Successful companies recognize that information technology can fundamentally alter the very nature of work. Such a transformation, however, often requires that an organization rethink its corporate strategy and remake its basic structure and processes — a task that one Fortune 500 CEO compared to “changing the tires on a moving car.” Looked at in this way, the so-called productivity paradox articulated in 1987 by Robert Solow — “you can see the computer age everywhere but in the productivity statistics”1 — becomes less mysterious. In fact, though, computers do affect productivity — and they do so to the extent that organizations adapt their internal structures, processes and culture to extract the greatest value from the technology. The data show a clear divide between companies that effectively change their organizations and those that do not. Laggard firms can live off their momentum and existing customer base for a while, but eventually a competitor will offer customers a significantly better product or service.
In this sense, IT is like steam power in the 1800s and electricity in the 1900s — a general- purpose technology with long-term impacts on the nature of production and consumption throughout the economy.2 But IT has become affordable, and thus ubiquitous, much more quickly than those earlier advances. Since the late 1950s, the price of computing power has fallen more than 2,000-fold. Although IT has enabled the growth of new companies and even entire industries, these technologies have also transformed the opportunities and challenges facing established manufacturing and service firms.3
We will show that the degree to which a particular company gains from changes in IT depends on the ability of firms to exploit investments in complementary assets —not just physical capital but also human and organizational processes. To support this proposition, we focus on how one company in the transportation sector transformed itself as it put IT to work.
We take as our point of departure the seminal work of Alfred Chandler4 and Harold Leavitt,5 who established the interrelatedness of a few major elements common to all organizations — namely, their strategies, their organizational structures, their employees and their technology.
1. R.M. Solow, ‘’We’d Better Watch Out,’’ New York Review of Books, July 12 1987, 36.
2. E. Helpman, ed., “General Purpose Technologies and Economic Growth” (Cambridge, Massachusetts: MIT Press, 1998).
3. J.E. Triplett, “The Solow Productivity Paradox: What Do Computers Do to Productivity?,” Canadian Journal of Economics 32, no. 2 (April 1999): 309–334.
4. A.D. Chandler, “Strategy and Structure” (Cambridge, Massachusetts: MIT Press, 1962).
5. H.J. Leavitt, “Managerial Psychology” (Chicago: University of Chicago Press, 1967).
6. M.S. Scott Morton, “Management of Tomorrow’s Corporation,” in “Amdahl Corporation: Review of Research Findings,” 1988; and M.S. Scott Morton, “The Corporation of the 1990s: Information Technology and Organizational Transformation” (Oxford: Oxford University Press, 1991).
7. M.S. Scott Morton, “The Corporation of the 1990s: Information Technology and Organizational Transformation” (Oxford: Oxford University Press, 1991); M.S. Scott Morton, “Emerging Organizational Forms,” European Management Journal 13, no. 4 (December 1995): 339–345; and T. Malone and J. Rockart, “Computers, Networks and the Corporation,” Scientific American 26, no. 3 (March 1991): 128–136; and A. D. Chandler Jr. and J.W. Cortada, eds., “A Nation Transformed by Information: How Information Has Shaped the United States from Colonial Times to the Present” (New York: Oxford University Press, 2000).
8. M.E. Porter, ‘’What Is Strategy?,’’ Harvard Business Review (November–December 1996): 61–78.; D.J. Teece, G. Pisano and A. Shuen, “Dynamic Capabilities and Strategic Management,” Strategic Management Journal 18, no. 7 (1997): 509–533; and D.J. Teece, “Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy,” Research Policy 15, no. 6 (1986): 285–305.
9. Gormley and others (1998) cited in E. Brynjolfsson, L.M. Hitt and S. Yang, “Intangible Assets: How the Interaction of Computers and Organizational Structure Affects Stock Market Valuations,” Brookings Papers on Economic Activity: Macroeconomics 1 (2002): 137–199.
