Technology and Competitive Advantage

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Authors: Anil Kumar Kartham,
Faculty Associate
ICMR (IBS Center for Management Research).

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Impact of Information Technology on Organizations Contd...

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%.)