Where You Spend Your Firms’ Capital Matters

On the front page of today’s US print edition of the Wall Street Journal there is an article (Firms’ Spending on Upgrades Soars) that reports on the notable increase on capital investment observed in the economy.  This spending is on factories, equipment and other capital goods.  Apparently Q1 is to top $166bn, up 24 percent on the same quarter last year.  This is, so the article says, the fastest uptick since 2011.

In the economics trade we call this ‘capital deepening’ in that the spend adds to the overall stock of capital per worker.  Capital deepening is important for long term growth, since it helps contribute to the changing nature of what organizations do.  So we just need to sit back now and wait for the good times to roll?

Actually the fact that capital spending is up is not necessarily good news.  There is all manner of evidence around us that suggests things like this:

• A contrarian view: S&P data show that some firms that increase their capital investment over competitors perform less well in the stock market (mentioned in the WSJ article)
• A clever view: It’s not the absolute spend or level that’s more important; it’s what you spend it on that counts.

In an old McKinsey Global Institute paper (How IT Enables Productivity Growth: The US experience across three sectors in the 1990s) that looks at the role of information and technology (IT) in productivity, I spied the following two key points:

“Competitive advantage through investment in IT alone, however, was difficult to achieve and sustain and was vulnerable to the ability of competitors to replicate the productivity and profitability improvements gained by the innovators.”

And:

“In short, IT does matter, but its ability to impact productivity depends upon how it is employed. When tailored to sector-specific business processes, deployed in an appropriate sequence, and co-evolved with managerial innovation, its impact on productivity and, in some cases profitability, can be large.”

So there you have it.  Its’ not that you are spending more, it is more important to spend your money on the right things, in the right sequence.  As noted previously (see 2018 Won’t See a Massive Productivity Boost From AI – 2019 Might Show It), this conversation talks to the following components:

• Informative and Technology as a general purpose technology (GPT) and later, specific purpose or complementary IT
• Managerial capability (ability to organize differently and adapt business model)
• Workforce skills to exploit the innovation

The applications of these three dynamics might look like this:

Figure 1: Innovation Cycles

So is there a perfect sequence, an ideal “stack” or shall we say “platform” that you should adopt?  Maybe.  There are lots of options.  We are looking at the wider picture with digital business platforms and the team I work in are looking at the core of this, the data and analytics platform:

• Generic, big picture: Building a Digital Business Technology Platform
• A core component: Build Your Digital Business Platform Around Data and Analytics
• Application and specific example of: A Digital Government Technology Platform Is Essential to Government Transformation

So there are lots of choices comprising a pretty large atlas – no one vendor or organizations even knows what that whole atlas looks like yet.  Yet there are examples of road maps you can leverage (data and analytics) and even specific examples that can be practically applied.  It’s going to be a fun few years.