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Studies of corporate
performance reveal a growing
link between certain kinds of
Investing in the IT That
technology investments and
intensifying competitiveness.
Makes a Competitive
Difference
by Andrew McAfee and Erik Brynjolfsson

Included with this full-text Harvard Business Review article:

1 Article Summary
The Idea in Briefthe core idea
The Idea in Practiceputting the idea to work

2 Investing in the IT That Makes a Competitive Difference

11 Further Reading
A list of related materials, with annotations to guide further
exploration of the articles ideas and applications

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Investing in the IT That Makes a Competitive
Difference

The Idea in Brief The Idea in Practice


Its not just you. It really is getting harder to The authors recommend these steps for staying ahead of rivals through IT-enabled process innovation:
outpace the other guys. Since the mid-
Deploy. Adopt a uniform technology platform Example:
1990s, competition in the U.S. economy
to be used throughout your company. U.K. grocery chain Tesco has long used
has accelerated to unprecedented levels.
customer-rewards cards to collect detailed
The engine behind this hypercompetition: Example:
data on individual purchases, to catego-
IT. Thanks to powerful tools like ERP and Before deploying a consistent platform,
rize customers, and to tailor offers. But it
CRM, backed by cheap networks, compa- Ciscos various units had nine different tools
went one step further: tracking redemption
nies are swiftly replicating business-process for checking an orders status. Each pulled
rates for direct-marketing initiatives and
innovations throughout their organizations. information from different repositories and
tweaking its processes to get better re-
The firm with the best processes (order defined key terms differently, leading to
sponses from customers. Its process inno-
fulfillment, field installation, job closing) circulation of conflicting order-status re-
vation drove its redemption rate to 20%
wins, but not for long. Rivals are striking ports around the company. The company
far above the industrys average of 2%.
back with their own IT-based process reconfigured its IT systems for consistent
innovations. execution of key business processes includ- Propagate. Use IT to replicate process innova-
ing market to sell, lead to order, quote to tions throughout your company.
To gainand keepa competitive edge in
cash, issue to resolution, forecast to build,
this environment, McAfee and Brynjolfsson Example:
idea to product, and hire to retire. The
recommend a three-step strategy: At CVS pharmacies, customer satisfaction
payoff? Strong performance over the past
was declining. The reason: Prescription or-
Deploy a consistent technology plat- few years.
ders were delayed during the insurance
form, rather than stitching together a
Innovate. Design better ways of doing work check, which was performed after custom-
jumble of legacy systems.
in your company. The best candidates for ers had left the store. So customers werent
Innovate better ways of working. innovation are processes that: immediately available to answer common
questions such as Have you changed jobs?
Propagate those process innovations Apply across a large swatch of your com-
The company decided to move the insur-
widely throughout your company. pany (such as all your stores, factories, or
ance check forward in the prescription-
COPYRIGHT 2008 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.

delivery teams)
By taking these steps, elevator-systems fulfillment process, before the drug-safety
maker Otis realized not only dramatically Produce results as soon as your new IT review, so customers would still be around
shorter sales-cycle times but higher reve- system goes live to answer questions.
nues and operating profit.
Require precise instructions (such as order The process change was embedded in
taking or delivery) the information systems that supported
operations at all 4,000 CVS pharmacies in
Can be executed the same way everywhere
the United States. Performance improved
and every time in your organization
across all the pharmacies, and customer
Can be tracked in real time so you can im- satisfaction scores rose from 86% to 91%
mediately spot and address any backsliding a dramatic difference in the aggressive
to older versions of the process pharmacy market.

page 1
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Studies of corporate performance reveal a growing link between certain
kinds of technology investments and intensifying competitiveness.

Investing in the IT That


Makes a Competitive
Difference
by Andrew McAfee and Erik Brynjolfsson

Its not just you. It really is getting harder to trated and winner-take-all markets, and more
outpace the other guys. Our recent research churn among rivals in a sector. Strikingly,
nds that since the middle of the 1990s, which this pattern closely matches the turbulent
COPYRIGHT 2008 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED.

