Is IT Still Strategic?By Rob Garretson | Posted 05-07-2007
Is IT Still Strategic?
They are the stuff of business school legend.
The supply chain management applications Wal-Mart Stores Inc. pioneered in the early 1980s propelled the discount store chain out of the back woods of Arkansas into the first $1 billion profit reported by the retailer in 1989. By 2002 it had risen to the top spot on the Fortune 500 list. The fabled package tracking system pioneered by FedEx Corp. in the mid-1980s helped build the then-upstart company into a $3 billion challenger to United Parcel Service Inc. and the U.S. Postal Service after only 15 years in business. Its technology leadership helps FedEx maintain its position as the world's largest cargo airline, with 2006 revenues topping $32 billion, and by some accounts it is gaining in its ground assault on package delivery leader ups. Citibank's bold 1977 move to blanket the Big Apple with its then-proprietary atms helped double its share of New York City deposits by 1981; today, it's the nation's largest financial institution, with 2006 revenues approaching $147 billion. And American Airlines' 1976 rollout of its pioneering SABRE computerized reservations system to travel agents helped catapult the airline to the status it still enjoys as the world's largest airline in total passenger miles flown and the largest U.S. airline, with nearly $22.6 billion in 2006 revenues.
Such massive IT projects once so celebrated are now few and far between. Conventional wisdom --even among many IT professionals--is that information technology is now standardized and ubiquitous, so it's no longer the source of strategic competitive advantage that it was just a decade ago. Thanks in no small part to the widely read and hotly debated 2003 Harvard Business Review article by Nicholas G. Carr, "IT Doesn't Matter," plus the collective technology hangover business suffered from the Internet boom and bust at the start of this decade, corporate IT is on the defensive. The lion's share of energy is focused on efforts to control costs while maintaining reliability and legal compliance. Fewer companies are wielding technology offensively to gain competitive advantage.
"Technology, which not so long ago provided companies with a competitive edge, has really been neutralized in a strategic sense," maintains Carr, whose 2004 book, Does IT Matter?, expanded on his controversial thesis. "It's still obviously essential, but it's very difficult to get a competitive advantage at any technological level with IT."
A central pillar of Carr's infamous argument is that IT's ubiquity, like that of previous industrial innovations such as railroads and electric utilities, has made it affordable and accessible to everyone a shared commodity with no strategic value. Years after his essay and book set off a firestorm in the IT community, Carr, the former executive editor of HBR, continues to advocate a defensive approach to IT management and warns against the "cult of innovation" that persists despite mounting evidence supporting his arguments.
Yet many CIOs aren't ready to give up on innovation or their strategic roles. And at visionary corporations ranging from century-old industrial and consumer products companies to entertainment and financial services enterprises to e-commerce operations, technology-driven innovation is still creating lasting competitive advantage. Not only has IT helped industry leaders like Wal-Mart and FedEx stay on top of their game, but it's helping other innovative challengers gain ground on industry frontrunners, like Harrah's Entertainment Inc., which is going after Marriott International Inc.'s hotel, resort and casino business.
Wal-Mart remains the best example of a company that uses IT strategically, not only to reach the top, but to stay there. The company, which topped $351 billion in revenues last year, collects massive amounts of data on sales and inventories and shares it with more than 17,000 suppliers in 80 countries via its Retail Link, which generates 21 million queries annually on daily sales, shipments, purchase orders, invoices, claims, returns, forecasts, rfid (radio-frequency identification) and more, according to Linda Dillman, Wal-Mart executive vice president of risk management and benefits administration and former CIO. Wal-Mart managers not only use its massive data warehouse to analyze and optimize routine product assortment and pricing, but they can now anticipate and prepare for demand spikes--stocking up on strawberry Pop-Tarts, top sellers among nonperishable foods, for instance, at stores in areas where hurricanes are forecast.
How IT Matters at
And though it lags industry leader Marriott by 51 spots on the Fortune 500, Harrah's aggressive deployment of technology throughout its casino and resort empire helped it grow revenue 32 percent last year to nearly $9.8 billion--nearly six times faster than Marriott's growth. Harrah's has been a pioneer in using technology to gain an edge, having earned both acclaim and patents on its Total Rewards frequent gambler database, and its Fast Cash program that offers real-time incentives to casino guests based on their ongoing game play. The company, which earlier this year attracted a $17-billion buyout offer from a group of private equity firms, uses information technology for everything from determining the placement and configuration of slot machines for maximizing intake to dynamically setting hotel room rates to attract guests who are more inclined to gamble.
Indeed, everyone from Internet companies and manufacturers to energy producers, consumer goods makers and sports teams is using IT as a competitive weapon.
In manufacturing, Toyota Motor Corp. has used world-renowned just-in-time supply-chain management and business-process management technology to eliminate waste, limit inventory buildup and continually improve production. Its technology leadership finally helped the Japanese manufacturer topple General Motors as the world's No. 1 automaker, with first-quarter sales of 2.35 million vehicles, compared with gm's 2.26 million.
