Wednesday, September 3, 2008

Investing in the IT That Makes a Competitive Difference

An interesting article was published in the July-August 2008 edition of HBR. It was titled "Investing in the IT That Makes a Competitive Difference" and written by Andrew McAfee and Erik Brynjolfsson. It interested me because McAfee is one of the authors - I try to follow his work. Furthermore I was curious what they had to say on the way companies invest in IT. In most large companies the large part of the spending is on large corporate-wide systems, like SAP. And not on an enterprise-wide collaboration tool or corporate intranet, for instance.

So, what do they have to say? What I’ll do is summarize the article for you, passing on the highlights. But first a couple of comments:

  • I’m surprised to read they advise companies to define (new) ways of working after deploying a technology platform. I thought we should define our working methods first?
  • I’m surprised they don’t mention PDM/PLM (Product Data Management/Product Lifecycle Management) systems as examples of enterprise software applications. For large technology companies, these tools are just as or more important than ERP systems.
  • I like the balanced approach this article takes, focusing on large enterprise systems, but also on web 2.0 tooling and, last but not least, people.

Here's my summary:

"To better understand when and where IT confers competitive advantage in today's economy, we studied all publicly traded U.S. companies in all industries from the 1960s through 2005, looking at relevant performance indicators from each (including sales, earnings, profitability, and market capitalization) and found some striking patterns: Since the mid-1990s, a new competitive dynamic has emerged - greater gaps between the leaders and laggards in an industry, more concentrated and winner-take-all markets, and more churn among rivals in a sector."

"In the following pages, we'll explore why the link between technology and competition has become much stronger and tighter since the mid-1990s, and we'll clarify the roles that business leader and enterprise technologies should play in this new environment."

About the link between IT (investment) and competitiveness. They set out "to compare the increase in IT spending with various measures of competition, focusing on three quantifiable indicators: concentration, turbulence, and performance spread."

"Were there economywide changes in these three measures after the mid-1990s, when IT spending accelerated? If so, were the changes more pronounced in industries that were more IT intensive - that is, where IT made up a larger scale of all fixed assets within an industry? In a word, yes."

"… our field research suggests that businesses entered a new era of increased competitiveness in the mid-1990s not because they had so many IT innovations to choose form but because some of these new technologies enabled improvement to companies' operating models and then made it possible to replicate those improvements much more widely."

"Although modern commercial enterprise systems are relatively recent - SAP’s ERP platform, for example, was introduced in 1992 - by now, companies in virtually every industry have adopted them. According to one estimate, spending on these complex platforms already accounted for 75% of all U.S. corporate IT investment in 2001."

"Sharing and replicating of innovations (via analog technologies like corporate memos, procedure manuals, and training sessions) would be relatively slow and imperfect, and overall market share would change little from year to year."

"In this Schumpeterian environment, the value of process innovations greatly multiplies. This puts the onus on managers to be strategic about innovating and then propagating new ways of working."

"To survive, or better yet thrive, in this more competitive environment, the mantra for any CEO should be, "Deploy, innovate, and propagate": First, deploy a consistent technology platform. Then separate yourself from the pack by coming up with better ways of working. Finally, use the platform to propagate these business innovations widely and reliably."

Deployment. "Determining which aspects of their companies' operating models should be globally (or at least widely) consistent, then using technology to replicate them with high fidelity."

Innovation. "Data analytics drawn from enterprise IT applications, along with collective intelligence and other Web 2.0 technologies, can be important aides not just in propagating ideas but also in generating them. They are certainly no replacement for brilliant insights from a line manager or a eureka moment during a meeting, but they can complement and speed the search for business process innovations."

Propagation. "While an ERP system is an obvious tool for propagation, other technologies area also important, and they show that innovations do not necessarily emanate from headquarters. For instance, Web 2.0 applications can help process changes emerge organically from lower levels in an organization."

"As corporate IT facilitates the implementation and monitoring of processes, the value of simply carrying out rote instructions will fall while the value of inventing better methods will rise. In some cases, this may even lead to a “superstar” effect, as disproportionate rewards accrue to the very best knowledge workers. Human resource policies and corporate culture will need to evolve to support this type of worker. An effective leader and a well-designed organization will need not only to aggressively seek out and identify such individuals and the innovations they generate but also to develop and reward them appropriately."

"The arrival of powerful new information technologies does not render obsolete all previous assumptions and insights about how to do business, but it does open up new opportunities to executives. Our research had led to three conclusions: First of all, the data show that IT has sharpened differences among companies instead of reducing them. (…) Second, line executives matter: Highly qualified vendors, consultants, and IT departments might be necessary for the successful implementation of enterprise technologies themselves, but the real value comes from the process innovations that can now be delivered on those platforms. (…) Finally, the competitive shakeup brought on by IT is not nearly complete, even in the IT-intensive U.S. economy."

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