19b
Does IT Matter?
Class 6: IT Investment & ROI
Letter to the editor responses to “IT Doesn’t Matter”
Case Summary by: Casey Cochran
Main Takeaways
All of the letter authors agree: IT does matter!
 Yes, hardware and commercialized software may become commodity, but they alone
don’t give strategic competitive advantage: what matters is the intelligent and innovative
application of information that creates customer value
 There is no correlation between IT spending levels and financial performance: two
companies can spend the same money and have similar systems, but get drastically
different results.
 Cost performance of IT continues to improve and will not slow down anytime in the near
future, if ever. Comparisons between IT and railroads (or other capital intensive
technology) compares apples to oranges.
 IT offers opportunities for cost savings, improvements in organizational structure,
products, and services, and greater customer value through improved supply-chain
management, consumer data collection, and business partnerships.
Success depends on several factors:
 IT must be well aligned with the company’s goals
 A company MUST change its practices to exploit the new technology
 Companies must continue to be innovative in their use of IT (without innovation there is
no advantage)
More in-depth Summary
This article includes various letters to the editor. I have broken down this summary by author:
Letter from John Seely Brown (Former Chief Scientist, Xerox), and John Hagel III
(Management Consultant and Author)
I. IT by itself offers no strategic advantage, yet companies can use IT to give them strategic
differentiation
II. There are 3 broad lessons regarding IT:
A. Extracting value from IT requires innovations in business practices; Companies that
insert IT without changing practices for exploiting the new technology destroy any
economic advantage.
i. Study by McKinsey Global Institute found out of 59 industries only 6 showed a
positive correlation between IT investment and productivity. In those 6, one or more
companies acted as innovators to leverage their IT capabilities (example: Walmart).
ii. Companies become locked in the view that IT only reduces transaction costs, and
ignore challenging business communication issues such as creation of meaning,
building of trust, and development and dissemination of knowledge. (Cisco has
overcome this with e-learning initiatives)
iii. Companies focus too narrowly on their own enterprise and not enough in terms of
making connections with other businesses, such as suppliers.
–1–
19b
Does IT Matter?
Class 6: IT Investment & ROI
Letter to the editor responses to “IT Doesn’t Matter”
Case Summary by: Casey Cochran
B. IT’s economic impact comes from incremental innovations rather than “big bang”
initiatives.
i. 1990’s taught us that big bang IT initiatives rarely produce expected returns
ii. Big bang is complicated and expensive, takes a long time to implement, and is highly
risky
iii. Successful implementation is done in short-term waves, which allows company the
chance to test and refine business practices, tighten feedback loops, and allows them
to deal with less opposition.
C. The strategic impact of IT investments comes from the cumulative effect of sustained
initiatives to innovate business practices in the near term.
i. Companies must continually innovate with IT over the long term, as IT’s capabilities
evolve.
ii. IT is different than steam engines, railroads, electricity, telephones. All of these
showed signs of diminishing returns as the rate of technological improvement slowed
down. IT shows no signs of slowing down, and rate of IT innovation shows no signs
of slowing down.
III. Conclusions
A. Although IT may be cheaply available, the “skills required to organize them into highvalue architectures are still in very short supply.”
B. Companies must align themselves with a long term view of the challenges and
opportunities brought about by IT (Dell and Wal-Mart are able to do this)
C. Technology vendors are partially responsible for IT being viewed as not providing
differentiation because their sales strategy has meant promising IT as a quick (although
expensive) fix, and doesn’t address IT as a tool that can help companies rework business
practices to gain productivity.
Letter from F. Warren McFarlan (Harvard B-School Professor) and Richard L. Nolan
(Harvard B-School Professor)
I. Carr makes a poor comparison between IT and railroads
A. Cost performance of IT technologies has improved 10^7, and will continue to evolve at
an exponential rate.
