Elevating IT as an Essential Component of Business Strategy -- A joint project of Knowledge@Wharton and Microsoft
Elevating IT as an Essential Component of Business Strategy A joint project of Knowledge@Wharton and Microsoft
Greg LeMond could have been speaking for every business executive when, commenting on his third Tour de France victory, he said, “It doesn’t get any easier. You just go faster.”[i] Today, all realms of business are spinning faster — product cycles, global competition, political and regulatory changes, customer tastes and expectations —contributing to an increasingly complex business environment that challenges even the most successful companies.
Despite the need to sense and react more nimbly than ever before, few companies are keeping pace with the changes, and instead are missing opportunities to build shareholder value. Rather than continually sharpening their competitive edge, many companies fall victim to what James G. March of Stanford calls the “competency trap” — an unwillingness to change what has been successful in the past. Continuing at the same pace usually means being left behind.
Of course, it’s far easier to recognize the need to make changes than to actually alter tried-and-true business practices. But businesses must be able to accommodate change in their pursuit of enduring growth and prosperity. Information technology, as a primary driver of market changes, must become a tool to help businesses achieve this flexibility.
The main assertion of this series, “Realizing the Potential of IT,” is that business flexibility and sustained performance is enabled through connected, malleable information systems that accommodate and drive the changing priorities of the business. We live in an information age, and information technology must be part of any organization’s equation for long-term competitiveness. Only by recognizing IT as an implement of strategy, and leveraging it as part of every top-level business initiative, will organizations be prepared to perceive and seize opportunities as they emerge in the marketplace.
Recognizing the Strategic Value of Information Technology All businesses rely on information systems to a greater or lesser degree. From human resources and finance to manufacturing and e-commerce, these systems are essential for running companies and bringing products and services to market.
Unfortunately, while these systems may be highly efficient, they were rarely designed to extend beyond their original focus. For an organization to be flexible, its information systems must be flexible — at least able to integrate and share data readily with other applications. In today’s climate, the lack of IT flexibility can actually hinder an organization’s ability to adjust its business practices and respond to changing market factors.
Swapping out a system is by no means easy. Business applications and processes become entrenched, and the switching cost of implementing a new system or upgrading an existing one — and adopting new processes based on the new solution — can be prohibitive.
And there’s the rub. To truly serve an organization, IT systems should adapt to business demands, rather than forcing the business to conform to the technology. This is possible when IT priorities align with the core objectives of the business. IT must serve not only as a mechanism for efficient operations, but as an infrastructure that creates the conditions for identifying and acting on new market opportunities. Wharton professors Harbir Singh, Robert E. Mittelstaedt and Eric Clemons, co-authors of On Building Corporate Value (2002), argue that the creative application of IT, aligned as a component of business strategy, can be a key enabling factor in offering nimble, creative companies new ways to grow and cut costs. “When it is used right, [IT] enables companies to extend the impact of their own operations in dramatic ways. It opens up opportunities and possibilities that would either have not existed — or existed in a very limited way.”
In other words, technology must go further. It must be put in the service of business agility. It must be an integrated component of every strategy and a consideration in every business decision that impacts a company’s bottom line.
MIT professors Peter Weill and Jeanne Ross have shown that “Companies that manage their IT investments most successfully generate returns that are as much as 40 percent higher than those of their competitors.” Weill and Ross point out that while a number of factors distinguish top-performing companies, “the most important is that senior managers take a leadership role in … key IT decisions.”[ii] Stated slightly differently, companies that view IT as a strategic asset seem to be better prepared to make IT investments that meet the unique physics of their business. This translates into investment decisions that distinguish between core technologies that are a source of competitive advantage and commodity technology investments that can be outsourced.
IT as a Force for Change Increasingly, the information network is taking center stage as organizations analyze the relative value of their internal investments. The IT platform is increasingly seen as the primary mechanism for change — the one thing able to integrate and mobilize employees, processes, multiple sources of information and external relationships with customers and suppliers. In this light, companies are reassessing their approach to IT investment — reviewing their core IT-enabled competencies versus commoditized services — and more intelligently choosing streamlined IT investment that creates business value and competitive differentiation versus outsourcing and its promise of predictable MIS costs.
Regardless of the mix of internal and outsourced technologies, flexible information systems must be connected. Today we can connect business systems using integration technologies such as Web services. Web services actually change the way IT works, and therefore it changes the way business works, fostering a competitive advantage.
JetBlue, an upstart low-cost airline — and one of the few profitable carriers today, typifies the strategy of configuring its “value drivers” — its people, processes, relationships and information, to maximize flexibility and offset risk. Early on, JetBlue management recognized economies of scale in standardization around a single airplane body, the Airbus A320, and the streamlined maintenance and training this decision would enable. JetBlue vice president and CIO Jeff Cohen, saw equal benefit in technology standardization and promised to make JetBlue “the most technologically advanced airline in the sky.” Based on Microsoft technology, Cohen created “the paperless cockpit,” in which pilots rely on rock-solid technology rather than printed manuals and pilot logs for information and support. Working alongside business managers, Cohen’s organization also designed JetBlue’s “on-plane weight-and-balance” program to cut overhead costs and drive fuel economy; and it eliminated $1 million per year in third-party shipping costs by systematizing JetBlue’s package delivery and tracking system and relying on its own planes and existing routes to do the job.
