tapscott - rethinking it in competitive advantage i

Information Technology & Competitive Advantage

&

in Competitive AdvantagePart I: The Debate

Information Techno logy

Rethinking

IT CA

Big Idea

by Don Tapscott

Themes of the

Open

Netw o

E n t erpriseaddres sed in this report:

rke d

1. World View 2. Corporate Boun daries 3. Value Inno vation 4. Intellectual Property 5. Modus Operandi 6. Business Processes 7. Knowledge and Human Capital 8. Information Liquidity 9. Relationships 10. Techno logyThis report is an analysis of a Big Idea, presented as part of New Paradigm's Information Technology and Competitive Advantage Program (IT&CA). The program, sponsored by 22 companies including yours, is investigating new business designs and strategies for competing in the networked business world. Specifically the program examines how a new business model The Open Networked Enterprise is emerging as the foundation of competitiveness, growth and sustained success.

Executive Director: Don Tapscott Executive Editor: David Ticoll Research Director: Mike Dover Member Services Director: Joan Bigham

& 2005 New Paradigm Learning Corporation (NPLC). Reproduction by any means or disclosure to parties who are not employees of IT&CA member organizations or wholly-owned subsidiaries is prohibited.

C A IT

Big Idea

The IT&CA research program membership includes unlimited free access to a secure web site where the research team project plans and research publications are posted for member review and feedback. Please visit www.nplc.com for information.

The Idea In BriefThe IT&CA Program was launched, in part, to resolve the debate regarding the changing nature and role of information technology in business, best illustrated by Nicholas Carrs provocative Harvard Business Review article IT Doesnt Matter,1 and his subsequent book Does IT Matter?2 Carr argues that IT has become aubiquitous, co mmodity infrastructurenecessary for competitiveness but insufficient for advantage. In the past, firms such as American Airlines, FedEx and American Hospital Supply built proprietary systems to differentiate their offerings and lock in customers. But today, Carr argues, IT has become a commoditya commonly available infrastructure at the end of the Scurve of adoption. All firms have access to IT and any system can be instantly replicated. Therefore companies should treat IT like electrical powermake sure it works, but spend as little as possible on it. Carr instructs CEOs to follownotleadand make IT boring, focusing on vulnerabilities, not opportunities. In a Spring 2005 article in Sloan Management Review, The End of Corporate Computing, Carr extends this view, arguing that corporations should move all IT onto the public infrastructure, thereby eliminating internal IT departments.3 I believe Carrs arguments are incorrect, but they reflect the questioning, confusion and cynicism

about IT found in many corporate suites. Corporate decision-makers are not confident that IT investments are funds well spent. In this climate of doubt a number of myths have taken hold or are being encouraged by ITs detractors. A two-part project investigated the main myths in the debate and the emerging model of the competitive corporation enabled by IT: the Open Networked

Enterprise. This paper comprises part one of the project. Below are the myths I examine. IT was more important to competitiveness in the past IT has reached the end of the Scurve of innovation and adoption Water, power and data are analogous commodities Software is now a commodity that undermines competitiveness Ubiquity of technology destroys competitiveness

IT is not part of consumer products IT cost-cutting is a strategy

Utility computing undermines competitiveness Networked businesses do not perform better IT-enabled business models can be instantly replicated B-webs mean the end of the corporation

Firms should be clear on these issues and avoid the pitfalls. Overall, the evidence is clear that emerging information technologies are central to new business designs and strategies that enable firms to create differentiated value or lower cost structures and therefore competitive advantage. There are new opportunities for IT cost reduction but this is not a strategy for success. Rather, firms should take actions to shift their investment portfolios from IT expenditures that are a-competitive to those that matter. Companies should not always follow as some suggest, but rather, seek to innovate and lead where they can achieve advantage.

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1.0 Myth: IT was more important to competitiveness in the pastDespite Carrs assertion, there was no halcyon period of proprietary IT competitiveness. I have been advising companies since 1975, and looking back, I can testify that there are only a handful of cases (Carrs few examples) where firms used IT to radically change business models. Back then, in the era of data processing, companies mainly used IT for mundane purposes, such as managing accounting or HR records. Systems targeting competitiveness were rare, expensive, risky and took years to build. Proprietary systems benefited the vendors more than users of IT, as computer companies were able to generate gross margins upwards of 80 percent by locking in their customers. Successes such as American Airlines SABRE reservation system, the FedEx network, and the American Hospital Supply procurement system became legends because they were so atypical. For every high-profile success there were dozens of failures and hundreds of banal implementations. research shows that today the leadership examples are much more plentiful. Even among dotcoms and pure Internet plays, many early innovators are performing well also undermining Carrs assertion that the technology cycle IT&CA

works against pioneers. For sure, scores of early Internet companies with bad business models failed. Yet household names like Amazon, eBay, Ameritrade, Checkfree, DoubleClick, E*Trade, Yahoo!, University of Phoenix Online, Salesforce.com and even Priceline.com to name a feware competing well and growing rapidly in revenue and earnings. By contrast, not many brick and mortar

upstarts emerged from nowhereto become industry leaders during the 1990s. Most importantly, the top competitors in traditional industry sectors have the best business models, in part because of IT strategies. In the retail sector, Wal-Mart, eBay, Staples, Amazon, Tesco (U.K.) and Best Buy dominate their respective markets, thanks to better information, customer relationships, business designs, differentiated offerings and the other benefits of superior IT. The same is true of leaders in many other industries: consumer credit (American Express), consumer food products (Pepsico), household (Procter & Gamble), communications technology (Cisco), media (Walt Disney), property insurance (Progressive), health (United Health Group), pharmaceuticals (Johnson & Johnson), materials (Nucor), utilities (PG&E), capital goods

(Paccar), commercial services (Cendant), technology (Qualcomm and Apple) and hotels (Marriott.) Of Fortunes latest top-ten most-admired companies, nine are known for shrewd use of IT to support unique business strategies: Wal-Mart, Southwest Airlines, GE, Dell, Microsoft, Johnson & Johnson, Starbucks, FedEx, and IBM.

