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Standardization and competition

September 26, 2005

Irving Wladawsky-Berger, IBM's technology strategist, has an interesting post about the ways technology and process standardization influence competitive advantage. He points out how the Internet is turning information technology from a fragmented, proprietary resource into a standardized, shared one. As IT becomes a universal (and commoditized) infrastructure, it necessarily loses its power as a business differentiator ("IT doesn't matter," in my terms) but at the same time it increases its value as a platform for innovation. A company no longer gets advantage from distinctive IT, in other words, but from the way it builds new products and services on top of the shared infrastructure. "The Internet," he writes, "showed everybody how much more valuable IT becomes when you can connect and access everything regardless of vendors ... The more standardized the underlying technologies and services available to a business, the more critical innovation becomes as a way for the business to avoid becoming just another commodity provider."

Wladawsky-Berger then goes on to suggest that the same thing will happen with the standardization of business processes. He argues that "we need to evolve from today's labor-intensive and one-of-a-kind approach to building business solutions, and embrace methodologies based on science and engineering, using sophisticated tools and disciplined processes, much as happened during the Industrial Revolution. And, as was the case with the Industrial Revolution, we need to standardize those processes where differentiation brings little or no incremental value, so as to avoid the huge inefficiencies involved in re-inventing the same process over and over again. We can then apply our energies to innovating around those processes and business models that bring true differentiation and value to the business."

I think this is much too rosy a view. I agree with Wladawsky-Berger that as more and more business processes become encoded in software, they will become more standardized across companies. Everyone will be able to more easily adopt "best practices." But I think this will on balance tend to corrode competitive advantages rather than provide a platform for creating new ones. I discuss this phenomenon in my book Does IT Matter?, in a chapter titled "The Universal Strategy Solvent": "Because IT is so flexible in its application and so deeply entwined with business processes - particularly the informational processes that have supplanted physical processes at the core of modern economies - it can corrode advantages not just in one or a few areas, but across many aspects of a company's business. Any traditional advantages in prosecuting a particular activity or process, from setting type to designing componentry to providing customer service, will tend to dissipate as that activity or process is automated. As businesses adopt similar systems, best practices turn into universal practices, and performance converges."

Businesses are made of processes, and the more standardized those processes become, the less room companies have to maneuver in setting themselves apart from rivals. Wladawsky-Berger implies that standardization will only occur for those processes "where differentiation brings little or no incremental value," but that's hard to believe. Indeed, from an economics standpoint, the greatest value will come from standardizing processes where there are currently large discrepancies in performance - that's where bringing every company up to best-practice levels will generate the greatest productivity gains throughout industries. And that's where process outsourcers that are able to offer best-practice solutions - like IBM, say - will make the most money.

Toward the end of his post, Wladawsky-Berger writes that "just as the Internet proved to be a highly democratic platform available to lots and lots of people, the availability of standard business processes in a competitive marketplace means that small and mid-size businesses can have access to many of the same advanced technologies and capabilities once available only to large companies, thus helping them better compete with those companies." That's exactly right, but it's important to remember that the more level the playing field, the harder it is to seize competitive advantage - or the outsized profits that competitive advantage confers.

Comments

It all makes perfectly sence. But is it happening?

Look at Toyota. Even though they are in a more than mature business they manage to excel in everything from product development and manufacturing to customer service and after market sales. Despite the fact that these process should be known by all of its competitors.

I share your thoughts about how everything COULD be similar . But somehow companies end up very differently in what they actually are doing to use the possibilities.

Posted by: Hans Eric Melin at September 26, 2005 06:07 PM

Interesting ideas.

I'm of the persuasion that, upon a bed of open standards, competitive advantage can be more easily achieved: more local IT resources are devoted to the competitive difference at the margin, and less to just keeping machines turned on.

Posted by: Sam Hiser at September 28, 2005 05:08 PM

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