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Studies of corporate


performance reveal a growing


link between certain kinds of


technology investments and


intensifying competitiveness.



Investing in the IT That


Makes a Competitive




by Andrew McAfee and Erik Brynjolfsson



Included with this full-text Harvard Business Review article:


1 Article Summary


The Idea in Brief?the core idea


The Idea in Practice?putting the idea to work


2 Investing in the IT That Makes a Competitive Difference


11 Further Reading


A list of related materials, with annotations to guide further


exploration of the article?s ideas and applications



Reprint R0807J



Investing in the IT That Makes a Competitive




The Idea in Brief



The Idea in Practice



It?s not just you. It really is getting harder to


outpace the other guys. Since the mid1990s, competition in the U.S. economy


has accelerated to unprecedented levels.


The engine behind this hypercompetition:


IT. Thanks to powerful tools like ERP and


CRM, backed by cheap networks, companies are swiftly replicating business-process


innovations throughout their organizations.


The firm with the best processes (order


fulfillment, field installation, job closing)


wins, but not for long. Rivals are striking


back with their own IT-based process





The authors recommend these steps for staying ahead of rivals through IT-enabled process innovation:



To gain?and keep?a competitive edge in


this environment, McAfee and Brynjolfsson


recommend a three-step strategy:


? Deploy a consistent technology platform, rather than stitching together a


jumble of legacy systems.






? Innovate better ways of working.


? Propagate those process innovations


widely throughout your company.


By taking these steps, elevator-systems


maker Otis realized not only dramatically


shorter sales-cycle times but higher revenues and operating profit.



Deploy. Adopt a uniform technology platform


to be used throughout your company.




Before deploying a consistent platform,


Cisco?s various units had nine different tools


for checking an order?s status. Each pulled


information from different repositories and


defined key terms differently, leading to


circulation of conflicting order-status reports around the company. The company


reconfigured its IT systems for consistent


execution of key business processes including market to sell, lead to order, quote to


cash, issue to resolution, forecast to build,


idea to product, and hire to retire. The


payoff? Strong performance over the past


few years.


Innovate. Design better ways of doing work


in your company. The best candidates for


innovation are processes that:


? Apply across a large swatch of your company (such as all your stores, factories, or


delivery teams)


? Produce results as soon as your new IT


system goes live


? Require precise instructions (such as order


taking or delivery)


? Can be executed the same way everywhere


and every time in your organization


? Can be tracked in real time so you can immediately spot and address any backsliding


to older versions of the process





U.K. grocery chain Tesco has long used


customer-rewards cards to collect detailed


data on individual purchases, to categorize customers, and to tailor offers. But it


went one step further: tracking redemption


rates for direct-marketing initiatives and


tweaking its processes to get better responses from customers. Its process innovation drove its redemption rate to 20%?


far above the industry?s average of 2%.


Propagate. Use IT to replicate process innovations throughout your company.




At CVS pharmacies, customer satisfaction


was declining. The reason: Prescription orders were delayed during the insurance


check, which was performed after customers had left the store. So customers weren?t


immediately available to answer common


questions such as ?Have you changed jobs??


The company decided to move the insurance check forward in the prescriptionfulfillment process, before the drug-safety


review, so customers would still be around


to answer questions.


The process change was embedded in


the information systems that supported


operations at all 4,000 CVS pharmacies in


the United States. Performance improved


across all the pharmacies, and customer


satisfaction scores rose from 86% to 91%?


a dramatic difference in the aggressive


pharmacy market.



page 1



Studies of corporate performance reveal a growing link between certain


kinds of technology investments and intensifying competitiveness.



Investing in the IT That


Makes a Competitive








by Andrew McAfee and Erik Brynjolfsson



It?s not just you. It really is getting harder to


outpace the other guys. Our recent research


?nds that since the middle of the 1990s, which


marked the mainstream adoption of the internet and commercial enterprise software,


competition within the U.S. economy has


accelerated to unprecedented levels. There


are a number of possible reasons for this


quickening, including M&A activity, the opening up of global markets, and companies? continuing R&D efforts. However, we found that


a central catalyst in this shift is the massive


increase in the power of IT investments.


