Vol. 8, No. 6 | Printer Friendly PDF version

IT: Determining Competitive Advantage

Domain

IT industry

Assertion 162:

IT has been found to be an accelerator in a company's market share formula, controlling the speed of process innovation and the effectiveness of deployment. This reality is increasing the pressure on businesses to engage IT as an equal business partner in order to gain and sustain competitive advantage.

Syllabus

Leading-edge companies are embracing IT as a business partner, giving them an expanded mission: enable business strategy, drive productivity, and facilitate company-wide innovation. Companies within industries that highly invest in information technologies are finding that while they have been gaining market share, they are also vulnerable to a tremendous amount of turbulence in their competitive rank within their industries. While many businesses have used the Internet and IT to quickly develop process innovations and widely deploy changes, their competition is able to do the same, thereby leaving them in a reactive position versus a proactive one. More and more CEOs, along with their executive leadership teams, are redefining their relationship with the IT organization. CIOs and their organizations are facing this challenge by reevaluating every aspect of their current operational model and making significant changes where necessary to meet this new expectation.

Contents

OPINION BY CHRISTINE DAVIS

IT has been a critical part of the production of running a business since the early days of the IBM 360. IT supports every aspect of the business from human resources to operations -- yet it has primarily been perceived to be a part of the backstage crew. IT has been extremely important to the success of the show, but it is not seen as a key actor who is center stage and critical to determining the final outcome. In fact, some have gone so far as to declare that IT doesn't really matter anymore [1]. Of course, we were reminded of its importance during the Y2K frenzy when, for the first time, IT found itself on the agendas of the board of directors in many corporations around the world, giving play-by-play reports on their coding problems. Around the same time, IT became a key player in the dot-com bubble, giving rise to the need for speed as dot-com businesses created their Web sites. However, IT organizations have been mostly perceived as one of many business support functions, just like finance, manufacturing, or HR. Until recently, IT has typically not been recognized as a determining factor in a business's ability to gain or lose market share or as the driver of the competitive dynamics of entire industries.

In a recent Wall Street Journal article titled "Dog Eat Dog," Andrew McAfee from Harvard Business School and Erik Brynjolfsson from MIT's Sloan School of Management share their research findings regarding IT and market share [2]. They divided the US private sector into 61 industries and determined the IT intensity of each one by the amount of spending on computer hardware and software as a percentage of total spending on fixed assets, grouping them into high-IT, medium-IT, and low-IT industry groups. Their study focused on the period after 1996 when technology investments increased sharply in the high-IT industries. Some of their key findings include:

  • Market share increases were greatest in industries that used IT most extensively.

  • High-IT industries experienced different competitive dynamics than other industries.

  • Sales turbulence (i.e., the amount of shifting in where a company ranks in sales within an industry from year to year) was substantially higher in the high-IT industries than in the other two categories.

McAfee and Brynjolfsson state that the direct link between IT and market share has surprised many researchers and executives because companies expect to buy technology in order to gain control over their environment, not lose it. How exactly has IT caused this to happen? It has been through the use of IT in process innovation and replication. Enterprise-wide software applications have enabled companies to integrate across functions, and the Internet has made IT-enabled tasks widely accessible. Improvements to algorithms, software updates, and new capabilities can be made very quickly and distributed broadly in a seamless manner. A company's leadership position today can be disrupted by a competitor the very next day if the competitor is more insightful, more connected to its customers, and quicker to deliver solutions. This is the new norm in this highly competitive and dynamic environment, and the turbulence will only become more intense and more pervasive as IT usage expands across all industries.

The good news is that IT really does matter. The bad news is that as every company and industry becomes more and more dependent on IT over the next 10-20 years, all industries and companies will experience this dog-eat-dog competitive cycle. It is not sufficient to merely react to the competition's last move; companies have to drive the competitive dynamics of their industries to be successful in keeping and/or gaining market share. As companies realize how important IT is in determining competitive advantage, they are making changes where necessary so that they can engage IT as a true business partner. As a result, IT is being forced to be much more agile and increasingly more engaged and integrated with both internal and external customers and suppliers. IT is back in the hot seat but with a much better negotiating position. Its performance and capability are being directly linked to the revenue-and-profit side of the financial equation. It is no longer a mere overhead expense; IT is being recognized as a true asset in determining a company's competitive position. However, the IT mindset has to shift in a number of ways to effectively meet the challenge.

