factiva?TheRealNewEconomyDianaFarrellMcKinseyGlobalInstitute4,686words1October2003HarvardBusinessReview1040017-8012EnglishCopyright(c)2003bythePresidentandFellowsofHarvardCollege.Allrightsreserved.Amythicaurasurroundsthesoarandswoonofthe"neweconomy."Thescalewasbreathtaking,illusionsabounded,andtheforcesatworkseemedatoncepowerfulandelusive.Asthebubbleinflated,manyfeltthatinformationtechnology,andtheInternetinparticular,would"changeeverything."Today,withthetechnologysectorinshreds,morethanafewbelievethatITchangedscarcelyanythingatall.Thetruth,ofcourse,liessomewhereinbetween.Butwhere?Whatbecameofalltheinnovationwethoughtwewereseeing?Whatactuallyhappenedtoproductivitygrowth?WhateffectdidITreallyhaveoncompaniesandtheirabilitytocompete?Mostimportant,whatcanmanagerslearnfromitall?Formorethantwoyears,theMcKinseyGlobalInstitutehasbeenstudyinginvestment.Whentechnologyinnovationsspreadequallythroughcountries,wefoundtheirimpactonproductivitycouldstillvarywidelydependingontheextentofindustryconsolidation.ITinnovationshadtheirgreatestimpactinindustrieswithahighdegreeofconcentrationorwithahighvolumeoutputpercustomer.Retailbankingisagoodexample.Retailbanksinallthreecountrieswestudiedhaveautomatedtheirbackoffices,enablingthemtoserviceavirtuallyunlimitednumberoftransactionsatnegligiblemarginalcost.YetU.S.bankshaveenjoyedthegreatestproductivitygains.ThafsbecauseU.S.consumerstypicallycarrytwotothreetimesmorefinancialassetsandloansthantheirFrenchandGermancounterparts.U.S.bankssimplyprocessmoretransactionspercustomer.Germanretailingisalsoillustrative.WeakcorporategovernancekeptunproductiveGermanretailersinbusiness,leadingtoovercapacityandmeagerprofits.ThatlimitedGermanretailers1abilitytoinvestintheIT-enabled,long-termefficiencyimprovementsthatsomeFrenchandmostU.S.retailerswereadopting.ANewAgendaforITEveninthesixsectorsthatgainedthemostfromIT,manycompaniesfailedtoearnstrongreturnsfromtheirtechnologyinvestments.Somesimplyabandonednewsystemswhenimplementationdifficultiesaroseorcostsexceededexpectations.Otherstookapiecemealapproach,automatingonlypartsoftheirbusinessprocesses.Stillothersdidn'tinvestintheareaswiththebiggestpotentialimpactonproductivityorinvestedtooearlyinsystemsthatcompetitorscouldeasilycopy.Someoftheseerrorsseemsurprisinglyobvious.Butinretrospectifseasytoseehowsomemanagersinthelate1990sgotcarriedawaywithITandspentmoneyunwisely.AsITinvestmentsoared,sodidproductivitygrowth,economicgrowth,earnings,andstockmarketvaluations.ITtookontheappearanceofapanacea,leadingmanymanagerstoassumethat“me-too”investmentswouldpayoff.There'smuchtobelearnedfromthecompaniesthatgainedthemostfromtheirinvestments.Ourresearchrevealed,inparticular,thatthreepracticesdistinguishthecompaniesthatweremostsuccessfulintheirITinvestments.First,suchcompaniestargetedtheirinvestmentsattheproductivityleversthatmatteredmostfortheirindustriesandthemselves.Second,theycarefullythoughtthroughthesequenceandtimingoftheirinvestments.Third,theydidn'tpursueITinisolationbutratherdevelopedmanagerialinnovationsintandemwithtechnologicalones.Lefslookmorecloselyathowtheseimperativesdriveproductivity.