B. In contrast a train took 80 years to move 6 times as fast.
C. Computers produced in 2000 run 10 million times faster than 1960s computers.
D. Carr’s graph (not included in our article copy) is deceptive and would look VERY
different if he had tracked the # of MIPS or CPU cycles on the network from 1990 to
2002. If he had done this the graph would have looked like a vertical straight line, rather
than a soft curve.
II. IT allows for new entrants in competition as costs of financial transactions have
dropped from dollars to mere cents.
A. IT (specifically networks and the internet) has made company boundaries “permeable,
organic, and global in scope”
B. Economics of conducting business will continue to improve as companies increase
customer value by providing intangible information-based services (such as On-Star).
III. IT dramatically reduces communication costs
IV. Competitive edge can be gained by those companies that use the technology to
differentiate themselves by service, product feature, and cost structure.
–2–
19b
Does IT Matter?
Class 6: IT Investment & ROI
Letter to the editor responses to “IT Doesn’t Matter”
Case Summary by: Casey Cochran
A. The first mover takes a risk but will reap a temporary advantage
B. The fast follower will risk less but has to recover lost ground
V. McFarlan and Nolan recommend a CEO look at IT through 3 lenses:
A. Lens #1: Focus on improving cost savings and efficiencies
B. Lens #2: Focus on incremental improvement of organizational structure, products and
services.
C. Lens #3: Extend value to customers by focusing on strategic advantage of extending
competitive scope, partnerships, the changing rules of competition, and new IT services.
VI. Some examples of new opportunities are radio-frequency ID devices at grocery stores,
smart cards, and automated ordering systems for physicians.
Letter from Jason Hittleman (IT Director for RKA Petroleum Companies)
I. IT is becoming a commodity, but that doesn’t mean IT management is boring.
II. Competitive advantage shouldn’t be the only objective of IT; Managing costs and
assessing risk are just as important.
A. IT implementation must be aligned with the company’s Mission
B. Must focus on transforming systems and processes, not just “implementing IT”
Letter from Paul A. Strassmann (Executive Advisor for NASA, former CIO of General Foods,
Kraft, Xerox, Department of Defense, and NASA
I. Carr erroneously recommends the following:
A. Cut IT budgets and do not invest in IT innovations
B. Follow, don’t lead
C. Delay investments --- everything will be less expensive later
D. Don’t seek out opportunity, rather, manage your risks and vulnerabilities
E. Don’t trust vendors offering “innovative offerings” --- they are interested in revenue and
are therefore highly suspect.
F. Delay innovation to reduce IT costs.
II. Each of Carr’s recommendations relies on various assertions:
A. IT has lost its strategic value
i. Counter Argument: Argument is not backed by research findings
ii. Counter Argument: Examples comparing IT to capital intensive technology (railroads,
etc) are flawed because capital intensive goods exhibit diminishing marginal returns
(causing the difference between MC and MR to disappear), whereas the MC of
information goods does not rise with increased scale. IT makes it possible to
continuously reduce MC, and gain enormous profitability.
B. IT is a commodity that does not offer a competitive distinction and therefore does not
provide a competitive advantage
i. Counter Argument: Having tools doesn’t give competitive advantage, effective use
of those tools confers competitive advantage.
ii. Counter Argument: Research (some done by Strassmann himself) shows firms
operating on same technology platforms experienced various degrees of profitability.
C. Because IT is an infrastructural technology that is easily acquired and copied, it cannot
confer competitive advantage
–3–
19b
Does IT Matter?
Class 6: IT Investment & ROI
Letter to the editor responses to “IT Doesn’t Matter”
Case Summary by: Casey Cochran
i. Counter Argument: In order to gain competitive advantage costs need to go down.
IT must be made available to global community to increase the standard of living for
all (through ease of communication and lower-cost business transactions).
D. The influence of IT will henceforth be macroeconomic and not a means for competitive
differentiation
i. Counter Argument: Global expansion of labor and consumers will provide enormous
opportunities for individual firms who choose to invest in and incorporate IT.
ii. Counter Argument: IT kills bureaucracies and reduces overhead, increasing its value
in microeconomics.
