Today’s Wall Street Journal contains their Business Insight section, which is a collaboration between the Journal and MIT Sloan Management Review. this section features research of interest to WSJ subscribers, and its articles are written by scholars rather than journalists.
Today’s Business Insight contains an article (also available here on the Sloan site) written by me and MIT’s Erik Brynjolfsson, who I continue to embarrass by describing (accurately) as the pre-eminent economist studying IT’s impact. For a while now, we’ve been collecting data and conducting analyses to address a fundamental question for our discipline: is there systematic evidence that IT matters in competitive battles?
There are three broad schools of thought about information technology’s impact on competition. The first, ably articulated and defended by Nick Carr, is simply that IT Doesn’t Matter for competition — that competitive dynamics remain unchanged as firms make their individual IT investments. IT brings productivity and performance benefits, but it brings them to all competitors equally. As a result, according to Carr, IT is "a cost of doing business that must be paid by all, but provides distinction to none."
A second hypothesis is that IT has a leveling or homogenizing effect on competition — that it makes firms in an industry more similar. After all, this argument goes, firms are increasingly buying commercial software (from vendors like SAP, Oracle, Microsoft, Business Objects, etc.) rather than writing it themselves. Consequently, everyone’s business processes should become more similar and undifferentiated, since they’re encoded in the same software. IT doesn’t separate winners from losers, in other words — it brings them closer together, and makes it less likely that anyone’s going to stand out.
The third view, of course, is that IT does matter; that its main effect is to differentiate competitors within an industry and separate winners from losers. Those of us who have been advocating this view have to date relied primarily on case studies to illustrate this effect. However, case studies of runaway IT-based successes can be dismissed as outliers — extreme examples that are not representative of any general trend.
So Erik and I, along with our colleagues Feng Zhu (a doctoral student in HBS’s IT Management program) and Michael Sorell (an HBS researcher) set out to determine the general trend. We reasoned that since IT spending increased substantially beginning in the mid 1990s, and since not all industries spend equally on technology, one good way to assess IT’s competitive impact would be to see if there was a difference in differences: if industries that spent a lot on IT (‘high IT’ industries) experienced different competitive dynamics after the mid 1990s than they did before, and if there was a difference in this respect between high and low IT industries. If both these differences existed, it would be a strong indication that IT mattered — that it was a driving force behind the observed changes in competition.
But how to measure competition? One common metric is concentration: the extent to which market share is held by a few big firms, rather than many small ones. We also looked at turbulence, or the extent to which firms in an industry jump around in rank order from year to year (If the #5 firm in sales one year is #10 the following year, this is a pretty turbulent industry).
The results of our analyses were clear. High IT industries experienced significantly greater turbulence and concentration growth after the mid 1990s than they did before, and these differences were not as pronounced in low IT industries. The Business Insight article contains graphs that show these differences, and I’ll post and discuss more results here later . For now I just want to point readers to the article (a paper written for an academic audience that discusses the research design and results in more formal terms is available here) and solicit their reactions.
What do you think? Do you buy that the competitive landscape is changing, and that IT is partly responsible for these changes? If not, why not? What other evidence would be more convincing? If so, here’s the really important question: what are you going to do about it? I’m very confident that the right prescription is not to start spending on IT like a drunken sailor. But what is the right response within an industry that’s being transformed by IT? How should a company and it’s leaders seize the day? Let us know your opinion, and stay tuned. There will be more discussion of these topics here.
{ 29 comments… read them below or add one }
Professor McAfee, first of all I would like to say thank you to you and the rest of your team for undertaking the research. It is clearly one of the fundamental questions facing the IT industry today.
I will readily admit that I am a subscriber to the “IT Doesn’t Matter” mantra, but I do so with one major caveat: IT doesn’t matter in the long-run. In the short-run, as firms adopt IT at different rates and rationalize those purchases with different levels of success there will be an amplification of turbulence. In the long-run, however, these forces will shake out as all firms reach the same plateau, rationalizing much of the same technology for the same business benefit. This is not to say that IT doesn’t matter at all — in the short-run it is tremendously important and can change the competitive landscape quite drastically — but the major game-changing shifts do not occur every day, they occur at most once every 10-12 years.