I have had the opportunity to listen to presentations from a number of CIOs over the last year, and I have observed a common theme: IT organizations face a new challenge -- how to capitalize on the growing demand for IT-enabled innovation. CEOs are giving their IT organizations a new, broader mission: enable business strategy, drive productivity, and facilitate company-wide innovation. In fact, a CEO from one of the largest technology companies has recently stated that he wants to enable every company move through its IT organization and eliminate the shadow or hidden IT functions across the company. In response to the pull from the businesses and CEOs, CIOs must transition their organizations from utility provider to business partner while shifting a significant portion of IT spending from supporting the business to growing the business. CIOs are increasingly being challenged to deliver value by driving common processes across the enterprise, optimizing IT spending with a shift to value-add, partnering to define enabling technical solutions, and utilizing these enabling technologies to generate revenue.

IT organizations are discovering that a "copycat" portfolio and IT strategy will not suffice in this intensely competitive environment. The traditional IT organization has been constructed to most efficiently and effectively plan, build, run, and maintain internal hardware and software. Over the last 10 years, IT organizations have taken on a new leadership role and responsibility in the areas of processes transformation, back-office consolidation, and shared services. The new IT is not only about automation, not just about process transformation, not primarily cost-focused, not necessarily focused on new technologies, and not about IT alone. The IT world is becoming more encompassing with both an external and an internal focus. Today's IT perspective is shifting to take on a joint ownership of the business's extended value network by helping businesses connect with customers in innovative ways and providing intelligent communication networks that serve their entire enterprise.

This overall trend is affecting IT in many ways, including its portfolio of projects, people, organizational structure, processes, corporate role, governance, investments, technologies, partnerships, and suppliers. IT must construct a balanced portfolio focused on maintaining IT operational excellence while investing in the business goals for growth, profit, and innovation. IT-enabled transformation projects will be more and more integrated across sales and marketing, engineering, and manufacturing, where they can drive their company's profit. IT is becoming a necessary and welcomed partner in the quest for innovation across the corporation as they lead efforts to take advantage of new and emerging technologies. In addition, the people in IT organizations are required to be more broad, flexible, versatile, and collaborative while blending IT technical skills with product development and marketing skills. In some traditional IT organizations, IT associates are learning to say yes instead of the standard "No, we don't do that" when asked if they can, will, or should do something differently. Processes are being forced to become more agile and risk-tolerant to meet the demand for speed, creativity, and flexibility. At some leading-edge companies, IT is no longer walking around with a tin cup begging for dollars; it now has a seat at the table. In these enlightened companies, IT investments are starting to be seen as a cost of doing business with longer-term payback. And finally, IT will be moving into more complex multidimensional relationships with internal functional departments, suppliers, and third-party technology organizations such as universities.

What if you are in a company that is still living in the traditional model? Your tin cup is out there, and nobody is making eye contact. Well, you can try to enlighten your leadership by giving them data on how IT is affecting market share and show them what leading-edge companies are doing about it. If they stay in denial for very long, it probably won't be an issue anymore since the company will more than likely fade away as it loses any competitive advantage it once enjoyed. You may want to dust off that résumé and join one of those organizations that has embraced IT as its hope for the future.

References

1. Carr, Nicholas G. "The End of Corporate Computing." MIT Sloan Management Review, Vol. 46, No. 3, Spring 2005 (http://sloanreview.mit.edu/wsj/insight/pdfs/46313.pdf).

2. McAfee, Andrew, and Erik Brynjolfsson. " Dog Eat Dog." Wall Street Journal, 28 April 2007 (http://online.wsj.com/public/article_print/SB117735476945179344.html).

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CONCURRENCE BY TOM DEMARCO

Christine is spot-on in arguing that IT has been and will be a critical factor in competitive advantage. The data provided by McAfee and Brynjolfsson is compelling, but just why is it that we need such compelling proof? What we see everywhere around us is a world reimagined and reimplemented with digital technology. Wealth creation, which has spurted far beyond what was even imaginable in our parents' day, is produced by or utterly dependent upon digitally served information. The global economy is a phenomenon that simply couldn't have been born without IT. Why is it necessary for a Christine Davis to tell us that IT is important?