2.0 Myth: IT has reached the end of the S- curve of adoptionThe proprietary technology theory argues that innovations such as electrical power and information technology can be a source of sustained competitive advantage for the select few who use them first. However, as they become ubiquitous moving up the S-curve of adoption their proprietary advantage diminishes, eventually to zero.

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When it comes to IT, this view is invalid for a number of reasons, the first of which is that there is no single S-curve. There are many curves. Some, like PC adoption, are relatively mature, at least in developed countries. Moreover, a myriad of emerging technologies and capabilities are still at the early adoption stages.4 The IT&CA program groups these technologies into nine categories. For each category, typically several important emerg ing technologies remain relatively unex ploited. Some will merely help reduce costs, but most provide opportunities for early adopters to gain some advantage. Consider Web services. Despite considerable discussion over the last few years, 40 percent of U.S. companies are not even evaluating or considering using Web services.5 This revolutionary technology is at the beginning of its scurve. It promises to provide years of differentiated business designs for companies that effectively exploit it. This is especially true given the importance of Web services for networked businesses the foundation of competitiveness in the 21st century.6 Even when it comes to computer hardware and network bandwidth, the most commoditized aspects of IT, explosive changes create opportunities for the swift and agile. Here technology is moving onto the

second half of the chessboarda clever phrase coined by the American inventor and author Ray Kurzweil. He recalls a tale of the Emperor of China and the inventor of chess. The Emperor was so delighted by the game that he offered the inventor anything he wanted in the kingdom. The inventor asked for rice. I would like one grain of rice on the first square of the chessboard, two grains of rice on the second square, four grains of rice on the third

Information in Cyberspace: Advanced search, geographic information, enterprise search, metadata, semantic webs, software agents, peer-to peer (P2P) content distribution Human Computer Interaction: User modeling and intelligent user interfaces, smart client interfaces, speech, advanced visual displays, 3D user interfaces, gaming, enterprise visualization, new form factors, digital media/computer convergence Collaboration Technologies: Collaborating across time and space, social networks, communities in cyberspace, weblogs, real-time collaboration, presence detection, knowledge management Networking and Mobility: Mobile enablement, WUSB (wireless USB), Bluetooth, Zigbee (IEEE 802.15.4), WiFi (IEEE 802.11.x), WiMAX (IEEE 802.16), .5G/3G/4G networks, new services, location based services, telematics, voice over Internet protocol (VoIP) Machine to Machine Communications: Wireless sensor networks, smart dust, radio frequency identification (RFID) Business Transaction Enablement: Identity and

authentication management, new security, electronic gated communities, digital rights management (DRM), micropayments Emerging Software Architectures: Web services, service-oriented architectures, eventdriven architectures, enterprise service buses, composite applications, software development paradigms, model-driven architectures, aspectoriented programming, open source Enterprise Process Enablement: Metadata, realtime, business process execution languages, b-web orchestration, enterprise business intelligence systems, enterprise decision management Infrastructure Architectures: Virtualization, multi-core processors, storage virtualization, automating storage virtualization, server virtualization, blade servers, network virtualization, service level metering and measuring, grid computing, hive computing, autonomic computing, operating systems

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square, and so on, doubling each time all the way to the last square, he said. The Emperor agreed, thinking this would add up to a couple of bags of rice. He was wrong. While the amounts of rice are small at the outset, they escalate to more than 2 billion grains halfway through the chessboard. On the second half of the chessboard, the absolute gains achieved by repeated doubling are huge. One version of the story has the emperor going bankrupt because the last square would contain 18 million trillion grains of rice. At ten grains of rice per square inch, this was enough to cover twice the surface area of the Earth, oceans included. The same principle applies to computers. The first microprocessor, produced in 1971, contained 2,300 transistors. Roughly every 18 months since, the number of transistors doubled. In 2003, Intel rolled out a chip with 500 million transistors, and its most recent chip has a billion. As microprocessor technology reaches its physical limits, the second half of the chess boards explosive growth will come from nanotechnology. Todays microprocessor industry will be gone in 15 years, replaced by molecular electronics. Nanotechnology-based products are already here, from highperformance oil refinery catalysts to stain-free khaki pants.

Computer companies large and small are working on nanocomputing. The promise? Our concept of a computer will include something the size of a large bacterium. It will not fit in your palmit will reside in the fiber of your shirt. When it comes to speed, Dons Law pays tribute to Parkinsons Law: user requirements expand to fill the capability available.7 The fact that

some companies use only half their IT capacity does not imply overcapacity but rather represents opportunities for virtualization and other innovative ways to maximize cost effectiveness of the IT infrastructure. The same is true of bandwidth. A few years ago Net users were restricted to 56 Kbps; to use a railroad analogy, let us say a single train track. Today they get around 1 Mbps, or about 18 tracks. By the end of this decade we are looking at OC3 about 155 Mbpsto the desktop with some companies claiming they can already do that now. That is about 2,340 tracksa rail system almost two miles wide (and that does not tell the whole story because you can stack trains up on top of each other). Think about how increased bandwidth will change the way companies communicate with customers, suppliers and other stakeholders. In

1980 it took me an hour to download a 100-page report. Today, I can download a full-length movie in that amount of time. Ten years from now, I will be able to download a simulation of the stock market in that hourand I will still consider it too slow. At the cusp of each wave of technology innovation, market leaders gain advantage by combining IT and business design, whether as early adopters or fast followers. Others have no choice but to follow in their wake. This has happened repeatedly and continues today with each wave of tech innovation.