My concern is that your analysis is, due to our place in history, examining the short-term impact of a major shift — where we would expect the competitive landscape to change. With a longer time horizon I think we will find that the day to day operations and decisions of IT shops have little to no impact on the competitive landscape. Then again, as John Maynard Keynes famously quipped “in the long-run we’re all dead.”
I have been writing about these ideas for the oil and gas industry.
In my blog you will find discussion of this article and reviews of Professor Richard N. Langlois, Professor Sydney Winter, and John Hagel’s works. This group of writers are all contributing to these ideas, and collectively are pushing the envelope.
So there is a correlation between IT spend & industry concentration & turbulence. At the risk of being naive, could a case be made that the causation pattern runs in the opposite direction? Could these industries have invested in IT precisely because they were perceiving greater competition in their markets (caused by other changes in their regulatory/technical/social environments)? This is the “IT as silver bullet” approach – which was rife in the mid-90s and is hardly uncommon now. A question might be: is growth in IT spend a leading or lagging indicator for concentration or turbulence?
The comments made under the heading “A Surprise”, are not that surprising for those familiar with the law of unintended consequences. To what extent does IT make the business environment more complex? It certainly allows more interactions between entities (which is a necessary condition for complexity to arise in a system – pace Alexrod & Cohen). And to what extent did IT in the 90s reduce flexibility at the price of conformity? ERP systems are notoriously hard to configure & deploy – which is why SOA & SAAS are getting the attention at the moment.
All that said I agree with the 3 comments made at the end of your article.
Interesting work. Your findings could have all sorts of strategic implications, especially in industries that are not already High-IT. But what about cause and effect? Have you looked into whether heavy IT adoption is the cause of greater concentration and turbulence OR the (possibly indirect) consequence of it?
In my mind there is no doubt that there is a strong interrelationship between IT expenditure and competitiveness.
But where it few years ago was all about resource planning and overall financial control I think it’s a new game today.
Maybe it’s possible to explain with different Capital-definitions?
1. Financial Capital as in “ERP”, “Lean”, “SAP”, “ROI”.
2. Human Capital as in “HR”, “HRM” and related stuff.
3. Social Capital as in “relations”, “Dunbar”, “web2.0″, E2.0″, “Open Innovation”.
4. Psychological Capital as in “Personal Leadership”, “Optimism”, “Hope”, “Efficacy”, “Resilience”.
5-10 years ago IT was all about 1&2 – today competitive force maybe is about something else, ceteris paribus, it’s about how you can grow the “Social Capital”. IT is definitely a determinant factor or what?
Thanks for diving into one of the fundamental questions, professor.
From the era of I-do-my-own-software portion of the industry has shifted more or less
into heavy homogenizing with the help of big vendors. This seems to be a quite a natural shift as we can see in any industry. Technology vendors will tend to even out the competition and make it better for consumer.
IT’s potential to differentiate is still as vast as human creativity. amazon Vs barnes & nobles, netflix Vs blockbuster…
(“We conclude that the improved ability of firms to replicate business innovations is linked not only to productivity increases, but also to changes in the nature of business com-petition itself.”)
When large corporations shake out their dust to get nimble, homogenizing may be the fastest and least risky way to do so. In the world of Goliaths, every body will have spades but it does matter how they decide use them. Deployment of IT makes a big difference (as professor said, ‘drunken sailor’ attitude will not help!). Its
deployment is. How well they are integrated into the business? How knowledgeable is the staff to harness the benefits?…Intelligent and visionary deployment can make the organizations respond to sudden and unexpected changes in the market place. Professor, I think it might be interesting to include a metric to check how IT helped (if at all!) organizations to respond to challenges in market place. These changes may or may not occur every year or so but some of them are capable of deciding the life span.
