A little while back I critiqued some claims made by Oliver Young about the impact of 2.0 technologies. I saw these claims as too broad and sweeping, and tried to articulate why.
Instead of getting defensive or hostile Oliver responded with a thoughtful comment, which read in part:
“… I do think this is a more fundamental shift that you are giving it credit for. [The] big reason [is] scale. Outsourcing, joint ventures, industry consortia, partnerships with academia, network organizations, etc. all bring outside value into the enterprise, but all require major infrastructure and expenditure to manage. The average enterprise simply cannot execute these initiatives in any sort of repeatable, scalable manner. Today it is almost all bespoke.”
Young’s point, if I read him right, is that modern IT, in particular 2.0 technologies, have drastically reduced the investment required to connect with external constituencies and work with them to create value.
I find this a compelling argument. It’s closely related to the argument that IT in general reduces barriers to entry, making it feasible for smaller players to do things that were previously possible only for the big boys. When the computer in your briefcase is as powerful as the supercomputers of the not-too-distant past, it’s not too hard to believe that technology is the friend of the little guy.
(A couple weeks ago I taught my MBA students the great case written by my friend Alan MacCormack and Marco Iansiti about Team New Zealand’s upset victory in the 1995 America’s Cup competition. For TNZ, necessity was the mother of invention; they made smart use of relatively cheap simulation hardware and software in part because they simply couldn’t afford the state-of-the-art stuff. After all, the case points out that simulations often required file sizes of between 8 and 16 gigabytes – who could afford enough storage and processing power to work with such massive files! In case anyone had missed the point about how far we’ve come since the time of the case I brandished my 16 gig iPhone in class.)
So cheap and powerful information technology of all kinds, 2.0 techs most certainly included, reduces the advantages of being big and puts smaller players in a more advantageous position than was previously the case. Right? Well, there’s evidence that the answer is yes. And no.
As I wrote here earlier, it does appear that in the US economy in recent years IT has been lowering barriers to entry, and so benefiting smaller players. This is a little bizarre, since economic theory predicts that capital investment should act to raise barriers to entry, not lower them. Adam Saunders, a doctoral student at MIT, has found, though, that as an industry acquires more IT it also sees more new entrants rather than fewer ones.
Saunders also found, though, that these new arrivals tend not to do very well over time against incumbents in IT-intensive industries. In such industries he found that concentration – the degree to which the industry was dominated by a few large players instead of being carved up among many small ones — rose more quickly than was the case in industries without as much IT.
Erik Brynjolfsson and I found exactly the same thing in our recent research on IT’s impact, which used different methodologies and data sources than did Saunders. We also documented an increase in concentration in the US since the mid 1990s, with the biggest increases occuring in the most IT-intensive industries.
A researcher with no focus on IT at all was the first to notice this strange and unexpected pattern in industry concentration. Prior to the mid 1990s c0ncentration had generally been decreasing in the US; in a 2002 paper NYU’s Lawrence White pointed out that the trend had recently reversed. He spent most of the paper carefuly documenting what was going on, and only at the end speculated about why. I love to quote one of his conjectures:
“Improved technologies of managing and monitoring may have helped overcome the inherent difficulties of managing larger organizations.”
As I’ve written in many places, and as Erik and I wrote in Harvard Business Review last year, the technologies of “Enterprise 1.0″ — ERP, CRM, SCM, procurement, and all the other applications that standardize data and workflows – are exactly such technologies, and they became widely available starting in the mid 1990s. Believers in IT’s power, then, would not be at all surprised if the deployment of these novel tools were accompanied by increased concentration. They help overcome the dysfunctions associated with getting big, and so allow big firms to take more full advantage of their strengths.
So technology helps both small firms and big ones. Since the mid 1990s IT appears on balance to be helping big ones more. But what will happen going forward? Some believe that as we move deeper into the 2.0 era technology’s benefits to the small will outweigh the ones it offers to the big.
I’m not so sure. I can easily imagine that at least big companies will be able to combine the advantages and benefits of 1.0 and 2.0 technologies, and so get the best of both IT-enabled worlds. If this is the case, they will be less likely to be usurped from below.
At the end of the day, this is an empirical question – one that can and will be settled by data. We’ll continue watching the competitive dynamics of industries to see if and how they change, and we’ll continue to investigate IT’s role in any changes.
What do you think we’ll find? Going forward, do you think technology will benefit small or large companies more? Leave a comment, please, and let us know what you think.
UPDATE: Young left a comment to this post saying that I’ve misunderstood his views. He says (in part):
“I do not in any way believe that 2.0 technology will primarily benefit the small. In fact my research and advice to clients consistently asserts that the benefits of 2.0 technology have disproportionately accrued to the very large. From all the research (quantitative and qualitative) I have conducted thus far blogs, social networks, wikis, and the rest all improve the ability to manage and orient large, globally distributed organizations far better than they improve the operations of smaller organizations.”
