Why Business IT Innovation is so Difficult

If done right, IT has the potential to completely transform business by flattening hierarchies, shrinking supply chains, and speeding communications, says professor Kristina Steffenson McElheran. Why, then, do so many companies get it wrong?
by Maggie Starvish

Harvard Business School professor Kristina Steffenson McElheran studies the effect of information technology on business process innovation. It's a topic, she is sometimes told, that is, well, less than exciting.

"I've had people say to me that studying IT use is like studying plumbing—every firm has it, so why is it interesting?" she says. "I think it's pretty sexy plumbing."

“There's a tremendous gap between the most IT-savvy firms and the IT laggards”

McElheran believes IT has the potential to completely transform the supply side of business by flattening hierarchies, shrinking supply chains, and speeding communications. The result: "People can spend more time thinking up new products and servicing customers, and less time checking boxes."

To get there, most firms must be willing to engage in radical change and completely rethink how they collaborate and compete. Few companies, especially larger ones, have done so. Those that have done the heavy IT and organizational lifting, such as Walmart, reap serious dividends.

"There's a tremendous gap between the most IT-savvy firms and the IT laggards," says McElheran, the Lumry Family Assistant Professor and a member of the Technology and Operations Management Unit at HBS. "The longer we take to figure this out, the more likely we're going to have a few of the best firms pulling way ahead based on this competitive advantage."

More Likely To Go Radical

In her research, McElheran explored the characteristics of firms that engage in radical business process innovation versus incremental change. It's widely understood that when it comes to product innovation, market-leading firms are often more likely than laggards to pursue product improvements in a very incremental way—a practice that protects short-term competitive advantage but that makes firms vulnerable to innovative upstarts over the long haul.

Would this trend also hold true for companies engaging in business processs innovation? McElheran wondered—a question not much studied by researchers.

To find out, she drew on 1999 US Census survey data of manufacturing firms: approximately 35,000 plants in 86 different manufacturing industries. The sheer amount of data allowed her to test for incremental versus radical innovation among firms in a unique way. For incremental change, McElheran looked at a firm's "e-buying" activities to serve as a proxy. For radical change, "e-selling" was the stand-in.

E-buying—electronically procuring goods like pencils, staples, and toilet paper—is a simpler process, and less risky to adopt. E-selling entails a much more complex group of products and requires cross-departmental interaction, as well as an important group outside the firm's walls: customers. It is riskier economically and organizationally to adopt.

"The thing that struck me right away was that e-buying and e-selling for the firms in my sample were fundamentally different activities," McElheran says. She was also struck by how the reality of e-business innovation portrayed in the census data differed from what she had read in the press. "It was clear that firms were actually doing far less of it than you would think if you read the newspaper."

The e-business that was being done among survey participants matched the original theory: larger firms, market leaders, were more likely to adopt the incremental change of e-buying, while smaller firms were more likely to adopt the radical change of e-selling.

The reason, however, was surprising. E-selling is harder to adopt because it's a complicated process, which is naturally made more complex when it has to be implemented across a large, distributed organization.

"Large firms definitely had some work to do to adopt," says McElheran. "But it seems that the best firms had practices in place to deal with the complexity. The real stumbling block was that their customers had to meet them in the process. Even if a given manufacturer might be ready, if its customers weren't, the [firm] couldn't make the jump."

Full results of the research are described in her working paper Do Market Leaders Lead in Business Process Innovation? The Case(s) of E-Business Adoption.

Missing Ingredients

So what should firms do to upgrade their IT-based business processes? Unfortunately, there is no easy answer.

"It's not just about writing a check to an IT vendor," McElheran explains. "There's a complicated assembly of processes and people and organizational structures and supply chain partners that really have to come together."

The first step, she says, is "treating it as an innovative process. Understand that there's uncertainty and put processes in place to manage it." When firms invest in a new product, for example, they usually have a strategy in place in case it bombs. "The same should go for process innovation," says McElheran.

Other ingredients:

  • Organizational understanding. A deep understanding of how the company functions and competes is essential, because IT needs to support essential firm processes, rather than vice versa.
  • Executive backing. Support at the very highest levels of the organization is crucial. "Don't treat it like plumbing," says McElheran. "I don't know a CEO who is deeply concerned about the firm's sewer system."
  • Long-term horizon. Transforming business processes takes time, so companies need to be willing to live in the unknown rather than going for the quick fix. "When you talk to people on the front lines, they know this is complicated and hard," she says.

Communication Breakdown

Investing in technology change without organizational change won't work either. For the Harvard Business Review article The Short Life of Online Sales Leads, McElheran and coauthors James B. Oldroyd and David Elkington measured how long 2,241 small- to medium-sized US companies took to respond to an online sales lead.

The majority—37 percent—did so within 1 hour; 16 percent responded between 1 and 24 hours; and 24 percent took more than 24 hours. Shockingly, 23 percent never responded at all.

A companion study shows that companies that respond to queries from potential customers within an hour are 7 times more likely to connect with a key decision maker than those that wait more than an hour, and 60 times more likely than those that wait more than 24 hours.

“Why do firms that have the IT capability on paper not have the execution?”

"It seems absolutely crazy," McElheran says. "These are the firms that already know they want to be fast. They've already invested in IT to make them faster. Why do firms that have the IT capability on paper not have the execution?"

