Surprise: new Harvard-MIT study finds IT does 'matter' -- a lot

Andrew McAfee of Harvard Business School and Erik Brynjolfsson of the Massachusetts Institute of Technology recently wrapped up a study that sought to answer the question that has been nagging at the industry for the past couple of years: does information technology matter? Or is it becoming commoditized to the point where it is a commonplace utility, such as electricity?

McAfee reports that the criteria he and Brynjolfsson used to determine "success" would be to look at market share before and after the mid 1990s, when IT spending began to go through the roof:

"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)."

McAfee reports that "'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"

Or, as McAfee and Brynjolfsson observe in a related Wall Street Journal article on the study: "On average, the whole U.S. economy has become more "Schumpeterian" since the mid-1990s. [Joseph Schumpeter coined the term "creative destruction" in 1942] What's more, these changes have been greatest in the industries that buy the most software and computer hardware."

"What we have observed in industry after industry is the emergence of widespread process innovation and replication that is analogous to the product innovation and replication that takes place in high tech. Just as Google Inc. can take an improved search algorithm and make it immediately available via the Web, or Apple Inc. can quickly distribute an updated version of iTunes, companies in other industries can invent a new way of doing business, embed it in internal software, and deploy it as widely as necessary across locations, divisions and departments to gain an advantage."

The study's authors say that the 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. "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."

Since the mid 1990s, the study finds, the high-IT industries had greater levels of concentration (the extent to which market share was held by a few dominant companies), as well as turbulence (the extent to which firms in an industry jump around in rank order from year to year).

As to those that say IT doesn't matter because everyone now has the same stuff, McAfee and Brynjolfsson state that even with all this IT, "both innovation and replication require a combination of leadership and insight from executives. Take innovation: Many companies use IT to capture huge amounts of data from their operations, but relatively few have been able to use this data creatively."

This study provides a good picture on the impact of IT on competitiveness -- something that has been needed, since companies have been pouring billions of dollars into the promise of greater competitiveness. I'd love to see more discussion on the interplay between technology adoption and management practices. Which comes first -- the chicken or the egg? As innovative new technologies seep into the organization, do they have a transformative effect on management practices as well? Or does it take forward-looking management and corporate culture in the first place to encourage technology-based innovation? Perhaps the adoption of new technologies and management practices by market leaders forces change upon more hidebound organizations from the outside. Look at Wal-Mart has been doing to the retail industry. 

As I've said on this blogsite before, there has never been an expectation that IT would be solely responsible for a company’s rise or fall. Adroit management, supported by the right IT tools, makes the difference. A company that smartly and innovatively leverages its IT in new and creative ways will move to the head of the pack. And, thanks to IT, you don’t need a workforce of thousands to do so.