I’m sorry for the confusion. In an attempt to alleviate it, I’ve modified this post. It originally said “Young believes that as we move deeper into the 2.0 era technology’s benefits to the small will outweigh the ones it offers to the big.” It now reads “Some believe that as we move deeper into the 2.0 era technology’s benefits to the small will outweigh the ones it offers to the big.”
For more of Young’s thinking on the topic, please read his comment below and his blog
{ 7 comments… read them below or add one }
With some of these arguments, I find the need to break IT into its separate parts: “information” and “technology.” I see the successful technologies are those that deliver the better information to the decision-makers. The bad technologies either fail to deliver or cloud the information.
Some of this lies with information that is poorly structured or not readily accessed.
I see a lot of the success with E2.0 based on the assumption that we cannot get lots of the business information structured in a way to deliver useful information. So the E2.0 systems do not impose a structure and let the users develop the structure. They also remove the barriers to access by keeping the platform very open.
In the end, there seems to be recognition that the information is more important than the technology.
Professor, I thought we were friends!
“Young believes that as we move deeper into the 2.0 era technology’s benefits to the small will outweigh the ones it offers to the big.”
I'm not sure how you got that impression, but I do not in any way believe that 2.0 technology will primarily benefit the small. In fact my research and advice to clients consistently asserts that the benefits of 2.0 technology have disproportionately accrued to the very large. From all the research (quantitative and qualitative) I have conducted thus far blogs, social networks, wikis, and the rest all improve the ability to manage and orient large, globally distributed organizations far better than they improve the operations of smaller organizations.
In smaller organizations (2-1,000 employees) the proximity to those you work with is much higher, and the odds you will hear about the efforts of those you don't are much greater. There is benefit to be had from 2.0 technology, but it is not nearly as impactful as the same technology applied to the worlds largest businesses. Further still, if we think about the extended community of partners, customers, academics, consultants, etc. for a smaller firm there frankly aren't that many balls to juggle. Scalability is useful, but not ground breaking. For the largest firms that extended network today is enormous and difficult to manage; hence underutilized.
I'm glad to see my point about scale from the last post came through but please don't misunderstand: economies of scale benefit companies of all sizes, however by definition the companies with the largest scale will see the largest economies.
Thanks for the update.
At some point we should talk about the promise of the LongTail which has either been horribly misrepresented or horribly misunderstood as the answer to every small business's prayers (the distinction between the two depends on your opinion of Chris Anderson). Personally I am of the belief that the long tail is the answer to Google, Yahoo, Craigslist, and others major companies prayers, but does nothing for the small guy. There is no money operating in the long tail, only money in aggregating it.
Young's comments describe part but not all of what is happening. The value of social networking is not so much in making it possible to manage larger organizations as it is to devolve and distribute authority. As IT becomes more accessible to individuals, it empowers those individuals.
The benefit accrues not only to large organizations, but to the ecosystems surrounding those organizations. The boundaries separating enterprises from the rest of the ecosystem become more permeable.
When looking at industries, is Young focusing merely on what business models already exist? It seems that smaller companies when they succeed often do so through creative destruction–that is, via business models that suddenly become viable because of new technology. Much of that activity may not be visible in standard industry data because of rigid industry classification schemes. There's so much industry boundary crossing these days that it must be difficult to arrive at a decent dataset to analyze.
I have worked with a broad range of small and mid-sized businesses, primarily around customer contact and unified communications, and suggest the delineation being made here between large and small is not the only factor to be considered. For leveraging the value of Enterprise 2.0 technologies specifically, I believe the nature and structure of the business may be more important than its size. A small to mid-sized business that has a distributed and virtual structure may see more value to these technologies than a large organization that is physically centralized and heavily hierarchical and siloed.
In fact, the very existence of these technologies enables these smaller organizations to grow more quickly and successfully by making it easier to connect and manage virtual employees and contractors without the traditional concerns of physical office space and local talent recruitment.
I do believe, however, that large organizations will continue to be the first to implement these new technologies as they already have the problem of trying to manage a large network of workers, and have the IT budget and personnel to implement it. This is of value to the SMB market as well as these large early adopters are funding the improvement of available tools and will drive the winnowing the crowded field of Enterprise 2.0 vendors, making it easier for SMB customers to choose a solution that is feature-rich and delivered by a stable vendor.
“Personally I am of the belief that the long tail is the answer to Google, Yahoo, Craigslist, and others major companies prayers, but does nothing for the small guy. There is no money operating in the long tail, only money in aggregating it.”
Those are perhaps the best two sentences on the long tail as applied to small businesses I've read. Exactly…
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Nice post. thanks for sharing.
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