvenpaa and Leidner1998), and the United Kingdom (Stoneman andKwon 1996), it is difficult to draw conclusionsregarding the impact of macro factors as researchdesigns do not enable incorporation of appropriatecontrol variables. We use resource-based theoryand results from other management literatures toinform the macro context.

The RBV informs understanding of IT businessvalue in the macro context by providing a frame-work to examine performance implications con-cerning the variation of human and technologicalcomponents of the IT resource across nations.Researchers have applied the resource-basedview to assess why some firms �possess uniqueresources and competencies�relative to theircompetitors of other nationalities� (Dunning 1995,p. 466). In the IT context, the extent to which ITskills are widely available in a given country is adeterminant of their rareness and heterogeneity,two attributes required for a sustained competitiveadvantage (Barney 1991). This point is under-scored in the study by Jarvenpaa and Leidner(1998), which emphasizes the salience ofinvesting in technology skills, hiring top IT talentoften educated abroad, and forming exclusivearrangements with partners possessing comple-mentary IT skills in gaining a competitive advan-tage via IT in a developing country. Moreover, ifcomplementary organizational innovations aremore widely available in one nation relative toanother, the former economy may benefit fromproductivity gains, while the latter may not.

In addition to variation in the IT resource acrosscountries, exogenous factors may also affect the

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degree to which IT can be used to improveorganizational performance. Path dependenciesmay play a role in determining the types of IT thatare demanded, how they are used, and theireconomic impact (Tigre and Botelho 2001). Forexample, Brousseau (2003) finds that the pre-existing organization of distribution channels andinterfirm relationships is salient to adoption andassimilation of e-commerce in France. Differ-ences in the extent to which technological im-provements diffuse in the U.S. versus otherdeveloped nations are suggested to play a role inobserved differences in productivity growth (Gustand Marquez 2001). The confluence of EDI,organizational transformation, and public policyare illustrated in a study of Singapore�s TradeNet(Teo et al. 1997). EDI at TradeNet resulted insubstantial gains in efficiency and effectiveness,illustrating the degree to which promotion of ITcan provide benefits to both the private and publicsector.

In summary, the role of the macro environment inaffecting the degree to which firms apply IT fororganizational improvement is complex and notsystematically understood. However, researchand theory suggest that macro characteristics varyby country, create country-specific sets of IT attri-butes, and thereby impact firms� IT choices andresultant organizational performance impacts.Additionally, other macro factors such as cultureand education also impact the ability of organi-zations to apply IT successfully. We summarizethis finding in the following:

Proposition 5A: The macro environmentshapes the degree to which firms canapply IT for organizational improvement.

The macro environment is dynamic and complex,and there is a paucity of IT business valueresearch in this area. However, examining therange of macro factors that potentially shape ITbusiness value generation, telecommunicationsinfrastructure, and, in particular, Internet diffusionwould appear to be an important factor enablingfirms to apply IT for improved performance.

Telecommunications infrastructure varies widelyacross countries (OECD 2003). As an example,

according to the Hemisphere Wide Inter-University Scientific and Technological InformationNetwork (2003), Internet host density (number ofhosts per 100 inhabitants) in Latin America as ofJanuary 2003 varies from a low of .002 inHonduras to a high of 2.3 in Uruguay�adifference of three orders of magnitude. Givensuch variation, researchers have explored howheterogeneity in telecommunications infrastructuremay be associated with macro performance.Roller and Waverman (2001) find empirically thatthe extent of telecommunications infrastructure isassociated with economic growth. Otherresearchers have analyzed the potential impact ofInternet diffusion on growth and productivityacross countries (Varian 2002).

According to Straub and Watson (2001, p. 338),�The net-enabled organization (NEO) coordinatesits activities and interacts with its stakeholdersthrough the exchange of messages overelectronic networks.� Having squeezed most ofthe efficiencies out of internal connectivity, organi-zations are looking to their external environmentto coordinate the production and delivery of goodsand services, with the potential for orders ofmagnitude increases in efficiency (Hammer 2001).However, without a sufficient telecommunicationsinfrastructure, i.e., broad diffusion of high-speedInternet connections throughout the economy, theresulting network externalities and net-enabledefficiencies are limited. Emerging empirical evi-dence of differences in IT business value acrossdeveloped and developing countries may be amanifestation of differences in Internet diffusion(Dewan and Kraemer 2000; Tam 1998).

