IT doesn’t matter, part 2

This is the second installment of the article “IT Doesn’t Matter.” Part 1 is here.

Vanishing advantage

Many commentators have drawn parallels between the expansion of IT, particularly the Internet, and the rollouts of earlier technologies. Most of the comparisons, though, have focused on either the investment pattern associated with the technologies – the boom-to-bust cycle – or the technologies’ roles in reshaping the operations of entire industries or even economies. Little has been said about the way the technologies influence, or fail to influence, competition at the firm level. Yet it is here that history offers some of its most important lessons to managers.

A distinction needs to be made between proprietary technologies and what might be called infrastructural technologies. Proprietary technologies can be owned, actually or effectively, by a single company. A pharmaceutical firm, for example, may hold a patent on a particular compound that serves as the basis for a family of drugs. An industrial manufacturer may discover an innovative way to employ a process technology that competitors find hard to replicate. A company that produces consumer goods may acquire exclusive rights to a new packaging material that gives its product a longer shelf life than competing brands. As long as they remain protected, proprietary technologies can be the foundations for long-term strategic advantages, enabling companies to reap higher profits than their rivals.

Infrastructural technologies, in contrast, offer far more value when shared than when used in isolation. Imagine yourself in the early nineteenth century, and suppose that one manufacturing company held the rights to all the technology required to create a railroad. If it wanted to, that company could just build proprietary lines between its suppliers, its factories, and its distributors and run its own locomotives and railcars on the tracks. And it might well operate more efficiently as a result. But, for the broader economy, the value produced by such an arrangement would be trivial compared with the value that would be produced by building an open rail network connecting many companies and many buyers. The characteristics and economics of infrastructural technologies, whether railroads or telegraph lines or power generators, make it inevitable that they will be broadly shared – that they will become part of the general business infrastructure.

In the earliest phases of its buildout, however, an infrastructural technology can take the form of a proprietary technology. As long as access to the technology is restricted – through physical limitations, intellectual property rights, high costs, or a lack of standards – a company can use it to gain advantages over rivals. Consider the period between the construction of the first electric power stations, around 1880, and the wiring of the electric grid early in the twentieth century. Electricity remained a scarce resource during this time, and those manufacturers able to tap into it – by, for example, building their plants near generating stations – often gained an important edge. It was no coincidence that the largest U.S. manufacturer of nuts and bolts at the turn of the century, Plumb, Burdict, and Barnard, located its factory near Niagara Falls in New York, the site of one of the earliest large-scale hydroelectric power plants.

Companies can also steal a march on their competitors by having superior insight into the use of a new technology. The introduction of electric power again provides a good example. Until the end of the nineteenth century, most manufacturers relied on water pressure or steam to operate their machinery. Power in those days came from a single, fixed source – a waterwheel at the side of a mill, for instance – and required an elaborate system of pulleys and gears to distribute it to individual workstations throughout the plant. When electric generators first became available, many manufacturers simply adopted them as a replacement single-point source, using them to power the existing system of pulleys and gears. Smart manufacturers, however, saw that one of the great advantages of electric power is that it is easily distributable – that it can be brought directly to workstations. By wiring their plants and installing electric motors in their machines, they were able to dispense with the cumbersome, inflexible, and costly gearing systems, gaining an important efficiency advantage over their slower-moving competitors.

Part 3

One thought on “IT doesn’t matter, part 2

  1. Jagan Vaman

    Hi Nick,

    I posted this comment on 2nd Jan 2007 to your blog item – “Your new IT budget: $10”. I didn’t realize that you will start this conversation – IT Doesn’t Matter Part 2. It looks more apt here. Look forward to your comments/thoughts.



    Hi Nick,

    I was looking for a thread to start this conversation – this one looks appropriate with references to your famous ‘Does IT Matter’ and Commoditization of IT train of thoughts.

    Here is the interesting piece.

    SAP info carried an interview with Dr. Rainer Janßen – CIO of Munich Re on the industrialization of application development.

    1. Dr. Rainer Janßen sounds like he has not yet recovered from the IT does not matter syndrome: Follow this-

    SAP INFO: In his book “Does IT Matter?” Nicholas G. Carr asks whether IT is still of strategic significance or whether it has become a commodity. Is this question relevant to the industrialization of IT?

    Janßen: Nicholas G. Carr’s book inspired me to write an essay titled “Does Management Science Matter?” His book is yet another demonstration of how methodologically unsound theories may be “sold” as research. His arguments remind me of a joke in which a judge asks a man in the dock whether he has stopped beating his wife – yes or no? The man says, “But I’ve never …”. “Yes or no,” the judge demands to know. Everyone knows that the logically correct answer is “no”; the man can’t have stopped beating his wife because he never beat her in the first place.

    It’s the same with the question “Does IT Matter?” IT specialists have never claimed that IT matters; what matters is how it is deployed, how it is linked to business solutions, and how it is used. The only people who have maintained that IT matters are hardware and software suppliers and management gurus like Carr. So Carr’s theories don’t affect me, nor are they relevant to the industrialization of IT.

    Interesting Nick that you have started a millennium storm.

    But wait – after all that what is the meaning of Industrialization of IT?

    Here is what SAP says ( September 21, 2006 || The industrialization of IT and its consequences)

    Just as Ford manufactured a highly standardized product using highly standardized production processes in the early days of industrialization, IT service providers are now preparing for the standardization of IT products and production processes enabled by new standards and technologies.

    Alongside current discussion of “IT commodities,” SAP’s efforts to define standardized enterprise services provide evidence of this trend. Enterprise services are simply standardized, loosely linked, functional components that have a modular structure and can be reused to support complex, individual business processes – in other words, mass customizing.

    While individual business processes can be supported by linking multiple enterprise services, each enterprise service can be produced using standardized procedures and processes which, by analogy with industrial manufacturing, are typically specified in a routing. This achieves production synergies and satisfies customer requirements for business process support.

    If we systematically apply the analogy between IT and the manufacturing sector (which can be extended to include service providers), it becomes clear that applications are like machines on which different operations, described in a routing, are performed to manufacture a standardized component — whether a car fender or an enterprise service. These standardized components are assembled into a customized product: a customer-configured car or support for a customer-specific business process.

    Now – all this sounds like (?!) SAP is trying to sell the same old concepts that you made popular in your Does IT Matter article and the long tail of controversy it started.

    Industrialization of IT is just an idea. It is too early to talk about the process maturity attainment of say Automotive industry and apply that to IT. In other words – Carrs Law about IT commoditization will apply! All this is the result of a spiralling effect of confusion about fundamentals that prevails in ERP/IT industry.

    Look forward to your comments,

    Here’s wishing you a happy & prosperous New Year!

    Best Regards,

    Jagan Vaman

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