Cutter paper: IT's role in creating business advantage

It is not sufficient to merely react to the competition's last move; companies have to drive the competitive dynamics of their industries using IT to be successful

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 centre 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 mind-set 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.

I welcome your comments on this issue of the Cutter Edge and encourage you to send your insights on the market in general to me at cdavis@cutter.com.

Christine Davis, Fellow, Cutter Business Technology Council

References

1. Carr, Nicholas G. "The End of Corporate Computing." MIT Sloan Management Review, Vol. 46, No. 3, Spring 2005.

2. McAfee, Andrew, and Erik Brynjolfsson. " Dog Eat Dog." Wall Street Journal, 28 April 2007.



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Absolutely. Generally the business ideas don't come directly from IT, but IT's role is to help design solutions that will bring the business ideas to reality. 
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