(Foradiscussionoftheimplicationsoftheseimperativesfortechnologycompanies,seethesidebaruTheChallengeforITVendors.M)Targettheproductivityleversthatmatter.Therearemanywaystoimproveproductivity,astheexhibit“WorkingwiththeProductivityEquation"illustrates.Youcanreducelabororotherfactorcosts.Youcanincreaselaborefficiencyorassetutilization.Oryoucansellneworhighervalue-addedgoodstoyourcustomers.ITcanplayaroleineachoftheseareas.ThetrickistoconcentrateyourITspendingonthoseleversthatwillhavethegreatesteffectonproductivity.Manycompanieswelookedatspentheavilyonseeminglyattractivenewtechnologies,onlytofindthattheyhadlittleeffectonresults.Theleversthatmattervaryfromindustrytoindustry.ThatexplainswhytheITapplicationswiththegreatestimpactareoftentailoredtoparticularsectors.Wefound,infact,thatnogeneral-purposeapplicationhadmucheffectonproductivity.Inretailbanking,customizedapplicationsforautomatinglending,creditcardoperations,andback-officetransactionsprovidedthegreatestbooststoproductivity.Inconsumerretailing,thekeyapplicationsfocusedonstreamliningdistributionandlogistics,merchandiseplanningandmanagement,andstoreoperations.Inthesemiconductorindustry,thegreatestgainscamefromhighlyspecializedtoolsforelectronicdesignautomation,processcontrol,andyieldoptimization.CRMapplications,ontheotherhand,generallypurposedtoincreaserevenuethroughbettercustomermanagement,tendedtoyieldmostlypoorresults.Evenwithinanindustry,differentproductivityleverscanhaveverydifferentimpacts.Considerretailing.GeneralmerchandiseretailerslikeWal-Martarelow-margin,high-turnoverbusinessessellingavastnumberofitems,manyofwhichareconsumerstaples.Theygetthemostbenefitfromtoolssuchaswarehouseandtransportationmanagementsystemsthatallowforatighterlinkwithsuppliersandanincreaseininventoryturnsforagivenproduct.Ontheotherhand,specialty-apparelretailersliketheGaphandlemanyitemswithshortshelflivesandthereforerelyonassortmentandallocationplanningtoolstocutobsolescenceandinventory-holdingcosts.AmongelectronicsretailerslikeCircuitCityorBestBuy,storeallocationandpriceoptimizationtoolsplayakeyroleinreducingmarkdowns.Homeimprovementretailers,whoseprofitshingeonafter-salesservicessuchaswarranties,homedeliveries,andrepairsrelyonextendedordermanagementsystemstoensuregreatercustomersatisfaction.Astheseexamplesshow,simplyfollowingbroadITtrendscanbackfire.ThesmartestcompaniesanalyzetheireconomicscarefullyandspendaggressivelyononlythoseITapplicationsthatwilldeliveroutsizedproductivitygains.Asforothernecessaryapplications,theyseekoutthecheapestpossiblesolutions.Andtheyalwaysrememberthatthesystemthatpaysoffforonecompetitormaydolittleforanother.Takesupplychainmanagementsystems,forinstance.Spendingonthesepopulartechnologieshasproventobeaboontogeneralmerchandisers,butcomparableinvestmentsbyapparelcompanieshaveyieldedverylittle.Getthesequencingandtimingright.ITinvestmentsbuildononeanother,oftenincomplexways.Companiesthatinstallsophisticated(andexpensive)newapplicationsbeforetheyVedonethenecessarygroundworkarealmostalwaysdisappointed.Theyeitherfailtoachievetheexpectedbenefits,ortheyfindthemselvesdoingconstantretrofitting.Butcompaniesthattakeadisciplinedapproach,sequencingtheirinvestmentscarefully,oftenreapgreatrewards.Wal-Marfs"stepchange"approachtoITinvestmentduringthe1990sisagreatexample.First,thecompanyinstalledsoftwaretomanagetheflowandstorageofproductsthroughitsfar-flungnetworkofsuppliers,warehouses,anddistributioncenters.Onceithadautomatedproductflow,itfocusedonusingITtocoordinateitsoperationsmoretightlywiththoseofitssuppliers,leveragingitsgreaterefficiency.Withthatsmoothercoordination,Wal-Martcouldinvesteffectivelyintechnologytoplanthemixandreplenishmentofitsgoods.Finally,afterintegratingallthesecapabilities,thecompanybuiltadatawarehousethatusesinformationpulledfromarangeofsourcestohandlecomplexqueries.KMart,bycontrast,madeamisstepinitsITinvestmentsthatunderminedtheireffectiveness.Itinvestedinsystemstoimprovepromotionsmanagementbeforeithadinstalledthesupplychainsystemsnecessarytohandlefluctuationsinsalesvolume.Asaresult,itwasunabletocapitalizeonthemorepreciselytargetedpromotions.Manyretailbanksalsomadeerrorsinsequencing.Theyinvestedinpopularcustomerrelationshipmanagementsystemsbeforetheyhadbuiltrepositoriesofconsistentandreliablecustomerdata.Notsurprisingly,theCRMinvestmentsfellwellshortofexpectations.Evenwithasoundplanforsequencing,firmshavetoconsiderthetimingoftheirinvestments.Theymustaskthemselves,inparticular,onecrucialquestion:ShouldweleadorfollowITtrends?Inmakingthisdecision,firmsmustunderstandthatITaloneisalmostneveratruedifferentiator.AswesawwithJ.P.MorganChase'sDealerTracksystem,ITprovidesdistinctiononlywhencoupledwithother,lessreplicableadvantages,suchasscaleorastrongbrand.Acompanyshouldrushaninvestment,therefore,onlywhenifsclearthatthetechnologywilladvancethefirm'sbusinessgoals,enabletrueinnovationthatstrengthensexistingadvantages,andberesistanttothelevelingeffectofimitation.Insemiconductors,wheresuperiorchipdesignconfersamajoredge,IntersinvestmentinthedevelopmentofthePentiumprocessortoreplacethe486provedessentialtostayingaheadofthecompetition.Insemiconductorequipment,AppliedMaterials*aggressiveinvestmentsinnewmanufacturingtechnologiesalsopaidoff,simplybecauseitssmallerrivalslackedtheresourcestorapidlyimitatetheadvances.Ofcourse,itshardtoforeseewhetheraninvestmentwillyieldinnovativeresults.Atthecriticalmomentofdecision,managersmustbealertforredflagsindicatingthattheinvestmentwillnotdifferentiatethefirm,suchaswidespreadhypeabouttheITopportunityorarollingwaveofcompetitorsconsideringit.Suchsignalsofbroadawarenesssuggestthatanyaddedprofitabilityfromtheinnovationwillquicklydissipate.Companiesmustalsoknowthemselves:theirtasteforrisk,theirconfidencethattheycanmergeITwithotheradvantagestostayaheadofthepack,andtheircorporatetrackrecordinmobilizingpeopleandprocessestoeffectchange.Wheretheindicatorsareweak,thebestcourseisusuallytofollow,notlead.Pursuemanagerialandtechnologicalinnovationsintandem.Historyshowsthattechnologicalinnovationsaretypicallyoflittleuseuntilmanagerialpracticesadapttothem.Thatwascertainlytrueinthe1990s,anditremainstruetoday.Wal-Mart,forinstance,wouldhavegainedlittlefromitsinvestmentsininnovativeinformationsystemsifithadn'talsoredefineditsrelationshipswithsuppliersanddramaticallysimplifiedthelogisticspracticesatitsdistributioncenters.BestBuyandTargetwouldnothavebecomeleadersinretailingiftheyhadn'tcombinedadvancedITwithcollaborativepurchasingsystemsandadvancesinwarehouseautomation,cross-docking,andinventorytracking.IntersITinvestmentsturbochargeditsproductivitybecausetheyaccompaniedbreakthroughsinmaterialstechnologyandmanufacturingprocesses.Inallthesecases,businessmanagersledtheway,reshapingtheircompanies1processesandpracticessothatthefullbenefitsofnewinformationsystemscouldberealized.CRMinretailbankingprovidesthecautionarytale.Bankshopedthatthenewsystemsforgatheringandsharingcustomerinformationwouldboostcrosssellingrates,reducecustomerattrition,attractnewcustomers,andincreaseprofitabilitypercustomer.YetdespitemassivespendingonCRM,thenumberofproductsheldbyanaveragehouseholdatitsprimarybankhasremainedflatoverthepastthreeyears.Onereasonforthis,asalreadynoted,waspoorsequencing-therequiredcustomerdatawasnotyetinplacewhentheCRMsystemscameon-line.Butmanybankmanagersalsofailedtomakenecessarychangestotheirsalesandmarketingprocesses.Thebanks'businessunitscontinuedtobeorganizedaroundspecificproductsandcustomersegments,hinderingtheintegratedmanagementofoverallcustomerrelationships.Inaddition,incentivestructuresforsalespersonnelunderminedthekindofcross-sellingthatCRMtheoreticallymakespossible.***ThesuccessofITinvestmentshingesontheparticularcharacteristicsofdifferentindustriesandtheparticularpracticesofdifferentcompanies.ThatfactgoesalongwaytowardexplainingthelackofcorrelationbetweenITspendingandproductivitythatwe'veseeninrecentyears.ForITtofulfillitspromise,usersandvendorsmustdeployitthoughtfully,tailoringittoindividualsectorsandbusinessesandmergingitwithotherproductandprocessinnovations.Thechallengewillbetouseexistingsystemseffectivelywhileatthesametimemakingtargetednewinvestmentsthatmaintaincompetitiveparityand,whenpossible,strengthendifferentiationandbuttressadvantage.ITisnotasilverbullet.Butifitisaimedcorrectly,itcanbeanimportantcompetitiveweapon.TheChallengeforITVendorsOurresearchrevealedthreepracticesthatdistinguishthecompaniesthatgainedthemostfromtheirITinvestments.TheseimperativesforeffectiveuseofIThaveimportantimplicationsforvendorsaswell.1ManagerialimperativeTargettheproductivityleversthatmatter.VendorresponseGaincustomer-specificknow-how,andfocusdevelopmentandsaleseffortsonspecificsectorsandbusinessmodels.ITprovidersmustlearnmoreabouthowtheirtechnologycanenhanceeachcustomer'sbusiness.Whethertheyarehelpingtoimproveretailsupplychains,cutprocessingtimeforinsuranceclaims,orreduceerrorsinhospitallabwork,theymustmasterthedetailsnecessarytoraisetheircustomers5productivity.Theshotgunapproach—supplyingallkindsofproductstoallkindsofcustomers—willalmostsurelybealosingstrategyforvendors.Thosewithapanoplyofofferingswillbecomemiredinthecomplexityofmanagingthebusiness,andmediocreexecutionforallcustomerswilllikelyensue.Soprovidersfacehardchoices.Theymustdecidewheretofocusand,byimplication,howto“rightsize"themselves.Thegoodnewsisthatthelessonsofthepastdecadesuggestthatvendorscangainvaluablebenefitsbyaddressingwell-definedcustomersegmentswhoseperformancetheycanreallyimprove.2ManagerialimperativeGetthesequencingandtimingright.VendorresponseHelpcustomersfindvalueinsunkenITinvestments.ManycompanieswithapparentlylifelessITinvestmentsmaybemissingonefinalpieceoftechnology.SoITvendorsmustdevelopsolutionstohelptheircustomersturnaroundunsuccessfultechnologydeploymentsandarticulateanddeliveraclearvaluepropositionforfutureinvestments.Unlesstheydoboth,customerswillbelesslikelytoacceptbigup-frontcostsforsoftwareandhardwareinthefuture.3ManagerialimperativePursuemanagerialandtechnologicalinnovationsintandem.VendorresponseInnovateselectively,andformlearningpartnershipswithcustomersandthirdparties.Technology-driveninnovationw川remainvital,butascompaniesgrasptheneedforsimultaneousmanagerialinnovation,