IT doesn’t matter, part 5

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

As with earlier infrastructural technologies, IT provided forward-looking companies many opportunities for competitive advantage early in its buildout, when it could still be “owned” like a proprietary technology. A classic example is American Hospital Supply. A leading distributor of medical supplies, AHS introduced in 1976 an innovative system called Analytic Systems Automated Purchasing, or ASAP, that enabled hospitals to order goods electronically. Developed in-house, the innovative system used proprietary software running on a mainframe computer, and hospital purchasing agents accessed it through terminals at their sites. Because more efficient ordering enabled hospitals to reduce their inventories – and thus their costs – customers were quick to embrace the system. And because it was proprietary to AHS, it effectively locked out competitors. For several years, in fact, AHS was the only distributor offering electronic ordering, a competitive advantage that led to years of superior financial results. From 1978 to 1983, AHS’s sales and profits rose at annual rates of 13% and 18%, respectively – well above industry averages.

AHS gained a true competitive advantage by capitalizing on characteristics of infrastructural technologies that are common in the early stages of their buildouts, in particular their high cost and lack of standardization. Within a decade, however, those barriers to competition were crumbling. The arrival of personal computers and packaged software, together with the emergence of networking standards, was rendering proprietary communication systems unattractive to their users and uneconomical to their owners. Indeed, in an ironic, if predictable, twist, the closed nature and outdated technology of AHS’s system turned it from an asset to a liability. By the dawn of the 1990s, after AHS had merged with Baxter Travenol to form Baxter International, the company’s senior executives had come to view ASAP as “a millstone around their necks,” according to a Harvard Business School case study.

Myriad other companies have gained important advantages through the innovative deployment of IT. Some, like American Airlines with its Sabre reservation system, Federal Express with its package-tracking system, and Mobil Oil with its automated Speedpass payment system, used IT to gain particular operating or marketing advantages – to leapfrog the competition in one process or activity. Others, like Reuters with its 1970s financial information network or, more recently, eBay with its Internet auctions, had superior insight into the way IT would fundamentally change an industry and were able to stake out commanding positions. In a few cases, the dominance companies gained through IT innovation conferred additional advantages, such as scale economies and brand recognition, that have proved more durable than the original technological edge. Wal-Mart and Dell Computer are renowned examples of firms that have been able to turn temporary technological advantages into enduring positioning advantages.

But the opportunities for gaining IT-based advantages are already dwindling. Best practices are now quickly built into software or otherwise replicated. And as for IT-spurred industry transformations, most of the ones that are going to happen have likely already happened or are in the process of happening. Industries and markets will continue to evolve, of course, and some will undergo fundamental changes – the future of the music business, for example, continues to be in doubt. But history shows that the power of an infrastructural technology to transform industries always diminishes as its buildout nears completion.

While no one can say precisely when the buildout of an infrastructural technology has concluded, there are many signs that the IT buildout is much closer to its end than its beginning. First, IT’s power is outstripping most of the business needs it fulfills. Second, the price of essential IT functionality has dropped to the point where it is more or less affordable to all. Third, the capacity of the universal distribution network (the Internet) has caught up with demand – indeed, we already have considerably more fiber-optic capacity than we need. Fourth, IT vendors are rushing to position themselves as commodity suppliers or even as utilities. Finally, and most definitively, the investment bubble has burst, which historically has been a clear indication that an infrastructural technology is reaching the end of its buildout. A few companies may still be able to wrest advantages from highly specialized applications that don’t offer strong economic incentives for replication, but those firms will be the exceptions that prove the rule.

At the close of the 1990s, when Internet hype was at full boil, technologists offered grand visions of an emerging “digital future.” It may well be that, in terms of business strategy at least, the future has already arrived.

Part 6