Daily Archives: August 16, 2008

Supply Chain IT Can Make A Competitive Difference

Since the mid-1990s, a new competitive dynamic has emerged — greater gaps between the leaders and laggards in an industry, more concentrated and winner-take-all markets, and more churn among rivals in a sector. Strikingly, this pattern closely matches the turbulent “creative destruction” mode of capitalism that was first predicted over 60 years ago by economist Joseph Schumpeter. This accelerated competition has coincided with a sharp increase in the quantity and quality of IT investments, as more organizations have moved to bolster (or altogether replace) their existing operating models using the internet and enterprise software.

In addition, the internet andenterprise IT are now accelerating competition within traditional industries in the broader U.S. economy. Why? Not because more products arebecoming digital but because more processes are: Just as a digital photo or a web-search algorithm can be endlessly replicated quickly and accuratelyby copying the underlying bits, a company’s unique business processes can now be propagated with much higher fidelity across the organization byembedding it in enterprise information technology. As a result, an innovator with a better way of doing things can scale up with unprecedented speed to dominate an industry. In response, a rival can roll out further process innovations throughout its product lines and geographic markets to recapture market share. Winners can win big and fast, but not necessarily for very long. Thus conclude Andrew McAfee and Erik Brynjolfsson in their feature article in the Harvard Business Review on how Investing in IT That Makes a Competitive Difference can intensify competitiveness.

The article described a number of findings from research conducted by the authors along with Michael Sorell and Feng Zhu on the link between IT and competitiveness, and some of the findings were surprising. Not surprising was the fact that the average turbulence has been sharply increasing across numerous industries since the mid-1990’s or that industry concentration began increasing again around the same time. What was surprising was that the researchers also considered the role of M&A activity, globalization, and R&D spending in their analysis of the competitive landscape and, although they found some minor correlations, none came close to the impact of IT.

So, why the correlation between increased IT investment and competitiveness? The researchers posit that it was not the breadth of IT innovation that led to the improvement but because some of these newtechnologies enabled improvements to companies’ operating models and then made it possible to replicate those improvements much more widely. How does this happen? Consider the example given by the authors:

Imagine that a drugstore chain … has a number of rivals, most of which also have multiple stores. Before the advent of enterprise IT, a successful innovation by a manager at one store could lead to dominance in that manager’s local market. But because no firm had a monopoly on good managers, other firms might win the competitive battle in other local markets, reflecting the relative talent at these other locations. Sharing and replication of innovations (via analog technologies like corporate memos, procedures manuals, and training sessions) would be relatively slow and imperfect, and overall market share would change little from year to year.

With the advent of enterprise IT, however, not just [one drugstore chain], but its competitors [also] have the option to deploy technology to improve their processes. Some may not exercise this option because they don’t believe in the power of IT. Others will try and fail. Some will succeed, and effective innovations will spread rapidly. The firm with the best processes will win in most or all markets. At the same time, competitors will be able to strike back much more quickly: Instead of simply copying the first mover, they will introduce further IT-based innovations, perhaps instituting digitally mediated outsourcing or CRM software that identifies cross- and up-selling opportunities. These innovations will also propagate widely, rapidly, and accurately because they are embedded in the IT system. Success will prompt these companies to make bolder and more frequent competitive moves, and customers will switch from one company to another in response to them.

As a result, 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. And yet turbulence will actually intensify, as the remaining rivals use successive IT-enabled operating-model changes to leapfrog one another over time. Thus, despite the shakeout, rivalry in the industry will continue to become more fast-paced, intense, and dynamic than it was prior to the advent of enterprise technology.

In other words, technology innovation leads to business innovation, and business innovation gets results. So invest in modern supply chain systems — like sourcing, procurement, and global trade — and watch your competitiveness rise.