1. Scale without Mass Measuring 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 Nations Washington, DC May, 2008

2. Copyright (c) 2008 2 The Real Quantity of Computers 0 20 40 60 80 100 120 140 160 180 200 1987 19891991 199319951997 1999 2001 20032005 Index: Year 2000 = 100

3. Copyright (c) 2008 3

4. 4 IT and Productivity: The Data Speak IT Stock (relative to industry average) Productivity (relative to industry average)

5. Copyright (c) 2008 5 What Does IT Do?

6. Copyright (c) 2008 6 What Does IT Do? 1. Replicate Bits

7. Copyright (c) 2008 7

8. 8 What Does IT Do? 1.Replicate Bits 2.Replicate Processes

9. Copyright (c) 2008 9 Case Study: CVS Basic prescription fulfillment process: 27% of scripts encountered a problem 16% of customers disappointed at pick-up 1 hour before pick-up 1 st step = drug utilization review (DUR) 2 nd step = insurance check

10. Copyright (c) 2008 10 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 o ver 4000 retail pharmacies New fulfillment process:

11. Copyright (c) 2008 11 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

12. Copyright (c) 2008 12 4 Stylized Facts and 3 Hypotheses 1.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 1.Since the mid 1990s, high IT industries should have experienced greater Concentration growth 2.Since the mid 1990s, high IT industries should have experienced greater Turbulence 3.Since the mid 1990s, high IT industries should have experienced greater Performance Spread => More “ Schumpeterian” competition throughout economy, not just high tech industries

13. Copyright (c) 2008 13 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

14. Copyright (c) 2008 14 High IT-using Industries Medium IT-using Industries Low IT-using Industries Sales Turbulence Increased

15. Copyright (c) 2008 15 High IT Industries Low IT Industries Medium IT Industries Concentration Increased

16. Copyright (c) 2008 16 Performance Spread (IQR) Increased

17. Copyright (c) 2008 17 Turbulence: Sales

18. Copyright (c) 2008 18 Concentration Growth: Sales

19. Copyright (c) 2008 19 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

20. Copyright (c) 2008 20 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)

21. Copyright (c) 2008 21 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 D96 equals 1 if year > 1996 and 0 otherwise

22. Copyright (c) 2008 22 Average yearly changes in Sales Turbulence, 1987-1996 vs. 1997-2004

23. Copyright (c) 2008 23 Turbulence: Enterprise Value

24. Copyright (c) 2008 24 Average yearly changes in the Herfindahl Index of sales, 1987-1996 vs. 1997-2004

25. Copyright (c) 2008 25 Concentration Growth: EV

26. Copyright (c) 2008 26 Implications for Managers 1.Heightened value of innovation Adjust recruiting, retention and incentives systems Innovations can be big or small 2.Invest in technologies that encourage, aggregate, codify and/or propagate innovations -ERP/SCM/CRM etc. -Enterprise-strength Web 2.0 and Social Networking 3.Design for agility 4.Others?

27. Copyright (c) 2008 27 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

28. Copyright (c) 2008 28 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

29. Copyright (c) 2008 29 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)