marked the mainstream adoption of the in- creative destruction mode of capitalism
ternet and commercial enterprise software, that was rst predicted over 60 years ago by
competition within the U.S. economy has economist Joseph Schumpeter. This acceler-
accelerated to unprecedented levels. There ated competition has coincided with a sharp
are a number of possible reasons for this increase in the quantity and quality of IT
quickening, including M&A activity, the open- investments, as more organizations have
ing up of global markets, and companies con- moved to bolster (or altogether replace) their
tinuing R&D efforts. However, we found that existing operating models using the internet
a central catalyst in this shift is the massive and enterprise software. Tellingly, the changes
increase in the power of IT investments. in competitive dynamics are most apparent in
To better understand when and where IT precisely those sectors that have spent the
confers competitive advantage in todays most on information technology, even when
economy, we studied all publicly traded U.S. we controlled for other factors.
companies in all industries from the 1960s This pattern is a familiar one in markets
through 2005, looking at relevant perfor- for digitized products like computer soft-
mance indicators from each (including sales, ware and music. Those industries have long
earnings, protability, and market capitaliza- been dominated by both a winner-take-all
tion) and found some striking patterns: Since dynamic and high turbulence, as each group
the mid-1990s, a new competitive dynamic of dominant innovators is threatened by
has emergedgreater gaps between the lead- succeeding waves of innovation. Consider
ers and laggards in an industry, more concen- how quickly Google supplanted Yahoo, which

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Investing in the IT That Makes a Competitive Difference

supplanted AltaVista and others that created net and enterprise software applications
the search engine market from nothing. Or like enterprise resource planning (ERP), cus-
the relative speed with which new recording tomer relationship management (CRM), and
artists can dominate sales in a category. enterprise content management (ECM)be-
Most industries have historically been fairly came practical tools for business. Corporate in-
immune from this kind of Schumpeterian vestments in IT surged during this timefrom
competition. However, our ndings show about $3,500 spent per worker in 1994 to
that the internet and enterprise IT are now about $8,000 in 2005, according the U.S. Bu-
accelerating competition within traditional reau of Economic Analysis (BEA). (See the ex-
industries in the broader U.S. economy. Why? hibit The IT Surge.) At the same time, an-
Not because more products are becoming nual productivity growth in U.S. companies
digital but because more processes are: Just as roughly doubled, after plodding along at
a digital photo or a web-search algorithm about 1.4% for nearly 20 years. Much attention
can be endlessly replicated quickly and accu- has been paid to the connection between
rately by copying the underlying bits, a com- productivity growth and the increase in IT
panys unique business processes can now be investment. But hardly any has been directed
propagated with much higher delity across to the nature of the link between IT and
the organization by embedding it in enter- competitiveness. Thats why, with help from
prise information technology. As a result, an Harvard Business School researcher Michael
innovator with a better way of doing things Sorell and Feng Zhu, whos now an assistant
can scale up with unprecedented speed to professor at USC, we set out two years ago
dominate an industry. In response, a rival can to compare the increase in IT spending with
roll out further process innovations through- various measures of competition, focusing on
out its product lines and geographic markets three quantiable indicators: concentration,
to recapture market share. Winners can win turbulence, and performance spread.
big and fast, but not necessarily for very long. In a concentrated or winner-take-all indus-
CVS, Cisco, and Otis Elevator are among try, just a few companies account for the bulk
the many companies weve observed gaining of the market share. For our study, we fo-
a market edge by competing on technology- cused on the degree to which each industry
enabled processescarefully examining their became more or less concentrated over time.
working methods, revamping them in inter- A sector is turbulent if the sales leaders in it
esting ways, and using readily available are frequently leapfrogging one another in
enterprise software and networking tech- rank order. And nally the performance spread
nologies to spread these process changes to in an industry is large when the leaders and
far-ung locations so theyre executed the laggards differ greatly on standard perfor-
same way every time. mance measures such as return on assets,
In the following pages, well explore why prot margins, and market capitalization per
the link between technology and competition dollar of revenuethe kinds of numbers that
has become much stronger and tighter since matter a lot to senior managers and investors.
the mid-1990s, and well clarify the roles Were there economywide changes in these
Andrew McAfee (amcafee@hbs.edu) that business leaders and enterprise technolo- three measures after the mid-1990s, when IT
is an associate professor at Harvard gies should play in this new environment. spending accelerated? If so, were the changes
Business School in Boston. He is the Competing at such high speeds isnt easy, and more pronounced in industries that were
author of Mastering the Three not everyone will be able to keep up. The more IT intensivethat is, where IT made
Worlds of Information Technology senior executives who do may realize not up a larger share of all xed assets within an
(HBR November 2006) and has a blog only greatly improved business processes but industry? In a word, yes.
at andrewmcafee.org/blog. also higher market share and increased We analyzed industry data from the BEA,
Erik Brynjolfsson (erikb@mit.edu) is market value. as well as from annual company reports, and
the Schussel Family Professor at the found that average turbulence within U.S.
MIT Sloan School of Management and How Technology Has Changed industries rose sharply starting in the mid-
the director of MITs Center for Digital Competition 1990s. Furthermore, after declining in previ-
Business in Cambridge, Massachu- The mid-1990s marked a clear discontinuity in ous decades, industry concentration reversed
setts. More of the authors research is competitive dynamics and the start of a period course and began increasing around the same
available at digital.mit.edu/erik. of innovation in corporate IT, when the inter- time. Finally, the spread between the highest

