This is the second installment of the article “IT Doesn’t Matter.” Part 1 is here.
Many commentators have drawn parallels between the expansion of IT, particularly the Internet, and the rollouts of earlier technologies. Most of the comparisons, though, have focused on either the investment pattern associated with the technologies – the boom-to-bust cycle – or the technologies’ roles in reshaping the operations of entire industries or even economies. Little has been said about the way the technologies influence, or fail to influence, competition at the firm level. Yet it is here that history offers some of its most important lessons to managers.
A distinction needs to be made between proprietary technologies and what might be called infrastructural technologies. Proprietary technologies can be owned, actually or effectively, by a single company. A pharmaceutical firm, for example, may hold a patent on a particular compound that serves as the basis for a family of drugs. An industrial manufacturer may discover an innovative way to employ a process technology that competitors find hard to replicate. A company that produces consumer goods may acquire exclusive rights to a new packaging material that gives its product a longer shelf life than competing brands. As long as they remain protected, proprietary technologies can be the foundations for long-term strategic advantages, enabling companies to reap higher profits than their rivals.
Infrastructural technologies, in contrast, offer far more value when shared than when used in isolation. Imagine yourself in the early nineteenth century, and suppose that one manufacturing company held the rights to all the technology required to create a railroad. If it wanted to, that company could just build proprietary lines between its suppliers, its factories, and its distributors and run its own locomotives and railcars on the tracks. And it might well operate more efficiently as a result. But, for the broader economy, the value produced by such an arrangement would be trivial compared with the value that would be produced by building an open rail network connecting many companies and many buyers. The characteristics and economics of infrastructural technologies, whether railroads or telegraph lines or power generators, make it inevitable that they will be broadly shared – that they will become part of the general business infrastructure.
In the earliest phases of its buildout, however, an infrastructural technology can take the form of a proprietary technology. As long as access to the technology is restricted – through physical limitations, intellectual property rights, high costs, or a lack of standards – a company can use it to gain advantages over rivals. Consider the period between the construction of the first electric power stations, around 1880, and the wiring of the electric grid early in the twentieth century. Electricity remained a scarce resource during this time, and those manufacturers able to tap into it – by, for example, building their plants near generating stations – often gained an important edge. It was no coincidence that the largest U.S. manufacturer of nuts and bolts at the turn of the century, Plumb, Burdict, and Barnard, located its factory near Niagara Falls in New York, the site of one of the earliest large-scale hydroelectric power plants.
Companies can also steal a march on their competitors by having superior insight into the use of a new technology. The introduction of electric power again provides a good example. Until the end of the nineteenth century, most manufacturers relied on water pressure or steam to operate their machinery. Power in those days came from a single, fixed source – a waterwheel at the side of a mill, for instance – and required an elaborate system of pulleys and gears to distribute it to individual workstations throughout the plant. When electric generators first became available, many manufacturers simply adopted them as a replacement single-point source, using them to power the existing system of pulleys and gears. Smart manufacturers, however, saw that one of the great advantages of electric power is that it is easily distributable – that it can be brought directly to workstations. By wiring their plants and installing electric motors in their machines, they were able to dispense with the cumbersome, inflexible, and costly gearing systems, gaining an important efficiency advantage over their slower-moving competitors.