3.0 Myth: Water, power and data are analogous commoditiesCarr argues that data is a commodity like water or powerthat increasingly is available through public

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infrastructure: Its hard to imagine a more perfect commodity than a byte of data endlessly and perfectly reproducible at virtually no cost.8 However, unlike electricity, water and other commodities available through public infrastructures, information is not fungible. You can put water in a bucket or electricity in a power grid and it is all the same. Not so with data. In fact, nothing in the universe is as unique as a byte of data, which can convey information ranging from a baby picture to a million-dollar bank transfer. It is akin to saying that Shakespeares works are a commodity because he used the same alphabet as everybody else. The fact is, nothing is as unique as the right information at the right time. No company can compete through better quality electric power, because it is all the same. But firms do compete by having better information a resource that rivals talent as an enabler of competitiveness. Superior business models depend on superior information, and IT makes superior information possible. As an extreme example, give me tomorrows stock prices (that is great information) and I guarantee my portfolio will outperform yours. As IT&CA Executive Editor David Ticoll says, Instead of information technology,

think about information deployment (how you create, capture, deliver and use information in your business). To say that information deployment will be fully commoditized in the near future is like saying innovation itself will be commoditized.

4.0 Myth: Software is a commodity, undermining competitivenessIt is only partly correct to assert that software has shifted from being a proprietary resource to a

purchased good, thereby leveling the playing field. Companies still do a great deal of custom software development. Between 1998 and 2003, while there has been an increase in revenue for both packaged applications and custombuilt, third party software companies, packaged software has actually declined as a percentage of business software spending. Software written by companies for their own use grew from 31 percent of total investment in 1998 to 42 percent in 2003.9 Proponents of the software as commodity view also underestimate the customization needs of complex off-theshelf applications, and the ensuing opportunities for distinguishing a firm. Many companies even today are implementing massive software projects that are hard to reproduce adapting packaged software from companies such as SAP and PeopleSoft. SAP Systems has 1,900 customers. But Colgate Palmolive CIO Ed Tobin recently said to me, Not one of them is using it the same way.

Its all about how you package in the business.

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Jabil Circuits, a $5 billion company, is the only firm in the electronics manufacturing services (EMS) industry to adopt SAP for its global manufacturing and supply chain operations. A typical EMS company has a hodgepodge of systems. By consolidating into a single program, Jabil slashed costs and increased its supply chains speed and transparency. It is now the industry value leader. A competitor, Celestica, has also chosen to develop a global SAP system.10 Yes, the other EMS companies can try to do the same, but in the 2-3 years it will take to catch up, Jabil (and perhaps Celestica) may take on a new IT challenge, such as building a business analytics capability for better management decision-making.11 Jabils performance is unmatched in recent years (see Figure 1). Their

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Figure 1 Performance of EMS companies year to date Jabil versus competitors20% 0%

JBL

-20%

40 %

FLEX

60 %

CLS SAN M SLR

80 % -100%

Source: MSN Money

two-year compound growth rate is 30 percent, and last years EBIAT is 4.2 percent both numbers double their nearest competitor. Independent analysts cite Jabils IT environment and global business processes as central to its success.12 It is true that much packaged software embodies best practices that, when implemented, provide competitive parity, not advantage. Viewed superficially, this implies that packaged software levels playing fields and therefore undermines competitiveness. But wise firms invest

in two ways: on tools for basic operations or competitive parity, and on applications that support differentiation and therefore competitive advantage. For the parity tool set it makes sense to change business processes and designs to correspond to applications software best practices. For competitive advantage differentiation

you should develop your own applications or customize packaged products. As Carr points out, with the rise of Web services, software is entering its next era. But rather than commoditize software and kill innovation, Web services will achieve the opposite. This revolution is transforming the Web from a publishing medium (thats what HTML was about) to a computational platform. Yes, the Internet is becoming an

infrastructure but a programmable one. This will create unlimited opportunities for unique applications, new business designs and competitive differentiation. Granted, Web services will enable company B to more easily reproduce what company A does. These tools, however, also enable company A to do new things faster. Carr only looks at the downside.

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The upside is that the new technologies enable companies to get to market faster with business innovations. This is the new normal, and companies must get used to it.

of its installed base. This is a new proprietary resource the power of IT enabled relationships. Amazon customers are locked in not because of proprietary hardware but because of the power of its IT enabled business model. Even though customer switching costs are lower than ever, Amazon has loyal customers because it forges strong relationships with them. Customers are loyal because Amazon delivers value by mining its

5.0 Myth: Ubiquity of technology destroys competitivenessIt is true that American Airlines and American Hospital Supply were able to lock in customers through technology-enabled business processes in a day when travel agents and hospital administra tors had no IT to speak of. Today, some techno logies such as the PC are pervasive, making it difficult to deliver differentiated value by way of hardware devices. But ubiquity is a double edged sword. In many situations ubiquity supports differentiation. It means that systems and new business models can scale instantly. Whereas American and AHS had to find money for users terminals and network connections, today eBay and Tesco can instantly get to millions of already connected customers. For this reason (among others) it took Amazon only five years to build one of the most important retail companies in the world. Amazons customers are nevertheless locked in through the power of the companys software applications and business model. No competitor can touch it, in part because

extensive data resources from billing histories, to birthdays of family and friends, to historical and shared interests in books, music and myriad other products. The technical switching costs are low, but the costs of reconstructing such information enriched relationships are high.

