N. Venkatraman's talk on the topic of information technology and corporate strategy was one of the highest rated of the year. Venkatraman wowed the audience with a talk about corporate strategy that was about technology only in the broadest sense. Mention of Moore's Law (chips speed doubles every 18 months without increasing in cost) was made, but only to illustrate that this pace of hyper-change applies to non-technological spheres as well.
The session took place on a gorgeous day in April, which explained some of the empty seats. More likely, it pointed to a problem strategic thinkers must cope with.
On the one hand, it's impossible to talk about changes in the way organizations succeed in 1998 without bringing in information technology.
On the other hand, senior managers must overcome reservations they have about computers, networks, and the like. Most managers hail from very different skill sets (finance, marketing) than IT professionals. Since those have been the skills that lead managers to the top, managers understandably feel superior to technicians in the trenches, Vernkatraman said.
He offered this piece of advice for technophobic executives: Get over it. You don't have to learn to program in C++ to understand that networks and computers are changing business models everywhere you look.
So settle in, strap yourself in, and get set for the ride you will have no trouble understanding -- a breakneck tour of the new business model.
Did the Nestle or Maxwell House brands imagine that upstart Starbucks, a new entrant to the coffee business, would be having them for breakfast?
What can be outsourced? Makers of KitKat know how important wrapping is. But the actual making of the candy bar wrappers can be done outside, with KitKat guarding the design process electronically.
Railroads stopped growing because they saw themselves as being in the rail business and not the freight or transportation business.
A proactive road service uses technology to go the extra mile in defining their business. They don't just send you a tow truck. They hire a cab to get you where you're going.
Today's kings are tomorrow's fools. At one time Saturday Evening Post passed on the opportunity to buy CBS. John Akers once asked the board of IBM to buy a third of Microsoft. The board, still seeing Microsoft as its supplier, passed on the opportunity.
An oil rig in the North sea is a lonely place, especially when things go wrong -- but not when parent company British Petroleum installs communication uplinks to all the experts the company has to help get you up and running again.
Think of the endowment Boston University would have today if it has captured 1% of 1% of the profits from an invention one of its faculty made a while back -- Alexander Graham Bell's telephone.
In 1997, 2 of 5 new car buyers used Internet in some way to buy a car. This is not like downloading a file, Venkatraman said. It's a car.
A favorite New Yorker cartoon. A manager at desk: "Do you mean to tell me that $1 billion is a thousand million? Why wasn't I informed of this before?"
The U.S. Army has redefined itself from a factory operation to a knowledge operation. When troops disembark in Haiti, they have access to everything that is known about that kind of operation. The Army sees itself as the ultimate "learning organization," with a world of difficult situations to master and comprehend.
Cadillac's OnStar takes the computer-onboard idea of Lexus to the next level. A sensor in the car's airbag contacts you immediately following an accident. If it hear no voice, it dials an ambulance for you.
Amazon.com's business model has outstripped its own industry. There is nothing about the company limiting it to sales of books. Amazon can sell anything.
Barnes & Noble, by contrast, has to choose whether each new dollar goes to its old business, mall superstores, or its new one, Barnesandnoble.com.
Kodak has invested its capital in a technology (electronic imaging) that may eventually destroy its original core competence, analog photography. Likewise, Hallmark is undermining its paper card business with cards of a digital sort.
In the 1980s, when N. Venkatraman first began looking into the issue of information technology and strategy, he found that most executives weren't interested, or were intimidated by computer stuff. Their concerns were non-technologcal -- cost containment, competing with imports, boosting quality. At their worst, execs condescended to IT, labeling its practitioners nerds.
Well, those days had better be over, because the model for the business of the 2000s is high-tech, whether the business is selling microchips or manure.
What's going on in the economy?
"I confess that in 1901 I said to my brother Orville
that man would not fly for 50 years....
Ever since, I have distrusted myself
and avoided all predictions."
-Wilbur Wright, 1908-
A lot. Businesses and industries are consolidating. New entrants are creating new business models.
Electronic commerce (Venkatraman dislikes this term too -- it suggests something separate from conventional commerce, not something that will be woven into it from now on) is revising how we think of every transaction.
Alliances, restructuring, and outsourcing are all altering the idea of what a business is at the core.
Amidst all this fundamental reshuffling, the worst mistake, Venkatraman said, is to see the future as an extension of the past. That is how strategy used to work -- the advance of a single idea down a unified path, making adaptations as conditions warrant. But the days of incrementalism are over. Today's strategies, instead of building on the old, build on their rubble.
The business model for tomorrow
We are moving from an Industrial Age model of vertical integration, focusing on products, toward an Information Age model of virtual integration, which focuses on relationships. Away from the manufacturing era's economies of scale, and the post-World War II era of finance-driven business, and its economies of scope, toward an era which derives value from knowledge, and whose economies are rooted in expertise.
