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What types of IT investments fuel the greatest competitive advantage? Investments in business process innovation. Here's why.
Also See:
10 BPM Pitfalls To Avoid
Profiting From Better Business Processes
By Ellen Pearlman
Strategic Thinkers:
Andrew McAfee and Erik Brynjolfsson
Credentials:
McAfee is an associate professor at Harvard Business School and Brynjolfsson is the Schussel Family Professor at the MIT Sloan School of Management and the Director of MIT's Center for Digital Business
Big Idea:
Innovations in business processes leads to a competitive advantage
Article:
"Investing in the IT That Makes a Competitive Difference," published by Harvard Business Review, July-August 2008
Blog:
The Impact of IT on Business and Their Leaders, by Andrew McAfee
Research:
Additional research from Erik Brynjolfsson
Competition between companies in the U.S. has risen to unprecedented levels. Some of that can be attributed to globalization, M&A and continued R&D investments. But Andrew McAfee and Erik Brynjolfsson, the authors of the article, "Investing in the IT That Makes a Competitive Difference," say the central catalyst in this acceleration is the "massive increase in the power of IT investments."
To reach this conclusion the authors studied performance indicators for all publicly traded companies in all industries from the 1960s through 2005. The research led them to discover a "new competitive dynamic" since the mid-1990s. They found greater gaps in leaders and laggards in an industry, more concentrated markets, and more churn among rivals in a sector. This happened at a time when there was a sharp increase in IT investments; corporate IT investments surged from $3,500 spent per worker in 1994 to about $8,000 in 2005, according to the U.S. Bureau of Economic Analysis. Changes in competitive dynamics, the authors say, were most apparent in sectors that spent the most on IT.
What types of IT investments fuel the greatest competitive advantage? Investments in business process innovation. The Internet and enterprise-wide IT have made it possible for business process innovations to be replicated quickly and accurately across an entire organization. Likewise, it's made it possible for rivals to respond more quickly with their technology-enabled innovations.
One example of how this works is CVS. In 2002, the giant drug store chain found that customer satisfaction was declining. After some digging it found that 17% of prescription orders were delayed during the insurance check, which was completed after the safety review process. This often took place after customers left the store making it difficult to verify insurance information when the customer was still in the store. So they decided to move this process forward in the prescription fulfillment process. Since the change was implemented through their enterprise-wide IT system, all pharmacies had to make this change. There was no room for error or non-compliance. As a result of this process change at all of their 4,000 sites, customer satisfaction increased by 5%; a significant improvement in the highly competitive pharmacy market.
CVS's competitors can also use IT to introduce additional business process innovations. These improvements can spread quickly and encourage even more changes as time goes by. As a result of this phenomenon, the authors say, "performance spread will rise, as the most successful IT exploiters pull away from the pack. Concentration will increase, as the losers fall by the wayside." Turbulence will also intensify, "as the remaining rivals use successive IT-enabled operating-model changes to leapfrog one another over time." Sound familiar?
This, of course, puts pressure on managers to continually fuel innovative processes. What's IT's role in all this? According to the authors there are two distinct roles—"as a catalyst for innovative ideas and as an engine for delivering them."
NEXT: THE CHALLENGES I.T. FACES
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