the end of specialized software that constitutes the applications portfolio of the firm and embodies its business designs and processes. The configuration of corporate hardware resources has nothing to do with the applications that exploit them. As Tim Warner of the IT&CA team points out, the optimal configuration of a companys processors and associated primary and secondary memory has always been a function of the cost and reliability of bandwidth, the economies or diseconomies of scale in processing power, and the location of users. Groschs Law (the power of a computer varies according to the square of its cost) and 300-baud lines dictated time-sharing and service bureaus. Today, when most processing power is used simply to provide the user interface, we have to put substantial power at the point of

6.0 Myth: Utility computing undermines competitivenessMany argue that almost free bandwidth, Web services, grid computing and the economies of scale of data centers will lead to the disappearance of computer departments.13 It is true that much of ITs functions can be moved to external suppliers. Outsourcing comput ing power and applications management is a well established practice, ASP models are commonplace, and as we have predicted for years, thin clients are replacing many desktop devices. But this does not mean

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use. But whether computing is centralized or distributedor boththe configuration has nothing to do with whether corporate computing is ending.14 Carr looks at the low utilization of the desktop PC5 percent or less and scolds companies for wasting a precious resource. But managers should make decisions about deploying technology not on utilization rates but rather on cost-benefit analysis of alternative architectures and strategies. Most people use their car for a short period of time during the day, but nevertheless can make the case for owning the vehicle. Just as bandwidth is (almost) free, so is a computer. PCs are by no means the most squandered computing resource. A mobile phone, far more powerful than early PCs, is used roughly five hours a month, or 0.7 percent of the time. Further, it will take years for corporate applications, more noted for inertia than rapid change, to migrate to an external infrastructure. The average lifespan of a legacy system is about 20 years.The application maintenance programmers job is safe for quite a while, even if its in Bangalore. For sure there is a trend towards so-called hosted servicessoftware and services to connect a b-web on a network. Hosted services promise to decrease the operational costs of managing b-web partners

through cost sharing across multiple players; reducing the capital costs of IT for enterprises; permitting the fast and flexible reconfiguration of business processes; delivering secure and reliable service levels; permitting upgrades and product enhancements on the fly and executed by best-in-class resources; and allowing

standards-based, plug-and-play integration with other applications and legacy code. In an ideal world corporate computing might comprise a set of business process modeling language (BPML) routines invoking Web services across a seamless, 100 percent reliable network. This might be the end-state of corporate computing, but hardly the end. The special intellectual property embodied in the routines that differentiate one firm from another will always be there, and somebody, the CIO or somebody with a similar title, will always be charged with managing it, nurturing it and leveraging it for competitive advantage.

(human capital, information, etc.) of a global networked economy enables competitiveness and better business performance. While Carr accepts the notion that business models can be the basis of competitiveness, he stubbornly denies that IT helps achieve such models. He suggests that investments in technology by industry leaders like Dell, Jet Blue, and Wal-Mart have contributed only marginally to their success. In the case of Jet Blue the source of that advantage lies not in the technology but in the business model. IT and business models, however, are not separate, mutually exclusive factors in strategy they are increasingly interdependent. IT can lead to profound changes in business designnot just at the business process level, but within the deep structure of the corporation. Because IT and

7.0 Myth: Networked businesses do not perform betterThose who dismiss IT do not grasp ITs role in the new business designs that enable competitive advantage. Superior orchestration of the resources

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networks radically drop transaction, interaction, and partnering costs, the vertically integrated corporation is unbundling and companies increasingly focus on what they do best and partner to do the rest. My colleagues and I call this new architecture business webs, or b-webs for short. Leading firms grow by focusing on their core competenciesthat cluster of unique capabilities which enable them to create differentiated products or services. This is the biggest change in corporate architecture we have seen in a century. IT&CA research shows that companies forging high performance b-webs have better products and/or lower cost structures and better profitability. The IT&CA program investigated the relationship between high performance (using 10 measures) and the use of IT in several industries. The leaders in three industries trucking (Paccar), computers (Dell), and telecommunications equipment (Cisco)were compared with competitors. See the appendix for analysis of these companies. One finding was that firms achieve advantage through IT-enabled relationships, that is, where customers are integrated into the bweb. Tesco, for example, is a food retailer in the U.K. that has created a parallel online grocery shopping experience that exploits the effectiveness of their

supply chain systems and design. Customers love it and the business is profitable and growing. The IT&CA research found other IT-enabled processes, information, business designs and strategies that were critical to competitive advantage. These include: Powerful new collaborative environments enable better knowledge sharing and innovation15

New capabilities for business intelligence enable better planning and marketing, and migrating decisions to the point of impact16 Modular enterprise business and technology architectures enable organizational agility and 17 responsiveness Outside-in process integration speed, cost control, execution high performance b- webs18 for and

networked enterprises as global forces brought to bear on the architecture of the corporation For companies that are slow or ineffective in exploiting these opportunities, punishment is swift.

