Value lesson for b-school - Technology Transfer - Column

Software Magazine, March, 1993 by Peter Greis, Robert Materna

* Can IT build-in switching costs? That creates a dependence which, combined with normal human inertia, makes switching to a competitor unattractive.

* Can technology change the basis of competition? IT has the potential to change competition in three ways: cost reduction, product differentiation and specialization.

* Can IT change the balance of power in supplier relationships? The interest here is on strengthening control over one's suppliers through the use of interorganizational information systems such as Electronic Data Interchange (EDI).

If the answer to one or more of the above questions is yes, McFarlan states that IT respresents a strategic resource that requires high-level attention.

Peter Keen outlines the "Principles for Competitive Positioning," in his book Shaping the Future: Business Design through Information Technology (Harvard Business School Press, 1991). For example, Keen suggests that firms need to target IT investments to core business drivers. They must examine those core drivers from the customer's perspective. Companies must also consider the time it is likely to take a competitive opportunity to become a competitive necessity, and assess their options within that time frame. Finally, businesses should look for sustainable advantage to come from the IT infrastructure, rather than from specific IT applications.

With the preceding in mind, managers must realize that investing in complex systems to achieve competitive advantage takes time and planning.

Research & Development. Creating an R&D budget is a familiar process in most firms. Historically, though, companies have not done so for the IT function. The justification for R&D within the IT area is that despite risk, one of the many projects will pay off. As a guideline, companies should only consider this approach for those projects in the mainstream of the business.

Paul Strassmann, in his book The Business Value of Computers (Information Economics Press, 1990. New Canaan, Conn.), states that firms should set aside at least 5% of their total development resources for exploratory purposes.

In the end, all senior decision makers must recognize that their business will require complex systems to achieve their breakthrough plans. Unfortunately, the business value of IT is not always immediately obvious. Management often cannot quantify these investments using traditional cost/benefit thinking.

In the information age, the value of IT depends more than ever on what a business does with the information obtained from the automation process. Therefore, businesses must apply new ways of thinking to the evaluation process.