The Four Ways IT is Driving Innovation

posted Apr 20, 2010, 8:35 PM by Nick Cooper
There’s always been a performance gap between companies that embrace technology and companies that resist it—what IT innovation thinker Erik Brynjolfsson calls the productivity gap between “leaders and laggers.”

What’s new is that while the gap was fairly steady for decades, in 1995 it suddenly started to widen—and is widening still. Credit the rise of systems like ERP (enterprise resource planning), the expanding use of the Internet, and the fact that every dollar buys incrementally more computerization.

Leaders are capitalizing on technology advances to pioneer a whole new innovation paradigm, based on the ways they measure, experiment with, share, and replicate information. In a conversation with MIT Sloan Management Review editor‐in‐chief Michael S. Hopkins, Brynjolfsson, the director of the MIT Center for Digital Business and the Schussel Family Professor at the MIT Sloan School of Management, talks about how smart companies have learned to tap the flood of data created by information technology and process it with what he calls a “higher information metabolism.” And how they’re changing the ways that innovation gets done.

In the long run, our competitive advantage and all of our living standards depends on innovation, and according to Erik for our era, the most important driver of innovation is information technology. IT is setting off a revolution in innovation on four dimensions simultaneously: measurement, experimentation, sharing, and replication. Each of these is important in and of itself, but, more profoundly, they reinforce each other. They magnify the impact of each other. Improved measurement makes experimentation much more valuable, which in turn becomes more valuable still if you can share those results to the other locations. And, ultimately, if those results are important, you want to be able to scale those results up. By doing all four of these changes together, companies are, in essence, creating a new kind of R&D.


Even without any conscious effort on the part of the designers, this information is just generated. But by studying these data very carefully, companies can have much better knowledge of their customers, of their business processes, of their product quality, and of defects of their supply chains. The field of business intelligence has been tapping into this explosion of data.


The big advantage of an experimental approach that uses IT is that you can get at causality in a way that you can’t with just pure measurement and observation. And that, of course, is the gold standard for being able to have actionable knowledge about what’s really happening in your business, what innovations are paying off and which ones aren’t.


A third thing that’s changed a lot in businesses over the past five to ten years is the way that companies can share not only data, but insights. The internet and information technology is uniquely well designed for this kind of sharing, of course. If we can find more effective ways of sharing those micro‐innovations with one another so that each person doesn’t have to reinvent the wheel or reinvent the printer routine, then we’re much more likely to be able to get a faster, more steady pace of economic growth and improved competitive advantage for the companies that make that easy.


IT makes it dramatically easier to replicate and scale up innovations once they’ve been identified. The first three approaches help companies find and share new innovations, but then IT makes it possible to take that innovation and copy it many times. Now, the most obvious examples are innovations that are made of bits, like software and music and web pages. Those get replicated thousands, hundreds of thousands, millions of times, and that process of replication has obviously completely changed those industries. However, what we also see is that business processes themselves can be replicated by leveraging information technology.

Most companies have just been overwhelmed with the flood of data that’s been created by their information systems. Much of that data arrives almost accidentally, when they install, say, a new enterprise resource planning system. Suddenly billions of bits of information are generated about their operations, about their customers, about their suppliers. And most of it just gets stored, never used, never looked at again.

Gary describes coming to Harrah’s as finding a gleaming new F‐16 fighter, but with no pilot. Just all this wonderful data that had nobody to steer it and take advantage of it. And I think that’s more the norm than the exception at companies as they implement information systems. The original systems often have very specific operational goals, but ultimately, the data that they generate may be even more important if it leads to innovations and changes in business practice.

According to Erik the way that companies implement business processes, organizational change, and IT‐driven innovation is what will differentiates the leaders from the laggers. Rather than leveling the playing field, IT is actually led to greater discrepancies. In most industries, the top companies are pulling further away from the companies in the middle and the bottom of the competitive spectrum. Rather than having a compression, we’re seeing a growing spread in performance on multiple dimensions.
We’re in a period of tremendous change and turbulence. People have called this The Great Recession. But it’s been said, “In chaos, lies opportunity.” And when historians look back on this era, I think many people will call it not just The Great Recession, but perhaps The Great Restructuring because of the way that businesses are changing how they’re working and because of the central role that IT has in driving some of those changes.