8.0 Myth: Business webs mean the end of the corporationCarr specifically attacks the b-web concept in a long defense of the vertically integrated firm entitled In Praise of Walls. He creates a straw man and then shoots it downlabeling me and others as the post company school. Apparently we believe that the corporation is no longer the fundamental unit of commerce and that it is being replaced by amorphous, lose groupings of firms. He asserts that we jump to the conclusion that companies will naturally get smaller. In supporting the death

Changes in the value proposition from commoditized products and services to powerful customer experiences19 Internet-based microrelationships that aggregate to an 20 enduring form of competitiveness Harnessing the power of self-organizing group behavior to co-create products and services21 Peer production of intellectual property22 Strategic cost control through

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of the company we suggest that managers should not keep their own companys interests foremost. A quick reading of our research and findings would expose this caricature as a fanciful distortion. Of course the corporation is and will remain the basic unit of commerce it is the vertically integrated corporation that is failing. Some of the hundreds of b-webs we have studied are loose couplings, but most have tightly integrated their business processes. Further, focused firms that orchestrate b-webs are not necessarily small; in fact they tend to enjoy faster revenue growth and better prospects. It is vertically integrated corporations that are becoming small as they atrophy and fail.

essential transformation of your company, not simply the technology. That it may be easier to replicate the technology today than 20 years ago is irrelevant. Consider Progressive Insurance. This company built a Web application that lets customers compare its rates with those of its competitors. This publicly available infrastructure seems pretty easy to replicate, at least from a technology perspective. But Progressives competitors seem unable to make the cultural and business changes necessary to

9.0 Myth: IT-enabled business models can be instantly replicatedIt has never been easier to copy technology innovations. However, it is not so easy to do the hard stuff that brings an application to life and provides advantages to a firm, like changing business processes, organizational structures, culture and human behavior. The corporate grave- yard is strewn with those who naively thought it easy to change a culture. Launch a new business design based on IT and the hardest thing for your competitors to replicate is the

achieve comparable results. Customers love the company because of its (IT-enabled) candor. And Progressives management works harder to keep prices competitive because deficiencies in its pricing are transparent. Progressive was also the first to build an application using a specialized appliance called a claims work bench whereby adjusters appear at the scene of an accident, process a claim and even issue a check on the spot. The result: faster, cheaper claims processing, lower payments and less costly litigation. (Clients usually take the check without disputing the amount because of the immediate results.) Progressive achieved competitive advantage for years through effective use of current IT and making the required business changes. At least one other insurance company has attempted to replicate these innovations, but Progressive has a head start and

continues to lead the pack on customer service. Its share price has quadrupled in the last three years. The scarce resources here are a crackerjack development team, an effective corporate architecture, the capacity to innovate based on IT and the capacity to mobilize an organization around a new business model.

10.0 Myth: IT is not part of consumer productsCarr further undermines his arguments by stating that his definition of IT does not include the growing variety of technologies embedded in consumer products. He thus conveniently eliminates one of the most important emerging waves of IT innovation and differentiation. The Internet is becoming the Hypernet, a term my colleagues and I use to describe truly ubiquitous broadband and services-based computing.

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The physical world is increasingly smart and networked. Access devices are changing: the PC is being eclipsed by millionssoon billionsof new information appliances. These include customized PDAs, handheld devices for warehouses, couriers, physicians or patients in pharmaceutical trials whether custom built or as generic appliances that can be integrated into a new systemmany of which constitute scarce resources and are not easily replicable. More importantly, thousands of new product categories are emerging, from digital televisions, automobiles, fire extinguishers, assembly lines, doors, clothing and coffee cups. All are becoming IT appliances. For example, doors in many hotel rooms today are smartthey have a chip in them and are networked. The point is not that smart doors provide a competitive advantage for hotels today; most hotels have them. Rather, the Hypernet provides an opportunity for door makers. They can add value to their products and those that act quickly beat out competitors with dumb, unconnected products. Every company has a historic opportunity to integrate IT-enabled services into its products. In one sense every company is becoming an IT company. These devices are part of the future IT hardware, differentiating otherwise commodity products to lock out competitors. VingCard, a hospitality door lock

company based in Norway, invented the recordable lock in 1979. It was first installed at the Peachtree Plaza in Atlanta, Georgia, the tallest hotel in the world at the time. VingCard continued to infuse their products with technology by innovating the first electronic card lock. Today, the companys smart cards contain all sorts of guest information, allow automatic checkins and check-outs, and have billing and payment capabilities. VingCard leads the

industry with over 3.5 million locks installed in more than 20,000 properties in 140 countries.23 DoCoMos i-Mode phone service gained almost 45 million customers since its launch in Japan in 1999. In this case a phone company understood that it could enrich its product a simple wireless telephone with IT services such as interactive games, shopping, and other entertain- ment servicesresulting in a profitable juggernaut that is now even taking transaction revenue from banks. The Hypernet changes our concept of hardware. Of course, some PCs, servers and storage technologies have become commoditizedsome- thing I and others have predicted for decades. But the Hypernet is redefining hardware. As with all technology, the greatest opportunities for such Hypernet appliance providers is to bundle knowledge and services in their products. In doing so they11 2005 NEW PARADIGM LEARNING CORPORATION

can create powerful barriers to entry. The iPod and iTunes is a great example. As discussed in the IT&CA Lighthouse Case, Apple creates a complete customer experience that is difficult for competitors to replicate. Someone may produce a faster or bigger MP3 player but the barriers to entry are significant, given Apples integration of iPod with iTunes. Corporate strategists must open their eyes to new opportunities to infuse products with intelligence, knowledge and services.

