A researcher can easily fall into the trap of losing the ability to look at his own work critically. He spends a lot of time looking at data and trying to figure out what’s going on, and eventually comes up a story that explains what he’s seeing. When he’s feeling pedantic (which is often) he calls this story a theory. He then tries to see if this story holds up — in other words he tests the theory — by gathering more data and looking at it in different ways.
An intellectually honest researcher tries hard to prove his own story wrong by looking for data that do not support the story he’s come up with, and by seeing if another story explains things better. This part of the work is critically important, as it helps to ensure that the researcher doesn’t look silly later on when someone else comes up with the ‘right’ story. It also strengthens and refines the theory itself. My colleague Clay Christensen, in his description of theory building, talks about the important role played by anomalies, or observations that don’t fit the current story and so spur the quest for a better one. In short, a conscientious researcher tries hard to find other explanations and anomalies.
You’ve figured out by now that I’m not talking about faceless researchers for abstract reasons. I’m selfishly talking about me and my work, and asking for help in the search for other explanations and anomalies related to a story I’ve helped come up with.
Erik Brynjolfsson, Michael Sorell, Feng Zhu, and I developed a story about the relationship between IT and competition. Over the past couple years we’ve built the story and tried to test it in as many different ways as we could. We couldn’t do all the tests we wanted because of data limitations, but this is almost always the case with empirical research — the data are never perfect or complete.
So we did the best we could. In a later post I’ll describe what I think is the best piece of story-testing that we did, one that yielded results I still find fascinating and powerful. It’s a test inspired by baseball and a very smart researcher in a totally unrelated field. I hope you find the story as interesting as I do — stay tuned.
We eventually came up with a pretty bold story; bold because it makes some strong claims about how the world of business is changing, what’s behind these changes (spoiler alert: it’s IT), and why. I’ll inelegantly summarize the story in a few bullet points:
- In the middle of the 1990s, there appeared two major additions to the ‘toolkit’ of information technologies available to companies: The Web (which introduced the business world to the Internet), and commercial enterprise information systems like ERP. Both of these were novel, and were much more than incremental improvements; they were quantum leaps forward in corporate IT.
- These technology innovations increase the impact of managerial innovations. They let a company take good ideas — improved business processes, sets of workflows, plans about who should get to make which decisions, etc. — and propagate them widely and with very high fidelity throughout the company or value chain. Prior to the mid 90s these types of good ideas often had only local and temporary impact. Thanks to the new technologies, from the mid 1990s on these ideas had broader, deeper, and longer-lasting impact.
- Good ideas are competitively valuable.
- Good ideas with broad and deep impact are even more competitively valuable. They increase the gap between winners (the companies with good ideas) and losers (the rest) in an industry.
- So after the new technologies appeared and increased the power of good ideas, the gaps between winners and losers in technology-consuming industries started to get bigger.
- These gaps were biggest in industries that spend the most on IT. IT spending, in other words, is a substitute (or ‘proxy’ ) for the volume of technology-enabled good ideas in an industry.
- Because people within companies keep having good ideas, the winners and losers in any particular industry don’t stay stable over time. IT, in other words, doesn’t just increase the gaps between winners and losers. It also makes it less likely that the winners at any point in time will stay on top. This churn or turbulence is greater in industries that spend more on IT.
- This new, nastier competition does not depend on continued IT innovation. It only depends on continued managerial innovation. If all the technology vendors were to close up shop tomorrow competition in all industries would not eventually revert to where it was prior to the mid-1990s. The current IT toolkit lets companies propagate business ideas faster, more broadly, and with higher fidelity. That’s all that’s necessary to increase the pace of competition, and to keep it high. Of course, the tech vendors are not about to shut themselves down and we’ll see a lot more innovation from them; this will only serve to further increase competitive nastiness. But technology innovation is the icing on the cake of managerial innovation.
Erik and I present a full version of the above story in the current (July/August 2008) issue of Harvard Business Review, and show the different kinds of data we gathered to assemble and test the story. We also discuss other possible explanations for the patterns we observe and talk about how we tried to test these alternative stories.
After finishing all this work I have a problem: I believe my own story. Like my colleagues, I’ve tried hard to listen to objections, constructive criticism, and other possible explanations for the patterns we’ve documented. And I don’t buy them. We’ve tested some of the alternative explanations and found them lacking, and the others just don’t seem that plausible to me.
Faith in one’s own work and results is a fine thing, but blind faith is a bad thing. And I’m worried that I’ve been so close to this work for so long, and so excited by our findings and conclusions, that I might be missing something.
So I’d love your help. Please read our HBR article (it’s freely available online for at least a month) and, if you’re so inclined, the academic paper that presents the work more formally. Take a look at our story and the data that support it. And see if you can think of any other plausible explanation for the patterns we observe and document.
If you can, please let me know about it. Leave a comment or, if you prefer, contact me directly. I’m sincerely interested in hearing other stories. Of course, if you think our story is spot on and needs no amendments or elaborations, that would be great to hear, too. But I’m most keen to hear what else you think could be going on. If IT isn’t changing competition in the way we describe, what is?
{ 10 comments… read them below or add one }
Hi Andrew, broadly i think you are spot on … only thing, i think the part about the way ERP has changed the way business is being done … to an extent, but i think its a bit romanticized, and actual scene at an ERP warzone would not be as nice as SAP and Oracle would like to think was.