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Investing in the IT That Makes a Competitive Difference

and lowest performers also increased. These competitive patterns.


changes coincided with the surge in IT in- While its true that the tool kit of corporate
vestment and the concurrent productivity IT has expanded a great deal in recent years,
rise, suggesting a fundamental change in we believe that an overabundance of new
the underlying economics of competition. technologies is not the fundamental driver of
(See the exhibit Competitive Dynamics: the change in dynamics weve documented.
Several Ways to Slice IT.) Instead, our eld research suggests that busi-
Looking more closely at the data, we found nesses entered a new era of increased compet-
that the changes in dynamics were indeed itiveness in the mid-1990s not because they
greatest in those industries that were more IT had so many IT innovations to choose from
intensivefor instance, consumer electronics but because some of these new technologies
and auto parts manufacturers. Further, we enabled improvements to companies operat-
considered the role of M&A activity, global- ing models and then made it possible to rep-
ization, and R&D spending in our analysis of licate those improvements much more widely.
the competitive landscape and found some CVS offers a great example. Theres no short-
minor correlationsbut none strong enough age of people looking to ll prescriptionsor
to override our measures (see the sidebar Is of outlets ready to handle those orders. So CVS
IT the Only Factor That Matters?). works hard to maintain a high level of cus-
One interpretation of our ndings might be tomer service. Imagine senior managements
that IT is, indeed, inducing the intensied concern, then, when surveys conducted in
competition weve documentedbut that 2002 revealed that customer satisfaction was
the change in dynamics is only temporary. declining. Further analysis uncovered a key
According to this argument, the years since problem: Some 17% of the prescription orders
the mid-1990s have seen a onetime burst of were being delayed during the insurance
innovation from IT producers, and its simply check, which was often performed after cus-
taking IT-consuming companies a while to tomers had already left the store. The team
absorb them all. Businesses will eventually decided to move the insurance check forward
gure out how to internalize all the new in the prescription fulllment process, before
tools, proponents of this theory say, and then the drug safety review, so all customers would
all industries will revert to their previous still be around to answer common questions
such as, Have you changed jobs?
This two-step process change was embed-
ded in the information systems that supported

The IT Surge pharmacy operations, thereby ensuring 100%


compliance. The transaction screen for the
The total real stock of IT hardware and software in the United States began to rise drug safety review now appeared on pharma-
dramatically in the mid-1990s. cists computers only after all the elds in the
insurance-check screen had been completed;
it was simply no longer possible to do the
Dollar value of total U.S. corporate IT stock
safety review rst. The redesigned protocol
Spending Triple
helped boost customer satisfaction scores
compared to
1995 level without compromising safetyand not just in
one store but in all of them. CVS used its
enterprise information technology to repli-
Double cate the new process throughout its 4,000-
plus retail pharmacies nationwide within a
year. Performance increased sharply, and
overall customer satisfaction scores rose from
86% to 91%a dramatic difference within the
Baseline
aggressive pharmacy market.
The enterprise IT underlying this initiative
served two key roles. It helped the process
1965 1975 1985 1995 2005 changes stick: Clerks and pharmacists couldnt
Source: U.S. Bureau of Economic Analysis fall back on their old habits once the new

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Investing in the IT That Makes a Competitive Difference

Competitive Dynamics: Several Ways to Slice IT


How does IT spending affect the nature of competition and the relative performance of companies within an industry? To
answer those questions, we focused on three indicatorsindustry concentration, turbulence, and performance spread. When
we aggregated data from all companies in all industries between 1965 and 2005, we noticed a consistent pattern: All indicators
rose markedly in the mid-1990s for high-IT industries (those in which IT accounts for a comparatively large percentage of all
xed assets), coinciding with the surge in IT spending.

