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IT Effects On Competitive Dynamics

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Competitive dynamics describe a range of actions and reactions that companies execute within their industry. Research on competitive dynamics and its importance have been motivated by Schumpeter's theory of creative destruction, which argues that to understand business competition, the interplay of actions and reactions must be analysed.

The effects on competitive dynamics caused by the implementation of information technology within business processes have increased drastically since the 1990s, during the mainstream adoption of the internet and enterprise software by companies. These effects were studied by focusing on industry concentration, turbulence and performance spread.

The IT Surge

In the middle of the 1990s, competition started growing at a rate unseen before. There are many possible reasons for this, such as open global markets and continuing research and development by the companies. However, the massive increase in investments on IT and its power play a large role in this rise. This was the time when the Internet and software applications such as ERPs and CRMs were widely adopted in businesses. According to the Bureau of Economic Analysis (BEA), investments in IT rose from about US$3500 per worker to US$8000 per worker, between the years of 1994 and 2005. The increase in IT investment is not only related to the rise in productivity, but also to increased competitiveness.

Links between IT and Competitive Dynamics

The gaps between market leaders and the rest have become greater, leading to winner-take-all industries, where just a few companies account for the majority of the market share. These patterns are very similar to those predicted by Schumpeter over 60 years ago. These competitive dynamics are more evident in sectors that have invested the most on IT, such as in markets for digitised products (e.g. computer software, music), where competitors can quickly take significant market share away from one another.

The main reason which made this possible is not that there are more digital products being made, but because business processes are being digitised. Such a process can be replicated with high fidelity across the organisation, no matter how large it its, by embedding it into information technology. As a result, innovations can spread quickly leading to dominance of an industry. At the same time, competitors can strike back with further innovations to recapture market share.

Industry Concentration, Turbulence and Performance Spread

Industry concentration is another term for winner-take-all industry. Turbulent sectors are those in which the competitors are constantly jumping around in the ranks. Finally, performance spread is large in an industry when the gap between market leaders and laggards is large on standard performance measures.

All of these indicators accompanied the rise in IT investment since the middle of the 1990s. These changes in the dynamics were more evident in industries which were more dependent on IT, such as consumer electronics.

Business competition increased not because there were so many IT innovations, but because these technologies allow companies' operating models to be widely propagated. Sharing and replication of these models the way they used to be done were slow and imperfect, and overall market share would change little from year to year.

Now, the companies with the best processes will win in most markets, since virtually every market depends on IT. However, competitors can deploy and propagate innovations much more quickly, enabling them to take competitive action more often than before.

All of this results in greater performance spread when those whose innovations are more successful get further ahead. Concentration increases as small competitors get pushed out of the market. Yet turbulence will also increase, due to the remaining competitors will continue innovating and taking action, enabling them to take back market share.

Competing on Digital Processes

Three general guidelines can be used in structuring a strategy to compete in these new dynamics:

  1. Deploy
  2. Innovate
  3. Propagate

First a solid technology platform is deployed. Then innovation differentiates the business from competitors. Lastly, use the platform to propagate the innovations through the whole organisation with reliability.

For a strategy to be successful, the business processes usually have some of these characteristics:

  • Can be applied in a wide span of the company, i.e. every store, factory, department.
  • Results are immediate. When the new system is deployed, the process changes should be visible.
  • The processes are highly precise. General guidelines incur in unreliable propagation.
  • Consistency, everywhere and every time it is used.
  • Easy monitoring.



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  2. "When Too Much IT Knowledge Is a Dangerous Thing". MIT Sloan Management Review. Retrieved 2018-07-12.
  3. Competitive dynamics research: Critique and future directions, KGSmith, WJ Ferrier, H Ndofor. Handbook of strategic management 315, 361
  4. Daneshvar, Poolad & , Dr.H.N.Ramesh. (2010). Review of Information Technology Effect on Competitive Advantage- Strategic Perspective. International Journal of Engineering Science and Technology. 2.
  5. Research on Competitive Dynamics: Recent Accomplishments and Future Challenges, David J. Ketchen, Jr., Charles C. Snow, Vera L. Hoover. Journal of Management, Smeal College of Business, Pennsylvania State University
  6. "Information Technology Changes the Way You Compete". Harvard Business Review. 1984-05-01. Retrieved 2018-07-12.
  7. Daneshvar, Poolad & , Dr.H.N.Ramesh. (2010). Review of Information Technology Effect on Competitive Advantage- Strategic Perspective. International Journal of Engineering Science and Technology.

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