The Reasons For Investing In It Projects

(Information Technology Essay (part 3


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 fixed 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 mid-1990s. Furthermore, after declining in previous decades, industry concentration reversed course and began increasing around the same time. Finally, the spread between the highest 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 findings might be that IT is, indeed, inducing the intensified 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 figure out how to internalize all the new tools, proponents of this theory say, and then all industries will revert to their previous 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 field 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.