Market share held by 100% Low-IT Industries Industry Concentration: After de-
top 20 largest firms cades of decline in all industries, in-
High-IT Industries dustry concentration began to rise in
80
the mid-1990s. Though the absolute
level is lower, the rate of rise is faster in
60 high-IT industries than it is for low-IT
industries.

40

20

0
1965 1975 1985 1995 2005

Average jump in 20 Turbulence: In turbulent markets,


number of places the top-selling company one year may
up or down the
rankings from not dominate the next. Todays 10th
16
previous year place company, for instance, might
catapult to number one the following
12 year. In less turbulent markets the same
companies dominate year after year
8 and theres very little movement up and
down in rank order. By this measure,
we found consistently more sales turbu-
4
lence in high-IT industriesand a
marked increase in the mid-1990s.
0

P e r c e n t a g e g ap 60% Performance Spread: The spread in


between top and gross prot margin between the com-
bottom quartiles
pany performing at the 25th percentile
in its industry and the company per-
40 forming at the 75th percentilean indi-
cation of the spread between winners
and losershas grown dramatically in
high-IT industries since the mid-1990s.
20

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Investing in the IT That Makes a Competitive Difference

protocol was embedded in the companys also have multiple stores. Before the advent
information systems. More important, it also of enterprise IT, a successful innovation by a
allowed for quick and easy propagation of manager at one store could lead to domi-
the new process to all 4,000 sitesradically nance in that managers local market. But
amplifying the economic value of the initial because no rm had a monopoly on good
innovation. Without enterprise IT, CVS could managers, other rms might win the competi-
still have tried to implement this process inno- tive battle in other local markets, reecting
vation, but it would have been much more the relative talent at these other locations.
cumbersome. Updated procedure manuals Sharing and replication of innovations (via
might have been sent to all CVS locations, or analog technologies like corporate memos,
managers may have been rotated in for train- procedures manuals, and training sessions)
ing sessions and then periodically surveyed to would be relatively slow and imperfect, and
monitor compliance. But propagating the new overall market share would change little from
process digitally accelerated and magnied its year to year.
competitive impact by vastly increasing the With the advent of enterprise IT, however,
consistency of its execution throughout the not just CVS, but its competitors have the
organization. option to deploy technology to improve their
Although modern commercial enterprise processes. Some may not exercise this option
systems are relatively recentSAPs ERP plat- because they dont believe in the power of IT.
form, for example, was introduced in 1992 Others will try and fail. Some will succeed,
by now, companies in virtually every industry and effective innovations will spread rapidly.
have adopted them. According to one esti- The rm with the best processes will win in
mate, spending on these complex platforms most or all markets. At the same time, com-
already accounted for 75% of all U.S. corpo- petitors will be able to strike back much more
rate IT investment in 2001. More recently, quickly: Instead of simply copying the rst
IT consultancy Gartner Group projected that mover, they will introduce further IT-based
worldwide enterprise software revenue would innovations, perhaps instituting digitally me-
approach $190 billion in 2008. diated outsourcing or CRM software that
To understand how this profusion of enter- identies cross- and up-selling opportunities.
prise IT is changing the broader competitive These innovations will also propagate widely,
landscape, imagine that a drugstore chain like rapidly, and accurately because they are em-
CVS has a number of rivals, most of which bedded in the IT system. Success will prompt
these companies to make bolder and more
frequent competitive moves, and customers
will switch from one company to another in
response to them.
Is IT the Only Factor That Matters? As a result, performance spread will rise, as
Previous research suggests that the concentration has increased since the the most successful IT exploiters pull away
changes weve observed in the competi- mid-1990s not because of more global from the pack. Concentration will increase, as
tive environment are not primarily competition but despite it. the losers fall by the wayside. And yet turbu-
driven by shifts in M&A activity, glo- On the other hand, Harvard professor lence will actually intensify, as the remaining
balization, or R&D spending. New York Diego Comin and his colleagues, in rivals use successive IT-enabled operating-
Universitys Lawrence White, in a paper their 2005 working paper, The Rise in model changes to leapfrog one another over
published in the Journal of Economic Firm-Level Volatility, did nd a correla- time. Thus, despite the shakeout, rivalry in
Perspectives in 2002, contended that tion between companies spending on the industry will continue to become more
M&A activity explained neither the de- R&D and changes in industry turbu- fast-paced, intense, and dynamic than it was
cline in concentration in the rst half of lence. So we reexamined our ndings, prior to the advent of enterprise technology.
the 1990s nor its rise in the second half. including R&D spending in our assess- These are exactly the changes we see reected
In a 2006 research paper published in ments, and found that it does not de- in the data.
Industrial and Corporate Change, Harvard tract from the signicance of our IT In this Schumpeterian environment, the
Business Schools Pankaj Ghemawat measures. In fact, IT appears to be value of process innovations greatly multi-
and his colleagues found that industry much more strongly correlated with the plies. This puts the onus on managers to be
concentration tends to decrease as changes in competitive dynamics than strategic about innovating and then propagat-
globalization rises, implying that R&D does. ing new ways of working.

