Knowledge@Wharton

Wharton's Lorin Hitt studies the impact and implications of the Computer Age

Is computer technology a giant black hole that drains corporate resources, demands ever-rising levels of expensive support staff and returns only negligible productivity increases?

Is the Internet driving down corporate profits as companies are forced to drop prices in order to compete in an arena where consumers can easily search for the lowest price?

Do e-commerce and the Internet mean an end to traditional competitive issues?

It's questions like these that have intrigued Lorin Hitt since the days he put himself through college at Brown University writing computer test code and software. Hitt, assistant professor of operations and management, studies the evolution of e-commerce, its influence on corporate performance, and the effect of information technology on productivity, among other trends. And in the largely uncharted waters of the IT revolution, it is information many observers believe can’t be disseminated fast enough.

As corporate America’s investment in and dependence on computer technology has mushroomed in recent years, some industry experts have called its value into question. A simple but provocative study by Morgan Stanley’s chief economist Steven Roach first drew attention to this so-called “productivity paradox” in 1987, arguing that the tremendous increase in computerization has in fact had little effect on economic performance. Hitt, somewhat skeptical of such arguments, began searching for answers in the early 1990s.

After earning his bachelor’s and master’s degrees from Brown, Hitt worked briefly as an engineer, then spent three years as a strategy consultant for Oliver, Wyman & Co. where he focused on quantitative computer- based data analysis for the financial services industry. After growing weary of a near-constant travel schedule, he decided to pursue his PhD at MIT’s Sloan School of Management, where his earliest research on IT and productivity began. Hitt joined Wharton in 1996.

What has his research on computers and productivity revealed? Working with Erik Brynjolfsson of MIT, Hitt examined data from 599 firms across a broad spectrum of industries, calculating productivity levels and growth from 1987 to 1994. Hitt and Brynjolfsson estimated the relationship between changes in productivity and changes in computerization and concluded that companies that invested heavily in computers were in fact more productive than their industry competitors. Further, these returns were two to five times greater over a seven year, versus one year, period. “Our results suggested that computers increase productivity both directly and by making new types of work structures possible over time,” Hitt says.

But despite this overall positive trend, Hitt’s research found huge variations across organizations: some spend aggressively on IT with great success, while others realize little benefit. What explains these differences? Hitt found that companies that combine decentralized decision-making processes, training, investment in employees, and customer-focused strategies are more productive technology users. Such companies, he notes, have many of the characteristics of “new organizations,” a buzzword coined by management guru Peter Drucker to describe a less hierarchical corporate structure.

The bottom line: firms that couple IT investments with work practices that leverage the skills and education of their employees are about 5 percent more productive than those that don’t. “Over the next decade, these decentralized and empowered organizations may begin to pull away from their industrial age counterparts … as they are better able to exploit increasingly inexpensive information technology,” Hitt says. “These results suggest that it is becoming more important to organize in ways that leverage the value of IT.” He warns, however, that companies should never assume that productivity gains are but a new computer system away. In fact, simply plugging in new technologies without simultaneous organizational change can actually have the opposite effect.