Exam essay: The value of IT
January 4, 2009
In this essay, I discuss how IT can create value for organizations.
Exam essay: The value of IT
Nicolas Carr’s book “Does IT Matter” generated much debate about the value of IT to the firm, primarily in terms of conferring competitive advantage. Summarize his argument, and (if appropriate) refute it. In your opinion, what is the value of IT to the firm?
Nicolas Carr’s book Does IT Matter was about the value of IT to the firm: does it confer competitive advantage to the firm, and if so, how? In this essay, I discuss how IT can create value for organizations. I then summarize Carr’s argument, and offer rebuttals to it.
What is the value of IT? It gives value to the organization in that it can processes information into forms more suitable to the purposes of the firm, it can deliver that information to the people who need to see it when they need to see it, and in that it can enhance the ability of people in the firm to communicate and collaborate. All of this can be used to either add value to the firm by opening opportunities or reduce costs of operation and development. IT can affect the firm’s business model in one of five ways. It can reduce the power that a firm’s suppliers and customers have over the firm. It can affect barriers to entry in markets, either lowering them in markets the firm wants to enter, or raising them in markets in which the firm is well established. It can raise or lower product/service switching costs: Gmail has it’s customer’s e-mail and the more they have, the harder it is for a customer to switch to another e-mail provider; conversely the Internet lowers switching costs for services who don’t keep data like Gmail does, because everything is equally far away on the Internet. It can change the nature of competition between a firm and its rivals by offering new information to customers and staff, and by transforming business processes and value chains. It can enhance existing products and services that the firm offers, or allow it to offer new products and services. As we’ve seen when businesses took to the Internet, and as they are now taking to mobile phones, it can open new channels to existing markets or open new markets.
Carr’s argument is that IT is no longer strategically important to firms because it can no longer confer competitive advantage to them, which means that they can no longer rely on only IT to help them to do better than their rivals in the markets in which they operate. His argument has two parts. First, that IT, especially IT infrastructure, has become so cheap, powerful and easily available to all that it has become commoditized, like electrical power or the telephone service. Second, he says that IT is now easily replicable, so that even if a firm would think of a novel way to use IT, it would be copied quickly by their rivals and their competitive advantage would disappear.
His first claim he supports by saying that Moore’s law (computers become twice as powerful for the same or lesser price every 18 months) and Gilder’s law (network bandwidth doubles every 6 months) have driven the price of powerful computing hardware and networking equipment down to the point where any firm can afford them. Gone are the days when simply owning a computer or having a WAN could give you an edge over your rivals that could last years. He says that commercial off the shelf software (COTS) has become so powerful and complex, embodying industry wide best-practices, that it would not make financial sense for a firm to attempt to duplicate them. He’s thinking of ERP, CRM and SCM software here, I imagine, as well as office software like word processors. Finally, he says that the dominance of standards in IT (the Internet, the WWW, Web Services, etc.) is such that shared infrastructure gives more value to the firm in terms of cost savings than the firm would get from developing a non-standards compliant IT artifact (that a competitor would have to duplicate, presumably).
Carr’s second claim – easy replicability of IT solutions – he supports as follows. Programmers are cheap, programming tools are very powerful, and software is easy and cheap to write. Hardware and software are, these days, plug and play building blocks, and hardware is pretty homogenous.
Carr has two fundamental misunderstandings regarding IT. First, that IT is a drop in solution for any organization, like adding new electrical capacity to the factory floor in a manufacturing plant. It is not. Second, that IT infrastructure is single use, again, like the electrical grid which provides power to firms and nothing else.
As we know well, being IS researchers, the IT artifact is surrounded by business processes which must be changed or created to integrate the IT artifact effectively into the business, It is used by humans who have more or less willingness and ability to use the artifact. And it is embedded in an organizational context: a business which has an organizational culture which can be hostile to the IT artifact, an enterprise architecture into which the artifact must fit, an absorptive capacity (the ability of the organization to understand how to learn to use the artifact effectively). All of this affects the ability of the firm to use the IT artifact effectively. Business/IT alignment is goes both ways: we must adapt the new IT artifact to the business environment, and we must adapt the business environment to the IT artifact. This adaptation takes time, years possibly, especially for the large systems like ERP, CRM and SCM systems. So even though the much knowledge, learning and complexity is embedded in these COTS systems, that is only part of the battle. In fact, it is debatable for some kinds of systems whether (if the firm has R&D capacity) it is more expensive to adapt the system to organization and vice versa, or write the system from the ground up to mate well with the organization. Content management systems are good examples of this. Thus, even if the IT artifact itself is a commodity, it can still confer competitive advantage to the firm due to process, people, and organizational context issues.
Carr’s second misunderstanding is about single-use IT. IT typically offers not just a single unchangeable use. Think of the Internet, which has been in operation since the late 1960s and whose core protocols have hardly changed since the 1970s. Every year (every few weeks or days, probably), people think of new ways to leverage the same infrastructure, ways that could not have been predicted back in the 1960s. This is the value of infrastructure, properly designed: it creates value by creating options. An IT artifact typically confers a short term value that is easy to replicate – this is the goal for which the artifact was designed. But if it is designed properly, the artifact offers value in the long term because it can be used for goals which were not foreseen during its design. This is especially true of infrastructural components of an artifact. It is this future opportunities that can confer competitive advantage, because it takes talent, vision and effective Business and IT governance to see and take advantage of them. Not every firm has this.