theirITinvestmentswillbecomemuchmoreselective.Inthisenvironment,partneringtolearnisvital.Vendorsinretailbanking,forexample,canbuildlong-termpartnershipswithbanksbyworkingwiththemtoidentifyandexecutethebusinesschangesnecessarytofullybenefitfrominvestmentssuchasdatawarehouses,CRM,customerdataintegration,andon-linebanking.Manycustomersmadelargeinfrastructureinvestmentsoverthepastfivetoeightyears,andtheywantnewproductsandservicesthatleveragetheassetstheyalreadyhave.Partneringwiththirdpartiescanalsohelpvendorstietheirtechnicalinnovationswithmanagerialbreakthroughs.ToachievethehighestvaluefromITinvestments,buyersneedtomakecriticalimprovementsintheirbusinessprocessesandorganizationalstructures.Anintegratedinformationsystemwillachievelittle,forinstance,ifbusinessunitscontinuetobemanagedinisolationwithoutanycross-unitincentivesorreviews.Bypartneringwithfirmsthatspecializeinredesigningprocessesandmanagingchange,successfulITvendorswillhelpensurethattheircustomersreapthefullbenefitsoftheirnewsystems.America'sUnevenProductivityBoom;Chart;WorkingwiththeProductivitylaborproductivityintheUnitedStates,France,andGermanyanditsconnectiontocorporateITspendinganduse.MycolleaguesandIhaveexaminedalargebodyofstatisticalandexperientialevidenceandconductedin-depthcasestudiesof20industries,eightintheUnitedStatesandsixapieceinGermanyandFrance.Thestudiesinvolvednotonlythecollectionandanalysisofdataonindustryandcompanyperformancebutalsoextensiveinterviewswithexecutivesineachsector.Wefoundthataneweconomydidindeedcomeintobeinginthe1990s,butthatitisverydifferentfromtheonethatwaswidelypromotedanddiscussedatthetime.RatherthanspringingfromtheInternet,itemergedfromintensifyingbusinesscompetitionandaresultingsurgeinmanagerialinnovation.Informationtechnology'sroleinthenewbusinessworld,wealsodiscovered,ismorecomplicatedthanhasbeenassumed.ITisofgreat,butnotprimary,importancetothefateofindustriesandindividualcompanies.Byuncoveringthetruedriversofcorporatesuccesstoday,ourresearchprovidesaclearerunderstandingoftherecentupheavalsinbusinessandpointsthewaytoamoreeffectivedeploymentofcorporateITinvestmentsandassets.TheTruthAboutProductivitySomethingdidchangeintheeconomyinthelate1990s,anditisvisibleintheproductivitystatistics.Aftergrowingatananemic1.4%annualratefrom1973through1994,U.S.laborproductivityshotup2.4%ayearfrom1995through1999.Andproductivityhasremainedfairlyvigorousevenduringtherecenteconomicdownturn,risingat2.9%in2000,1.1%in2001,and4.8%in2002,accordingtotheBureauofLaborStatistics.Equation;Chart;TheChallengeforITVendors;TextboxDocumentHBR000002003101Odzal0000aThelate1990sproductivitysurgecoincidedwithabigincreaseinthemoneyandattentionU.S.companiesdevotedtoinformationtechnology.Inmanyindustries,technologyspendingdoubledasbusinesseswovecomputerandcommunicationssystemsmoredeeplyintothefabricoftheiroperations.Overall,thepercentageofthegrossdomesticproductaccountedforbytechnologygoodsrosesixfold,from2%to12%,duringthedecade.Notsurprisingly,manypeoplelookedatthesenumbersandconcludedthattheITinvestmentsdrovetheproductivitygains.Butifsnotthatsimple.Whenweexaminedtheperformanceofdifferentindustries,wesawlittlecorrelationbetweenproductivityandITinvestment.AlthoughmostindustriessignificantlyboostedtheirITspending,theirratesofproductivitygrowthvariedenormously.Infact,intheUnitedStates,productivitygainswereconcentratedinjustsixsectors:retailing,securitiesbrokerage,wholesaling,semiconductors,computerassembly,andtelecommunications.Thesesectorsaccountforonly32%oftheU.S.GDP,buttheycontributed76%ofthecountry'snetproductivitygain.Manyothersectors,suchashotelsandtelevisionbroadcasting,investedheavilyinITbutsawlittleornoproductivitygrowth.