The reason is that almost from the beginnings of our industry, we have endured a series of backlashes that have only increased in virulence. We have been abused as geeks, illiterate incompetents, unsocial and mindless technobots, purveyors of an arrogant cult of the machine, and merciless automators of decent people's jobs.

A few years back I read Susan Faludi's perceptive book Backlash, which presented a history of how a largely fundamentalist segment of American society had lashed out repeatedly to deprive women of whatever economic independence they had been able to achieve. The Rush Limbaughs who today scream, "Feminazi!" at women who want to work are only the latest instance. The almost mindless groupthink that caused Rosie the Riveter to be simply kicked out of the workplace after the second World War was an earlier one. My aunt, Aileen McLaughlin, was one of those who got their walking papers in 1945. During the war, she had been an electronics technician in an experimental lab at MIT -- a lab that produced a half-dozen key radar patents with her name on them. After the war, the best she could do was work as a secretary. She was a victim of the backlash.

The backlashes against IT have followed a similar pattern. When computers first came on the scene, there was an early outcry against them as a threat to workers everywhere, as a heartless and terrifying peril to human society. More recently, there have been three successive backlashes, each centered around a widely read and widely disseminated publication that damned IT and everyone associated with it:

  1. "Reengineering Work: Don't Automate, Obliterate," by Michael Hammer (Harvard Business Review, July 1990).

  2. "Software's Chronic Crisis: Trends in Computing," by W. Wayt Gibbs (Scientific American, September 1994).

  3. "IT Doesn't Matter," by Nicholas G. Carr (Harvard Business Review, May 2003).

The three articles span a period over which IT simply transformed the world.

All three articles were angry. And all three caught on big time, particularly in the upper reaches of our corporations.

There is something going on here that needs to be understood. IT is extremely threatening to a segment of our society that is not technically savvy. We've known this all along and have gone to some lengths to calm the fears of people in this group. Those we haven't reached, however -- now after nearly 30 years of trying -- are extremely resistant and more threatened than ever. (The guy who passed out all those copies of Nicholas Carr's article is the same one who has never figured out how to use his e-mail.) Sensationalist anti-IT articles pander to them. And these people are not powerless. Many of them are in our corporate boardrooms and upper echelons.

For the last half-century, the path to a corporate presidency or chairmanship has often been through sales or marketing. Because these areas were late to computerize, many of their promoted leaders have been among the unsavvy. Today's technically unsavvy executives are feeling embattled.

This is not good news. They may be dinosaurs, but they have big teeth.

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CONCURRENCE BY ROB AUSTIN

I find it easy to agree with the arguments Christine makes in her opinion, although like some others on the Council, I find it startling that we need to keep making these arguments. The work by my colleagues Andrew McAfee and Erik Brynjolfsson is first-rate and goes well beyond the issue of whether IT matters. But the whole debate feels like an unnecessary and unproductive digression. The evidence that IT matters is all around us, as is the evidence that it will continue to matter and will matter even more in the future. Carr never had standing, really, to question this; he was a journalist who laid claim to a soapbox and used it to do lots of damage. Regrettably, one need not look very far today to find examples of people saying incendiary things merely to gain notoriety.

I also want to second Christine's claim that IT is becoming a factor in innovation and growth and that those IT organizations not playing a role beyond cost-cutting, efficiency enhancing, and process improving need to stop and think about their future direction. This is the way that IT will really matter, big time, in the future -- as an accelerator of innovation. IT is the one technology that can, across the board, make it possible to try things cheaply, to work iteratively, and that is (according to my research) the key to unlock serious innovative capability. But, as Christine says, a lot of people don't understand this yet. They will, one way or another.

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CONCURRENCE BY RON BLITSTEIN

Of course IT matters. However, technology in isolation has never created strategic value. What matters more is the tight alignment between IT and its organizational business partners. Sophisticated IT capabilities cannot, on their own, lead the charge to faster cycles of innovation. IT can provide tools, capabilities, methodologies, and the like, but as a discipline we are not functional experts for sales, marketing, manufacturing, supply chain, and so on. Rather, effective leadership and demonstrated operational excellence are essential prerequisites. Only when a climate of trust exists can IT help enable businesses achieve their ambitions.

