Large companies' proprietary information technology allows them to maintain dominance while slowing the growth of rivals, reducing opportunities for innovative disruption, according to an essay in MIT Technology Review.
Essay author James Bessen, an economist and executive director of the technology and policy research initiative at Boston University School of Law, challenges common thinking that technology creates disruption, in which smaller, newer companies' innovations enable them to grow and ultimately leapfrog their older, less productive predecessors.
This type of disruption has declined sharply the last two decades, and Mr. Bessen attributes the falloff to dominant companies' proprietary technologies.
In total, companies (excluding those whose product is software) now invest more than $240 billion in internal software each year, up from $19 billion in 1985. "Large firms account for most of that change," Mr. Bessen writes. "The top four companies in each industry, ranked by sales, have increased their investment in their own software eightfold since 2000, far more than even second-tier firms."
Dominant companies see the return on investment. Since the 1980s, the top four firms in each industry have increased their market share by 4 to 5 percent in most sectors. "My research shows that investments in proprietary software caused most of this increase," Mr. Bessen writes, noting that the companies' growing dominance is accompanied by a corresponding decrease to the risk that they will be disrupted.
Disruption has been on the decline since about 2000, when top companies began investing heavily in proprietary IT systems.
"In a given industry, the chance that a high-ranking firm (as measured by sales) will drop out of one of the top four spots within four years has fallen from over 20 percent to around 10 percent," Mr. Bessen writes. "Here, too, investments by dominant firms in their internal systems largely account for the change."
How so? Proprietary software and IT reduce the costs of managing complexity; they also allow large companies to scale while simultaneously adjusting to consumer needs and preferences with agility. Look at retail: Walmart responds faster to changing customer needs and offers greater selection than Sears or Kmart. "Sears was long the king of retail; now Walmart is, and Sears is in bankruptcy," the essay states.
"With the right data and the right organization, software allows businesses to tailor products and services to individual needs, offering greater variety or more product features. And this allows them to best rivals, dominating their markets," Mr. Bessen writes.
Mr. Bessen is the author of the upcoming book "The New Goliaths: How Corporations Use Software to Dominate Industries, Kill Innovation, and Undermine Regulation," from which the essay published by MIT Technology Review is adapted. Read the essay in full here.