Why IT Does Matter
HBS professors F. Warren McFarlan and Richard L. Nolan respond to the much-discussed assertion by Nicholas Carr that company investments in IT are less and less likely to produce competitive advantage.
Editor's Note— Harvard Business Review editor-at-large, Nicholas G. Carr, ignited a firestorm in the opinion piece "Why IT Doesn't Matter" published in the May 2003 issue of HBR.
Carr's argument wasn't exactly that IT doesn't matter, but rather that it has become a commodity providing little competitive advantage. As a result, he said, companies should rethink how much they pay for IT given this reduced return on investment.
HBR received a large number of positive and critical responses to Carr's piece including a letter we offer here from two professors at Harvard Business School. —Ed.
In no other area is it more important to have a sense of what you don't know than it is in IT management. The most dangerous advice to CEOs has come from people who either had no idea of what they did not know, or from those who pretended to know what they didn't. Couple not knowing that you don't know with fuzzy logic, and you have the makings of Nicholas Carr's article.
Carr's examples of railroads and electric power played out over eighty years, (not forty, as he suggests), turning society, business organizations, and lifestyles inside out. The deeper societal impacts came during the second forty years, as society's insights on how to use the technology changed. It is worth noting that although these technologies mutated significantly (for trains, it meant moving from fifteen miles an hour to eighty miles an hour), the mutation was on a totally different and much smaller scale than IT's.
The cost performance of IT technologies over the first forty years changed by roughly 107, and for the foreseeable future will continue to evolve at the same rate. That is in sharp contrast to a train, which after eighty years moved six times faster than it had in the earlier period. This is impressive, but not nearly as dramatic as a computer produced in 2000, which runs 10 million times faster than a 1960s' computer.
Carr's graph on information technology stands as a subject lesson for Darrell Huff's well-known book How to Lie with Statistics. Carr's chart would look very different if he had tracked the number of MIPS or CPU cycles on the network from 1990 to 2002. Even using a log scale on the vertical axis would be barely enough to tilt a vertical straight line enough to create something resembling the curves of the other two schematics in Carr's article. With this explosion of cost effectiveness has come the ability to do things truly differently. American Hospital Supply's distribution software and American Airlines' SABRE reservation system are examples of victories in past technologies. The firms were the first in their industries to see technology's transforming potential, they had the courage to invest in its performance, and they used it to gain a significant competitive edge. It is naive to assume that other sharply discontinuous technologies will not offer similar transformation opportunities in the future.
In our view, the most important thing that the CEO and senior management should understand about IT is its associated economics. Driven by Moore's Law, those evolving economics have enabled every industry's transaction costs to decrease continually, resulting in new economics for the firm and creating the feasibility of products and services not possible in the past. The economics of financial transactions have continually dropped from dollars to cents. New entrants have joined many industries and have focused on taking strategic advantage of IT's associated economics. Company boundaries have become permeable, organic, and global in scope through IT networks and the Internet.
The most important thing that the CEO and senior management should understand about IT is its associated economics.
As the pace of doing business increases, the CEO and senior management team must be aware of how IT can change rules and assumptions about competition. The economics of conducting business will likewise continue to improve—providing opportunities for businesses to expand the customer value proposition by providing more intangible information-based services. For example, the automobile value proposition continues to expand with technology that continuously senses road conditions and applies the appropriate wheel traction and suspension system pressures.
CEO and senior management must understand that historical constraints of every kind continue to be knocked off IT because it is a "universal information-processing machine." Before e-mail and the Internet, the cost of communications was seen as limiting IT's wider use. Packet switching was invented as a way to digitize voice, data, and video in a matter that enabled digital computers (and its associated economics) to communicate, and the cost of communication sharply and suddenly dropped. Similar situations have transpired with the advent of digitized photography, use of radio frequencies for various handheld IT appliances, and the development of such products as elevators that call in to the service center or to a computer that automatically dispatches collective software or people when a part or system is about to fail. Often, only the senior management team's imagination limits new IT-based opportunities.
Our research suggests the following:
New technologies will continue to give companies the chance to differentiate themselves by service, product feature, and cost structure for some time to come. The first mover takes a risk and gains a temporary advantage (longer if there are follow-on possibilities). The fast follower is up against less risk but also has to recover lost ground. Charles Schwab versus Merrill Lynch and Walgreens versus CVS are examples of this playing out over the past decade. Our advice to the CEO is to look at IT use through several different lenses. One lens should be focused on improving cost savings and efficiencies. Another should be focused on the incremental improvement of organizational structure, products, and services. Still another should be focused on the creation of strategic advantage through extending competitive scope, partnerships (customers and other parties), the changing of the rules of competition, and the provision of new IT-based services to extend the customer value proposition.
Unless nurtured and evolved, IT-enabled competitive applications, like many competitive advantages, don't endure. Even historic strategic systems like American Hospital Supply's (after a decade of financial malnourishment) may wind up turning into a strategic liability. Others, however, like American Airlines' SABRE have shown extraordinary robustness and have permitted the survival of otherwise doomed organizations.
Evaluating these opportunities as well as thinking through their implications and timing, is vitally important, nonboring work. The new technologies will allow new things to be transformed in nonlinear ways. Radio-frequency identification devices for grocery stores, smart cards, and automated ordering systems for hospital physicians are all examples of new process targets that technologies will soon address. In the more distant future we will see the improved creation of drugs and treatments through the ability to rapidly and more deeply analyze huge databases. Understanding the potential and then deciding when the time is right to seize these transformative applications will be neither routine nor boring for the CEO or CIO.
Grid computing, standardization of components, and open systems, far from stifling differentiation, provide a stable platform to build on and offer new ways of differentiating, either by cost, structure, product, or service. Just as literacy stimulated innovation, so do open systems and grids. Outsourcing the commodity infrastructure is a great way to control costs, build competence, and free up resources, which can be used to combine data bits in creative ways to add value. Relatively bulletproof operational reliability will be a key part of the price of success. Back-office or server farms, help desks, and network operations will be outsourced to specialists to attain this reliability (at rock-bottom costs). Packages like SAP further help remove commodity maintenance activities and allow firms to better analyze customer information and provide service at the sharp end. The package of skills needed inside an organization is changing very fast for competition in the information age.
The jobs of the CTO and CIO are and will be of unparalleled importance in the decades ahead. Max Hopper of American Airlines and Paul Strassmann of Kraft and NASA are not the last of a dying breed of dinosaurs, but prototypes of the leadership skills needed for survival.
If you take 1955 (with the IBM 701) as the start date and use eighty years as a technology cycle, 2035 may not be far off the mark for playing much of this out. Even then, the special recombinant nature of this technology makes us uncomfortable calling an end date. We wish Carr were right, because everyone's golf handicap could then improve. Unfortunately, the evidence is all to the contrary.
Excerpted with permission from "Does IT Matter? An HBR Debate," Harvard Business Review Online, June 2003.