If IT gets too far in front of its business partners, we are labeled arrogant. If IT lags the business, we are an encumbrance to business strategies. This "Goldilocks syndrome" promotes an IT/business partner dynamic that has all parties best served when IT is no more than half a step ahead of the prevailing business direction.

However, the challenge is not only in the pacing but in the demographics as well. As a functional discipline, IT remains fairly young. Its effect on the landscape began in the late 1950s and has accelerated at a blazing rate ever since. Some of you may recall a terrific Tracy/Hepburn movie called Desk Set, which provided an amusing look at the early days of "efficiency experts" and computing systems. Though technology may be swift to change, people are not.

Alan Kay, one of the early pioneers of network computing, object-oriented programming, and graphical user interfaces, offered a definition of technology that may provide some insight on this. Kay said, "Technology is anything that wasn't around when you were born." 1 Though that may be a stretch for some, one look at my nine year old effortlessly downloading music or searching the Web tells me that we are still about 10 years away from the corporate boardrooms being refreshed with a generation of leaders who no longer see "technology" but instead see just tools. When coupled with unique customer insights and business strategies, these powerful tools drive growth, operating margins, and share multiples.

This does not mean that IT just waits for evolution to promote change. Creating change-ready organizations goes hand in hand with harnessing the power of IT and innovation. I suspect that if we were able to dig deeper into the study by McAfee and Brynjolfsson, the real magic may well be a culture that embraces change across the board, including the technological kind.

NOTES

1See http://en.wikipedia.org/wiki/Alan_Kay.

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CONCURRENCE BY LYNNE ELLYN

According to Christine, companies are "embracing IT as a business partner, giving them an expanded mission: enable business strategy, drive productivity, and facilitate company-wide innovation." I agree that many, perhaps most, companies are looking to IT for innovation and support for business strategy, but this trend is just old wine in new bottles. From the earliest implementations of automated payroll and accounting to the latest high-tech analytics, the history of IT has been business innovation. Today the idea of computerized payroll is a yawn, but when the first companies began to automate payroll it was the realization of business strategies focused on productivity and cost reduction. Once payroll systems became common, no one thought of them as strategic -- necessary, but certainly not strategic. Ditto for accounting, automated manufacturing, corporate communications (e-mail), and a host of other important applications that once were strategic and innovative. Enabling business strategy is what IT does -- what IT has always done.

So is there no trend to talk about? I think there is a trend, but it isn't about IT per se. I think the trend is the dearth of business strategies and a lack of innovation on the part of businesspeople. The last 10-15 years has seen such a slavish devotion to cost-cutting and a bottom-line focus that the business community has exorcised all the creative genes of the organization. The relentless focus on quarterly results has squeezed out all the creative organizational juice from most organizations. New ideas die a fast death because they present a threat to the almighty budget.

In addition to the relentless focus on cost, the pedigreed strategy consulting firms have developed a stranglehold on most organizations and most strategy processes. The consultancy machinery is dependent on an unquestioned belief in their puffed-up reputation and their Ivy League-trained junior consultants who are great at collecting data and parroting back the easiest way to execute ideas. This ludicrous process involves inexperienced analysts gleaning superficial knowledge about the organization and plotting strategy based on "hardcore" analysis. This has largely yielded more slash-and-burn activities but rarely has provided companies with any sustainable competitive advantage. The unintended consequence of this pathological dependence on strategy consultants has been the commoditization of corporate strategy with whole industries consumed with outsourcing, cost reduction, and efficiency, yielding no increase in corporate effectiveness. As time has gone on, the lack of corporate competitive juice has become apparent, and now the business is frantically searching for some spark, some clue about what to do next -- ergo the "new" interest in IT. While this may be a good thing for IT people (provided there are any left in the company), this is an incomplete answer to the dilemma of how to improve the corporate effectiveness and profitability.

If companies want to become more effective, they should certainly involve IT -- maybe even let IT lead the idea creation process -- but little will come of this search for innovation without a new respect for the people closest to the problems. A focus on listening to the troops, experimenting with new business models, and an easing of some cost constraints would create fertile ground for new, more effective business strategies. And the strategy consultants? Unless you want another round of obvious cost-reduction programs masquerading as strategy -- get rid of them! Focus on novel approaches and spend a little money experimenting with new ways of doing. Look to the IT agile methods as a template for iterative experimentation and fail often and fail fast. It took Thomas Edison thousands of experiments to invent the successful incandescent light bulb. Successful business innovation depends on just such a willingness to experiment. IT stands by to assist.