“We’ve worked hard to obtain and maintain a culture that gives our crew members the feeling that they should go out and do the best for themselves and for our customers,” says Cohen. To that end, JetBlue deploys technology to both enhance customer satisfaction and keep the company at the forefront of the airline industry. In an industry that has already posted over $2 billion in losses for the first quarter of 2003, JetBlue’s business and IT leaders have fused business and technology to enable real-time information and flexibility, and unrivaled profitability — to the tune of 98 percent revenue growth for 2002, and 34 percent profit growth in the first quarter of 2003, to $17.6 million. With continued growth on the horizon, the company sees IT as one of the key resources it must rely on to further hone its competitive edge.
GE Capital Information Technology Solutions Europe (GECITS), and Avanade are others who also have embraced IT at the highest levels to improve business performance. GECITS upgraded its business’ infrastructure and consolidated all of its European operations under a single service to achieve centralized administration, increased security, reduced downtime and support costs, and greater control over individual desktops. The business demanded better efficiency and flexibility, and IT delivered.[iii] Similarly, Avanade used an advanced technology infrastructure to ensure that its mobile workforce remained connected and productive — lowering administrative overhead by 80 percent by providing remote access to mission-critical applications to its 17 Development Centers worldwide.[iv] What’s clear is that agile organizations such as these are using technology to manage change — to operate efficiently and to build the internal and external strength and “awareness” necessary to compete and win. They approach technology investment as a key business differentiator, when old modes of differentiation have been commoditized. And they rely on IT to support and drive new services, expose new markets and generate new revenue streams.
Leveraging IT for Survival and Success The dot-com explosion taught everyone a lesson about where to look for sources of advantage. Few companies now would contest the return to business fundamentals and a renewed focus on core competencies.
“The only sustainable advantage a firm has comes from what it collectively knows, how efficiently it uses what it knows, and how readily it acquires and uses new knowledge,” say Thomas Davenport and Laurence Prusak, authors of Working Knowledge: How Organizations Manage What They Know “Unlike material assets, which decrease as they are used, knowledge assets increase with use. Ideas breed new ideas, and shared knowledge stays with the giver while it enriches the receiver.”[v]
Successful companies are using technology to minimize lost revenues and maximize the inflow of new ideas while building competitive advantage. Far from ignoring or outsourcing IT, they are they are removing the bottlenecks from limited server processing power by distributing computing across the network through use of smart devices — a new generation of connected applications that will power PCs, mobile and embedded devices, and allow for more personal user experiences — and Web services.
Using Web services, discrete units of code that can be called across platforms and operating systems regardless of the programming language, companies are able to integrate data, processes and systems without costly overhauls. The result is a flexible data infrastructure that provides real-time access to information, and improved collaboration and knowledge management. They are rethinking enterprise resource planning (ERP), customer relationship management (CRM) and enterprise application integration (EAI) programs, and deploying mobility solutions based on Microsoft’s .NET technology as well as competing products. And they are gaining much needed skills and prowess to remain competitive and to survive a down market.
Companies such as Northrop Grumman Newport News (NGNN) have turned to XML-based solutions to empower their employees to get and act on information when and where they need it, leading to better decisions. And they are customizing it to give customers more personal, tailored service, letting them interact with their business anytime, any place — on the device of their choice. Others, such as Bear Stearns, are turning knowledge into business value by exposing their own systems to customers in real time.
In Northrop Grumman’s case, the company created a wholly-owned subsidiary, Naptheon, to help shipbuilding and repair companies use IT to solve business problems. IT was central to Naptheon’s charter, and something that NGNN saw as a means to compete and gain market share. Instead of abdicating their intellectual property and losing touch with their core business, NGNN and Naptheon executives leveraged Microsoft .NET technology to build ShipRepair.NET, an internal application that leveraged NNGN’s existing knowledge and systems, and which now helps the company create applications that support complex project management through Web services. Today, the company easily and quickly extends those applications to mobile wireless devices.[vi]
To help its developers quickly and easily develop richer applications for the company, its clients and its partners, Bear Stearns used IT to expose its existing stock order processing functionality as a set of Web services. As a result, these services have greatly improved their applications’ effectiveness in helping employees conduct their daily business and creating new opportunities for customers and partners. As a measure of success, the company has exceeded its performance goals and increased developer productivity, while saving an estimated $250,000 over other solutions.[vii]
On Being Agile Clearly, businesses across the globe have unique challenges that require smart technology strategies to support their objectives and enhance business agility. With this union of business strategy and information technology come necessary changes to traditional business structures. In linking IT to the broader objective of business success, the agile organization must then build a business ecosystem that incorporates IT, enabling information flow across the enterprise and among its partners and customers. “It doesn’t get any easier. You just go faster” is a wake up call to business. By taking a broader approach to technology in business, the agile organization sets itself up to surge ahead of competitors on numerous levels.
Being connected enables companies to more quickly identify and respond to market changes, to share knowledge with customers and suppliers, and to achieve economies of scale across operating units. If companies are not doing everything in their power to streamline their business operations, then they will undoubtedly lose their edge and slip back into the pack.
We look forward to continuing the discussion, and welcome your comments. Please write to us at: [email protected].