by Andrew White | October 28, 2018 | Comments Off on How IT Drives Business Growth – Your Guess is as good as mine. Perhaps.
My fascination with the implied relationship between IT and how it drives value, how we account for how IT drives business value and growth, continues apace. Readers of this blog will know this well.
Some time ago I had read McKinsey’s paper, How IT Enables Productivity Growth, from 2002. The paper did a really nice job of calling out the sources of the last major productivity growth spurt that drove the US economy. The report concluded that certain industry sectors, including retail, wholesale, and the IT industry itself, was exploiting information and technology (new technologies, new work practices, and new organizational models) to drive the economies overall productivity.
It so happens I just read another paper that explores the same time period – the 1990s. The paper I just read is called, Intangibles, Investment, and Efficiency, and is written by Nicolas Crouzet and Janice Eberly. It was published in May of this year. This paper looks across a long time period, including the period of the McKinsey report, and explores what has driven productivity in retail in recent years, since the financial crisis. The authors actually look at retail – being at the productivity-frontier in the 1990s.
Recent research suggests that industry concentration has increased. This leads to fewer and fewer, larger and more dominant firms, that take more and more of an industries profits. Several reports have suggested that industry concentration has indeed increased. Some others have suggested this has led to a reduction in competition, and this then leads to a reduction in the natural order of creative destruction. With less competition, there is less pressure on firms to seek to innovate and drive the next productivity wave. The authors show that mark-ups have not increased significantly in retail, which suggests that market power has not accrued, even to those really large retailers.
The authors also show that over the period analyzed, capital investment in retail remained quite sluggish. Capital investment is used to acquire hardware, processing power, new equipment and plant, and warehouses etc. It was also used to license large software-driven business transformation projects. More recently such costs are no longer tracked as capital investments since many of them can now be secured as a service, and so written off in the year used as an expense. Somewhere between capital investment and expenses are investments in intangibles.
What the authors bump into is that they find that even as capital investment remains depressed or low in retail, spending on intangibles have risen noticeably. At the same time the authors call out how it is changes in “logistical and organizational changes in large retail chains” that drove the improvement. What intangible assets drive those changes? Software.
This plays into the argument some have that suggests that software is now more important to growth and productivity than hardware: in other words, it’s the business process that counts more than the speed at which things are processed. The authors conclude that there is a strong correlation between productivity growth and increased investment in intangibles.
The question remains – what to invest your firms’ money in? As to that, the jury remains quite silent. The salesperson will tell you, but then again, you expected that.
- Aug 2018 Intangibles Now Drive More Productivity Than Tangibles – Perhaps
- Jan 2018 New Ideas Why Productivity Growth Is Low
- Jan 2018 Book Review: Capitalism without Capital – The Rise of the Intangible Economy
- July 2017 IT’s Future Value Proposition
- July 2017 The Role of Digital and its Impact on the IT Productivity Paradox
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