Executive Thought Leadership

Formula for Ensuring Productivity Gains

MIT research shows that technology investments focused on helping customers and suppliers are the key to productivity growth.

Dr. Erik Brynjolfsson, a professor at the MIT Sloan School of Management and co-director of the Center for eBusiness@MIT, is known for his groundbreaking research on how businesses can effectively use information technology (IT). The editor of Understanding the Digital Economy (MIT Press, 2000), Dr. Brynjolfsson is charting how companies in the Internet economy are achieving unprecedented productivity gains. The editors of iQ spoke with Brynjolfsson to learn more about his recipe for improved corporate productivity. For more information about Understanding the Digital Economy, visit Barnes & Noble .

iQ: In your research, you've described companies as being either extroverted or introverted with respect to their IT strategies. What do you mean by that, and what does this have to do with productivity?

Brynjolfsson: What popped out of our research data was a little unexpected. There seemed to be two clusters of firms. One cluster focused their IT investments on customer service, quality, timeliness, and supplier relations. The other cluster of firms listed the main benefits of their IT investments as reducing costs, giving more control to executives, and improving management information.

The data were very striking in these two different attitudes. We labeled the first group as the extroverted group because they were focused on how the technology could help their customers and their suppliers. We labeled the second group the introverted group because they focused more on controlling internal management, information, and cost.

iQ: Did these extroverted firms gain any advantage?

Brynjolfsson: We found extroverted firms to be significantly more productive and more profitable. When we looked at the productivity growth over a five-year period, the extroverted firms had about a 7% higher productivity growth than the introverted firms.

This statistic is economically important in that in most industries, even a 1% increase in productivity would put a firm at a significant competitive advantage over the other firms in its industry. But a 7% gain over that period of time is the kind of gain that makes Alan Greenspan's eyes pop out.

iQ: Your research also found that intangible assets are now more responsible for how a company creates value. How so?

Brynjolfsson: There are a number of assets that enable a firm to create output. The obvious ones are the tangible assets—the factories, the equipment, the land. Our study tried to determine how important intangible assets were. What we found was that for every dollar of IT capital investment, there were about $9 or $10 of intangible assets that were created around the IT investment. The intangible assets include things which people historically have not really thought [of] as being assets—what we call organizational capital.

Developing new organizational processes is costly, but in an economic sense, organizational investments are bigger and more important than dollars spent on technology. Organizational development can be thought of as an asset in the following sense: The upfront costs yield a stream of benefits over several years, and those benefits may be lower costs or higher revenue or greater responsiveness to customers or a more pleasant work environment.

Firms that made these investments were easily rewarded by the financial market in terms of higher market capitalization.

iQ: What advice do you have for managers?

Brynjolfsson: Well, by definition, productivity doesn't come just from using more labor or more capital. So, if you want to increase productivity, you have to think of more creative ways of doing things. Successful companies today are not merely installing the technology and leaving the rest of the organization unchanged. They are really transforming the nature of work.