Effect of Information Systems Resources and Capabilities on Firm Performance: A Resource-Based Perspective

We draw on the resource-based theory to examine how information systems (IS) resources and capabilities affect firm performance. A basic premise is that a firm's performance can be explained by how effective the firm is in using information technology (IT) to support and enhance its core competencies. In contrast to past studies that have implicitly assumed that IS assets could have direct effects on firm performance, this study draws from the resource complementarity arguments and posits that it is the targeted use of IS assets that is likely to be rent-yielding. We develop the theoretical underpinnings of this premise and propose a model that interrelates IS resources, IS capabilities, IT support for core competencies, and firm performance. The model is empirically tested using data collected from 129 firms in the United States. The results provide strong support for the research model and suggest Journal of Management Information Sy.<:tems / Spring 2005, Vol. 21, No. 4, pp. 237-276. © 2005 M.E. Sharpe, Inc. 0742-1222 / 2005 $9.50 + 0.00. 238 RAVICHANDRAN AND LERTWONGSATIEN that variation in firm performance is explained by the extent to which IT is used to support and enhance a firm's core competencies. The results also support our proposition that an organization's ability to use IT to support its core competencies is dependent on IS functional capabilities, which, in turn, are dependent on the nature of human, technology, and relationship resources of the IS department. These results are interpreted and the implications of this study for IS research and practice are discussed.