10. S.E. Black and L.M. Lynch, “How to Compete: The Impact of Work-place Practices and Information Technology on Productivity,” Review of Economics and Statistics 83, no. 3 (August 2001): 434–445; S.E. Black and L.M. Lynch, “What’s Driving the New Economy? The Benefits of Workplace Innovation,” Economic Journal 114, no. 493 (February 2004): 97–116; A.D. Cosh, X. Fu and A. Hughes, “Management Characteristics, Collaboration and Innovative Efficiency: Evidence from U.K. Survey Data,” working paper 311, Centre for Business Research, University of Cambridge, Cambridge, United Kingdom, September 2005; E. Brynjolfsson and L.M. Hitt, “Computing Productivity: Firm-level Evidence,” Review of Economics and Statistics 85, no. 4 (2003): 793–808; E. Brynjolfsson and L.M. Hitt, “Information Technology as a Factor of Production: The Role of Differences among Firms,” Economics of Innovation and New Technology 3, no. 4 (1995): 183–200; E. Brynjolfsson and L.M. Hitt, “Beyond Computation: Information Technology, Organizational Transformation and Business Performance,” Journal of Economic Perspectives 14, no. 4 (fall 2000): 23–48; M.A. Huselid, “The Impact of Human Resource Management Practices on Turnover, Productivity and Corporate Financial Performance,” Academy of Management Journal 38, no. 3 (1995): 635–872; and C. Ichniowski, K. Shaw and G. Prennushi, “The Effects of Human Resource Management Practices on Productivity: A Study of Steel Finishing Lines,” American Economic Review 87, no. 3 (June 1997): 291–313.
11. E. Brynjolfsson, L.M. Hitt and S. Yang, “Intangible Assets: How the Interaction of Computers and Organizational Structure Affects Stock Market Valuations,’’ Brookings Papers on Economic Activity: Macroeconomics 1 (2002): 137–199.
12. R.H. McGuckin, M. Spiegelman and B. van Ark, “The U.S. Advantage in Retail and Wholesale Trade Performance: How Can Europe Catch Up?,’’ working paper 1358, The Conference Board, New York, March 2005.
13. McKinsey Global Institute, “U.S. Productivity Growth 1995–2000. Understanding the Contribution of Information Technology Relative to Other Factors,” (Washington, D.C.: McKinsey Global Institute, October 2001); L. Foster, J. Haltiwanger and C.J. Krizan “The Link Between Aggregate and Micro Productivity Growth: Evidence from the Retail Trade,” working paper 9120, National Bureau of Economic Research, Cambridge, Massachusetts, August 2002.
14. R.H. McGuckin, M. Spiegelman and B. van Ark, “The U.S. Advantage in Retail and Wholesale Trade Performance: How Can Europe Catch Up?,’’ March 2005.
15. L. Foster, J. Haltiwanger and C.J. Krizan, “The Link Between Aggregate and Micro Productivity Growth: Evidence From the Retail Trade,’’ 2002.
16. S. Basu, J.G. Fernald, N. Oulton and S. Srinivasan, “The Case of the Missing Productivity Growth: Or Does Information Technology Explain Why Productivity Accelerated in the United States but not in the United Kingdom?,” working paper 8, Federal Reserve Bank of Chicago, June 2003; and B. van Ark, R. Inklaar and R.H. McGuckin, “‘Changing Gear’ Productivity, ICT and Service Industries: Europe and the United States,” research memorandum GD-60, Gröningen Growth and Development Centre, University of Gröningen, The Netherlands, 2002.
17. M.S. Scott Morton and A. Meyer, “Schneider Corporation A-E,” (Cambridge, Massachusetts: MIT Sloan School of Management, 2004).
18. E. Brynjolfsson and L.M. Hitt, “Beyond Computation: Information Technology, Organizational Transformation and Business Performance,” Journal of Economic Perspectives 14, no. 4 (2000): 24–48; and N.G. Carr, “The End of Corporate Computing,” MIT Sloan Management Review 46, no. 3 (spring 2005): 67–73.