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Investing in the IT That Makes a Competitive Difference

Competing on Digital Processes deployment: fragmentation and autonomy.


To survive, or better yet thrive, in this more Historically, regional, product, and function
competitive environment, the mantra for any managers have been given a great deal of lee-
CEO should be, Deploy, innovate, and propa- way to purchase, install, and customize IT sys-
gate: First, deploy a consistent technology tems as they see t. But bitter experience has
platform. Then separate yourself from the shown that its prohibitively time-consuming
pack by coming up with better ways of and expensive to stitch together a jumble of
working. Finally, use the platform to propa- legacy systems so they can all use common
gate these business innovations widely and data, and support and enforce standardized
reliably. In this regard, deploying IT serves processes. Even if a company invests heavily
two distinct rolesas a catalyst for innovative in standardized enterprise software for the
ideas and as an engine for delivering them. entire organization, it may not remain stan-
Each of the three steps in the mantra presents dard for long, as the software is deployed in
different and critical management challenges, ways other than it was originally intended
not least of which have to do with questions of in dozens, or even hundreds, of separate in-
centralization and autonomy. stances. When that happens, its almost
Deployment: the management challenge. certain that data, processes, customer in-
Since the mid-1990s, the commercial availabil- terfaces, and operating models will become
ity of enterprise software packages has added inconsistentthus defeating the whole com-
a new item to the list of senior managements petitive purpose of purchasing the package in
responsibilities: Determining which aspects of the rst place.
their companies operating models should be Thats what initially happened at network-
globally (or at least widely) consistent, then ing giant Cisco. In the mid-1990s, Cisco suc-
using technology to replicate them with high cessfully implemented a single ERP platform
delity. Some top teams have pounced on throughout the company. Managers were
the opportunity. Many more, however, have then given the green light to purchase and
embraced this responsibility only reluctantly, install as many applications as they wanted,
unwilling to tackle two formidable barriers to to sit on that platform. Ciscos IT department

The Elements of a Successful IT-Enabled Process


Given the costs of enterprise IT and the risks to call back to the dispatch center immedi- They are precise, rather than general
inherent in deploying it poorly, its especially ately after leaving a customers house. That guidelines, suggesting highly scripted in-
important that the change projects you enables the center to contact the customer to structions for business activities (furniture
select capitalize on ITs strengths. Consider verify his or her satisfaction and address any order taking and delivery).
the following hypothetical example of a concerns. The software tracks delivery times They are consistentexecuted the same
company that did just that. and satisfaction levels and nds the former is way everywhere, every time. Every furniture
A U.S. furniture maker sells both standard decreasing while the latter ticks upward. store uses the same method to quote lead
and custom pieces out of its 100 showrooms Recognizing its success, the company times, and deliveries are closed out the same
nationwide. Because salespeople in each of quickly embeds the new process in its enter- way day after day.
the showrooms have very little direct interac- prise software and rolls it out to the other 99 They make monitoring easy. Activities
tion with or information about the com- locations. Because customers value these and events can be observed and tracked in
panys three factories, they all quote long process innovations, the companys market real time, providing unprecedented opportu-
lead times for custom furniture, just to be on share grows nationwide. nities for testing and feedback.
the safe side. Successful IT-enabled business process They build in enforceability. The designers
To rectify this situation, the company de- improvements like this one generally have a of a new process thats embedded in IT can
velops software to integrate the activities of number of important characteristics: have great condence that it will be executed
manufacturing and sales, and tests it at one They cover a wide span. The new ways of as intended. It is often simply impossible to
location. Now salespeople can enter the working apply across a very large swath of a execute the process the old way, and even
specications of a custom order and instantly companyin this case, all stores, factories, when backsliding is possible it can be recog-
receive an accurate delivery date. and delivery teams. nized and addressed. The furniture company
The company also decides to use the soft- They produce results immediately. As could easily use the data collected during the
ware to manage customer deliveries. The de- soon as the new enterprise system goes live, delivery process to determine if all teams were
livery team for the test showroom is required so do the process changes it enables. calling in properly.