From the perspective of resource-based theory,telecommunications infrastructure is not a re-source in the conventional sense as it is notowned and operated by the focal firm. Rather, itcan be conceptualized as a country-specific assetavailable to all firms. As firms and their tradingpartners adopt and co-specialize their own IT tothe telecom infrastructure, the extent of generatedIT business value is likely to increase. However,the circumstances under which this occurs areunclear due to a lack of prior research. Thus, al-though differences in telecommunications infra-

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structure across countries enable varying oppor-tunities of co-specialization with focal firm ITresources, the nature of resulting benefits in spe-cific contexts is uncertain. Due to a lack of empi-rical evidence, therefore, we cannot say whetherthe role of telecommunications infrastructure inshaping IT business value is of an efficiency orcompetitive nature. We thus propose that

Proposition 5B: Telecommunicationsinfrastructure�a complementary andpotentially co-specialized asset with theIT resource�moderates the economicvalue of an interorganizational informa-tion system to the focal firm and itstrading partners; the extent of modera-tion varies depending on the organiza-tional and technological context.

Discussion

Several streams of research are concerned withassessing the organizational performance impli-cations of information technology, each bringingits own theoretical and empirical toolkit to bearupon similar research questions. Unfortunately,these approaches are divergent and the result hasbeen analogous to multiple but separate com-munication channels traversing a single pipe ofinquiry into the organizational performance im-pacts of IT. The lack of integration has led toambiguity and debate over basic principles, ex-tending beyond the IS research community. Thetopic is vital to public policy makers, the ITindustry, and IS practitioners, as exemplified bythe recent debate over whether IT matters initiatedin Harvard Business Review by Nicholas Carr(2003) arguing that firms have overestimated thestrategic value of IT and overspent on thecommodity that is IT. Our analysis has illuminatedthese issues through the lens of a robust theore-tical framework.

Although we could not have anticipated theemergence of this new debate at the outset of ourresearch effort, our analysis of accumulated ITbusiness value knowledge speaks directly to it.

Examining prior reviews of the literature convincedus that the integration of ideas across the variousstrands of research via a common theoretical lenswas not only a unique approach, but also one thatwould likely yield the greatest contribution toknowledge. Our approach was thus to integratequantitative empirical research addressing theproductivity paradox, conceptual and empiricalstudies assessing the competitive advantage im-plications of IT, and qualitative empirical researchassessing general performance impacts of ITwithin a single conceptual framework of ITbusiness value. Comparing and contrastingarticles across research strands led to the insightthat although the focal firm bounds the locus ofdirect performance impacts, the external environ-ment shapes them. Synthesizing the internal andexternal perspectives using resource-basedtheory enabled us to identify what we know andwhat we don�t know and suggest illustrativepropositions, the future assessment of which will,we hope, expedite knowledge advancement.

We have learned that IT is valuable, offering anextensive menu of potential benefits ranging fromflexibility and quality improvement to cost reduc-tion and productivity enhancement. Our analysisalso suggests that the synergies resulting fromtechnical and human IT resources likely result inshort-lived competitive advantages. Regardingthe mechanisms by which value is achieved, welearned that the high degree of complexity leadsto a context-contingent set of synergistic combina-tions of IT and other organizational resources,including workplace practices, change initiatives,organizational structure, and financial condition.Further examination of the attributes of such com-plementary resources led to the proposition thatunder conditions of sufficient rarity and non-substitutability, the more difficult they are toimitate, the more likely is the attainment of asustained competitive advantage.

Moving to the external environment, examinationof differential impacts across industries suggestedthat industry characteristics such as regulationmay constrain IT business value. In contrast,other facets of industry structure such as rapidtechnological change may enable leaders to

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constantly innovate and maintain their IT-basedcompetitive advantages. Refinement of this argu-ment led to the proposition that the relationship ofIT-enabled profitability and productivity enhance-ment (Hitt and Brynjolfsson 1996) may bemoderated by the level of industry compe-titiveness. We also found that trading partnersplay a critical role in shaping the generation anddetermining the capture of focal firm IT businessvalue when they are electronically linked. Inparticular, we posited that power is reinforcedwithin IOS, i.e., IT reinforces preexisting powerimbalances, enabling lead firms to capture adisproportionate amount of value. Moving to thefinal layer in our IT business value model, wefound that a variety of public policy mechanismsas well as cultural and structural factors shapeorganizational adoption of IT and the resultingorganizational performance impacts. In particular,telecommunications infrastructure is a comple-mentary country-specific asset whose qualityshapes the extent to which firms can apply IT toimprove organizational performance.

