The secret of success for Amazon, Google and Microsoft is how much they invest in their own technology. IT spending that goes into hiring developers and creating software owned and used exclusively by a firm is the key competitive advantage. It’s different from our standard understanding of R&D in that this software is used solely by the company, and isn’t part of products developed for its customers.
Tech companies such as Google, Facebook, Amazon and Apple—as well as other giants including General Motors and Nissan in the automotive sector, and Pfizer and Roche in pharmaceuticals—built their own software and even their own hardware, inventing and perfecting their own processes instead of aligning their business model with some outside developer’s idea of it.
In 1985, firms spent on average 7% of their net investment (which includes software, new buildings, R&D and the like) on proprietary IT, according to data from the Bureau of Economic Analysis. In 2016, about 24% of U.S. firms’ net investment went into proprietary IT. That’s nearly $250 billion in a single year, and almost matches their outlay for R&D and capital expenditures.
Companies with more employees have a higher percentage of their workers in information technology. One explanation for how this came to be is that things have just gotten too complicated. The technologies we rely on now are massive and inextricably linked to the engineers, workers, systems and business models built around them. While in the past it might have been possible to license, steal or copy someone else’s technology, these days that technology can’t be separated from the systems of which it’s a part.
Just spending money on technology is not enough. In retail, Sears in the ’80s was IBM ’s biggest customer. They were a big investor in IT but they just proved incapable of competing effectively with Walmart and its systems. Part of the problem with Sears’s approach could be that it hired an outside technology firm instead of doing the work—and building the infrastructure of talent, systems and institutional knowledge—itself.