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Stories by Andrew McAfee and Erik Brynjolfsson

IT investments that matter

It’s not just you! It really is getting harder to outpace the other guys. Our recent research finds that since the mid-1990s, which marked the mainstream adoption of the internet and commercial enterprise software, competition within the US economy has accelerated to unprecedented levels. There are a number of possible reasons for this quickening, including merger and acquisition activity, the opening up of global markets, along with 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 US companies in all industries from the 1960s through to 2005, looking at relevant performance indicators from each (including sales, earnings, profitability and market capitalisation) 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 concentrated with 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 first predicted more than 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 organisations 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.

Written by Andrew McAfee and Erik Brynjolfsson07 Sept. 08 22:00

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