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CONCURRENCE BY KEN ORR

What Christine has put her finger on is the single biggest thing taking place in large organizations across the world: the acknowledgement that IT is a vital component of enterprise delivery of all its products and services and an attempt to come to grips with how IT fits into the management of the 21st-century organization.

Historically, there has been a classic distinction between line (the folks who develop, make, sell, and service the organization's products and services) and staff (planning, administration, finance, HR, and so on). Organizationally, line functions dealt with the major operational components of the business, while staff functions dealt with those functions that cut across the business. From an accounting standpoint, line was accounted for under "costs of goods sold" and staff under "overhead expense." But in the second half of the 20th century, more and more line and staff functions were computerized (automated), so instead of org charts solely representing people, you had mixed charts representing both people and automated functions.

From a management standpoint, one of the great unanswered questions in modern organization theory is, "Who represents the computers?" Computers don't eat or sleep or (usually) talk back, but they are doing a greater amount of heavy lifting. Moreover, they take an increasingly long time to reprogram and/or convert to handle new or restructured activities. Computers on the mixed org chart behave differently than people, but not much of significance can be done without them anymore.

This is why Christine is fundamentally on track with her opinion. Smart organizations recognize that the closest thing they have to a computer representative is the CIO. Two of my colleagues on the Cutter Trends Council have the title CIO and Senior VP; they sit on the boards and/or executive management committees of their respective enterprises, and they represent the computers down on the third floor or over in Denver or Bangalore. This is a good sign, but we still have a long way to go. One of the reasons is that the rest of the folks at the top are uneasy with the presence of the CIO in the inner sanctum.

No one wants to give up power, and corporate management is all about power. Increasingly, CIOs are getting invited to the corporate management party, but they are not yet seen as peers, much as student representatives appointed to the Faculty Senate are not considered peers. In many organizations, CIOs, like student representatives, are still expected only to "speak when spoken to." They are supposed to be there to represent computers (technology) but not the business. Over time, they will have a more and more important voice. As a wise old mentor of mine once pointed out, "In politics, once you're in the room, nobody asks how you got there" -- the same goes for business.

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CONCURRENCE BY TIM LISTER

After reading Christine's opinion, I went back and stared at this statement for a while:

Leading-edge companies are embracing IT as a business partner, giving them an expanded mission: enable business strategy, drive productivity, and facilitate company-wide innovation.

"Enable business strategy, drive productivity, and facilitate company-wide innovation" -- isn't that the job of executives?

Then the "business partner" phrase struck me: a business partner? The way I read what Christine is saying is that IT can be and should be a vital business organ.

Something I have seen very rarely but I would like you to consider is a real program for young rising-star IT managers to get some valuable business line experience and equally for business line wunderkind managers to get some inside IT experience.

I think I rarely see this because it is disruptive. Nobody in the group is thrilled that a young star leaves their area because, by definition of their talent, they are always desperately needed. The star may not be thrilled about leaving his or her area of expertise or familiar life. In the short term it looks like a loser, but think about it like a study abroad experience when you were a student. It changes your life.

If IT is truly integrated into the business, there must be a comfort level with IT that I just don't believe most executives can get by osmosis. Look at the executive level of companies that don't directly sell software as a product or in their product. To me, it looks like the IT world is still generally underpopulated at the executive level of those organizations. Look at some younger companies that fall into that non-IT-specific class. In the US, Fidelity Investments 2 and Progressive Insurance 3 come to mind. They are excellent examples of companies embracing IT for a great advantage in a non-IT-specific domain. These are folks who had ideas of how to use technology to their advantage. Why didn't Merrill Lynch and Allstate lead the way? The age of the company is telling to me. The older companies are invested in their ways of delivering trading and insurance.

If IT is that vital organ for you, you cannot afford the time to allow IT knowledge to slowly percolate up to the executive level. You need a way to boil in that IT understanding to those who will be making the most critical decisions. Look for those up-and-comers, and get that IT/business exchange program going.

NOTES

2Fidelity brings online trading and investing to its clients.

3Progressive brings online vehicle insurance quotes, purchasing, and bill payment to its clients.

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IT: Determining Competitive Advantage