Limitations and FutureResearch

Although we have endeavored to achieve thehighest levels of objectivity, accuracy, and validity,our analysis is not without limitations. Theresource-based view of the firm has emerged asthe leading theory within strategy research(Barney 2001) and is used in various manage-ment literatures including marketing (Fahy andSmithee 1999) and international business (Peng2001). However, although there is growing con-sensus that the RBV provides a robust frameworkfor viewing the sources of competitive advantageswithin firms (Barney 2001; Peteraf and Barney2003), it is not without criticism (Priem and Butler2001). Despite its synthesis of economics ration-ale with a managerial perspective, RBV is some-times criticized as drawing too heavily fromeconomics. The selection of articles followed acarefully prescribed set of procedures and weendeavored to achieve complete objectivity andcomprehensiveness. However, selection may

have been implicitly influenced by existing biases.Attention to the included articles in prior reviewspotentially mitigated this threat, as did the sug-gestions of outside reviewers. In summary,despite its limitations, we are hopeful that ouranalysis not only sheds light on a difficult andcomplex subject, but also shines a ray, albeitmodest, on the future.

The research agenda resulting from our analysisrelates to each of the five research questionsidentified herein. Although a great deal of re-search has examined the value of the technolo-gical IT resource, several aspects of the firstresearch question remain relatively understudied.For example, case and field studies of specificorganizational contexts might shed light on thedifferent dimensions of organizational perfor-mance resulting from different types of IT deploy-ment, e.g., infrastructure versus business appli-cations. In addition, quantitative empirical studiesof emergent forms of IT, including e-business andWeb services, might benefit from a growing rangeof statistics collected by national governments, asdocumented for the U.S. by Tehan (2003).Moreover, quantitative and qualitative researchexamining the synergies between human ITexpertise (HIR) and technological IT resources(TIR) would improve understanding of how theyinteract and inform implications for competitiveadvantage, as suggested by Proposition 1B.

Moving to the second research question, muchwork remains to uncover which resources aresynergistic with which types of IT and in whatcontexts. In particular, empirical studies assessingthe degree of imitability�perhaps using primarysurvey data as in Powell and Dent-Micallef (1997)and Tallon et al. (2000)�would improve ourunderstanding of the sustainability of competitiveadvantage resulting from synergies between ITand complementary resources. Combiningmultiple levels from the integrative model within asingle analysis may also inform the question ofcomplementarities. For example, is the use ofdecentralized decision making combined withgreater information sharing dependent upon busi-ness processes or industry characteristics? Casestudies controlling for IT and non-IT resources

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would inform understanding. Future researchexamining the ability of firms to apply IT succes-sfully may build upon the capabilities perspectiveof the resource-based view (Grant 1991).

Our analysis also identifies several researchstreams concerning the external environment.We know very little about how industry charac-teristics moderate the degree of IT businessvalue. As data on such characteristics as unioni-zation and competitiveness are often collected bynational governments, this represents a potentiallyfruitful area of future research. In addition, thedynamic capabilities extension to the RBV may beuseful in understanding dynamic markets charac-terized by rapid change (Eisenhardt and Martin2000; Teece et al. 1997). For example, are thepractices of Dell in the PC industry adaptable toslower clockspeed industries such as woodproducts? Case and field studies are required tobuild a foundation for understanding the role oftrading partner resources on the focal firm�s abilityto generate IT business value. Building from initialstudies of the role of trading partners (Chatfieldand Yetton 2000; Mukhopadhyay and Kekre2002), further research might draw from con-ceptual work on value creation and capture(Bowman and Ambrosini 2000). The literature oninterorganizational relationships (Barringer andHarrison 2000), transaction cost economics, andagency theory might also be useful. Finally,studies that incorporate macro characteristics,whether in multiple case studies or in empiricalresearch, are needed to examine which macrocharacteristics are salient and how they mayinteract with one another in shaping the ability offirms to apply IT for organizational improvement.The examination of similar firms in a singleindustry across multiple countries might enablethe isolation of macro factors that are the sourceof differential IT business value.

Acknowledgements

This research has been supported by grants fromthe Computer, Information Science and Engi-neering (CISE) Division of the National ScienceFoundation and by the IBM Corporation. We

thank seminar participants at the University ofCalifornia, Irvine, and Boston College for theirthoughtful insights and suggestions pertaining toearly versions of this paper. We appreciate theguidance and patience of Jane Webster and RickWatson, the critical remarks of three anonymousreviewers, and the many who generously gave oftheir time to comment on drafts of the manuscript,including Cynthia Beath, Jason Dedrick, RobFichman, John Gallaugher, Rajiv Kohli, and LynneMarkus. All errors are the sole responsibility of theauthors.