11.0 Myth: IT cost cutting is a strategyThe IT&CA program found that it is not just CFOs and CEOs pressing for greater cost control in IT, but CIOs as well. From interviews with more than 100 CIOs we found that one of the three top items on their agendas was the reduction of IT unit

Strategic Investment

Possible Savings

costs.24 And the evidence is strong that lower IT costs can be achieved through techniques such as service-oriented architectures, intelligent information networks, adherence to standards, autonomic systems, virtualization and database consolidation. However, cost reduction is not a strategy. IT cost reduction is greatest when it supports a strategy for more cost-effective IT. In other words, cut the fat and strengthen the muscles and nervous system. Use improvements in technology, outsourcing and IT operations to shift the portfolio towards initiatives contributing to competitive advantage. Research suggests that this is precisely what leading CIOs are doing,25 as illustrated in Figure 2. It is dangerous to forfeit opportunities to transform a business through IT and focus solely on vulnerabilities and risks like outages or security breaches, as Carr suggests. You should manage vulnerabilities but focus on opportunities, not just for IT, but for innovative business models enabled

by IT. Think like Maple Leaf Foods, a company that is investing in a system to provide supermarkets and consumers with detailed information on the history of a package of meat, thus ensuring safety and quality. Transparency and accountability throughout its b-webfrom farm gate to plate will help the company differentiate its products. Sometimes it makes sense to be a follower; to keep up and achieve competitive parity. But in other situations you should try to be a leader. Not necessarily a bigger spender, but a leader where it counts. Many followers have tried hard to displace the leaders I have discussed above. Most have failed. Althoughthe issues are complex, ultimately companies have two choices. They can innovate in ITa resource still in its infancyto enable new business designs that help them differentiate in the market. Or they can give in to the pressures and cynicism of a difficult business environment. Punishment is already proving swift for those that have chosen the latter.

Figure 2 Shifting strategy for IT investmentsStrategi c Investmen t Possible Savings

Competitive Parity Competiti A-competitive ve Infrastructure Parity

Competitive Parity A-competitive Infrastructure Strategic Strategic Investment Investment

Competitive Parity Acompetitive Infrastructur e

A-competitive Infrastructure

Source: New Paradigm12 2005 NEW PARADIGM LEARNING CORPORATION

Appendix 12.0: IT, Networked Business Models and Financial Performance12.1 Paccar Inc.Paccar Inc. is a leading heavy- to medium-sized truck manufacturer, operating under brand names such as Kenworth and Peterbilt. The 100 year old company prides itself on state-of-the-art information technology in its plants, and in its relationships with customers and suppliers. Like Dell, the company strives to optimize its manufacturing and supply chain to quickly match demand for its products. Trucks deliver 68 percent of freight in the United States, and 80 percent of trucks are owner- operated or part of a small fleet. Paccar works with 1,800 independent dealers who serve this fragmented, yet vital market by speeding up the new truck ordering process and ensuring spare parts availability. Orders are transmitted electro- nically, and once approved by engineers, Paccar sends electronic orders for the necessary parts to suppliers. Paccars online parts database and order form means instant processing. The company manages dealer spare parts inventory with sophisticated forecasting models. This

results in 93 percent next- day local availability and 98 percent national availability within two to three days.26 The companys manufacturing facilities are sophisticated, particularly its 270,000 square foot plant in Renton, Washington. The plants design allows for mass customization where nearly every

truck rolling off assembly is unique. Employees can access electronic engineering diagrams, bills of materials, and an online assembly task encyclopedia through numerous computer terminals. Quality technicians and managers use tablet PCs to collect and analyze real time production trends and solve problems during manufacturing. Paccar orchestrates a large b-web, sourcing from some 800 suppliers, many small and technologically unsophisticated. The company promotes supply chain automation through the use of radiofrequency bar codes; 60 percent of parts have these bar codes. Paccar also promotes RFID with its major suppliers. The company uses a Web- based transportation planning system to optimize supplier freight shipments.27 The results have been phenomenal. In 2004 the company enjoyed profit margins of 8 percent, more than three times that

of

Navistar, its closest competitor. Paccars supply chain enjoys an inventory turnover of 21 times per year, compared to Navistars 11. The company has won numerous awards including J.D. Powers customer satisfaction award, a place in Business Weeks Top 50, and it ranks fourth in SearchCIOs list of 200 companies with the highest returns on IT investments. The future of the industry is promising, with 65 percent of trucks on the road being more than three years old and needing replacement. Paccar is well positioned to take advantage of this opportunity. The companys tireless promotion of IT and its close collaboration with suppliers and dealers illustrates a successful open network enterprise strategy (see Figure 3).

13


Figure 3 Paccar vs. competitorsPaccar Results for fiscal year ended Net revenues (millions) Market capitalization (millions) year end Return on assets Net profit margin Revenue per employee (actual dollars) Inventory turnover Days in inventory Cash flow from operations (millions) Cash conversion cycle Revenue growth (20032004) Source: Company Annual Statements Dec 31 2004 $11,396 $13,995 7.4 % 8.0 % $555,902 21. 6 16. 9 $89 1 15 3 39.1 % Navistar Oct 31 2004 $9,724 $2,411 3.3 % 2.5 % $657,027 11. 4 31. 9 $17 3 1 8 28.2 % Volvo Dec 31 2004 $31,812 $17,479 0.8 % 0.8 % $406,829 5. 4 67. 9 $6 1 7 4 1.3 %

12.2 DellDells direct build-to-order model lets it run a super-lean supply chain and offer a highly customized customer experience. The model matches supply and demand in real time, requiring precise coordination of customers, suppliers, assemb lers, distributors, and service providers. The company relies heavily onthe Internet to orchestrate its bweb. The companys e-commerce sites including Dell.com and Premier Pages for corporate customers are among the busiest in the world, with nearly 2 billion page views every quarter. More than half of all Dell orders originate on the Web, generating close to $25 billion in revenue per year. Customers configure products

themselves and can track their orders progress from inception to delivery. Through serviceenhanced customization, Dell builds considerable brand equity in a commodity industry.