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Investing in the IT That Makes a Competitive Difference

helped the various functions, technology much fragmented as virtually nonexistent.


groups, and product lines throughout the As Harvard Business Schools F. Warren
world get their desired programs up and McFarlan and Brian J. DeLacey recounted in a
running without attempting to constrain or 2005 case study, the software applications in
second-guess their decisions. place were largely antiquated for implement-
When newly arrived CIO Brad Boston ing the critical processes of gathering cus-
assessed Ciscos IT environment in 2001, he tomer requests to install a new elevator
found that system, data, and process fragmen- system, specifying the exact conguration of
tation was an unintended consequence of the the order, and creating a nal proposal. In
companys enthusiasm for technology. There many regions, in fact, the processes were still
were, for example, nine different tools for being done entirely on paper.
checking the status of a customer order. Like Cisco, Otis took a hard look at its core
Each pulled information from different re- processes and ended up replacing old soft-
positories and dened key terms in different ware with a new enterprise technology plat-
ways. The multiple databases and fuzzy terms form the company called e*Logistics. It was
resulted in the circulation of conicting order- designed to connect sales, factory, and eld
status reports around the company. Bostons operations worldwide through the internet.
assessment also revealed that there were Otis dened four processessales, order ful-
over 50 different customer-survey tools, 15 llment, eld installation, and job closing
different business-intelligence applications, and designed e*Logistics to ensure that
and more than 200 additional IT projects improvements in the way each process was
in progress. carried out occurred uniformly, every time,
Deployment efforts heighten the tensions everywhere. Eventually, Otis realized not
present in every sizable companybetween only signicantly shorter sales-cycle times but
global consistency and local autonomy. As the higher revenues and operating prot.
Cisco example shows, however, this conict Innovation: IT-enabled opportunities. Data
often exists by default rather than by design. analytics drawn from enterprise IT applica-
Ultimately, the top teams focused efforts tions, along with collective intelligence and
to manage this tension reaped tremendous other Web 2.0 technologies, can be important
benets. aides not just in propagating ideas but also
Responding to the CIOs assessment, senior in generating them. They are certainly no
managers decided to upgrade Ciscos original replacement for brilliant insights from a line
ERP system and other key applications to manager or a eureka moment during a meet-
support standardized data and processes. The ing, but they can complement and speed the
upgrade was budgeted at $200 million over search for business process innovations.
three years. Cisco identied several key busi- UK grocery chain Tesco is one company
ness processesmarket to sell, lead to order, that employs enterprise ITs aggregation and
quote to cash, issue to resolution, forecast to analysis capabilities in this way. Like many
build, idea to product, and hire to retireand retailers around the world, it uses customer-
congured its systems to support the sub- rewards cards to collect detailed data about in-
processes involved in each stage. The software dividuals purchases, to categorize customers,
updates and the strategy discussions the and to tailor offers accordingly. But the grocer
technology engendered eventually resulted in goes a step further, tracking redemption rates
greater consistency throughout the organiza- in great detail and performing experiments to
tion and contributed to Ciscos strong per- tweak its processes to get a better response
formance over the past few years. from customers. In an industry where the
At about the same time that Cisco was average redemption rate for direct-marketing
untangling its legacy spaghetti, the leader of a initiatives is about 2%, Babson professor Tom
much older and more traditional company Davenport has noted, Tescos data analytics
was also reimagining the kinds of information help drive its rate to approximately 20%.
systems his rm would need to compete more Web 2.0 applications that bring collective
successfully. When Ari Bousbib became presi- wisdom to the fore can also uncover potential
dent of Otis in 2002, the information systems business innovations. Jim Lavoie, CEO of the
of the 149-year-old company were not so technology rm Rite-Solutions, built some-

