Does IT Matter? Results are In

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.