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by No Analyst or Consultant

Even if IT Doesn’t Matter, Informational Capabilities Still Do

Oct 15, 20049 mins
CSO and CISOData and Information Security

By Anitesh Barua

Prabhudev Konana

Andrew B. Whinston

Department of MSIS

McCombs School of Business

The University of Texas at Austin

In his influential Harvard Business Review article “IT Doesn’t Matter” (May 2003), Nicholas Carr argues that since computing resources are widely available to most firms today, they cannot be a source of competitive advantage. The argument is further bolstered by the observation that even business processes, which are often considered non-commoditizable, are built into standard software packages today. Carr’s rationale implicitly assumes that as soon as new IT becomes available, firms are able to magically deploy such IT and other resources successfully and foster business innovation in their daily operations.

The reality, however, is quite different. Firms differ widely in how they view IT, with some regarding it as wasteful spending and others as highly strategic. Companies also have drastically different organizational capabilities to assimilate new technologies and business processes. A deeper focus on how IT enables organizations and the difference between IT and other types of resources shows that while IT may be available to all or most firms today, not everybody is able to leverage it to the same extent. In fact, the focus of attention should not be on raw computing resources such as PCs, servers and networks, but on informational capabilities from IT that create value for customers and business partners and enable operational excellence.

What are informational capabilities? Broadly speaking, they involve the capture, processing and exchange of strategic and tactical information across the value chain including customers, suppliers and channel partners. Examples of informational capabilities include sharing customer order information, quality feedback, capacity and other resource related information in real-time with suppliers and other business partners, and coordinating and collaborating electronically within and outside the organization.

Informational capabilities have less to do with deploying the latest software packages and more to do with intra- and inter-organizational issues. Even when technologies are widely available, there are significant impediments to successful organizational assimilation of such technologies including learning curves, changing corporate culture and incentives, and getting business partners to adopt similar initiatives for seamless integration. Not surprisingly these capabilities are at the heart of the success of the world’s leading IT practitioners, who set technological standards and redefine the competitive landscape.

Firms who are capable of harnessing new technologies are also likely to engage in business process innovation that will separate them from the competition. Wal-Mart, Cemex, and Progressive Insurance are a few exemplars that have set performance benchmarks through superior informational capabilities in the mature, commoditized and highly competitive industries of retail, cement and insurance. Despite Wal-Mart’s unparalleled operational excellence in retail, the firm continues to push the frontiers in the use of information technologies such as radio-frequency ID (RFID) to define future retail competition. Through RFID technology, for example, Wal-Mart is attempting to create a superior informational capability that has the potential to increase productivity, and to improve operational and financial performance critical in the hyper-competitive retail sector.

Differentiating Through
Cemex, one of the world’s largest cement companies and one of Mexico’s most successful firms, uses highly streamlined processes enabled by satellite technology to schedule, dispatch and guide truckloads of premixed concrete to jobsites in a timely manner. While in theory other cement companies should be able to catch up with this application of technology, quite possibly they are not even able to grapple with the vision of such cutting-edge operations. Chances are that even if they start with similar initiatives today, it will be a long time before they can catch up with Cemex’s capabilities and mode of operation. It is the vision of how to fundamentally transform a business that enabled Cemex to develop such advanced informational capabilities in the early 1990s. Progressive Insurance, one of the most profitable consumer auto insurance underwriters, uses IT-enabled process innovation to separate itself from a crowded market. The firm has addressed numerous problems facing its industry, improving claims processing, lowering consumer uncertainty over quotes, and building better consumer risk profiles through complementary IT with partners. Progressive Insurance uses a web-based informational capability to provide consumers with comparison rates of competitors with their quotes. They offer mobile setup for claims processing through wireless informational capabilities and have superior abilities to combine and process consumer credit scores to explicate risk profiles.

Informational Capabilities

Creating informational capabilities

Informational capabilities of a firm address fundamental problems resulting from a lack of information sharing, information asymmetry and uncertainty in supply/demand-chain management (for example, bullwhip effect) and customer-relationship management (for example, customer preferences). Superior informational capabilities address the flow of information across the entire value chain, which results from recombination and reconfiguration of three complementary resources- technology, processes and readiness of business partners. Complementarity implies that simultaneous improvements in all three areas lead to higher payoffs; conversely, an isolated focus on IT may even lead to negative consequences.

