scale without mass measuring and explaining the increasing turbulence in the us economy erik...

Scale without MassMeasuring and Explaining the Increasing Turbulence in the US Economy

Erik Brynjolfsson,* MIT Center for Digital Business and MIT Sloan School

(with Andrew McAfee, Michael Sorell and Feng Zhu)

The 2008 World Congress on National Accounts and Economic Performance Measures for NationsWashington, DC

May, 2008

Copyright (c) 2008 2

The Real Quantity of Computers

0

20

40

60

80

100

120

140

160

180

200

1987 19

8919

9119

9319

9519

9719

9920

0120

0320

05

Index: Year 2000 = 100


Labor Productivity (Output Per Hour), Nonfarm Business

4.3

Dec-72Sep-73Jun-74Mar-75Dec-75Sep-76Jun-77Mar-78Dec-78Sep-79Jun-80Mar-81Dec-81Sep-82Jun-83Mar-84Dec-84Sep-85Jun-86Mar-87Dec-87Sep-88Jun-89Mar-90Dec-90Sep-91Jun-92Mar-93Dec-93Sep-94Jun-95Mar-96Dec-96Sep-97Jun-98Mar-99Dec-99Sep-00Jun-01Mar-02Dec-02Sep-03Jun-04

75

80

90

100

110

120

135

Q1 1973- Q4 1995Trend = 1.47% per year

Q1 1996-Q3 2004Trend = 3.06% per year

Index 1992 = 100

Source: BLS and Institute for International Economics


IT and Productivity: The Data Speak

IT Stock (relative to industry average)

Productivity(relative to industry average)


What Does IT Do?


What Does IT Do?

1. Replicate Bits


What Does IT Do?

1. Replicate Bits

2. Replicate Processes


Case Study: CVSBasic prescription fulfillment process:

• 27% of scripts encountered a problem

• 16% of customers disappointed at pick-upQuality Assurance

INVENTORY

INVENTORY

Drop -offDataEntry

ProductionQuality

AssurancePick -up

Standardscript path

Data entry

RPh

RPh

Shelves

Dr. call or

Production

Consult

areaDrop -off

Pick

-up

Quality Assurance

INVENTORY

INVENTORY

Drop -offDataEntry

ProductionQuality

AssurancePick -up

Standardscript path

Data entry

RPh

RPh

Shelves

Dr. call or

Production

Consult

areaDrop -off

Pick

-up

1 hour before pick-up1st step = drug utilization review (DUR)

2nd step = insurance check


CVS: Scale without Mass

• Short-term results: customer satisfaction scores– Wait time satisfaction: 76 86– Overall pharmacy satisfaction: 86 91

• New process embedded in Enterprise IT (EIT)– 100% compliance

• Rapid roll-out to over 4000 retail pharmacies

Drop -offDataEntry

Insurancecheck

Production DUR QA Pick -up

While customer is present

Drop -offDataEntry

Insurancecheck

Production DUR QA Pick -up

While customer is present

New fulfillment process:


Case Study: Cisco Mac Wiki- Over 10,000 Macintosh users at Cisco,

but no central IS support

- A few users established a wiki, where users could post tips, tricks, files, links and other content

- Example: tip for using the Linux printers which were ubiquitous at Cisco

- Many users all over world got up to speed entirely via Mac Wiki

- Thousands of small ideas from hundreds of users


4 Stylized Facts and 3 Hypotheses1. IT makes it easier to replicate processes (not

just bits)– Aggregates formerly diffused– Diffuses best practices– Monitoring and compliance– CVS, Merrill, Wal-mart, Intel, etc.

2. Boundary of firm remains important• Bloom and Van Reenen 2005, Brynjolfsson, Hitt and

Yang, 2004, etc• B&N vs. Amazon; Schwab vs. Merrill; K-mart vs.