More than 100,000 corporate clients use custom ordering interfaces on Dell Premier Pages. Some incorporate Premier Pages into their ERP systems. By helping them manage their IT investment more astutely, Dell enables its larger customers, such as Boeing, to realize significant cost savings. Dell engenders intense customer loyalty by operating more like a procurement solutions provider than a PC manufacturer. On the supply side, Dell feeds real time order data into its b-web of manufacturers, assemblers and

distributors. Dells goal is to minimize inventory throughout the systema key performance driver in an industry where products depreciate in value 1 percent a week. On average, Dell carries less than four days of inventory, compared with an industry average of over five days. The company turns its inventory 102 times per year vs. the industry average of 69. Dell boasts an unusually favorable cash conversion cycle of -37 days, meaning that, on average, it receives payment from

14


Dell Results for fiscal year ended Net revenues (millions) Market capitalization (millions) year end Return on assets Net profit margin Revenue per emplo yee (actual dollars)

customers well before it pays suppliers. This low

Inventory turnover

working capital requirement is a major contributor to the companys performance.28 Dells advantages stem from selling relatively simple products via direct channels. For example, it does not have the back- and front-end complexities (more components, more suppliers, value adding channel partners) that confront Cisco. Eliminating intermediaries saves money, increases margins and reduces demand volatility. Dells networked infrastructure and enterprise strategy means it excels in a fundamentally unattractive low-margin, highly competitive industry. The company also boasts the highest return on assets with 13.1 percent compared to 4.6 percent and -32 percent for CompaqHP and Gateway respectively (see Figure 4).

virtual private networks, security, storage area networks, and integrated voice, data and video.29Compaq/HP Gateway

As it grew explosively during the 1990s, Cisco shed non-core activities such as manufacturing and logistics, acquired leading and emerging technology intellectual property and partnered (or forged alliances) to round out its value proposition. A single enterprise system approach to orches- trating its b-web has helped Cisco consistently outper form its competition, even through the telecom recession. Cisco captures 90 percent of its revenues via the Internet. By helping themselvesconfiguring products, downloading software upgrades and uploading support documentation Ciscos customers help save the company an estimated $920 million a year. This helps the company achieve the industrys highest revenue per employee$648,382 vs. $296,506 at Alcatel. Because they invest significant time and energy in their relationships with Cisco, customers assume substantial switching costs.

12.3 Cisco SystemsCisco Systems has been a networked enterprise for so long that even its legacy systems are Web based. The company currently focuses on highgrowth markets including voice over IP, wireless LANs,

Figure 4 Dell computers vs. competitorsDays in inventory Results for fiscal year ended Cash flow form operations (millions) Net revenues (millions) Cash conver sion cycle Market capitalization (millions) year Reve nue growth (2003 2004) end Return on asse ts Net profit margin Revenue per employee (actual dollars) Del l Jan 28 2005 $49,205 $102,000 13.1 % 6.2 % $891,395 Compaq/HP Oct 31 2004 $79,905 $54,114 4.6 % 4.4 % $529,172 Gateway Dec 31 2004 $3,649 $2,182 -32.0% -15.5% $1,920,526

Inventory turnover Days in inventory Cash flow form operations (millions) Cash conver sion cycle Revenue growth (2003 2004) Source: Company Annual Statements15 2005 NEW PARADIGM LEARNING CORPORATION

10 2 4 $5,31 0 37 18.7 %

9 4 0 $5,08 8 3 0 9.4 %

2 2 1 7 $43 4 2 7.3 %

Supply side b-web participants work from a central demand forecast that helps cut process redundancies, order-topayment cycles, inventory and working capital requirements. Ciscos cash cycle, for example, was 35 days in fiscal 2004, considerably less than the 48 days of Lucent, its next best competitor. In 2000, Ciscos networking initiatives saved it an estimated $1.94 billion in operating efficiencies and cost 30 avoidance. This system does not completely eliminate forecastingrelated problems, however, as occurred during the sudden 2001 industry recession. For some products sales growth went from 70 percent a year to flat or declining in less than 60 days. Cisco

was forced to write off $2.2 billion in inventory. Its networked model helped it respond to this problem faster than otherwise would have been possible. Ciscos top line performance leads the industry. 2004 revenues grew 17 percent while Lucent achieved 7 percent (see Figure 5).

Figure 5 Cisco Systems vs. competitorsCisco Results for fiscal year ended Net revenues (millions) Market capitalization (millions) year end Return on assets Net profit margin Revenue per employee (actual dollars) Inventory turnover Days in inventory Cash flow form operations (millions) Cash conversion cycle Revenue growth (20032004) Source: Company Annual Statements Jul 31 2004 $22,045 $135,583 12.4% 20.0% $648,382 6. 7 54. 9 $7,121 3 5 16.8% Alcatel Dec 31 2004 $16,604 $20,319 1.5% 2.3% $296,506 5. 2 70. 2 -$391 12 5 5.7% Lucent Sep 30 2004 $9,045 $13,948 11.8% 22.1% $284,434 7. 2 50. 4 $63 4 4 8 6.8% Nortel Dec 31 2004 $9,828 $14,921 -0.3% -0.5% $287,789 4. 8 75. 6 -$184 12 0 -3.6%

