The US economy has become substantially more IT intensive in recent years. Figure 1a plots IT’s percentage of total investment in tangible wealth each year from 1987 to 2006, together with the equivalent percentages for equipment and plant (the three values for each year sum to 100). IT’s share of the total nearly doubled during this period, to over 21% of total tangible wealth. Figure 1b, which plots IT stock per full-time employee (FTE) in the US over the same period, shows that annual increases in this measure were particularly large in the latter half of the 1990s when several novel technologies appeared. By 2006, at more than $2,600, it was at a record high, more than three times higher than it had been in 1987. What’s more, because IT is delivering more power per dollar, these increases in spending dramatically understate the amount of real computing power delivered and the consequent potential for changing business strategy, structure and performance. In total the real, quality-adjusted quantity of computing power used by American companies increased by over 33-fold within the past twenty years (Figure 1c).
In this paper, drawing from a series of case studies, we show that contemporary IT, in particular large-scale commercial enterprise applications, has become a means of not only embedding business innovations, but also replicating them with high fidelity across an arbitrarily large intra-firm “footprint.” Today, managers can scale up their process innovations rapidly via technology without the degree of inertia historically associated with larger firms. In other words, they can achieve scale without mass.
However, we also hypothesize that these innovations do not diffuse rapidly or equally across all firms in an industry. Firms that successfully use IT to embed and diffuse innovations grow relatively rapidly at the expense of other firms, leading to winner take-all dynamics and hence greater concentration at the industry level. Because firms operate in dynamic environments, successful adoption of a set of IT enabled business innovations at one point in time does not guarantee sustained dominance. Competitors and new entrants can also innovate and replicate with IT over time, leading to high levels of turbulence within an industry.
We therefore hypothesize that the increased use of IT will increase both turbulence and concentration at the industry level. Using data from Compustat about firm performance and IT data from the Bureau of Economic Analysis (BEA) on industry-level IT investment, we document a substantial increase in turbulence starting in the 1990s, as measured by the average intra-industry rank change in sales, earn ings before interest, taxes, depreciation and amortization (EBITDA), and other metrics. In particular, we find that IT-intensive industries account for most of this increase in turbulence, especially after 1995. In addition, we find that IT-intensive industries became more concentrated than non IT intensive industries after 1995, reversing the previous trend. The combination of increased turbulence and concentration, especially among IT-intensive industries, is consistent with an increasingly Schumpeterian style of creative destruction (Schumpeter, 1939, 1947) as well as more recent theories of hypercompetition.
According to D’Aveni (1994), hypercompetition is an environment with intense and rapid change, in which competitive rules of the game change rapidly, and firms must move quickly to build new advantages and erode the advantages of their rivals. While traditional approaches to strategy emphasize sustainable competitive advantage (e.g., Porter 1985), the hypercompetition perspective suggests that markets today have become inherently unstable as they are fraught with uncertainty, diverse global players and rapid technological changes. As a result, competitive advantage is temporal and can only be obtained by continuous exploitation of short-term opportunities and creative destruction of opponents’ advantage. Scholars, however, do not have a consensus on the existence of hypercompetition. For example, Thomas (1996) and Thomas and D’Aveni (2004) find that in the manufacturing sector there is a monotonic shift towards more temporary advantages as well as indicators of increasing market instability. Wiggins and Ruefli (2002, 2005) analyze 40 industries and find that only a very few firms exhibit superior economic performance for a long time frames. In addition, competitive advantage has become harder to sustain and this phenomenon is seen across a broad range of industries. Similar findings have been reported in Jacobsen (1998), Foster and Kaplan (2001) and Brown and Eisenhardt (1998). In contrast, other recent studies show the opposite (e.g., Mueller, 1986; Odagiri and Yamawaki, 1990; Makadok, 1998; Roberts, 1999; Gimeno and Woo, 2001; Maruyama and Odagiri, 2002; McNamara, Vaaler and Devers, 2003). For example, Makadok (1998) finds that early-movers in the mutual fund industry enjoy both a highly sustainable pricing advantage and a moderately sustainable market share advantage. McNamara et al. (2003) find that while performance and market stability decreased from the later 1970s to the later 1980s, this trend reversed from the later 1980s to the mid-1990s. They argue that the perceptions of increasing instability in current time periods could result from hindsight bias.
