RESPNSE 3
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Does IT Matter?
Introduction
For over 50 years, computing technology has been a part of business. Organizations have
spent trillions of dollars on information technologies. But has all this investment in IT
made a difference? Have we seen increases in productivity? Are companies that invest in
IT more competitive? In this reading, we will look at the value IT can bring to an
organization and try to answer these questions. We will begin by highlighting two
important works from the past two decades.
The Productivity Paradox
In 1991, Erik Brynjolfsson wrote an article, published in the Communications of the ACM,
entitled “The Productivity Paradox of Information Technology: Review and Assessment.”
By reviewing studies about the impact of IT investment on productivity, Brynjolfsson was
able to conclude that the addition of information technology to business had not
improved productivity at all—the “productivity paradox.” From the article, he does not
draw any specific conclusions from this finding and provides the following analysis
(Brynjolfsson, 1991):
Although it is too early to conclude that IT’s productivity contribution has been subpar, a
paradox remains in our inability to unequivocally document any contribution after so
much effort. The various explanations that have been proposed can be grouped into four
categories:
1. Mismeasurement of outputs and inputs,
2. Lags due to learning and adjustment,
3. Redistribution and dissipation of profits, and
4. Mismanagement of information and technology.
Learning Resource
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In 1998, Brynjolfsson and Lorin Hitt published a follow-up paper entitled “Beyond the
Productivity Paradox” (Brynjolfsson & Hitt, 1998). In this paper, the authors utilized new
data that had been collected and found that IT did, indeed, provide a positive result for
businesses. Further, they found that sometimes the true advantages in using technology
were not directly relatable to higher productivity, but to “softer” measures, such as the
impact on organizational structure. They also found that the impact of information
technology can vary widely between companies.
IT Doesn’t Matter
Just as a consensus was forming about the value of IT, the internet stock market bubble
burst. Just two years later, in 2003, Harvard professor Nicholas Carr wrote his article “IT
Doesn’t Matter” in the Harvard Business Review. In this article, Carr asserts that as
information technology has become more ubiquitous, it has also become less of a
differentiator. In other words, because information technology is so readily available and
the software used so easily copied, businesses cannot hope to implement these tools to
provide any sort of competitive advantage. Carr goes on to suggest that since IT is
essentially a commodity, it should be managed like one: low cost, low risk. Using the
analogy of electricity, Carr describes how a firm should never be the first to try a new
technology, thereby letting others take the risks. IT management should see themselves as
a utility within the company and work to keep costs down. For IT, providing the best
service with minimal downtime is the goal.
As you can imagine, this article caused quite an uproar, especially from IT companies.
Many articles were written in defense of IT; many others in support of Carr. Carr released
a book based on the article in 2004, entitled “Does IT Matter?”
Probably the best thing to come out of the article and subsequent book was that it
opened up discussion on the place of IT in a business strategy, and exactly what role IT
could play in competitive advantage, which is addressed in this reading.
Competitive Advantage
What does it mean when a company has a competitive advantage? What are the factors
that play into it? While there are entire courses and many different opinions on this topic,
let’s go with one of the most accepted definitions, developed by Michael Porter (2001) in
his book Competitive Advantage: Creating and Sustaining Superior Performance. A
company is said to have a competitive advantage over its rivals when it is able to sustain
profits that exceed average for the industry. According to Porter, there are two primary
methods for obtaining competitive advantage: cost advantage and differentiation
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advantage. So the question becomes: how can information technology be a factor in one
or both of these methods? In the sections below, we will explore this question using two
of Porter’s analysis tools: the value chain and the five forces model. We will also use
Porter’s analysis in his 2001 article “Strategy and the Internet,” which examines the impact
of the internet on business strategy and competitive advantage, to shed further light on
the role of information technology in competitive advantage.
The Value Chain
In his book, Porter describes exactly how a company can create value (and therefore,
profit). Value is built through the value chain: a series of activities undertaken by the
company to produce a product or service. Each step in the value chain contributes to the
overall value of a product or service. While the value chain may not be a perfect model for
every type of company, it does provide a way to analyze just how a company is producing
value. The value chain is made up of two sets of activities: primary activities and support
activities. We will briefly examine these activities and discuss how information technology
can play a role in creating value by contributing to cost advantage, differentiation
advantage, or both.
Porter’s Value Chain
Series of activities that contribute to the overall value of a product or service
The primary activities are the functions that directly impact the creation of a product or
service. The goal of the primary activities is to add more value than they cost. The primary
activities are:
Inbound logistics: These are the functions performed to bring in raw materials and
other needed inputs. Information technology can be used here to make these
processes more efficient, such as with supply-chain management systems, which
allow the suppliers to manage their own inventory.
