May 6, 2004
How Much Does Information Technology Matter?
N May 2003, The Harvard Business Review published an article by a former editor, Nicholas G. Carr, titled "IT Doesn't Matter."
The reaction from industry chief executives was immediate. "Hogwash!" said Steven A. Ballmer of Microsoft. "Dead wrong," said Carleton S. Fiorina of Hewlett-Packard. Craig R. Barrett of Intel responded forcefully, "IT matters a whole lot."
Now, a year later, Mr. Carr has replied to his critics with a new book, "Does IT Matter?" (Harvard Business School Press).
It's a good book. Mr. Carr lays out the simple truths of the economics of information technology in a lucid way, with cogent examples and clear analysis.
His basic point is straightforward. At one time, information technology was so expensive and so difficult to manage that companies could make large amounts of money simply by being able to make systems work. (Think I.B.M.)
Companies that lacked the skills to manage information technology effectively suffered compared with competitors that had mastered those skills. But over the years, as information technology has become cheaper and more manageable, this source of competitive advantage has been reduced and perhaps eliminated. Hiring knowledgeable employees is much easier than it used to be, and the tools to manage this technology are far more powerful than they were a few short years ago. Nowadays anybody can set up a Web server, or an accounting system, or an inventory management system.
The ability to manage technology effectively is no longer the barrier to entry it once was. Hence, it no longer serves as a source of competitive advantage.
So it is with every new technology. When electric motors became small enough to drive individual machine tools, it became possible to set up assembly lines and greatly improve productivity.
Henry Ford and his colleagues created the assembly line and other techniques of mass production in the formative days of the automobile industry and enjoyed a significant advantage over their competitors for nearly 20 years.
But by the end of the 1920's, all automobiles were made using the techniques Ford pioneered, and his competitive advantage disappeared. The playing field tipped toward General Motors, which had developed more flexible procedures that allowed it to offer frequent updates in model styles. Knowing how to run an assembly line no longer conferred a competitive advantage, because everyone knew how to do it.
According to Mr. Carr, knowing how to use information technology is like knowing how to run an assembly line. It is a utility now, like telephone service or electricity.
Asking whether information technology matters is like asking whether electricity matters. In one sense it certainly does - without electricity, commerce would grind to a halt. But skill in the management of electricity isn't particularly useful to most companies, since electricity is now so cheap and so commonplace that it can't really be a source of competitive advantage to anyone.
Profit comes from scarcity. Companies that can provide products or services that others can't provide can charge premium prices. As more and more companies are able to supply something, competition works its magic and forces prices down.
"Complexity management" can still serve as a barrier to entry in some industries. Making integrated circuits is fiendishly complex, and Mr. Barrett of Intel is certainly right when he says information technology is critical in his industry.
But as he would readily agree, it is not the whole story. A potential competitor could go out and buy the same technology that Intel uses and still fail miserably in trying to compete with it.
Even Intel doesn't know quite why some chip manufacturing processes work better than others. In the late 1990's it instituted a program called "Copy EXACTLY!," which required that new plants use equipment and procedures replicated from existing plants, right down to the color of paint on the wall.
When a technology is so complex that the only way to make things work is to copy what you already have in place, you have a competitive advantage. After all, only the incumbents have something to copy, which makes it difficult for new companies to enter the industry.
But most businesses aren't as complex as chip manufacturing. If someone makes money selling fruit-flavored iced tea, you can be sure that other competitors will soon spring up. And if one of them gains some temporary competitive advantage by building an inventory management system, the others will soon follow.
So Mr. Carr's main thesis is right. It is not information technology itself that matters, but how you use it.
But even though it is true that when information technology is turned into a commodity it no longer serves as a source of unique competitive advantage, we still face a critical question: Are we now at that point?
Standardization and commoditization of a technology don't always mean that innovation stops. Once products become commodities, they can serve as components for further innovation.
In the 19th century, American manufacturers created standardized designs for wheels, gears, pulleys, shafts and screws. As such standardized parts became widely available and could be purchased "off the shelf," there was an outpouring of invention.
Sewing machines made clothing manufacture cheaper. Farm equipment made planting and harvesting cheaper. The locomotive made transportation cheaper. By the end of the century, the groundwork had been laid for the automobile and the next wave of innovation involving power tools and mass production.
In the 19th century the real innovations came after the basic building blocks were commoditized.
Perhaps information technology is like those standardized parts. Desktop PC's, Web servers, databases and scripting languages have become components in larger, more complex systems. As these components have become more standardized, the opportunities to create innovations have multiplied.
Do such innovations offer "sustainable competitive advantage"? Maybe, maybe not. Truly sustainable competitive advantage is a high hurdle. Doing something better and cheaper than the competition is always valuable, even if the competitive advantage is only temporary.
In my view, companies cannot afford to ignore information technology, or relegate it to the back burner. Commoditizing it does not necessarily mean innovation slows. If anything, it could accelerate as more and more innovators experiment and tinker with those cheap, ubiquitous information technology commodities.
Hal R. Varian is a professor of business, economics and information management at the University of California, Berkeley.