Investing in the IT That Makes a Competitive Difference

Competition Policy and Antitrust

Article Snapshot

Author(s)

Erik Brynjolfsson and Andrew McAfee

Source

Harvard Business Review, Vol. 86, No. 7, pp. 98-106, 2008

Summary

This paper argues that information technology investments have increased competition in US industries.

Policy Relevance

In industries where information technology is widely used, market concentration and market power are often present but fleeting for any one firm.

Main Points

  • Annual per-worker corporate expenditures in information technology (IT) ballooned from $3500 in 1994 to $8000 in 2005, and the total value of IT equipment tripled between 1995 and 2006. These are remarkable figures.
     
  • The period from about 1995 to about 2005 saw three notable trends in the organization of industries:
    • Over the same period, industries became more turbulent: the market shares of firms in each industry rose and fell more quickly than in earlier periods.
       
    • Performance spread—the difference in profit margins between more-profitable and less-profitable firms—also increased after the mid 1990s.
       
    • Finally, the years during and after the mid-90s tech boom saw an increase in industry concentration: fewer firms controlled a larger share of the market.
       
    • These trends were probably not driven by large-scale patterns in mergers and acquisitions; globalization; or changes in research and development expenditures.
       
  • This pattern of market leaders rising, then being toppled by competitors, can partly be explained by the technology-enabled ability of firms to rapidly deploy new business practices across their markets in a consistent manner.
     
  • The most successful business practice improvements typically:
    • Are deployed across a firm.
       
    • Produce results immediately.
       
    • Are precise rather than general, and consistent.
       
    • Permit monitoring by planners and are easily enforced.
       
  • Organizations that successfully implement business practices through information technology had more rigorous hiring processes.
     

 

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