Wal-mart, etc.• “Standard” SAP is small fraction of total ERP

investment

3. IT discontinuity in mid 1990s– Enterprise IT (SAP R3, ERP, etc)– Internet and Intranets

4. Business Innovation continues– Alta Vista vs. Lycos vs. Yahoo vs. Google– Apple vs Microsoft– Schwab vs. Merrill Lynch

Since the mid 1990s, high IT industries should have experienced greater Concentration growthSince the mid 1990s, high IT industries should have experienced greater TurbulenceSince the mid 1990s, high IT industries should have experienced greater Performance Spread

=> More “Schumpeterian” competition throughout economy, not just high tech industries


Data• Industry Turbulence and Concentration (Compustat)

– Revenue (SALES) and enterprise value (EV)– Turbulence: the average rank change of all firms in that industry (Comin

and Philippon 2005) – Concentration growth rate: % change in Herfindahl index (HI)

• IT Intensity of an Industry (BEA Tangible Wealth Survey)– IT capital service flow as a share of total capital service flow– Tangible Wealth Survey (1987-2004): 63 industries– Same measures as Stiroh (2002)

• Weights (BEA NIPA)– Full-time employees (FTE) – National Income and Product Accounts


Average sales turbulence by industry category, 1960-2004

0

2

4

6

8

10

12

14

16

18

20

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Average sales turbulence

High IT-using Industries

Medium IT-using Industries

Low IT-using Industries

Sales Turbulence Increased


Average C20 index by industry category, 1965-2004

70

75

80

85

90

95

100

1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Average of C20 index (sales)

High IT Industries

Low IT Industries

Medium IT Industries

Concentration Increased


Average EBITDA margin by industry category, 1960-2004

0

10

20

30

40

50

60

70

1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

Average EBITDA margin IQR

Performance Spread (IQR) Increased


Model 1 2 3 4 5 6

0.56*** 0.30*** 0.93*** 0.23 0.68*** 0.36(0.17) (0.08) (0.15) (0.18) (0.25) (0.64)

0.99** 0.68*** 1.20*** 0.81*** 1.16*** -0.77*(0.42) (0.24) (0.42) (0.28) (0.40) (0.47)

0.57** 0.787** 0.77***(0.27) (0.36) (0.18)

0.041*** 0.04*** 0.033*** 0.04*** 0.032*** 0.05***(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)

Weights yes yes yesIndustry fixed effects yes

Drop Outliers yes yes yes yes yesDrop low-density industries yes yes yes yes yes

Observations 1096 936 936 936 936 936Number of industries 61 52 52 52 52 52

R-squared 0.74 0.77 0.91 0.77 0.90 0.94

IT-intensity

Post-1996 dummy

Post-1996 dummy * IT-intensity

# of firms

Turbulence: Sales


Concentration Growth: SalesModel 1 2 3 4 5 6

-0.165 -0.207 -0.843 -0.576 -1.853*** -0.55(0.32) (0.31) (0.52) (0.40) (0.72) (3.54)

4.685*** 3.534*** 4.335*** 3.172*** 3.601*** -9.380***(0.81) (0.82) (0.90) (0.92) (0.92) (3.47)

0.833 2.066** 6.034***(0.57) (1.02) (1.49)

0.001 0.002* 0.058*** 0.00 0.007*** -0.008*(0.00) (0.00) (0.02) (0.00) (0.00) (0.00)




R-squared 0.04 0.03 0.01 0.02 0.06 0.19

IT-intensity

Post-1996 dummy


# of firms


Conclusions

• The improved ability of firms to replicate business processes via IT is associated not only with higher productivity but also with more Schumpeterian competition since 1996• More turbulence• More concentration• More performance heterogeneity

For more details, see http://digital.mit.edu/erik


Robustness Checks

• Discrete vs. continuous IT intensity metric• Other operationalizations of IT intensity (IT

per FTE, IT as share of GDP)• Other aspects of Turbulence (e.g. EBITDA,

assets) • Other measures of concentration (e.g., C4

instead of HI; 1st difference in Log HI)


Break Year• Chow-test indicates 1996 is a break year

– This finding is consistent with our replication story– 1995 and 1997 are also break years

