Technology and Competitive Advantage

Article by - Anil Kumar Kartham ,
Faculty Associate ,
ICMR Case Studies and Management Resources.

continued : Impact of information technology on organizations

Customizability is another major benefit offered by new information technologies. Today organizations are able to tailor their products based on the specific needs and preferences of individual customers. For example, newspapers provide same information to all buyers, irrespective of their interests. Online editions are customized to offer news & information that the subscriber is interested in. Dell Computers offers PCs to its customers based on their requirements in terms of right disk space, microprocessor power, and other features. New information technologies are allowing Dell Computers to offer made-to-order computers at competitive prices. Other companies operating in this environment and competing with Dell Computers have to mould their strategies based on the realities of new technological environment.

Customers buying books at Amazon.com no longer buy just books. There are many customers who purchase toys, clothing, tools, and other items along with books. They do that because they are familiar with the website, and have trust in the quality of products and services it is offering. The above examples demonstrate how important technological environment is in determining the strategies of the firms.

IT and its Strategic Value

As information technologies have gained strength in terms of capacities and presence, most of the companies are increasingly seeing them as crucial tools to success. This is evident in their spending on IT. In 1960s, less than 5% of capital expenditure of American companies went towards IT. In early 1980s, the time when PCs were introduced, the spending on information technologies rose to 15 %. Early 1990s saw the spending on IT rise to more than 30%. By 2000, the spending was nearly 50%. Even today, when companies are supposed to be niggardly in their IT spending, businesses all over the world are spending more than $2 trillion a year on IT. Even the shift in attitudes of top managers suggest this. Twenty years back most top managers viewed computers as tools to help low-level employees like secretaries, analysts & technicians. Rarely did they use applications of IT in their strategic thinking. However, today IT is expected to deliver strategic value. Top managers perceive it as a tool to gain competitive advantage.
Today, Chief information officers are part of senior management teams. Organizations have even hired strategy consulting firms to help them leverage IT for differentiation and advantage. The senior executives are led by a simple assumption: increasing potency of IT and its ubiquity have increased its strategic value. But Nicholas Carr (Carr) says in his HBR article, "IT doesn't matter", that IT no longer offers a strategic value.

According to him, a resource such as IT is strategic and offers competitive advantage only as long as it is scarce[1]. Such a resource offers edge over competitors only when they cannot have it. Core functions of IT such as data storage, data processing, and data transport are no longer limited to a few companies. Most of the companies have infrastructure to perform these functions. With increased ubiquity, IT, once a strategic resource of pioneering companies became a commodity factor of production. IT infrastructure is becoming a cost of doing business, but it is offering real advantage to none. Carr compares IT to steam engine, railroad, telegraph, telephone, electric generator, and internal combustion engine. They offered competitive advantage for sometime as they were being built into infrastructure of commerce. These technologies offered real advantages to some forward-looking companies for sometime. However, with increased availability, decreased cost, and wide usage, these technologies became commodity inputs offering strategic advantage to none.

IT does matter

IT by itself does not offer any significant strategic advantage. However, IT offers strategic advantage when the firm using it exploits the possibilities and options offered by IT. These possibilities did not exist before. The ability to exploit the possibilities can be a significant differentiating factor. Though IT is ubiquitous today, yet only a few companies truly know how to harness the potential of IT.

Creating value out of IT needs innovations in business practices of firms. Mechanically deploying IT into existing businesses, without creating new practices to exploit new capabilities is certain to destroy the economic value of IT. Companies often do that. McKinsey Global Institute (MGI) conducted a study in Oct 2001, which focused on "U.S productivity growth, 1995-2000". The study aimed to identify correlation between IT investments & productivity by industry sector. It was found that only 6 out of 59 industries studied showed significant positive correlation. 53 sectors which accounted for 70% of the US economy showed marginal or negligible improvements after the investment. On further exploring, MGI found that one or more companies in these industries made significant innovations to leverage their IT capabilities. Competitive pressure in these industries led other companies to adopt comparable business practices. For example, in retailing industry, Wal-Mart innovated around new generations of IT. Competitors imitated Wal-Mart. To cope with the competitive pressure, Wal-Mart focused on next wave of innovations. Even after imitation, Wal-Mart is able to maintain significant productivity advantage (to the tune of 40%.)  


^[1]IT Doesn't Matter, By: Carr, Nicholas G., Harvard Business Review, 00178012, May2003, Vol. 81, Issue 5.