Our study provides comprehensive evidence using a dataset covering all public firms in more than 50 industries from 1987 to 2006. Previous studies have either looked at a single industry (e.g., Thomas, 1996; Makadok, 1998) or examine a time period before mid-1990s (e.g., Wiggins and Rue, 2002, 2005; Roberts, 1999). Scholars have noted that hypercompetition is a relatively new phenomenon and has become wide-spread recently (e.g., Bettis and Hitt, 1995; Thomas, 1996). Therefore, it is important to examine recent changes in industry dynamics. Our study shows not only an increase in market instability from 1987 to 2006, but also acceleration of this change after mid-1990s.
Second, our study suggests that the increased use of IT is a key driver of recent shift in industry dynamics and develops a formal model of this mechanism. While technology has been suggested a number of times in the literature as one of the potential contributors to hypercompetition (e.g., Bettis and Hitt, 1995; Grimm, Lee and Smith, 2005), the linkage between IT and these industry dynamics has not to our knowledge been empirically tested. We show that IT intensity of different industries can explain variations in the rate of change in competitive dynamics among these industries.
Third, while the hypercompetiton literature typically focuses on increases in industry volatility over time and the resultant lack of sustainable advantage, our study also suggests the emergence of winner-takes-all dynamics as a result of the improved ability to replicate best business practices. Hence, while competitive advantage becomes more difficult to maintain, it is also more rewarding. In addition, as our case studies demonstrate, such winner-takes-all dynamics do not require radical innovation small innovation widely replicated can have dramatic impacts on industry dynamics.
Our study also contributes to the stream of economics research on the impact of IT. A key finding from past research has been that the linkage between IT investment and the surge in U.S. economic productivity has been a strong one, especially since 1995 (Brynjolfsson and Hitt, 2000, 2003; Stiroh, 2002). A second consistent finding has been that neither IT endowments nor their impacts are evenly distributed (Kohli and Devaraj, 2003). IT investment levels themselves vary greatly across firms and industries, as do the organizational forms and practices accompanying these investments (Bresnahan, Brynjolfsson and Hitt, 2002) and the outcomes linked to them, including productivity and revenue gains (Dedrick et al., 2003; Brunner et al., 2006), stock market valuations (Brynjolfsson, Hitt and Yang, 2002; Im, Dow and Grover, 2001), levels of vertical integration and diversification (Hitt, 1999; Dewan, Michael and Min, 1998) and share-price volatility (Chun et al., 2005).
However, there has been little systematic research on the competitive implications of recent IT investments in the US or elsewhere. It is not known if the increasing penetration of IT into firms and industries has been accompanied by significant shifts in firms’ competitive positions and industries’ dynamics, and whether these shifts (if they exist) have been consistent or divergent across sectors. Diametrically opposed arguments have been advanced. Some argue that IT can be a source of competitive advantage (Mata, Fuerst and Barney, 1995; Powell and Dent-Micallef, 1997; Prahalad and Krishnan, 2002; Medina-Garrido, Ruiz-Navarro and Bruque-Camara, 2005) while others argue that ‘IT doesn’t matter’ – it is a “cost of business that must be paid by all but provides distinction to none” (Carr 2003). To date, the evidence in support of both arguments has consisted primarily of case studies or surveys of a small number of firms. Accordingly, this paper extends research on the impact of IT by statistically assessing outcomes related to competition.
Finally, our study is related to the literature on replication. Replication is a process of reproducing a successful routine in new settings (Winter and Szulanski, 2001; Baden-Fuller and Winter, 2007). Scholars have shown that the ability to replicate best practices internally is critical to a firm’s performance (Szulanski, 1996; Dagnino, 2005; Szulanski and Jensen, 2006). In addition, successful replication is shown to hinge on efficient codification of a successful routine into a template (Nelson and Winter, 1982; Zander and Kogut, 1995; Jensen and Szulanski, 2007). Our research, using a series of case studies, finds that IT, particularly enterprise information technology (EIT) post mid-1990s, could substantially increase the speed and fidelity of replication using templates. We argue that this improved replication ability as a result of IT usage not only affects individual firms’ productivity, as shown in many previous studies (e.g., Szulanski and Jensen, 2006), but also leads to winner-takes-all dynamics.
his rest of the paper is organized as follows. In the next section, we use several short case examples to describe how contemporary IT is used to embed and replicate business innovations, and why this process could be expected to lead to competitive heterogeneity across firms in an industry. Given these empirical observations, we then present our hypotheses. Next we describe our data sources and variables, and present results of empirical analyses that make use of industry-level IT endowment and firm-level performance data. Finally we provide a brief summary and conclusion. In the appendix, we provide a simple analytical model of competition that formalizes how, over time, both concentration and turbulence will increase as IT-enabled replication becomes more prevalent.
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