IT doesn’t matter, part 3

This is the third installment of the article “IT Doesn’t Matter.” Part 1 is here.

In addition to enabling new, more efficient operating methods, infrastructural technologies often lead to broader market changes. Here, too, a company that sees what’s coming can gain a step on myopic rivals. In the mid-1800s, when America started to lay down rail lines in earnest, it was already possible to transport goods over long distances – hundreds of steamships plied the country’s rivers. Businessmen probably assumed that rail transport would essentially follow the steamship model, with some incremental enhancements. In fact, the greater speed, capacity, and reach of the railroads fundamentally changed the structure of American industry. It suddenly became economical to ship finished products, rather than just raw materials and industrial components, over great distances, and the mass consumer market came into being. Companies that were quick to recognize the broader opportunity rushed to build large-scale, mass-production factories. The resulting economies of scale allowed them to crush the small, local plants that until then had dominated manufacturing.

The trap that executives often fall into, however, is assuming that opportunities for advantage will be available indefinitely. In actuality, the window for gaining advantage from an infrastructural technology is open only briefly. When the technology’s commercial potential begins to be broadly appreciated, huge amounts of cash are inevitably invested in it, and its buildout proceeds with extreme speed. Railroad tracks, telegraph wires, power lines – all were laid or strung in a frenzy of activity (a frenzy so intense in the case of rail lines that it cost hundreds of laborers their lives). In the 30 years between 1846 and 1876, reports Eric Hobsbawm in The Age of Capital, the world’s total rail trackage increased from 17,424 kilometers to 309,641 kilometers. During this same period, total steamship tonnage also exploded, from 139,973 to 3,293,072 tons. The telegraph system spread even more swiftly. In Continental Europe, there were just 2,000 miles of telegraph wires in 1849; 20 years later, there were 110,000. The pattern continued with electrical power. The number of central stations operated by utilities grew from 468 in 1889 to 4,364 in 1917, and the average capacity of each increased more than tenfold.

By the end of the buildout phase, the opportunities for individual advantage are largely gone. The rush to invest leads to more competition, greater capacity, and falling prices, making the technology broadly accessible and affordable. At the same time, the buildout forces users to adopt universal technical standards, rendering proprietary systems obsolete. Even the way the technology is used begins to become standardized, as best practices come to be widely understood and emulated. Often, in fact, the best practices end up being built into the infrastructure itself; after electrification, for example, all new factories were constructed with many well-distributed power outlets. Both the technology and its modes of use become, in effect, commoditized. The only meaningful advantage most companies can hope to gain from an infrastructural technology after its buildout is a cost advantage – and even that tends to be very hard to sustain.

That’s not to say that infrastructural technologies don’t continue to influence competition. They do, but their influence is felt at the macroeconomic level, not at the level of the individual company. If a particular country, for instance, lags in installing the technology – whether it’s a national rail network, a power grid, or a communication infrastructure – its domestic industries will suffer heavily. Similarly, if an industry lags in harnessing the power of the technology, it will be vulnerable to displacement. As always, a company’s fate is tied to broader forces affecting its region and its industry. The point is, however, that the technology’s potential for differentiating one company from the pack – its strategic potential – inexorably declines as it becomes accessible and affordable to all.

Part 4

One thought on “IT doesn’t matter, part 3

  1. Tom Lord

    I like your line of reasoning and think you are basically right but perhaps there is an important sense in which you are wrong.

    Yes, power lines and railways “infiltrate” every aspect of an economy, and IT is no different. Yes, commodities rapidly emerge, differentiation becomes difficult, and, as you nicely put it, there are big macro-economic shifts. However…

    Unlike those other infrastructure elements, IT is very open-ended. For example, once you have *any* way to deliver power to a machine on an assembly line — well, that’s the entire power concept, right there. There’s nothing more to add. Everything else is just incremental improvements in efficiency. In contrast, once you have some tech-based IT, like your first customer database, well, that’s just the beginning. You don’t much differentiate by making a more efficient customer database (as any frurstrated software craftsperson can tell you) — you differentiate by doing some entirely new thing that, while still IT, has no precedent. Transportation and power have no analogy to the level of improvisation that matters in IT.

    I think your micro-economic analysis here accurately predicts that, for example, no firm

    (not even Google) can differentiate by buying

    more or more efficient disks — on the other hand, a sufficiently clever firm (say Google) can differentiate by driving those disks with unprecedented software. The mere ability to compute some fact of value, before others, is IT’s perspetual source of growth.


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