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December 10, 2003

More productive? An earlier Daily Summit piece on productivity led reader Chris Stokes to comment: "If we are indeed going to hear a lot about how ICTs are going to boost productivity, I do hope we hear first that the IT productivity paradox has been solved once and for all... the fact remains that over the period when investment in ICTs has shot up (since say the 60s), productivity has refused to follow suit and insisted instead on stagnating."

Maybe this McKinsey Global Institute study, reported in the Harvard Business Review, is relevant. It claims that a "new economy" does exist in the US - but it behaves differently from how many people think.

The authors base their findings on "a large body of statistical and experiental evidence... in-depth case studies of 20 industries, eight in the United States and six apiece in Germany and France... [and] extensive interviews with executives in each sector."

The US has recently enjoyed strong productivity growth in 1990s, the study claims, at a time when "in many industries, technology spending doubled as business wove computer and communication systems more deeply into the fabric of their operations."

But there was little correlation between productivity growth and IT investment. In fact most of the gain (76%) came from just six sectors - retailing, securities brokerage, wholesaling, semi-conductors, computer assembly. Other sectors saw little return for their investment in IT.

So what's going on? According to Diana Farrell, McKinsey Global Institute Director, highly competitive sectors did well, while more regulated ones did poorly. When competition was fierce, managers were forced to innovate, creating new products and services, adopting with new business processes, and introducing new technologies:

"There are many ways to innovate, of course," Farrell writes, "but during the 1990s information technology proved to be a particularly powerful tool. We found three reasons why that was so. First, IT enabled the development of both attractive new products and efficient new business processes. Second, it facilitated the rapid industrywide diffusion of innovations. And third, it exhibited strong scale economies - its benefits multiplied rapidly as its use expanded."

Successful IT investments differ greatly from industry to industry - indeed, Farrell says that "no general-purpose application had much effect on productivity." Customer relationship management (CRM) systems, for example, generally produced disappointing results, while highly-specialised applications peformed much more effectively.

Managerial and technological innovation must also be pursued in tandem. "Walmart, for instance, would have gained little from its investments in innovative information systems if it hadn't also refined its relationship with suppliers and dramatically simplified the logistics practices at its distribution centers."

"A critical dynamic of the new economy - the real new economy - is the virtuous cycle of competition, innovation and productivity growth," she concludes.

Daily Summit doesn't think the issue is settled, it's a data point...
David Steven @ December 10, 2003 08:26 AM | TrackBack

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