An emerging case is Wal-Mart’s drive towards using RFID for efficient movement of goods in the value chain. Without the readiness of suppliers to embed RFID within their products, Wal-Mart cannot make much progress based on its own initiatives. Likewise, Wal-Mart’s pursuit of process innovation involving the capture and processing of data from RFID enhances the benefits of new IT adoption.

The ability to create informational capabilities is also about designing proper incentives within business process innovation. The importance of incentive alignment amplifies when dealing with suppliers and customers. In some companies, there is a long history of successful sharing of information, while in others, employees treat information as a private resource. Thus, incentives have to be structured keeping in mind existing culture and trust-related challenges. Firms may have to revisit how they select and evaluate suppliers in order to create information capabilities since a lack of trust and incentives may result in misuse of strategic information such as demand forecast for short-term gain. It is naïve to believe that long established culture, often driven by incentive systems, can be changed overnight.

Developing informational capabilities is also about synergy between customer-side and supplier-side initiatives. The ability to fulfill an order placed online by a customer depends largely on how the supply-chain side is structured. A tighter integration of the entire value chain will allow a firm to be accurate and reliable with its promises to customers, improving customer satisfaction and loyalty.

Obstacles galore

As illustrated above, creating information capabilities is not simply a matter of acquiring new IT. Firms are likely to face many challenges in converting IT into informational capabilities. For instance, to create information capabilities, firms need integrated systems that enable information flows from the customer-facing side of the business to the supplier side via internal systems. Yet, with so much technology and IT expertise around, most companies do not have integrated systems. Even when firms invest in ERP for integration purposes, their flexibility for process innovation often gets dramatically curtailed. Thus, integrated systems are required within a flexible architecture that supports process innovation.

Next, consider the ability to share customer order information with suppliers in real time, which is widely linked to reduced inventory levels and shorter order-fulfillment cycle time. While it is true that the technologies needed to make this a reality are abundant, how is it that a vast majority of manufacturers and their suppliers today still do not have this capability? The lack of readiness on the part of suppliers discussed earlier (possibly stemming from the lack of trust, incentives and appropriate business processes) prevents value networks from exchanging critical information in real time.

Lack of trust is a history-dependent factor that is virtually impossible to eliminate in the short run. And even if new software comes with embedded business processes, it will be years before the manufacturer and its suppliers can truly make such business processes a part of their everyday operations. Moving from forecast-based to real-time operations is not an instantaneous transformation for a firm, even if new business processes are handed over on a silver platter. Most organizations are painfully slow to fully embrace changes enabled and necessitated by new technology and processes. By such time, brand new technologies will have arrived, ushering in new ways of doing business, and the game will be afoot again.

It is not just the time it takes to adopt technology that makes a difference in how firms use IT. Development priorities in IT projects are often misplaced, further enhancing the differences between IT successes and failures. For instance, in a large-scale study of electronic business practices (forthcoming, Management Information Systems Quarterly), we found that most firms in our sample consisting of manufacturers, retailers and wholesalers/distributors have focused on technologies and processes on the customer side rather than on the supplier side of their business.

The fallacy of this approach is that while it appears intuitively appealing, developing informational capabilities on the customer side without corresponding changes on the supplier side is likely to backfire, as the ability of a firm to serve its customers is critically dependent on how well it interacts with its suppliers. In fact, by developing advanced interaction capabilities with customers, a firm is bound to raise customer expectations, but will be unlikely to meet or surpass such expectations due to poor interactions on the supplier side. Further, making changes to the supplier-facing side of a business is far more challenging than making isolated changes on the customer-facing side. This observation demonstrates that even when technologies are widely available, how to use them in the best possible way is still not common knowledge.

Computing resources are not the same as informational capabilities

So does IT still matter? Undoubtedly, computing resources get faster, cheaper and friendlier, and are indeed becoming available to more and more firms. However, such IT is just a necessity, and not sufficient to create informational capabilities that make a difference in firm performance. While the arrival of faster and more powerful technologies continues to promise ever-increasing value, we nonetheless appear to have reached a plateau in business where the ability to deploy technological innovations nimbly, strategically and across the breadth of an organization and beyond is presently more important than the technologies themselves. A firm’s ability, as a coherent entity, to use IT tools within the firm and across the value network remains the stumbling block for too many organizations and the key to success for a select handful of industry leaders.