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About the Authors

Nigel Melville is an assistant professor ofInformation Systems and a member of the Opera-tions, Information and Strategic ManagementDepartment at the Wallace E. Carroll School ofManagement, Boston College. He earned hisPh.D. in management from the Graduate Schoolof Management at the University of California,Irvine. His research interests include IT businessvalue and information product markets; hisresearch has appeared in Information SystemsResearch and Social Science Computer Review.He is the Students in Free Enterprise Sam WaltonFellow at Boston College. Prior to earning hisPh.D. he worked as an engineer for several yearsand cofounded a software company. He earnedan M.S. in electrical and computer engineeringfrom the University of California, Santa Barbara,and a B.S. in electrical engineering from theUniversity of California, Los Angeles.

Kenneth Kraemer has conducted research on thesocial, managerial, and policy aspects of com-puting in organizations for more than 35 years.He is currently studying the global diffusion ofelectronic commerce and the overseas out-sourcing of knowledge work. He has previouslystudied national computing policy in Asia-Pacificcountries, the dynamics of computing in organi-zations, the business value of IT, and policies forsuccessful implementation of information systems.He has coauthored nine books, including Asia�sComputer Challenge: Threat or Opportunity forthe U.S. and the World? (with Jason Dedrick,Oxford University Press, New York) and Managing

Information Systems (with John Leslie King,Debora E. Dunkle, and Joseph P. Lane, Jossey-Bass, San Francisco, 1989). His articles havebeen published in Communications of the ACM,MIS Quarterly, Management Science, InformationSystems Research, Journal of ManagementInformation Systems, The Information Society,Public Administration Review, Telecommuni-cations Policy, and Policy Analysis. He was ShawProfessor in Information Systems and ComputerSciences at the National University of Singaporein 1990. Professor Kraemer was named Taco BellProfessor of IT for Management at the Universityof California, Irvine, in 1995.

Vijay Gurbaxani is a professor of InformationSystems at the Graduate School of Management,University of California, Irvine. His researchinterests are in the economics of informationsystems, focusing on evaluating returns to ITinvestment, competition in the digital economy,and on the sourcing and management ofinformation services. He is the author of a book,Managing Information Systems Costs (ICIT Press,Washington, DC, 1990), and numerous journalarticles. His research has appeared in InformationSystems Research, Management Science, andCommunications of the ACM. He received hisPh.D. from the William E. Simon Graduate Schoolof Business Administration, University ofRochester, and a Master�s degree in Mathematicsand Computer Science from the Indian Institute ofTechnology, Bombay. His doctoral thesis won theprize for the best dissertation in a worldwidecompetition sponsored by the International Centerfor Information Technologies.

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Appendix A

Methodology Used to Identify Research Articles

Our methodology for identifying IT business value studies proceeded in three stages (Webster and Watson2002). First, using key words from our definition of IT business value we queried journal databases (no timeperiod constraint) and browsed the titles of articles in leading journals and conference proceedings (1990through 2002). Journal databases included Business Source Premier and JSTOR. Browsed journalsincluded American Economic Review, Communications of the AIS, Communications of the ACM, DecisionSupport Systems, Economics of Innovation and New Technology, Information Systems Research, Journalof MIS, Management Science, MIS Quarterly, Organization Science, and Production and OperationsManagement. Conferences included Americas Conference on Information Systems, AustralasianConference on Information Systems, European Conference on Information Systems, and the InternationalConference on Information Systems. Second, we used citations of identified articles as further sources.Finally, we used the Social Sciences Citation Index and the Web of Science to identify additional candidatearticles. This systematic and comprehensive search resulted in 202 IT business value articles, a completelisting of which is available upon request from the authors. Note that this process excluded book chapters,working papers, and other articles not subjected to the peer-review process. In addition to identifying ITbusiness value studies, we also identified prior reviews of the literature (Barua and Mukhopadhyay 2000;Brynjolfsson 1993; Brynjolfsson and Hitt 2000; Brynjolfsson and Yang 1996; Chan 2000; Cronk andFitzgerald 1999; Dedrick et al. 2003; Dehning and Richardson 2002; Kauffman and Weill 1989; Soh andMarkus 1995; Triplett 1999; Wilson 1995). Regarding reliability of the final list of included articles, forapproximately 75 percent of the articles, there was agreement on the selection by all three reviewers. Forthe remainder, there was agreement by at least two reviewers. Each of these articles was then discusseduntil there was agreement that the article should be included or excluded from the final set.

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