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Don

Tapscott

is CEO of New

EndnotesNicholas Carr, IT Doesnt Matter, Harvard Business Review, May 1, 2003. 2 Nicholas Carr, Does IT Matter? (Cambridge: Harvard Business School Press, April 2004). 3 Nicholas Carr, The End of Corporate Computing, Sloan Management Review, Spring, 2005. 4 Max Stevens-Guille and Willem Galle, Spawning S-Curves, IT&CA Program, New Paradigm, May 2005. (Proprietary document for IT&CA members only.) 5 Eric Austvold, Tom Whiteford, David OBrien, Web Services 2004: Over hyped and Unlikely to Transform Business Anytime Soon, AMR Research, June 25 2004. 6 Gartner reports from a survey of 400 North American enterprises that the most significant benefit reaped by companies that have already adopted Service-Oriented Architectures is their ability to collaborate with external parties. 7 Parkinsons Law: Work expands to fill the time available. 8 Nicholas Carr, IT Doesnt Matter, Harvard Business Review, May 1, 2003. 9 David Kirkpatrick, Execs Tell Software Makers: Some of you are doomed, Fortune, May 6, 2005.1

Paradigm Learning Corporation, which he founded in 1992, and Adjunct Professor of Management, Joseph L. Rotman School of Management, University of Toronto. He is one of the worlds leading authorities regarding the role of technology in productivity, business design, effectiveness and competitiveness.

Don Tapscott is a member of the Celestica Board of Directors. 11 Full disclosure: Don Tapscott is on Celesticas board of directors.10

Figures reported for Jabil are from the companys Fiscal 2004 Annual Report. See: http://jabil.com/2004annualreport/ 13 Nicholas Carr, The End of Corporate Computing, Sloan Management Review, Spring 2005.12

Tim Warner, The End of Nicholas Carr, Computing Canada, May 2005. 15 See Hubert Saint-Onge, Collaborative Knowledge and Competitive Advantage, IT&CA Big Ideas, IT&CA Program, New Paradigm, May 2005. (Proprietary document for members only.) 16 See Pierre-Luc Bisaillon and Paul Barter, Rethinking Business Intelligence for the O.N.E., IT&CA Big Ideas, IT&CA Program, New Paradigm, May 2005. (Proprietary document for members only.)14

See Art Caston and Peter Haine, Rethinking Enterprise Architecture and Competitive Advantage, IT&CA Big Ideas, IT&CA Program, New Paradigm, May 2005. (Proprietary document for members only.) 18 See Del Langdon, Business Integration OutsideIn,17

IT&CA Big Ideas, IT&CA Program, New Paradigm, May 2005. (Proprietary document for members only.) 19 See Joe Pine, Using Digital Technology for Competitive Advantage as Goods and Services Commoditize, IT&CA Big

17


Ideas, IT&CA Program, New Paradigm, May 2005. (Proprietary document for members only.) See Don Tapscott and Alan Majer, MicroRelationships and Competitive Advantage, IT&CA Big Ideas, IT&CA Program, New Paradigm, May 2005. (Proprietary document for members only.) 21 See David Ticoll and Phil Hood, The Dancing Penguin: Harnessing self-organization for competitive advantage, IT&CA Big Ideas, IT&CA Program, New Paradigm, May 2005. (Proprietary document for members only.)20

See Anthony Williams, Rethinking Intellectual Property for the O.N.E., IT&CA Big Ideas ,IT&CA Program, New Paradigm, May 2005. (Proprietary document for members only.)22

VingCard Elsafe Company Data. See: http://www.vingcard. com/page?id=18. 24 Bruce Rogow, Transforming the IT Function for the Open Networked Enterprise, IT&CA Program, New Paradigm, May 2005. (Proprietary document for members only.) 25 Bruce Rogow, Transforming the IT Function for the Open Networked Enterprise, IT&CA Program, New Paradigm, May 2005. (Proprietary document for members only.) Or Yankee Group research shows a shift from expenditures in core (a- competitive) technologies to edge (inter-enterprise collaboration) technologies. 26 H. Atkinson, On the Road Again. DC Velocity, February 2004. 27 A. Weber, Technology Drives Kenworth to Excellence. Assembly Magazine, November 2004. 28 Industry Averages taken from MSN Money. See: http://moneycentral. msn.com/home.asp 29 John Rendleman, Cisco Positioned to Profit from Changing Market, InformationWeek, May 13, 2002. 30 Cisco Determined to Turn Tide of 100 Year Flood, Internet Week, June 11, 2001.23

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The Rise of the

Open

Netw o

E n t erpriseClosed CorporationNational Engine US, Japan, Europe Protectionist Vertically-integrated Nonporous Content M&A Closed Innovation Do It Yourself Proprietary Protected Plan and Push Hierarchical Power over ... Lumbering Internal (Enterprise Integration) Complex Hardwired Traditional Demographics Containerized Knowledge Internal Opaque Asynchronou s Processing Traditional BI Transactions Product/Services Proprietar y Monolithic Silos Enterprise Dumb Networks

rke d

Strategy Domain1. World View

Open Networked EnterpriseGlobal Engine China, India, Emergent Free Trade Focused on Core Business Web Context, Agency + Fasttrack Business Models + Open Innovation + Co-Creation + Open + Shared Engage and Collaborate Self-organizing Power through ... Agile External (Inter-enterprise Integration) Modular Reconfigurable + Global N-Generation Collaboration + Across the B-web + Transparent Real Time Networked Intelligence + Relationship Capital + Experiences + Standards-based Service-oriented Interoperable + Inter-enterprise Intelligent Networks

2. Corporate Boundaries

3. Value Innovation 4. Intellectual Property 5. Modus Operandi

6. Business Processes

7. Knowledge and Human Capital 8. Information Liquidity 9. Relationships 10. Technology

in Competitive AdvantagePart I: The Debate

Information Techno logy

Rethinking

www .nplc.com

I& T C A

Big Idea

tapscott - rethinking it in competitive advantage i

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