• Use a difference-in-difference approach

0 1 2 396 96d D IT D ITβ β β β ε= + + + ⋅ + D96 equals 1 if year > 1996 and 0 otherwise


Average yearly changes in Sales Turbulence, 1987-1996 vs. 1997-2004

Turbulence in sales, 1987-1996 vs. 1997-2004

0

5

10

15

20

25

30

35

40

0 5 10 15 20 25 30 35 40

Average rank change in sales, 1987-1996

Average rank change in sales, 1997-2004

Below Median IT Intensity

Above Median IT Intensity


Turbulence: Enterprise ValueModel 1 2 3 4 5 6

0.76*** 0.35*** 0.903*** 0.25 0.57* 3.74***(0.22) (0.13) (0.20) (0.25) (0.29) (0.72)

0.6 0.22 0.25 0.041 0.021 -2.34***(0.42) (0.30) (0.57) (0.36) (0.55) (0.53)

0.83** 1.12** 0.25(0.39) (0.44) (0.21)

0.07*** 0.074*** 0.066*** 0.07*** 0.07*** 0.10***(0.00) (0.00) (0.00) (0.00) (0.00) (0.00)




R-squared 0.83 0.84 .0.93 0.77 0.93 0.97

IT-intensity

Post-1996 dummy


# of firms


Average yearly changes in the Herfindahl Index of sales, 1987-1996 vs. 1997-2004

Average growth rate in HI of sales, 1987-1996 vs. 1997-2004

-15

-10

-5

0

5

10

15

20

25

30

-15 -10 -5 0 5 10 15 20 25 30

Average of yearly HI sales growth rate (%) , 1987-1996

Average of yearly HI sales growth rate (%) , 1997-2004

Below Median IT Intensity

Above Meidan IT Intensity


Concentration Growth: EVModel 1 2 3 4 5 6

-0.214 -0.238 -1.272 -0.422 -2.499** 8.101(0.33) (0.30) (0.98) (0.41) (1.08) (13.87)

5.567*** 4.683** 6.210* 4.710** 5.772* -10.223(1.86) (1.90) (3.33) (1.92) (3.29) (6.37)

0.452 2.743** 5.776***(0.68) (1.28) (2.57)

0.004 0.005** 0.091 0.005** 0.01 0.01(0.00) (0.00) (0.10) (0.00) (0.01) (0.02)




R-squared 0.04 0.04 0.01 0.04 0.06 0.10

IT-intensity

Post-1996 dummy


# of firms


Implications for Managers1. Heightened value of innovation

• Adjust recruiting, retention and incentives systems• Innovations can be big or small

Invest in technologies that encourage, aggregate, codify and/or propagate innovations

- ERP/SCM/CRM etc.- Enterprise-strength Web 2.0 and Social Networking

Design for agilityOthers?


A Stylized Model

• Two firms, A and B, compete in n locations. Each firm has one branch in one location.

• Costs in each location are independent random variables, and are re-drawn each period.

• Assume the branch with a lower cost wins 100% market share in that location.

• Total market share of firm A is ratio of “wins” to total locations


Random Cost Draws, Without Replication

• Market share of each firm is not far from 50% (or whatever the assumed distribution of cost differences is)

– Overall Concentration and Sales Rank does not change much from period to period

Without Replication

0

5

10

15

20

25

1 2 3 4 5 6 7 8 9 10

Location

Cost

Cost of Firm A Cost of Firm B


What if Low Cost Processes Can Be Replicated within Each Firm?

• With replication, e.g. via IT– All locations for each firm now replicate the cost structure of the

location with best cost structure within their own firm• As a result

– Winner-take-all => The industry becomes much more concentrated– It is easier to take over the leadership in the next period

• (i.e., the industry is more turbulent)

With Perfect Replication

0

5

10

15

20

25

1 2 3 4 5 6 7 8 9 10

Location

Cost

Cost of Firm A Cost of Firm B

scale without mass measuring and explaining the increasing turbulence in the us economy erik...

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