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Investing in the IT That Makes a Competitive Difference

thing called a Mutual Fun market within the view that propagating processes using
the companys intranet that has three indices enterprise IT necessarily leads to more central-
employees can invest inSavings Bonds for ized companiesones in which most of the
ideas on saving costs, Bow Jones for ideas on important decisions are made at the top and
extending existing products, and Spazdaq for the rest of the business exists only to execute
new product concepts. Any Rite-Solutions them. Many of the choices about core business
employee can suggest a new idea in any of processes and the systems that support them
these markets. Workers can also view the were taken out of the hands of business-
prospectus of ideas, invest play money in unit leaders and regional managers, and the
them, and even sign up to complete any tasks companies change efforts appeared to lead
necessary to make those concepts reality. As to higher levels of centralization than had
Lavoie said in a recent online interview with previously existed. But the reality is more
the nonprot Business Innovation Factory: complicated.
We believe the next brilliant idea is going Even as some decisions become centralized
to come from somebody other than senior and standardized, others are pushed outward
management, and unless youre trying to from headquarters. Senior executives do play
harvest those ideas, youre not going to get a primary role in identifying and propagating
them....Thats why we give everybody an critical business processes, but line manag-
equal voice, and a game to provoke their ers and employees often end up with more
intellectual curiosity. discretion within these processes to serve cus-
Propagation: top down and bottom up. tomer needs and to apply tacit, idiosyncratic,
Part of the attraction of enterprise systems or relationship-specic information that only
has been the opportunity for management they have. To appreciate how important
to impose best practices and standardized this distinction is, consider an analogy from
procedures universally, as CVS did to great government. The process of writing a con-
advantage, and so eliminate the chaos of stitution is inherently a highly centralized
inconsistent homegrown practices. Theres activitya small group of framers makes
really no competitive advantage in having decisions on behalf of an entire population.
each department develop and use its own Its perfectly possible, and in fact common,
idiosyncratic process for inventory control, however, for that constitution to dene a
for instance, especially when best practices highly decentralized government.
already exist. At both Cisco and Otis, local managers and
While an ERP system is an obvious tool for frontline employees retained critical responsi-
propagation, other technologies are also im- bilities in their companies IT-enabled operat-
portant, and they show that innovations do ing modelsand often gained new ones.
not necessarily emanate from headquarters. After e*Logistics was put in place at Otis, for
For instance, Web 2.0 applications can help example, eld installation supervisors became
process changes emerge organically from responsible for the rst time for certifying
lower levels in an organization. Within Cisco, that a site was ready to install an elevator
for instance, a community of about 10,000 before it would be shipped. (In the old operat-
Macintosh users was dissatised with the ing model, the equipment was simply shipped
level of support they were receiving from the as soon as it was manufactured.) The new
companys central IT group. But instead of business practice was standardized through-
complaining, they created a wiki to share out the world, but it was not centralized. It
ideas about how to use their Macs more effec- actually placed more responsibility in the
tively. They posted information, les, links, hands of frontline employees.
and applications that could be edited by any Consider, too, the Spanish clothing com-
usertips and tricks that ultimately became pany Zara. It has more than 1,000 stores
huge productivity enhancers. In this case, worldwide, and they all order clothes exactly
process innovations owed through the com- the same way, using the same digital form,
pany to its great benet without central following a rigid weekly timetable for placing
management direction. orders. Most other large apparel retailers
The role of decision rights. At rst glance, rely on sophisticated forecasting algorithms,
the Cisco and Otis examples seem to support executed by computers at headquarters, to

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Investing in the IT That Makes a Competitive Difference

