Executive Thought Leadership

MIT Study on Organizational Capital

Professor Erik Brynjolfsson discusses how IT investments influence a company’s culture as a whole and increase productivity.

Cisco: Why did you conduct this study on Internet culture and what is the single most significant finding from your research?

Brynjolfsson: We began this research with the goal of understanding what differentiates successful users of the Internet and related technologies from the laggards. Based on executive interviews and case studies that we completed, we hypothesized that a certain way of organizing work, including specific business practices and an Internet-friendly culture, might make a big difference.

We were able to identify the nature of such an organization and culture that correlated with successful Internet use. Companies that combine information technology investments with the right "digital organization" are significantly more productive than firms that only make the technology investments. They also have higher levels of innovation and stock market value.

Cisco: How do you define the specific set of practices that comprise the “digital organization” and their impact on productivity and innovation?

Brynjolfsson: Characteristics of a "digital organization" fall into seven key groups:

• A policy of open information access and communication
• Distributed decision rights and "empowerment" of line workers
• Strong performance-linked incentives
• Active investment in corporate culture
• Regular communication of strategic goals throughout the organization
• An emphasis on recruiting and hiring top employees
• Heavy investment in training, including online training, once employees are hired

In our report, which we will make available by August 2002, we provide more detail on each of these practices.

Cisco: Cisco: What was the study’s basic methodology?

Brynjolfsson: We began with numerous interviews and site visits. We then designed a questionnaire and interview protocol administered to several hundred CIOs, HR managers, and other executives. The interviews are still being conducted, so our sample is growing. In parallel, we gathered data on companies’ outputs (for example, inflation-adjusted revenues) and inputs (for example, labor, computer, and other capital, materials, purchased services, and so on) and constructed a measure of “total factor productivity,” which is essentially the amount of output per weighted unit of input, with adjustments for industry and year. Finally, we ran a series of statistical analyses that helped us identify the set of characteristics that correlated with the most productive firms and the most effective users of various information technologies. In related analyses, we examined other performance measures such as stock market valuation and a multivariable metric of innovation.

Cisco: What are the study’s key findings that relate companies’ IT equipment stock to their productivity?

Brynjolfsson: In our work, we confirmed our earlier finding that, on average, companies that invest more heavily in IT are more productive than their competitors. In other words, IT correlates to increased productivity. These companies also had higher stock market values, controlling for factors such as industry and other investments by the firm, which suggests that investors expect them to have higher profits over time than their industry peers. In conjunction with the general increase in technology investment in the past eight years, our findings can help explain the productivity surge that the United States experienced during that period.

However, we also found tremendous variation in productivity and in all other measures of performance. Some IT-intensive firms were extremely productive, but others that spent just as much on IT were actually significantly less productive than their industry average. This high dispersion led us to examine companies’ organization and culture as possible additional factors contributing to productivity.

Cisco: Can you share with us key findings on the importance of corporate culture?

Brynjolfsson: One of the striking findings was the importance of implementing complementary practices such as open information access, strong performance-linked incentives, active investment in corporate culture, and heavy new employee training. The firms that combined a specific corporate culture with greater than average IT intensity were, on average, far more productive than the firms that adopted the culture or the IT intensity separately. Most of the productivity was found in the subset of firms that had put all the pieces of the puzzle together.

Cisco: What is your advice to business leaders who want to improve their productivity and leverage their IT investments?

Brynjolfsson: Correlation is not necessarily causality. However, the combination of the case study evidence and the statistical results suggests to me that the companies with the best overall performance don’t simply invest in IT. They have also adopted the principles of the digital organization I described earlier. These principles may not be right for every company in every situation. However, if I were a CEO, I’d take a close look at them and see if they made sense for my firm.

Secondly, the fact that complementarities appear to be important suggests that it is essential to coordinate technology initiatives with the company’s organization and culture. We recently held a CIO summit at MIT , and this alignment proved to be a central issue for those attending. In our sample, companies that tried to become IT-intensive organizations without also adopting the right internal organization and culture were more likely to have below average productivity. Clearly, IT investments cannot simply be relegated to the realm of the hardware itself, but must influence the company’s culture as a whole.