1 AN INDUSTRY-LEVEL ANALYSIS OF THE POTENTIAL AND REALIZED VALUE OF INVESTMENTS: AN INDUSTRY-LEVEL MODEL

Overview. Managers rely on prior beliefs and expectations to make decisions. Typically, IT investment decisions are made by weighing the potential benefits and actual costs of the investment. Hence, establishing an objective understanding of the potential value of such investments is crucial to ensure an effective investment decision making process. The potential benefits of IT investments, however, do not always translate directly to the actual payoffs of investments due to a variety of intervening factors in the value creation process. As such, there often is a gap between potential and realized value of IT investments which needs to be defined and measured (Davern and Kauffman 2000). Most studies in the value of IT literature focus on measuring the realized value of IT investments. Few have explored the issue of the potential value of IT. Moreover, none has developed objective measures for potential value based on explicit statements of theory. As a result, there are a number of modeling and statistical challenges that need to be overcome before we can offer better managerial guidance. We explore the methodological tools available to measure potential and realized value of e-commerce-related IT investments and address the gap between the potential and realized value by developing a measurement model grounded in production economics. We adopt the Malmquist productivity index to model the potential and realized value of IT and apply data envelopment analysis (DEA) techniques to solve the model. Using this model, we examine the gap between potential and realized value of IT investments in industries within the United States. W