Oil and gas giant Exxon Mobile Corp., the nation's most profitable company, with 2006 earnings of $39.5 billion, has more than soaring oil prices to thank. It invests heavily in applications that give it an edge in finding increasingly harder-to-reach oil and gas deposits, while at the same time squeezing costs out of its refinery operations, chemicals businesses and distribution outlets.
Consumer goods leaders Proctor & Gamble Co. and Anheuser-Busch Companies, Inc. have a long history of pioneering analytical software and data mining to track and adjust sales and promotions in relative real time, and they continue to push the envelope. At P&G, the nation's largest maker of household and personal products, with more than $68 billion in 2006 revenue, cio Philippo Passerini is so committed to the company's analytical applications that he recently moved the most advanced and sophisticated analysts from the its operating units into a central organization reporting to him. The reorganization is designed to ensure that the best analytical skills are applied to the most strategic problems.
Anheuser-Busch, the nation's largest brewer, recently added mobile technology to its BudNet system, allowing company-owned and independent distributors to use handheld devices to update sales and inventory data, providing better insight into its distribution chain and helping sales grow, compared with flat or declining sales at some competitors.
Professional sports teams, including baseball's Oakland Athletics and Boston Red Sox, are famous for applying sophisticated data analysis to remain competitive against the rival New York Yankees, who spend millions of dollars more each year on player salaries.
Even the cement business, among the most prosaic and non-analytical of industries, includes a company Mexico's Cemex that uses IT to gain a leg up on competitors.
Whether building on industry dominance or challenging entrenched leadership, all these companies wield information technology as a competitive weapon to keep or gain their edge.
Though Carr's observation that IT infrastructure has become commoditized may be accurate in aggregate, critics say his argument that technology is no longer a source of competitive advantage is an oversimplification that doesn't factor in the implementation of IT at the organization level.
"Some organizations get almost no value from IT, and others get a lot and when you average it all out, it comes out to be not so much," says Jeanne G. Harris, director of research at Accenture's Institute for High Performance Business and author of Competing on Analytics, The New Science of Winning, who takes issue with Carr's assertion that IT has become a commodity, and with his analogy between IT and electric utilities. "If it were a commodity, then half of all IT projects wouldn't fail," she notes, referring to oft-cited reports such as the Standish Group's chaos study, which show how frequently software and other IT projects come in late, over budget or simply don't succeed. "Certainly, half of all electric outlets you plug into don't fail."
Harris, however, credits Carr's essay with helping to refocus management on IT's strategic role. "Personally, I think it was the best thing that could have happened to the it field, because it reignited debate about the role of it within the business organization," she says. "It got people talking about IT and focused on what really matters."
Though debate raged for months after the 2003 publication of Carr's essay, there's little doubt now that Carr's fundamental premise about the rise of the utility-like delivery of it services over the Internet, which has taken off for everything from storage and security to once-strategic applications such as erp and crm, was spot on. Research firm Gartner Inc. predicts hosted applications known as "software as a service" will account for 25 percent of new business software deployed by 2011.
"More and more basic IT services really look like utilities supplied over the Internet," Carr observes. "And by definition, a utility, even though it can be extremely important, isn't going to provide you with a competitive advantage because the whole idea is that it's being offered to everybody."
His overall observations may be sound, yet Carr's advice doesn't take into account the number of individual companies still gaining competitive advantage from innovative use of IT, technology advocates argue.
And, according to CIO Insight's most recent annual survey, CIOS expect to focus more on strategy and innovation--in the form of new technologies and new ways to exploit information--in the years ahead, as they step back from overseeing day-to-day operations, process improvement, data quality, projects, standards and architecture issues.
Harrah's cio Tim Stanley is a case in point. Recently added to his duties was responsibility for the company's gaming operations worldwide. "That, I think, probably sends a pretty clear message that the confluence of technology is a key innovation element and something we compete on," he says.
The company's Total Rewards program, for example, uses smart cards that plug into readers in slot machines and gaming table kiosks and lets gamblers rack up points redeemable for free drinks, hotel rooms and other rewards. But not only does the system offer incentives for spending, it keeps customers satisfied and coming back for more by intervening in real time if, say, it detects an overly precipitous losing streak, by deploying a restaurant coupon that expires within the hour.
"The act and the approach to gaming itself is at a pretty interesting technology inflection point right now," Stanley says, describing the advent of server-based gaming systems. Harrah's is rolling out new high-definition touch-screen systems designed to customize the casino experience for its guests, attracting and retaining customers. Video-based machines let Harrah's adjust availability of slot-machine games based on variables including day of week, time of day and game popularity. New systems will soon allow similar personalization of the customer experience at table games. "We're pushing that envelope and advancing it forward as fast as we can," Stanley says.
Harrah's is not among the last survivors of a dying breed of forward-looking enterprises, but part of a broad class of competitors across virtually all industries that still wield information for competitive advantage, according to Accenture's Harris. The company is typical of a growing cadre of organizations that compete not by deploying unique IT systems but by using IT resources better than competitors.
