The big and small of IT

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