E. IT is primarily a transport technology, and because it is open to everyone, it offers no
advantage
i. Counter Argument: IT is not about transporting the message; it’s about managing the
information transmitted.
ii. Counter Argument: IT allows companies to manage “the exploding accumulation of
scientific, research, customer, engineering, property, and intellectual assets.”
F. IT functions will be homogenized, and proprietary applications are therefore doomed
i. Counter Argument: Standardization is not a bad thing in this case; with a common
platform communication will flow more easily and IT staff can turn attention toward
aligning the enterprise with IT.
ii. Counter Argument: Homogeneity allows eases communication between customers
and suppliers
G. Corporations will adopt generic applications, business processes will therefore be
uniform and without competitive advantage
i. Counter Argument: Generic applications damage unique businesses, who lose out as
they try to “fit the mold.” The diversity of businesses makes it impossible to adopt
entirely generic applications.
H. Existing IT capabilities are largely sufficient for corporate needs.
i. Counter Argument: A rapidly changing business environment demands innovations in
IT capabilities – there is still a STRONG demand for more and better IT.
I. Widespread adoption of best-practices software makes IT-based advantages disappear for
everyone
i. Counter Argument: Widespread adoption of best-practices means the fastest and most
innovative will out-compete others. This speed and innovation is attained through
larger investments in IT. Increased competition leads to greater investment in IT, not
less.
J. IT is arriving at the end of its growth cycle and is reaching saturation
i. Counter Argument: There is no such evidence to support this claim; IT has shown no
signs of slowing down.
K. IT risks now exceed advantages, requiring shifts in executive attention
i. Counter Argument: Risks of system corruption, information security, and network
reliability, can only be reduced through more innovation, not less. Rather than trying
to patch up problems with existing IT, companies will need to be prepared to invest in
“another IT investment cycle” to replace flawed systems.
III. Conclusions
A. Carr is a pussy.
B. Carr’s recommendations threaten innovation
–4–
19b
Does IT Matter?
Class 6: IT Investment & ROI
Letter to the editor responses to “IT Doesn’t Matter”
Case Summary by: Casey Cochran
C. Without innovation IT offers no economic benefits to enterprises and customers
Letter from Marianne Broadbent (group VP and Gartner Fellow for Gartner), Mark
McDonald (VP and Research Director for Gartner), and Richard Hunter (VP and Gartner
Fellow for Gartner)
I. It’s not about the box; it’s about what’s inside the box: Hardware and commercialized
software don’t matter, what matters is the intelligent and innovative application of
information that creates customer value through low cost, high speed, and the right scale.
II. Advantage comes from understanding your customer through the collection and
interpretation of information, and the alignment of IT with your company. Wal-Mart and
Dell “have consistently used information better and with greater alignment to their value
proposition.”
III. Factors that affect how well IT investments are turned into real business value are:
clear decision rights, accountability for IT-related decisions, integrated business and
technology planning and execution, and the reinforcement of collaborative behaviors.
IV. Conclusion: Firms with a clear business focus, with well-informed and integrated decision
making across the organization, will benefit most from IT.
Letter from Bruce Skaistis (President, eGlobal CIO)
I. IT does matter and the following steps should be taken by organizations to ensure that
it continues to add economic value:
A. Aim IT efforts and resources at helping the business achieve its strategic objectives
B. Focus on using IT to respond quickly to changing conditions and requirements
C. Focus on optimizing the cost effectiveness and performance of IT resources
D. Focus on minimizing IT risks
Letter from Vladimir Zwass (Computer Science and MIS professor at Dickinson University)
Harrah’s, Dell, Wal-Mart are proof that IT matters. Harrah’s strategically deploys IT to gain
competitive advantage. Dell and Wal-Mart have used IT to manage supplier relationships.
All other letters repeat the same arguments already mentioned.
–5–