Implications for IT leadership
Venkatraman wishes the word technology would go away. As soon as people hear it, their mind leaps to its functional considerations -- wires, chips, instructions-per-second -- and we lose the larger picture of capabilities. It is like seeing the forest, but not the trees.
The true power of technology is not in hardware or software, in data or on the Net. Its true power for business lies in its transformational ability:
It transforms data into information, and information into knowledge.
It transforms products and processes.
It destroys the old ways -- the traditional sources of advantage.
It creates entirely new kinds of advantages.
It remakes markets, and it resizes margins.
The first two points may be ho-hum to your business. But the last three are killers, because they change everything your business is about -- failure, success, and profitability.
Think of the stages of information management at your organization as five stages, with gaps between:
The art of IT is the art of successfully negotiating the gaps between these stages. Most of us are skilled at this point at handling the Design Gap, extracting usable information from the haystack of raw data, and most of us can handle the Execution Gap, getting desired results from decisive action.
The middle is where most organizations bog down. How do we become experts on our own information, so as to transform it into real knowledge?
And how do we find the leverage to transform knowledge into action? You can bet that Barrows Bank, employer of Nick Leeson, overnight loser of 1.2 billion pounds in the Singapore bond market, wishes it had a better grasp of that gap.
Venkatraman showed a graphic showing the range of development of strategic IT thinking:
Localized Exploitation. Technology as discrete task solution; solving the problem of phonelessness by installing a phone.
Internal Integration. Technology forms links within a business and its suppliers. Venkatraman used the example of Lexis cars including computers that phone for help in event of an accident.
Business Process Redesign. Here IT changes the business. FedEx is the kind of business it is because of the technology at its disposal.
Business Network Redesign. Now IT reaches beyond the company and changes the entire network by which work is done. Processes better done elsewhere are outsourced, and technology allows the an5chor organization to maintain control.
Business Scope Redefinition. The most powerful level of IT integration, in which technology changes the scope of the business you are in. We see whole industries being redefined as IT opens up new possibilities: greeting cards, newspapers, books, entertainment, even car sales.
The implications of this revolution are five:
Information technology is the single most important under-leveraged resource today.
Technological developments outpace an organization's ability to master and leverage.
Information technology supports your current business strategy as well as shapes future strategy.
You need to adopt a strategic perspective on information technology.
It's difficult to conceive of business strategy without recognizing information technology implications.
The concept of a Value Center
For years managers have thought of IT much as they have thought of human resources, as something necessary that affected the bottom line primarily as a cost.
That is changing now, as IT continues to make its importance felt. But how an organization implements IT strategy is critical. You cannot simply have a philosophy of "occupy the bleeding edge and devil take the hindmost." An appropriate IT strategy balances the different roles IT rightfully plays:
It is a
cost center, on some levels -- a function within your organization with known input/output relationships, whose delivered value is not measurable as profit. E.g., providing terminals for data entry.
But it often serves as a
service center as well -- supporting the organization's regular business functions. Whenever IT helps deliver value to customers, this is what it is.
Higher up on the chain, IT can be viewed as an
investment center. It sees technology in strategic terms, for creating new business capabilities. Just as Microsoft invests in other tech companies, so can your company invest in technology, through equity investments, joint development projects, licensing and "scanning."
Finally, IT has a rightful role as a
profit center. Here your technology is put to work making money outside the company -- not just to pad the bottom line, but to keep IT at your organization involved in the real world.
The Value Center in practice
Venkatraman created a final diagram showing your organization when it has achieved the balance it wants in IT.
What this table shows is that the best strategy is the one gives highest priority to IT functions that are the most important to future success. If a function is incidental to a company's core purpose, and is not especially good at it anyway, it must be relegated to the parity zone, and perhaps outsourced to someone who can do it better or cheaper.
If an IT function is key to the company's success, it naturally belongs in the distinction zone.
New Relationships
What Venkatraman sees at the end of the rainbow is a view of IT that no longer imprisons it in the preconceptions of wires and logic gates, but opens up to it as a means of thinking more strategically.
A key word is relationships. Venkatraman envisions IT's role as that of a "solution integrator" with these characteristics:
Proactive, and no longer merely reactive.
Focused on technology-enabled business capabilities.
Value-added to business capability, not a captive monopoly of it.
Earning the right to be a member of the business team.
The custodian of the organization's IT architecture.
Enjoying managing relationships, without owning the organization's assets.
A world-class IT organization, he said, is one that has advanced:
beyond legacy technology to legacy administrative logic;
beyond conventional outsourcing to selective, multiple forms of sourcing;
beyond the cost center mentality for IT, to a new vision of IT as a value center.
In the present, IT is always confusing, and managers are right to feel put off by it -- even to skip a challenging session like this one. But Venkatraman wants to put the word out that an amnesty is at hand. Executives are not expected to understand the length, breadth, and depth of the swirl of technological change.
But what they must do is remain open to the new business and human capabilities technology makes available -- through the power of imagination.