(Seetheexhibit“America'sUnevenProductivityBoom.”)Ifinformationtechnologywasn'ttheprimaryfactorintheproductivitysurge,whatwas?Theanswerisclear:Intensifyingcompetitionledtoproductivityboostinginnovationsinthesixkeysectors.Ourresearchshowsthatmanagersinthoseindustrieswereforcedtoinnovateaggressivelytoprotecttheirrevenuesandprofitsinthefaceofstrongcompetition.Itwasthoseinnovations-inproducts,businesspractices,andtechnology-thatledtothegainsinproductivity.Infact,animportantdynamicoftheneweconomy—therealneweconomy—isthevirtuouscycleofcompetition,innovation,andproductivitygrowth.Fiercecompetitionspursinnovation,inbothtechnologyandbusinessprocesses.Theseinnovationsspreadquickly,improvingproductivityacrossthesector.Asproductivityrises,competitionintensifiesfurther,bringingafreshwaveofinnovation.Thecrucialroleplayedbycompetitioncanbeseenclearlyintheperformancevariationsthatwereevidentacrosscountriesandindustries.Insectorswherecompetitionwaspromoted—throughthedismantlingofregulatoryconstraints,primarily—innovationflourishedandproductivitysoared.Butwhereverregulationorotherforceswarpedthecompetitiveenvironment,competitivepressureseased,innovationsfailedtodeveloportospreadrapidly,andproductivitygrowthslackened.Lookatthemobile-telecommunicationsindustry.IntheUnitedStates,thegovernmentsauctionofadditionalspectrumin1995ledtoincreasedcompetition,withtheaveragenumberofcompetitorsinalocalmarketjumpingfromtwotoalmostfive.Pricesfell,usageincreased,andtheentiresector'sproductivitygrewatanaverageannualrateof15%duringthedecade.Thafsaveryhealthyrate,yetitpalesincomparisonwiththe25%gainspostedbythemobile-telecomsectorsinFranceandGermany.ThedifferenceisthatU.S.regulationscreatedafragmentedandprotectedmarketwithdozensofsubscaleregionalprovidersandlittlenationalcompetition.Today,morethan50providersservefewerthan200,000customerseachintheUnitedStates.InFranceandGermany,bycontrast,ahandfulofnationalprovidersserveanaverageof10millioncustomerseach.ThestrongrivalryamongthebigEuropeanproviders,aswellastheirsuperiorscale,ledtotheexceptionalproductivitygains.Suchdifferencesbetweennationswereevidentinothersectorsaswell.Competitioninretailbanking,forexample,isfreerintheUnitedStatesthaninGermany,wheresmallstate-ownedandcooperativebankshavebeenunabletobuildsufficientscaleyetremainshieldedfromtheshareholderdemandsofcapitalmarkets.OurstudyshowedthatweakercompetitionkeptGermanbankingatasignificantproductivitydisadvantage,eventhoughthesectorgrewhealthilyasaresultofhighercustomerdemandandawaveofconsolidations.RetailbankingproductivityinGermanywasonly74%oftheU.S.levelbytheendofthe1990s.Infoodretailing,FrancefellbehindtheUnitedStatesinproductivitygains.Again,theculpritwasrestrainedcompetition.ZoninglawseffectivelyshieldedthedominantFrenchhypermarketsfrominnovativecompetitors,andsmaller,traditionalmerchantsalsoenjoyedconsiderablegovernmentalprotection.TheproductivityoftheFrenchgrocerysectoractuallyfellata0.5%annualrateinthe1990s,whileU.S.foodretailersposted1.6%annualgains.Competitionwasnottheonlyforcedrivingproductivityinthe1990s.Strongconsumerconfidence,forexample,ledcustomerstopurchasemoreexpensivegoods,whichalsohelpedboostproductivity.Andbuoyantcapitalmarketscontributedtogainsinthesecuritiessector.Butourresearchclearlyshowsthatwherevercompetitiveintensitywasgreatest,innovativeproductsandpracticesproliferatedandproductivitygrewrobustly.Andwherevercompetitionwasconstrained,innovationwanedandproductivitysuffered.TheRoleofInformationTechnologyWhencompetitionintensifiesandcompaniesfacethepossibilityoflostcustomersandprofits,managershaveoverwhelmingincentivestopursuecreativewaystocutthecostsoftheiroperationsandincreasethevaluetheyprovidetobuyers.Thechoicereallyistoinnovateordie.Therearemanywaysformanagerstoinnovate,ofcourse,butduringthe1990sinformationtechnologyprovedtobeaparticularlypowerfultool.Wefoundthreereasonswhythatwasso.First,ITenabledthedevelopmentofbothattractivenewproductsandefficientnewbusinessprocesses.Second,itfacilitatedtherapidindustrywidediffusionofinnovations.Andthird,itexhibitedstrongscaleeconomies—itsbenefitsmultipliedrapidlyasitsuseexpanded.IT'spowertopromoteinnovationwasnotfeltequallyinallindustries,however.Thesectorsmostdependentonintensiveinformationprocessing一thosewithhighlycomplexoperatingprocesses,heavytransactionloads,ortechnicallysophisticatedproducts,forexample-reapedthelion5sshareofthegains.Whenanindustryhadsuchcharacteristicsandexhibitedintensifyingcompetition,productivityboomed.NewProductsandProcesses.SomeoftheIT-basedinnovationsofthelastdecadecameintheformofnewproductsandservices(suchasfastermicroprocessorsoron-linesecuritiestrading).Otherswereenhancementstoexistingbusinessprocesses(suchascheckimagingandcentralizedcreditauthorizationinretailbanking).Inmanycases,thenewproductsandprocessesweretightlyintertwined.Inthesemiconductorindustry,forinstance,therapidincreaseinthecomplexityofchipdesignsrequiredeverstricterprocesscontrolsanddiagnostics.Thatspurredthedevelopmentofsophisticatednewinformationsystemsformanagingchipfabrication,whichboostedproductivitythroughoutthesector.Thesixindustriesweidentifiedasshowingthegreatestproductivitygainsduringthe1990sallleveragednewITcapabilitiestocreateproductsorrefineprocesses.SophisticatednewITsystemswere,forexample,agodsendforretailing.Bigretailersexecutemillionsofrelativelysmalltransactionseachday,creatingextraordinaryoperatingcomplexity.IThelpsthemmanagethatcomplexitymuchmoreeffectively.Itnotonlyautomatesroutinefunctionssuchasinventoryreceivingandcontrol,pricescans,andcheckout,italsooptimizesmanycomplicatedprocesses,includingsupplychainmanagement,merchandising,andcustomerrelationshipmanagement.Securitiesbrokerageisanotherinformation-intensiveindustrythatbenefitedgreatlyfromnewITcapabilities.Between3millionand4millionsecuritiestransactions,withanaveragesizeof$25,000,takeplaceintheUnitedStateseachday.WiththespreadoftheInternet,innovatorslikeCharlesSchwabandE*Tradewereabletoincorporatehighlyefficienton-linetradingintotheiralreadyproductivediscountbrokeragemodels.Ourresearchrevealsthat,withouton-lineinterfaces,thesebrokerageswouldhaveneededtentimesmorebrokersorothercustomerserviceemployeestohandlethedemandtheyencountered.Theadoptionofon-lineinterfaceshasbeenremarkablyswift.Almostnoretailbrokeragetradeswereexecutedon