I generally agree that spending on IT can make companies more productive, but would like to see more details on where investments in enterprise IT really pay off. For example, I have seen lots of companies dump tons of money into enterprise IT with little apparent payoff.
What is it that the successful companies are doing differently? It would seem like investing in technology is one part of the equation, where the investments are made is just as important, and at some point there is a corporate culture component.
Can you imagine Apple stock at the current price levels, if with all their innovative products, the company could not execute their basic business processes? Steve Jobs, who is rightfully credited for Apple miraculous revival, is known as a visionary leader when it comes to innovation. However small side stories about him being personally involved in selection of tune for the new product commercials, also offer a glimpse into his focus on details of execution.
I quoted your post at http://evolutionofbpr.com/innovation-and-execution/
OK, donÂ’t have time to read the academic article, so you may have addressed my concerns with the Management review article. But a few things came to my mind.
“We divided the U.S. private sector into 61 industries and determined the IT intensity of each one, essentially by calculating how much companies within each industry spend on computer hardware and software as a percentage of total spending on fixed assets.”
I have a small issue with this metric. You state that there are overall two different benefits of IT spending, internet-based and ERM products, that I would say buoy the standardization/consistency of the companyÂ’s process/products. But you donÂ’t separate this out. For instance, is there anything to be learned by companies that invested heavily in ERP, say a 3M company, but relatively doesnÂ’t spend as much on internet-based IT. Not sure if this affects you results, but at first glace the % fixed assets variable seems too broad to accurately segment. It doesnÂ’t take into account the labor vs. fixed cost ratio, labor intensive vs. non labor intensive industries. It may be OK, just looks weird. Anyhoo, leading my next pointÂ…
“Industries that consume a lot of information technology included those in both the services and manufacturing sectors—publishers and insurers, as well as makers of autos and machinery, for example. As a group, high-IT industries increased their technology investments sharply starting in the mid-1990s, pulling away from medium-IT and low-IT industries such as farming, real estate, rail transportation and utilities.”
At first glance, your “low-IT industries” tend to be government regulated or at least interfered with (farming, utilities). Thus claims of enhanced concentration ratio maybe are based on policies of protectionism vs. lack of IT spending.
“Second, some observers have argued that information technology is so pervasive that it no longer offers companies any big advantage. If many businesses in the same industry bought the same type of large-scale commercial-enterprise software, there is reason to believe they would subsequently become more similar, and the competitive field would level. Instead, something close to the opposite has taken place.”
I don’t know if I agree with your assumption on this assumption. I think that this statement is correct, but that companies becoming “similar” isn’t the physical companies themselves, but the playing field for a company’s ability to market, product, sell its product is now leveling off. For instance, take Coke and Pepsi. I would reason that with the emergence of enterprise systems, the ability of Coke and Pepsi to market their product is similar. Both accurately reasoned that its far more profitable to differentiate their business strategy, focus on their strengths, and change the strategic focus of their products vs. competing against each other head-on. Coke decided to focus on the soft drink category and increase share of stomach and Pepsi Co. now is head first with the “good for you” strategy. For instance, Diet Pepsi is now a bigger brand than Pepsi and both products are now just Cash cows, milked until unprofitable. It is because of ERP? Who knows, but I think this is why there is instability vs. companies becoming more physically similar with increased levels of ERP.
Anyhoo, hope this helps.
No need to curb your enthusiasm. I think it supports an interpretation of Enterprise 2.0 as more about release 2.0 of how a large and disparate group of people can work together effectively with common purpose than about release 2.0 of a particular technology.
You have an interesting argument that it’s possible to reduce the “friction” inherent in introducing new ideas or techniques to such large and disparate groups using two diametrically opposed approaches: 1) Embed what’s new as part of a discrete and non-discretionary process that can be replicated mechanically; 2) Use social software principals to make the benefits of new ideas, techniques – or just connections and working communication – more visible and actionable throughout an organization.
The first alternative works for transactional processes where variation is bad, the second for work where innovation, exceptions and knowledge work have the greatest value. Both require mangment skill and leadership to orchestrate. A nice combination!
A few more thoughts at http://traction.tractionsoftware.com/traction/permalink/Blog737
I am working in the banking industry. Commercial Banks relies on IT heavily. However, I still cannot see successful stories of ERP in banking. Do your studies pick up any successful cases in banking?
Hi Andrew,
I disagree somewhat with your first idea that the web and erp increase the impact of managerial innovations
The WEB & IT for sure can help spread & increase the impact of new ideas and ERP allows ideas to be tested and successful ones identified but…
I think that to increase the impact of managerial innovations (as well as IT) you need to find more REAL, GOOD & ACTUAL innovations – these stem from the total brainpower / group randomness brainpower of your talented team, tapping into and converting this is what i believe would have the biggest impact
IT propagates an idea, but it is the conceptual super idea that counts
Generally I don’t think only researchers lose the ability to look at his own work critically. Anybody who comes up with a great idea wants to get it out to the world. Often their enthusiasm gets the better of them. Especially with the internet, there are countless good ideas floating around that in no way benefited the creator.
When you said, “Because people within companies keep having good ideas, the winners and losers in any particular industry donÂ’t stay stable over time”, would you say that means that the proliferation of IT has made competitive markets more volatile?
Similar to that, would you say that properly utilized IT could “level the playing field” between large and small corporations?
Excellent post. All the links attached are great but the issue discussed in the link description of theory building is the best I think. I also Liked the way you discussed it in your post. Thanks for sharing this.