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Operations: Any part of a business that is involved in converting the raw materials
into the final products or services is part of operations. From manufacturing to
business process management (covered in Business Processes), information
technology can be used to provide more efficient processes and increase innovation
through flows of information.
Outbound logistics: These are the functions required to get the product out to the
customer. As with inbound logistics, IT can be used here to improve processes, such
as allowing for real-time inventory checks. IT can also be a delivery mechanism itself.
Sales/Marketing: The functions that will entice buyers to purchase the products are
part of sales and marketing. Information technology is used in almost all aspects of
this activity. From online advertising to online surveys, IT can be used to innovate
product design and reach customers like never before. The company website can be
a sales channel itself.
Service: The functions a business performs after the product has been purchased to
maintain and enhance the product’s value are part of the service activity. Service can
be enhanced via technology as well, including support services through websites and
knowledge bases.
The support activities are the functions in an organization that support, and cut across, all
of the primary activities. The support activities are:
Firm infrastructure: This includes organizational functions such as finance,
accounting, and quality control, all of which depend on information technology; the
use of enterprise resource planning (ERP) systems (to be covered in The People in
Information Systems) is a good example of the impact that IT can have on these
functions.
Human resource management: This activity consists of recruiting, hiring, and other
services needed to attract and retain employees. Using the internet, HR
departments can increase their reach when looking for candidates. There is also the
possibility of allowing employees to use technology for a more flexible work
environment.
Technology development: Here we have the technological advances and innovations
that support the primary activities. These advances are then integrated across the
firm or within one of the primary activities to add value. Information technology
would fall specifically under this activity.
Procurement: The activities involved in acquiring the raw materials used in the
creation of products and services are called procurement. Business-to-business e-
commerce can be used to improve the acquisition of materials.
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This analysis of the value chain provides some insight into how information technology
can lead to competitive advantage. Let’s now look at another tool that Porter developed—
the “five forces” model.
Porter’s Five Forces
Porter developed the “five forces” model as a framework for industry analysis. This model
can be used to help understand just how competitive an industry is and to analyze its
strengths and weaknesses. The model consists of five elements, each of which plays a role
in determining the average profitability of an industry. In 2001, Porter wrote an article
entitled ”Strategy and the Internet,” in which he takes this model and looks at how the
internet impacts the profitability of an industry. Below is a quick summary of each of the
five forces and the impact of the internet.
Porter’s Five Forces Model
Five elements that determine an industry’s competitiveness and average profitability
Threat of substitute products or services: How easily can a product or service be
replaced with something else? The more types of products or services there are that
can meet a particular need, the less profitability there will be in an industry. For
example, the advent of the mobile phone has replaced the need for pagers. The
internet has made people more aware of substitute products, driving down industry
profits in those industries being substituted.
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Bargaining power of suppliers: When a company has several suppliers to choose
from, it can demand a lower price. When a sole supplier exists, then the company is
at the mercy of the supplier. For example, if only one company makes the controller
chip for a car engine, that company can control the price, at least to some extent.
The internet has given companies access to more suppliers, driving down prices. On
the other hand, suppliers now also have the ability to sell directly to customers.
Bargaining power of customers: A company that is the sole provider of a unique
product has the ability to control pricing. But the internet has given customers many
more options to choose from.
Barriers to entry: The easier it is to enter an industry, the tougher it will be to make
a profit in that industry. The internet has an overall effect of making it easier to
enter industries. It is also very easy to copy technology, so new innovations will not
last that long.
Rivalry among existing competitors: The more competitors there are in an industry,
the bigger a factor price becomes. The advent of the internet has increased
competition by widening the geographic market and lowering the costs of doing
business. For example, a manufacturer in Southern California may now have to
compete against a manufacturer in the South, where wages are lower.
Porter’s five forces are used to analyze an industry to determine the average profitability
of a company within that industry. Adding in Porter’s analysis of the internet, we can see
that the internet (and by extension, information technology in general) has the effect of
lowering overall profitability (Porter, 2001). While the internet has certainly produced
many companies that are big winners, the overall winners have been the consumers, who
have been given an ever-increasing market of products and services and lower prices.
Using Information Systems for Competitive Advantage
Now that we have an understanding of competitive advantage and some of the ways that
IT may be used to help organizations gain it, we will turn our attention to some specific
examples. A strategic information system is an information system that is designed
specifically to implement an organizational strategy meant to provide a competitive
advantage. These sorts of systems began popping up in the 1980s, as noted in a paper by
Charles Wiseman entitled “Creating Competitive Weapons From Information Systems”
(Wiseman & MacMillan, 1984).
Specifically, a strategic information system is one that attempts to do one or more of the
following:
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deliver a product or a service at a lower cost;
deliver a product or service that is differentiated;
help an organization focus on a specific market segment; or
enable innovation.
