…Wal-Mart’s ongoing infrastructure innovation is what inspires their investments, actions and fears. The result has been a genuine revolution in economic productivity. This revolution also reinforces a profound truth about the economics of innovation: implementation matters far more than invention.
The numbers starkly bear this out. A recent McKinsey Global Institute report analyzing the spurt in U.S. productivity growth from 1995 to 2000 proffers provocative statistics that should give champions of “supply-side” innovation pause. “By far the most important factor in that is Wal-Mart,” reports Robert Solow, the MIT Nobel Prize-winning economics professor emeritus who chaired the report’s advisory committee. “That was not expected. The technology that went into what Wal-Mart did was not brand new and not especially at the technological frontiers, but when it was combined with the firm’s managerial and organizational innovations, the impact was huge.”
Solow’s comments bear particular notice as he’s notorious in technology circles for his tart-tongued observation a few years back that “Computers can be found everywhere but in the productivity statistics.” In fact, the McKinsey analysis found them-but not exactly where Solow thought.
“Productivity growth accelerated after 1995 because Wal-Mart’s success forced competitors to improve their operations,” the report maintains. “In 1987, Wal-Mart had just nine percent market share but was 40 percent more productive than its competitors. By the mid-1990s, its share had grown to 27 percent while its productivity advantage widened to 48 percent. Competitors reacted by adopting many of Wal-Mart’s innovations, includingeconomies of scale in warehouse logistics and purchasing, electronic data interchange and wireless bar code scanning. From 1995 to 1999, competitors increased their productivity by 28 percent, while Wal-Mart raised the bar by further increasing its own efficiency another 20 percent.”
The key variables here, says Solow, are the roles of imitation, adaptation and organizational innovation that he believes traditional economists either minimize or ignore. “Our historical research emphasis focusing on measuring R&D spending as a proxy for innovation is probably a mistake,” he observes. “I do think that’s a gap-that we don’t look enough at organizational innovation as in this Wal-Mart case.”
Consider Wal-Mart’s $4 billion-plus investment in its “Retail Link” supply chain system. What’s intriguing is not the multibillion-dollar nature of the company’s IT infrastructure initiative, but the fact that it has had at least an order-of-magnitude impact on its suppliers’ own supply chain innovations. That is, Wal-Mart’s own $4 billion expenditure has likely influenced at least $40 billion worth of supplier investments in systems and software. Of course, those supply chain innovations are also eventually emulated by competitors, further amplifying the multiplier effect.
Read on at MIT Technology Review
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