Further research revealed what may be missing. "It has to do with the complementary organizational practices with which the IT has been deployed," she says. Deep hierarchical structures with long lines of communication muddy the signal.

"We talked to this manager whose organization is completely flat," McElheran explains. "He is on top of everything in that organization. He knows all the people. He oversees their training. He looks at the software every day. He runs experiments. He customized all the reports to tell him exactly what he needs to know for his particular business…and they are lightning-fast."

It would of course be impossible for one manager to do all that in a larger organization, and McElheran can't say for sure which part matters most. "Is it the flatness of the organization? Is it a process where the IT output is evaluated every day? Is it because the company invested heavily in customizing the IT?" Future research is aimed at answering these questions.

The Competitive Advantage

Despite the hard work involved, there are companies that get it right. "Walmart has done tremendously well," McElheran says. "One of the reasons Walmart has been able to compete so well on prices is that tremendous cost has been taken out of its supply chain and operations by using IT to keep inventory low but still not stock out."

That Walmart is secretive about how it manages to so finely coordinate its enormous global supply network is telling. "They're keeping it really hidden because it's a source of competitive advantage for the company."

McElheran looks forward to further exploration.

"I'm still at the very beginning of a very long and interesting journey," she says. "It'd be sad if I had all the answers right now."

About the Author

Maggie Starvish is a writer based in Somerville, Massachusetts.
    • Audrey Kadis
    Have you done any research on the implementation of innovative technology in nonprofits? It would be interesting to know what characteristics predict the willingness of a nonprofit organization to embrace change. I recently left a mid-size nonprofit in which many people were very resistant to any type of change, especially technological change. I wonder if this is the norm or there is a broad distribution as in the for-profit world.
    • Branka Tokic
    This is great article! As are the questions that you ask in your research.
    I used to work for IT business solutions implementator, and now I'm on the other side, working in supply chain planning of FMCG manufacturer company. What you described here is very realistic and accurate view on the subject that is so often misstreated by lots of trendy hype.
    • Jagdish Amane
    • AGM (Corp IT), Tata Motors Ltd. India
    I am very thankful to Kristina for this article. I am pleasantly surprised that this area is under active research. Carrying a strong conviction that IT has tremendous potential to transform Manufacturing & Supply Chain, I was always wondering why the Mfg. leaders are unable to see the value it in. The more intriguing question always was - why all the leaders agree in principle on IT enablement and extend all the support to IT initiatives in Conference rooms, but don't dare take steps for associated change management on ground. All the support effectively and factually ends up as lip service. Couple of my observations and thought contribution (limited to Mfg. industry alone)...
    1. IT credibility: IT is still be build credibility with Mfg. fraternity. This is on two counts -
    a. (Lack of) end to end solutioning. IT industry fragments itself in their approach as H/w and S/w. There is lack of knowledgeable system integrators of IT and automation. I guess IT industry and solutions have long way to go to mature. They needs to make thoughtful investments and hard work to create plug and play.
    b. (Lack of) Courage to upset the cart for radical business processes. This clearly is on mfg. leadership. In Operations, probably they have grown comfortable with "if it ain't broke, don't touch it". They need to do their bit on restructuring organizations and also help and direct Operation's team to do their bit on process revamp. Also not sure why mfg. can accept solutions catering for 80% of the business scenarios (which have straight forward logic) instead of harping on getting all the scenarios converted into logic, which they are not able to jot down. They expect their gut of responding to a business scenario to be converted into an executable logic.

    Million dollar question remains - what are the solutions to bridge this gap at the earliest? It is not only matter of financial gains for an organization but the benefits of bringing efficiency overall economy at large.
    • Arsalan Khan
    • N/A, N/A
    Interesting article. Here are some other ingredients to think about:

    -- End-to-end collaborative and holistic approach to problem-solving.
    -- Full implementation of projects that will improve operations even if they were from previous executives.
    -- Always have a People-Plan which entails post-implementation training and re-assignments.

    Arsalan Khan
    • Anonymous
    This is possibly one of the most common business problems thrown at consultants and change managers - how will you help us ensure the technology you propose is adopted and benefits realized? I have the following two questions regarding success in technology adoption efforts. First - and intuitively appealing - is the hypotheses that the degree of adoption (and hence benefits realized) is directly proportional to the criticality of adopting the new IT based processes to the core business operations of the company - i.e. - where there is no alternative or no real choice. Hence the greater likelihood of core ERP module implementations succeeding than those for B2B CRM or e-selling - where there are alternatives of using non-package based processes. The second, related question - is adoption smoother when such less critical applications are merely "eased-in" to the day to day working of the company, with senior management be
    ginning to use them after they become available, and referring to them in meetings, thus setting up the expectation that 'its no big deal, we dont need to set up major change programs and communication programs and coax users to use it'. In other words, "dont ram it down the user's throats, and they will probhably follow you in testing out the utility and adopting the process if they see you doing it".
    • Sameer Punse
    • Manager
    Some times their is poor implementation from IT, they just convert the manual process as it is, where as what is required is a radical change. Also the cost needs to be taken into consideration, a company can have a RFID system to keep accurate track of inventory, but the cost of implementing the solution would make them look for some alternative solution which might be less accurate. Thus even after implementing a IT solution they have to deal with the constraints of the new system and therefore are not able to reap the complete benefits of IT.