"Harrah's is a wonderful example of a company that on the surface did a lot of things everyone else does," says Harris. Its Total Rewards loyalty program--a derivation of frequent-flyer programs pioneered by the airlines decades ago--has been widely copied by other casino companies, and its use of statistics to determine the odds and configurations of its games is fundamental to the gaming industry. "Why then are they so successful--why does their loyalty card have so much more penetration than everybody else's?" Harris asks. "The answer is that they simply use analytics better. And they view analytics not just as something that's done in one place or another place in the organization, but it's kind of an overall capability."
At Cemex, a 101-year-old global ready-mix concrete supplier with annual sales volume of about 70 million cubic meters, what matters is the product's perishability. The concrete begins to harden as soon as it's loaded into a truck for delivery to a construction site, so Cemex needed a way to accommodate weather and traffic delays, not to mention last-minute orders from builders. Taking a page from the handbooks of FedEx, food delivery services and ambulance dispatchers, cio Gelacio Iniguez led development of a scheduling and routing application based on dso (Dynamic Synchronization of Operations), which is combined with a GPS system installed on the company's cement-mixer trucks. Dubbed CemexNet, the system has increased truck productivity by 35 percent and cut average response time for changed orders from three hours to 20 minutes. What's more, Cemex can now charge premium prices to time-sensitive customers, and it is building brand loyalty among contractors whose costs spiral when crews wait idly for deliveries.
Cemex's ability to guarantee fast delivery is a huge competitive advantage over other companies that require a half- or full-day delivery window, Harris says. "It allows them to charge premium prices for what is the ultimate commodity product. It's hard to have more of a commodity than cement." The company grew sales more than 72 percent last year and has a three-year growth rate of nearly 30 percent for sales and more than 42 percent for earnings per share, according to Reuters.
At the opposite end of the spectrum are newer businesses--think Google Inc. and Netflix Inc.--that embrace IT innovation to the max.
"Google is building out IT infrastructure at a rate that is simply unbelievable," says Martin Reynolds, a vice president at Gartner. Google, which evolved from a popular Web search site into a major media company with a stock market value of more than $100 billion, spent $2 billion on IT infrastructure last year and plans to spend $3 billion this year, compared with about $600 million spent by rivals Yahoo and Microsoft. "It's giving Google a foundation for competitive advantage like you wouldn't believe."
Netflix continues to use information systems to keep chief competitor video rental giant Blockbuster at bay. Netflix' stock market value at about $1.5 billion remains 50 percent higher than Blockbuster's, despite the video chain's five-to-one advantage in annual revenue and its recent attempts to mimic and even leapfrog Netflix' online DVD delivery service.
Netflix uses more than low overhead, a whiz-bang Web site and logistical wizardry to keep costs down and profitability up. Its data management and analysis prowess in anticipating customer behavior and buying patterns is its not-so-secret sauce. Founded by ceo Reed Hastings, who has a Master's degree in computer science from Stanford, the company uses proprietary algorithms and software to drive its movie recommendation engine, which helps steer customers of its all-you-can-watch, free-delivery-and-return service to lower-demand DVD titles, smoothing inventory allocation. More controversial is its automated systems for prioritizing shipments, which favors more profitable infrequent-use customers over the dvd gluttons that cost the company money.
Netflix is among the growing class of data-driven organizations Accenture calls "high-performance businesses." They not only deploy IT to address specific competitive challenges, but incorporate an "analytics architecture" throughout their organizations, Harris says. An example she cites in her book: Netflix applied insights gained from data analysis when deciding what it was willing to pay for distribution rights to Favela Rising, a documentary about musicians in Rio de Janeiro slums. Executives were able to correlate the 1 million customer orders for the 2003 film, City of God, a drama set in the slums of Rio, with 500,000 customer selections of a documentary on slum life in India, Born into Brothels, to come up with its license for 250,000 rentals of Favela Rising.
Carr's thesis is that technology innovations like Netflix's data analysis are easily duplicated in an age when companies have access to many, if not all, of the same tools. Blockbuster, for its part, has tried to go Netflix one better, offering the same type of all-you-can-eat DVD rental plans for a fixed monthly fee, but allowing immediate exchanges for new movies at its video stores, eliminating the wait that Netflix customers have receiving the next title on their priority list only after a dvd is returned by mail.
Yet in May, despite adding approximately 800,000 subscribers to its Total Access online service in the first quarter, Blockbuster reported an operating loss for the quarter of $18.4 million, compared with operating income of $32.1 million in first-quarter 2006. Cash flow for the quarter was a negative $144 million, down from a positive $41 million in first-quarter 2006. Hastings at Netflix has publicly called Blockbuster's service and pricing not "economically feasible," and it appears he may be right.
In a recent survey of 450 executives in 370 companies across 35 countries and 19 industries, Accenture found a strong link between extensive and sophisticated use of analytics and sustained high performance.
"All true high performers had an analytics architecture so they could provide the clich: all the information at the right time, with the right tools," Harris says.
What makes companies like Harrah's, Netflix, Cemex and others less vulnerable to rapid duplication of their innovations, Harris says, is the way the use of information is engrained in their corporate culture.
"Their real differentiation is their organizational capability to have a steady stream of analyses that generate value-creating insights and their ability to execute on those insights," she says. "A lot of organizations have analysts who generate reports, but those reports just sit on a manager's desk."