Harvard Business Review:
The real reason superstar firms are pulling ahead
5 October 2017
But why is IT leading to winner-take-all competition? Bessen’s paper can’t answer that, however he raises two possibilities. It could be because “software development typically requires large upfront fixed costs,” meaning that firms that are already pretty large are the ones who can afford to invest in it. If it’s expensive to adopt and get good at IT, it’s more economical for big companies like Wal-Mart that can spread those costs out over lots and lots of products sold. Or maybe the firms succeeding with IT know something their competitors don’t. Perhaps, as OECD economist Chiara Criscuolo wrote in 2015, “Some firms clearly ‘get it’ and others don’t.” … superstars aren’t succeeding because of IT per se, but because they effectively combine it with other intangibles, like good management, well-known brands, or intellectual property. And, as with IT, each of those can require considerable upfront investment, meaning bigger players are better positioned to take advantage. … This hypothesis is bolstered by another recent paper. In it, John Van Reenen, Christina Patterson, and their coauthors find that industries with superstars aren’t distinguished by more investment in computers, but by more innovation as measured by patents. It’s not IT that creates superstars, but the combination of IT with other intangibles like R&D. Bessen also finds evidence linking intangible investment to higher profit margins. And it’s possible that his measure of IT employees isn’t a proxy for IT investment, but for the intangibles required to make IT profitable. … For an example of scalable intangibles in action, we can turn to McDonald’s. As Stanford’s Nicholas Bloom explains, McDonald’s created a system for running a restaurant, which required upfront effort but then could be scaled across stores. “Once a firm ‘invents’ good management it will then grow rapidly and dominate the market,” Bloom argues. …Moreover, as Sadun, Bloom, and Van Reenen have documented, cost isn’t the only reason some firms fail to adopt good management practices. Many managers simply don’t realize that their firms are poorly run; something similar could be happening with IT. In other words, maybe firms with terrible IT don’t realize how far behind they really are.
Related publications
Chiara Criscuolo CEP publications webpage: http://cep.lse.ac.uk/_new/publications/author.asp?author=criscuolo
Related links
Chiara Criscuolo CEP alumni webpage: http://personal.lse.ac.uk/criscuol/