To better understand when and where IT


confers competitive advantage in today?s


economy, we studied all publicly traded U.S.


companies in all industries from the 1960s


through 2005, looking at relevant performance indicators from each (including sales,


earnings, pro?tability, and market capitalization) and found some striking patterns: Since


the mid-1990s, a new competitive dynamic


has emerged?greater gaps between the leaders and laggards in an industry, more concen-



harvard business review ? july?august 2008



trated and winner-take-all markets, and more


churn among rivals in a sector. Strikingly,


this pattern closely matches the turbulent


?creative destruction? mode of capitalism


that was ?rst predicted over 60 years ago by


economist Joseph Schumpeter. This accelerated competition has coincided with a sharp


increase in the quantity and quality of IT


investments, as more organizations have


moved to bolster (or altogether replace) their


existing operating models using the internet


and enterprise software. Tellingly, the changes


in competitive dynamics are most apparent in


precisely those sectors that have spent the


most on information technology, even when


we controlled for other factors.


This pattern is a familiar one in markets


for digitized products like computer software and music. Those industries have long


been dominated by both a winner-take-all


dynamic and high turbulence, as each group


of dominant innovators is threatened by


succeeding waves of innovation. Consider


how quickly Google supplanted Yahoo, which



page 2



Investing in the IT That Makes a Competitive Difference



Andrew McAfee (


is an associate professor at Harvard


Business School in Boston. He is the


author of ?Mastering the Three


Worlds of Information Technology?


(HBR November 2006) and has a blog




Erik Brynjolfsson ( is


the Schussel Family Professor at the


MIT Sloan School of Management and


the director of MIT?s Center for Digital


Business in Cambridge, Massachusetts. More of the author?s research is


available at



supplanted AltaVista and others that created


the search engine market from nothing. Or


the relative speed with which new recording


artists can dominate sales in a category.


Most industries have historically been fairly


immune from this kind of Schumpeterian


competition. However, our ?ndings show


that the internet and enterprise IT are now


accelerating competition within traditional


industries in the broader U.S. economy. Why?


Not because more products are becoming


digital but because more processes are: Just as


a digital photo or a web-search algorithm


can be endlessly replicated quickly and accurately by copying the underlying bits, a company?s unique business processes can now be


propagated with much higher ?delity across


the organization by embedding it in enterprise information technology. As a result, an


innovator with a better way of doing things


can scale up with unprecedented speed to


dominate an industry. In response, a rival can


roll out further process innovations throughout its product lines and geographic markets


to recapture market share. Winners can win


big and fast, but not necessarily for very long.


CVS, Cisco, and Otis Elevator are among


the many companies we?ve observed gaining


a market edge by competing on technologyenabled processes?carefully examining their


working methods, revamping them in interesting ways, and using readily available


enterprise software and networking technologies to spread these process changes to


far-?ung locations so they?re executed the


same way every time.


In the following pages, we?ll explore why


the link between technology and competition


has become much stronger and tighter since


the mid-1990s, and we?ll clarify the roles


that business leaders and enterprise technologies should play in this new environment.


Competing at such high speeds isn?t easy, and


not everyone will be able to keep up. The


senior executives who do may realize not


only greatly improved business processes but


also higher market share and increased


market value.



How Technology Has Changed




The mid-1990s marked a clear discontinuity in


competitive dynamics and the start of a period


of innovation in corporate IT, when the inter-



harvard business review ? july?august 2008



net and enterprise software applications?


like enterprise resource planning (ERP), customer relationship management (CRM), and


enterprise content management (ECM)?became practical tools for business. Corporate investments in IT surged during this time?from


about $3,500 spent per worker in 1994 to


about $8,000 in 2005, according the U.S. Bureau of Economic Analysis (BEA). (See the exhibit ?The IT Surge.?) At the same time, annual productivity growth in U.S. companies


roughly doubled, after plodding along at


about 1.4% for nearly 20 years. Much attention


has been paid to the connection between


productivity growth and the increase in IT


investment. But hardly any has been directed


to the nature of the link between IT and


competitiveness. That?s why, with help from


Harvard Business School researcher Michael


Sorell and Feng Zhu, who?s now an assistant


professor at USC, we set out two years ago


to compare the increase in IT spending with


various measures of competition, focusing on


three quanti?able indicators: concentration,


turbulence, and performance spread.