Following are some examples of information systems that fall into this category.
Business Process Management Systems
In their 2003 book, IT Doesn’t Matter—Business Processes Do, Smith and Fingar argued
that it is the integration of information systems with business processes that leads to
competitive advantage. They then go on to state that Carr’s article is dangerous because it
gave CEOs and IT managers the green light to start cutting their technology budgets,
putting their companies in peril. They go on to state that true competitive advantage can
be found with information systems that support business processes. In the reading,
Business Processes, we will focus on the use of business processes for competitive
advantage.
Electronic Data Interchange
One of the ways that information systems have participated in competitive advantage is
through integrating the supply chain electronically. This is primarily done through a
process called electronic data interchange, or EDI. EDI can be thought of as the
computer-to-computer exchange of business documents in a standard electronic format
between business partners. By integrating suppliers and distributors via EDI, a company
can vastly reduce the resources required to manage the relevant information. Instead of
manually ordering supplies, the company can simply place an order via the computer and
the next time the order process runs, it is ordered.
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Manual Order Process
Graphic comparison of the manual order process
Order Process with EDI
Graphic comparison of the order process with electronic data exchange (EDI)
Collaborative Systems
As organizations began to implement networking technologies, information systems
emerged that allowed employees to begin collaborating in different ways. These systems
allowed users to brainstorm ideas together without the necessity of physical, face-to-face
meetings. Utilizing tools such as discussion boards, document sharing, and video, these
systems made it possible for ideas to be shared in new ways and the thought processes
behind these ideas to be documented.
Broadly speaking, any software that allows multiple users to interact on a document or
topic could be considered collaborative. Electronic mail, a shared Word document, social
networks, and discussion boards would fall into this broad definition. However, many
software tools have been created that are designed specifically for collaborative purposes.
These tools offer a broad spectrum of collaborative functions. Here is just a short list of
some collaborative tools available for businesses today:
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Google Drive. Google Drive offers a suite of office applications (such as a word
processor, spreadsheet, drawing, presentation) that can be shared between
individuals. Multiple users can edit the documents at the same time and threaded
comments are available.
Microsoft SharePoint. SharePoint integrates with Microsoft Office and allows for
collaboration using tools most office workers are familiar with. SharePoint is covered
in more detail in the reading, Networking and Communication.
Cisco WebEx. WebEx is a business communications platform that combines video
and audio communications and allows participants to interact with each other’s
computer desktops. WebEx also provides a shared whiteboard and the capability for
text-based chat to be going on during the sessions, along with many other features.
Mobile editions of WebEx allow for full participation using smartphones and tablets.
Atlassian Confluence. Confluence provides an all-in-one project-management
application that allows users to collaborate on documents and communicate
progress. The mobile edition of Confluence allows the project members to stay
connected throughout the project.
IBM Lotus Notes/Domino. One of the first true “groupware” collaboration tools,
Lotus Notes (and its web-based cousin, Domino) provides a full suite of collaboration
software, including integrated email.
Decision Support Systems
A decision support system (DSS) is an information system built to help an organization
make a specific decision or set of decisions. DSSs can exist at different levels of decision-
making with the organization, from the CEO to the first-level managers. These systems
are designed to take inputs regarding a known (or partially known) decision-making
process and provide the information necessary to make a decision. DSSs generally assist a
management-level person in the decision-making process, though some can be designed
to automate decision making.
An organization has a wide variety of decisions to make, ranging from highly structured
decisions to unstructured decisions. A structured decision is usually one that is made
quite often, and one in which the decision is based directly on the inputs. With structured
decisions, you know the decision that needs to be made once you know the necessary
information. For example, inventory reorder levels can be structured decisions: Once our
inventory of widgets gets below a specific threshold, automatically reorder 10 more.
Structured decisions are good candidates for automation, but we don’t necessarily build
decision support systems for them.
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An unstructured decision involves a lot of unknowns. Many times, unstructured decisions
are decisions being made for the first time. An information system can support these
types of decisions by providing decision-makers with information-gathering tools and
collaborative capabilities. An example of an unstructured decision might be dealing with a
labor issue or setting policy for a new technology.
Decision support systems work best when decision-makers are making semi-structured
decisions. A semi-structured decision is one in which most of the factors needed for
making the decision are known, but human experience and other outside factors may still
play a role. A good example of an semi-structured decision would be diagnosing a medical
condition (see sidebar).
As with collaborative systems, DSSs can come in many different formats. A nicely
designed spreadsheet that allows for input of specific variables and then calculates
required outputs could be considered a DSS. Another DSS might be one that assists in
determining which products a company should develop. Input into the system could
include market research on the product, competitor information, and product
development costs. The system would then analyze these inputs based on the specific
rules and concepts programmed into it. Finally, the system would report its results, with
recommendations and/or key indicators to be used in making a decision. A DSS can be
looked at as a tool for competitive advantage in that it can give an organization a
mechanism to make wise decisions about products and innovations.
Isabel—A Health Care DSS
DSSs are best applied to semi-structured decisions, in which most of the needed
inputs are known, but human experience and environmental factors also play a role.
A good example that is in use today is Isabel, a health-care DSS. The creators of
Isabel explain how it works:
Isabel uses the information routinely captured during your workup, whether
free text or structured data, and instantaneously provides a diagnosis checklist
for review. The checklist contains a list of possible diagnoses with critical
“Don’t Miss Diagnoses” flagged. When integrated into your EMR system,
Isabel can provide “one click” seamless diagnosis support with no additional
data entry (http://www.isabelhealthcare.com/home/ourmission).
Investing in IT for Competitive Advantage
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In 2008, Brynjolfsson and McAfee published a study in the Harvard Business Review on
the role of IT in competitive advantage, entitled “Investing in the IT That Makes a
Competitive Difference.” Their study confirmed that IT can play a role in competitive
advantage, if deployed wisely. In their study, they draw three conclusions (McAfee &
Brynjolfsson, 2008):
First, the data show that IT has sharpened differences among companies instead of
reducing them. This reflects the fact that while companies have always varied widely
in their ability to select, adopt, and exploit innovations, technology has accelerated
and amplified these differences.
Second, good management matters. Highly qualified vendors, consultants, and IT
departments might be necessary for the successful implementation of enterprise
technologies themselves, but the real value comes from the process innovations that
can now be delivered on those platforms. Fostering the right innovations and
propagating them widely are both executive responsibilities that can’t be delegated.
Finally, the competitive shakeup brought on by IT is not nearly complete, even in the
IT-intensive US economy. We expect to see these altered competitive dynamics in
other countries, as their IT investments grow.
Information systems can be used for competitive advantage, but they must be used
strategically. Organizations must understand how they want to differentiate
themselves and then use all the elements of information systems (hardware,
software, data, people, and process) to accomplish that differentiation.
Summary
Information systems are integrated into all components of business today, but can they
bring competitive advantage? Over the years, there have been many answers to this
question. Early research could not draw any connections between IT and profitability, but
later research has shown that the impact can be positive. IT is not a panacea; just
purchasing and installing the latest technology will not, by itself, make a company more
successful. Instead, the combination of the right technologies and good management,
together, will give a company the best chance of a positive result.
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Study Questions
1. What is the productivity paradox?
2. Summarize Carr’s argument in “Does IT Matter?”
3. How is the 2008 study by Brynjolfsson and McAfee different from previous
studies? How is it the same?
4. What does it mean for a business to have a competitive advantage?
5. What are the primary activities and support activities of the value chain?
6. What has been the overall impact of the internet on industry profitability?
Who has been the true winner?
7. How does EDI work?
8. Give an example of a semi-structured decision and explain what inputs would
be necessary to provide assistance in making the decision.
9. What does a collaborative information system do?
10. How can IT play a role in competitive advantage, according to the 2008 article
by Brynjolfsson and McAfee?
References
Brynjolfsson, E. (1991). The productivity paradox of information technology: review and
assessment. Communications of the ACM, 36(12), 66-77.
Brynjolfsson, E., & Hitt, L. (1998). Beyond the productivity paradox. Communications of
the ACM, 41(8), 49–55.
McAfee, A., & Brynjolfsson, E. (2008, July - August). Investing in the IT that makes a
competitive difference. Harvard Business Review. Retrieved from
https://hbr.org/2008/07/investing-in-the-it-that-makes-a-competitive-difference
Porter, M. (2001). Strategy and the internet. Harvard Business Review, 79(3), Retrieved
from http://hbswk.hbs.edu/item/2165.html
Smith, H. & Fingar, P. (2003). IT doesn’t matter—Business processes do. Tampa, FL:
Meghan-Kiffer Press.
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Wiseman, C., & MacMillan, I. C. (1984). Creating competitive weapons from information
systems. Journal of Business Strategy, 5(2), 42.
Licenses and Attributions
Chapter 7: Does IT Matter?
(https://www.saylor.org/site/textbooks/Information%20Systems%20for%20Business%20
and%20Beyond.pdf) from Information Systems for Business and Beyond by David T.
Bourgeois is available under a Creative Commons Attribution 3.0 Unported
(https://creativecommons.org/licenses/by/3.0/) license. © 2014, David T. Bourgeois.
UMGC has modified this work and it is available under the original license.
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