Deriving Business Value from IT Applications in Product Development: A Complementarities-Based Model - Information Technology and Product Development - page 24

the total effects of A and B together must be greater than the sum of the effects of
A individually plus B individually. For example, in the CAD case, more investment
in and usage of CAD equipment (A) increases the value generating potential of
“design-for manufacturability” (B), and vice versa. Thus, value produced from the
combination of CAD usage together with design-for manufacturability is greater
than the sum of the returns to either taken individually, meaning these two elements
are supermodular.
Several alternative statistical approaches have been used to infer the presence
of complementarities, including pairwise partial correlations (Colombo & Mosconi,
1995; Hitt & Brynjolfsson, 1997), interaction terms (Bresnahan, Brynjolfsson, &
Hitt, 2002; Powell & Dent-Micallef, 1997; Zhu, 2004), and second-order factors
(Laursen & Foss, 2003; Tanriverdi & Venkatraman, 2005). Brynjolfsson and Hitt
(2003) take a different approach, and infer the presence of complementarities by
demonstrating multi-year lags in the arrival of productivity improvements.
In empirical work by organizational innovation researchers, complementarities
have been used to explain the linkage between a cluster of a system of “new” human
resource practices and greater innovation performance (Laursen & Foss, 2003); the
synergy between technological and product market experience in promoting new
product development in the pharmaceutical industry (Nerkar & Roberts, 2004); and
the effects of business knowledge synergies on performance in multi-business firms
(Tanriverdi & Venkatraman, 2005).
Empirical work by IT business value researchers has demonstrated that firm
performance is enhanced by combining IT investment with the following com-
plementary sets of elements: flexible culture, strategic planning-IT integration,
and strong supplier relationships (Powell & Dent-Micallef, 1997); and decentral-
ization of decision authority, emphasis on subjective incentives, and a greater
reliance on skills and human capital (Hitt & Brynjolfsson, 1997). In other notable
work, Zhu (2004) found that e-commerce capabilities and IT infrastructure were
complementary in their effects on firm-level performance.
Complementarities have also been the subject of theorizing by IT business value
researchers. Melville et al. (2004) give a prominent treatment to complementari-
ties in IT business value framework synthesized from a comprehensive review of
the literature. In an earlier review of the IT business value literature, Barua and
Mukhopadhyay (2000) suggest that complementarities represent the most promising
route forward for business value research. They use complementarities to develop a
sketch of a theory in which business strategies, IT applications, business processes,
and organizational incentives/controls form a complementary system that enhances
intermediate firm outcomes (e.g., customer service, time to market, and inventory
turnover).
The growing streams of research linking complementarities to innovation and to
business value suggest that complementarities hold considerable problem as a foun-
dation for theory that joins both IT innovation and business value. In the following
section, we use complementarities to develop a coherent theory of IT investment,
innovation, and business value.