determine which clothes will sell in each leverage the talents of a high-performing
location and in what quantities. Headquarters manager at one location to maximize results
pushes these clothes down to stores with in thousands of sites worldwide.
virtually no input from their managers. Zaras
store managers, however, have almost com- The arrival of powerful new information
plete discretion over which clothes to order; technologies does not render obsolete all
they choose them based on local tastes and previous assumptions and insights about
immediate demand. how to do business, but it does open up new
This sharp difference between Zaras and opportunities to executives. Our research has
other retailers approaches to the same chal- led us to three conclusions: First of all, the
lenge highlights a critically important point: data show that IT has sharpened differences
We dont expect that enterprise IT will inevi- among companies instead of reducing them.
tably lead to one best way to execute core This reects the fact that while companies
processes. In fact, it can prompt a great deal have always varied widely in their ability to
of experimentation and variation, as compa- select, adopt, and exploit innovations, tech-
nies try to understand who has the most nology has accelerated and amplied these
relevant knowledge to make decisions and differences. Second, line executives matter:
where, ultimately, to site decision rights. Highly qualied vendors, consultants, and IT
departments might be necessary for the
Maximizing Return on Talent successful implementation of enterprise tech-
As corporate IT facilitates the implementation nologies themselves, but the real value comes
and monitoring of processes, the value of from the process innovations that can now
simply carrying out rote instructions will fall be delivered on those platforms. Fostering the
while the value of inventing better methods right innovations and propagating them
will rise. In some cases, this may even lead to a widely are both executive responsibilities
superstar effect, as disproportionate rewards ones that cant be delegated. Finally, the
accrue to the very best knowledge workers. competitive shakeup brought on by IT is not
Human resource policies and corporate culture nearly complete, even in the IT-intensive U.S.
will need to evolve to support this type of economy. We expect to see these altered com-
worker. An effective leader and a well-designed petitive dynamics in other countries, as well,
organization will need not only to aggressively as their IT investments grow.
seek out and identify such individuals and the It is not easy for most companies to deploy
innovations they generate but also to develop enterprise IT successfully. The technologies
and reward them appropriately. themselves are complicated to congure and
An analysis of 400 U.S. companies that Erik test, and changing peoples behavior and
Brynjolfsson published with Wharton profes- attitudes toward technology is even more
sor Lorin Hitt in 2005, found that organiza- challenging. Enterprise IT typically changes
tions successfully using IT were signicantly many jobs in major ways; this is never an easy
more aggressive in vetting new hires: They sell to either employees or line managers. As
considered more applicants. They scrutinized the performance spread, concentration, and
each one more intensively. They involved churn increase, management becomes a
senior management (not just HR) early and distinctly less comfortable professionmore
often in the interview process. After identify- unforgiving of mistakes, faster to weed out
ing top talent, these rms invested substan- low performers. Even those executives who
tially more time and money on both internal are prepared will not necessarily survive the
and external training and education. Further- inevitable turbulence. But those who do can
more, they gave their employees more discre- expect outsize rewardsat least until another
tion in how to do their jobs while linking player comes along and uses IT to propagate a
their compensation and rewardsincluding business innovation thats even better.
promotionsmore tightly to performance
using a suite of metrics that was more de- Reprint R0807J
tailed than competitors. The costs of manag- To order, see the next page
ing talent in this way may be high, but the or call 800-988-0886 or 617-783-7500
payoff increases exponentially if you can or go to www.hbr.org

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Investing in the IT That Makes a Competitive
Difference

Further Reading
ARTICLES COLLECTION
Radically Simple IT Wringing Real Value from IT, 2nd Edition
by David Upton and Bradley R. Staats by Nicholas G. Carr, Michael E. Porter, and
Harvard Business Review Diana Farrell
March 2008 HBR Article Collection
Product no. R0803J October 2008
Product no. 5135
The authors focus on the Deploy principle
for driving IT-enabled process innovations. This collection provides additional insights for
Their advice? Build a low-cost, efficient IT maximizing the value of your IT investments.
system that runs your existing business and In IT Doesnt Matter, Nicholas Carr recommends
supports new growth fueled by process inno- ways to save money on your investments. For
vations. Develop your system over time, using example, explore cheaper alternatives, such as
these principles: 1) Forge your business and open-source systems and barebones PCs. In
IT strategies togetherso your IT platform Strategy and the Internet, Michael Porter
supports your strategic objectives. 2) Strive advises using IT to integrate your virtual and
for simplicityso you can reuse elements of physical business processes. For instance,
your system and save money. 3) Invite users employ your Web site to attract customers
inputso theyll quickly embrace the new and draw them to flesh-and-blood salespeople,
system. Using these principles, Japans Shinsei who provide personalized advice and after-
Bank created an enterprise system that sup- sales service. In The Real New Economy,
ported its strategy of providing new retail Diana Farrell suggests figuring out what drives
services. Its customer base jumped from productivity most in your company (labor
50,000 in 2001 to 2+ million in 2007. efficiency? asset utilization? cost reduction?),
and sequencing your IT investments so they
The Next Revolution in Productivity
build on each other.
by Ric Merrield, Jack Calhoun, and
Dennis Stevens
Harvard Business Review
June 2008
Product no. R0806D

This article sheds further light on the Propa-


gate principle. The authors recommend using
service-oriented architecture (SOA)a way of
designing business-process technology built
on Web-based services. SOA makes it vastly
easier to share processes with other units. To
To Order take advantage of SOA, identify processes that
give you a strategic edge. Then automate
For Harvard Business Review reprints and these processes through Web-based services
subscriptions, call 800-988-0886 or anyone (different business units, customers,
617-783-7500. Go to www.hbr.org suppliers) can access. Airlines did this by en-
abling passengers to check in for flights on
For customized and quantity orders of their home computers, at airport kiosks, or
Harvard Business Review article reprints, through customer-service representatives.
call 617-783-7626, or e-mail
customizations@hbsp.harvard.edu

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