In a concentrated or winner-take-all industry, just a few companies account for the bulk


of the market share. For our study, we focused on the degree to which each industry


became more or less concentrated over time.


A sector is turbulent if the sales leaders in it


are frequently leapfrogging one another in


rank order. And ?nally the performance spread


in an industry is large when the leaders and


laggards differ greatly on standard performance measures such as return on assets,


pro?t margins, and market capitalization per


dollar of revenue?the kinds of numbers that


matter a lot to senior managers and investors.


Were there economywide changes in these


three measures after the mid-1990s, when IT


spending accelerated? If so, were the changes


more pronounced in industries that were


more IT intensive?that is, where IT made


up a larger share of all ?xed assets within an


industry? In a word, yes.


We analyzed industry data from the BEA,


as well as from annual company reports, and


found that average turbulence within U.S.


industries rose sharply starting in the mid1990s. Furthermore, after declining in previous decades, industry concentration reversed


course and began increasing around the same


time. Finally, the spread between the highest



page 3



Investing in the IT That Makes a Competitive Difference



and lowest performers also increased. These


changes coincided with the surge in IT investment and the concurrent productivity


rise, suggesting a fundamental change in


the underlying economics of competition.


(See the exhibit ?Competitive Dynamics:


Several Ways to Slice IT.?)


Looking more closely at the data, we found


that the changes in dynamics were indeed


greatest in those industries that were more IT


intensive?for instance, consumer electronics


and auto parts manufacturers. Further, we


considered the role of M&A activity, globalization, and R&D spending in our analysis of


the competitive landscape and found some


minor correlations?but none strong enough


to override our measures (see the sidebar ?Is


IT the Only Factor That Matters??).


One interpretation of our ?ndings might be


that IT is, indeed, inducing the intensi?ed


competition we?ve documented?but that


the change in dynamics is only temporary.


According to this argument, the years since


the mid-1990s have seen a onetime burst of


innovation from IT producers, and it?s simply


taking IT-consuming companies a while to


absorb them all. Businesses will eventually


?gure out how to internalize all the new


tools, proponents of this theory say, and then


all industries will revert to their previous



The IT Surge


The total real stock of IT hardware and software in the United States began to rise


dramatically in the mid-1990s.


Dollar value of total U.S. corporate IT stock




compared to


1995 level





















Source: U.S. Bureau of Economic Analysis



harvard business review ? july?august 2008









competitive patterns.


While it?s true that the tool kit of corporate


IT has expanded a great deal in recent years,


we believe that an overabundance of new


technologies is not the fundamental driver of


the change in dynamics we?ve documented.


Instead, our ?eld research suggests that businesses entered a new era of increased competitiveness in the mid-1990s not because they


had so many IT innovations to choose from


but because some of these new technologies


enabled improvements to companies? operating models and then made it possible to replicate those improvements much more widely.


CVS offers a great example. There?s no shortage of people looking to ?ll prescriptions?or


of outlets ready to handle those orders. So CVS


works hard to maintain a high level of customer service. Imagine senior management?s


concern, then, when surveys conducted in


2002 revealed that customer satisfaction was


declining. Further analysis uncovered a key


problem: Some 17% of the prescription orders


were being delayed during the insurance


check, which was often performed after customers had already left the store. The team


decided to move the insurance check forward


in the prescription ful?llment process, before


the drug safety review, so all customers would


still be around to answer common questions


such as, ?Have you changed jobs??