I subscribe to the notion IT does matter as it springs forth from an inextinguishable
resource – human creativity.
Very interesting results. I do, however, believe that discussing IT in general is too broad of a concept. I suggest looking at IT-investments with two different perspectives:
Operational deployment
IT serves as an enabler. Operations (as discussed with CVS) can be made more efficiently, and greater control of information can augment the standard product, such as when UPS offers tracking of their shipments. Typical ERP/MIS systems fall under this category.
Strategic deployment
IT serves to strategically differentiate. The company builds its business model around the opportunities that IT offers. Offering unique solutions enabled by IT that are strategically aligned with the business model can create competitive advantages that may even outlive the rapid turbulence of the high-IT industry.
These two categories of deployment are significantly different and offers very different result. I believe both of these can occur in any of the IT-industry segments (low/medium/high), but strategic deployment is mostly seen in the high-end side of the spectrum.
As mentioned before me, IT is worth nothing unless properly deployed with the mindset and culture of the organization. Therefore, IT provides strategic competitive advantage only with the support of human creativity to reap its benefits.
Oliver Young makes a good point that any advantage conferred by technology innovation may be short-term. But, as with any competitive edge, it matters a lot how the company plays that advantage. Consider Yahoo’s early lead in search-engine technology, which it has managed to parlay into a lasting, top-tier position in that media niche, while other early stars of that niche (Excite, Alta Vista) are candidates for “I Love the 90s” episodes.
So, any competitive edge, even a short-termed one, can’t be lightly discarded (nor relied on exclusively, of course). Given that, Lars Haugstad’s point about the types of IT investment seems extremely relevant, as it proposes differentiating among companies that have invested in innovation that would give them an advantage, versus those companies that simply spend a great deal on IT because they haven’t learned how to run their commodity-level IT operations cost-effectively.
A ripe area for exploration would be the performance of companies that spend more of their IT budget on new products, processes, and services, compared to those that spend more on daily operations.
It’s a very interesting work.
But after reading all of it I have a feeling that turbulence and concentration mean unstable industries. Could it happen that
because IT innovation cycles are shorter than many other technologies, this would mean that depending on the point at which a company had made its three to five years major investment this could result in a competitive advantage at the beginning and just the opposite at the
end of each investment cycle? Because of IT obsolescence, those industries with major IT investments and financial resources should
get the major share of the market?
Very nice article Professor McAfee.IT is certainly on demand nowadays. If you look any kind of work lot of things depends on software you use. It has made revolution this will be still or even increase alive in upcoming years. The only thing required is proper research and planning which is the most important in this field.
Interesting study. Starting to go through the details now. Here’s a thought. Within IT-heavy industries IT magnifies competitive effects through faster-moving market learning cycles (Boisot SLCs). This has the result of increasing information flow within and between firms. As the information flow “heats up” competitive cycles shrink and the effect of differences in short-term advantage magnifies. The market gets “hotter” exhibiting more randomness as a result of increased information flow.
Normally systems are seen as ways of reducing randomness, which may be true within the firm, but models of competition may actually vary more greatly between firms as culture, shared mental-models, cognitive limitations, etc. cause the firm to lock in on different information and hence difference strategies for competing. Also, since firms self seek differential strategies they are inclined to see and use information differently from their competitors, thus creating more variation is strategy and strategy execution. In this case, increased investments in IT in markets may be seen as destabilizing due to basic human behavior in competition. I got a better gun so I believe I can out-shoot my opponents.
For the competitors our there (which all firms are), this is seductively interesting since over-optimism leads businesses to believe they can navigate the increased chaos better than the competitors, thus fueling further investment in IT.
It would be curious to see if there are firms that seem to be not turbulent (don’t alter their position in share) despite the turbulence of the market. Is there a leader separating from the pack? If so, this may be evidence of a use of IT that is more enduring than short-term leap-frogging.