This two-step process change was embedded in the information systems that supported


pharmacy operations, thereby ensuring 100%


compliance. The transaction screen for the


drug safety review now appeared on pharmacists? computers only after all the ?elds in the


insurance-check screen had been completed;


it was simply no longer possible to do the


safety review ?rst. The redesigned protocol


helped boost customer satisfaction scores


without compromising safety?and not just in


one store but in all of them. CVS used its


enterprise information technology to replicate the new process throughout its 4,000plus retail pharmacies nationwide within a


year. Performance increased sharply, and


overall customer satisfaction scores rose from


86% to 91%?a dramatic difference within the


aggressive pharmacy market.


The enterprise IT underlying this initiative


served two key roles. It helped the process


changes stick: Clerks and pharmacists couldn?t


fall back on their old habits once the new



page 4



Investing in the IT That Makes a Competitive Difference



Competitive Dynamics: Several Ways to Slice IT


How does IT spending affect the nature of competition and the relative performance of companies within an industry? To


answer those questions, we focused on three indicators?industry concentration, turbulence, and performance spread. When


we aggregated data from all companies in all industries between 1965 and 2005, we noticed a consistent pattern: All indicators


rose markedly in the mid-1990s for high-IT industries (those in which IT accounts for a comparatively large percentage of all


?xed assets), coinciding with the surge in IT spending.


Market share held by


top 20 largest firms



Industry Concentration: After decades of decline in all industries, industry concentration began to rise in


the mid-1990s. Though the absolute


level is lower, the rate of rise is faster in


high-IT industries than it is for low-IT





Low-IT Industries






High-IT Industries




















Average jump in


number of places


up or down the


rankings from


previous year






























Turbulence: In turbulent markets,


the top-selling company one year may


not dominate the next. Today?s 10th


place company, for instance, might


catapult to number one the following


year. In less turbulent markets the same


companies dominate year after year


and there?s very little movement up and


down in rank order. By this measure,


we found consistently more sales turbulence in high-IT industries?and a


marked increase in the mid-1990s.






P e r c e n t a g e g ap


between top and


bottom quartiles









Performance Spread: The spread in


gross pro?t margin between the company performing at the 25th percentile


in its industry and the company performing at the 75th percentile?an indication of the spread between winners


and losers?has grown dramatically in


high-IT industries since the mid-1990s.









harvard business review ? july?august 2008



page 5



Investing in the IT That Makes a Competitive Difference



protocol was embedded in the company?s


information systems. More important, it also


allowed for quick and easy propagation of


the new process to all 4,000 sites?radically


amplifying the economic value of the initial


innovation. Without enterprise IT, CVS could


still have tried to implement this process innovation, but it would have been much more


cumbersome. Updated procedure manuals


might have been sent to all CVS locations, or


managers may have been rotated in for training sessions and then periodically surveyed to


monitor compliance. But propagating the new


process digitally accelerated and magni?ed its


competitive impact by vastly increasing the


consistency of its execution throughout the




Although modern commercial enterprise


systems are relatively recent?SAP?s ERP platform, for example, was introduced in 1992?


by now, companies in virtually every industry


have adopted them. According to one estimate, spending on these complex platforms


already accounted for 75% of all U.S. corporate IT investment in 2001. More recently,


IT consultancy Gartner Group projected that


worldwide enterprise software revenue would


approach $190 billion in 2008.


To understand how this profusion of enterprise IT is changing the broader competitive


landscape, imagine that a drugstore chain like


CVS has a number of rivals, most of which



Is IT the Only Factor That Matters?


Previous research suggests that the


changes we?ve observed in the competitive environment are not primarily


driven by shifts in M&A activity, globalization, or R&D spending. New York


University?s Lawrence White, in a paper


published in the Journal of Economic


Perspectives in 2002, contended that


M&A activity explained neither the decline in concentration in the ?rst half of


the 1990s nor its rise in the second half.


In a 2006 research paper published in


Industrial and Corporate Change, Harvard


Business School?s Pankaj Ghemawat


and his colleagues found that industry


concentration tends to decrease as


globalization rises, implying that



concentration has increased since the


mid-1990s not because of more global


competition but despite it.