IT does matter. If you see the way technology companies are merging than you will realize that small players are increasingly getting harder and harder to survive.
That is the reason why Social Tagging sites like DIGG, Del.icio.us and Communal Portals like MySpace, FaceBook and have given smaller players hope as they tapped on to exponential growth of the internet.
IT has shown that it gives the innovative players a chance to take on the big boys and companies leveraging IT to have an equal chance of survival.
As pointed out in other posts, the causality is not well established, at least based on what is written in this blog.
Great research. I align with the “IT does matter” side.
Some additional angles that would be interesting to observe in this research are:
- Alongside with the increase in competition and turbulence detected in high IT consuming industries, is there a similar icnrease in the variance of corporate performance? That is, does the difference between best-worse performer in the industry vary?
- Is there an observed difference depending on the type of IT adopted? For example, does the adoption of large process automation software like ERP have the same impact as the adoption of collaboration or information management software?
I think that while all three hypotheses on IT “mattering” in a competitive sense have merit, there is a fourth variation I would like to contribute. The technology could be completely homogeneous (SAP, Microsoft) for any market segment (e.g., the oil and gas industry) with markedly different results. This is a function of organization’s culture (highly adaptive, adaptive, reluctant or resistant), where IT stands in the political pecking order within the organization, legacy IT (technologies and experiences) and, ultimately, how it is embraced and deployed. We can give the same stick to a stupid monkey and a brilliant human being and get constructive results from the monkey (and a stick in the hand of the brilliant human). It’s all how the IT is embraced and deployed, not what the IT is per se. Competitive advantage goes to those who innovate on how to use the stick, not necessarily the qualities of the stick itself.
I agree with David, the way companies in a particular industry use IT, will separate the winners from the losers.
In my opinion, if your industry is being transformed by IT, then it is important to invest in IT. How to invest?
Firstly, if there’re commercial off-the-shelve (COTS) ERP, or hosted SaaS thats been designed for your business needs, then consider using it. This brings you to a basic competitive level. At this point, “IT still doesn’t matter” since your competitors will likely be using similar COTS.
Now, to use IT as a competitive edge, invest in smaller bespoke systems like plugins for the COTS product / SaaS you’re using. Every company is different. Having some form of strategic customization will give your business the competitive edge.
Then IT do matter.
Is investment in IT a questionable thing? I really don’t have anything on this but IT today can build of destroy a business. Information Technology with is something that can not be left out of the picture now…. especially as the web 2.0 has fully integrated itself with the internet. I wrote something regarding online marketing which would go out to suggest what length these people go to and what methods they adopt for marketing a products launch and what factors make campaigns successful.
I also agree, I.T is the way forward, but its how you use it that ultimately creates success or failure. If implemented without proper research it can be a costly mistake that fails to benefit anyone.
if your industry is being transformed by IT, then it is important to invest in IT. How to invest?
Firstly, if there're commercial off-the-shelve (COTS) ERP, or hosted SaaS thats been designed for your business needs, then consider using it. This brings you to a basic competitive level. At this point, “IT still doesn't matter” since your competitors will likely be using similar COTS.
Great research. I align with the “IT does matter” side.
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Thank you for sharing your ideas.
t would be curious to see if there are firms that seem to be not turbulent (don't alter their position in share) despite the turbulence of the market. Is there a leader separating from the pack? If so, this may be evidence of a use of IT that is more enduring than short-term leap-frogging.
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The cost performance of IT technologies over the first forty years changed by roughly 107, and for the foreseeable future will continue to evolve at the same rate. That is in sharp contrast to a train, which after eighty years moved six times faster than it had in the earlier period. This is impressive, but not nearly as dramatic as a computer produced in 2000, which runs 10 million times faster than a 1960s' computer.
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Sunrise Capital Private Limited is a privately owned independent company At the core, Sunrise Capital is a team of highly accomplished financial professionals with a range of skills and qualifications which enable us to advise confidently and competently on most aspects of portfolio management and associated financial planning issues including specialist areas. kse