On the other hand, Harvard professor


Diego Comin and his colleagues, in


their 2005 working paper, ?The Rise in


Firm-Level Volatility,? did ?nd a correlation between companies? spending on


R&D and changes in industry turbulence. So we reexamined our ?ndings,


including R&D spending in our assessments, and found that it does not detract from the signi?cance of our IT


measures. In fact, IT appears to be


much more strongly correlated with the


changes in competitive dynamics than


R&D does.



harvard business review ? july?august 2008



also have multiple stores. Before the advent


of enterprise IT, a successful innovation by a


manager at one store could lead to dominance in that manager?s local market. But


because no ?rm had a monopoly on good


managers, other ?rms might win the competitive battle in other local markets, re?ecting


the relative talent at these other locations.


Sharing and replication of innovations (via


analog technologies like corporate memos,


procedures manuals, and training sessions)


would be relatively slow and imperfect, and


overall market share would change little from


year to year.


With the advent of enterprise IT, however,


not just CVS, but its competitors have the


option to deploy technology to improve their


processes. Some may not exercise this option


because they don?t believe in the power of IT.


Others will try and fail. Some will succeed,


and effective innovations will spread rapidly.


The ?rm with the best processes will win in


most or all markets. At the same time, competitors will be able to strike back much more


quickly: Instead of simply copying the ?rst


mover, they will introduce further IT-based


innovations, perhaps instituting digitally mediated outsourcing or CRM software that


identi?es cross- and up-selling opportunities.


These innovations will also propagate widely,


rapidly, and accurately because they are embedded in the IT system. Success will prompt


these companies to make bolder and more


frequent competitive moves, and customers


will switch from one company to another in


response to them.


As a result, performance spread will rise, as


the most successful IT exploiters pull away


from the pack. Concentration will increase, as


the losers fall by the wayside. And yet turbulence will actually intensify, as the remaining


rivals use successive IT-enabled operatingmodel changes to leapfrog one another over


time. Thus, despite the shakeout, rivalry in


the industry will continue to become more


fast-paced, intense, and dynamic than it was


prior to the advent of enterprise technology.


These are exactly the changes we see re?ected


in the data.


In this Schumpeterian environment, the


value of process innovations greatly multiplies. This puts the onus on managers to be


strategic about innovating and then propagating new ways of working.



page 6



Investing in the IT That Makes a Competitive Difference



Competing on Digital Processes


To survive, or better yet thrive, in this more


competitive environment, the mantra for any


CEO should be, ?Deploy, innovate, and propagate?: First, deploy a consistent technology


platform. Then separate yourself from the


pack by coming up with better ways of


working. Finally, use the platform to propagate these business innovations widely and


reliably. In this regard, deploying IT serves


two distinct roles?as a catalyst for innovative


ideas and as an engine for delivering them.


Each of the three steps in the mantra presents


different and critical management challenges,


not least of which have to do with questions of


centralization and autonomy.


Deployment: the management challenge.


Since the mid-1990s, the commercial availability of enterprise software packages has added


a new item to the list of senior management?s


responsibilities: Determining which aspects of


their companies? operating models should be


globally (or at least widely) consistent, then


using technology to replicate them with high


?delity. Some top teams have pounced on


the opportunity. Many more, however, have


embraced this responsibility only reluctantly,


unwilling to tackle two formidable barriers to



deployment: fragmentation and autonomy.


Historically, regional, product, and function


managers have been given a great deal of leeway to purchase, install, and customize IT systems as they see ?t. But bitter experience has


shown that it?s prohibitively time-consuming


and expensive to stitch together a jumble of


legacy systems so they can all use common


data, and support and enforce standardized


processes. Even if a company invests heavily


in standardized enterprise software for the


entire organization, it may not remain standard for long, as the software is deployed in


ways other than it was originally intended


in dozens, or even hundreds, of separate instances. When that happens, it?s almost


certain that data, processes...


Paper#9210863 | Written in 27-Jul-2016

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