Does IT Matter? Ken Peffers UNLV January 2005

IT as a Commodity—Carr Data Storage Data Storage Data Processing Data Processing Data Transport Data Transport These components of information technology are commodities. They aren’t scarce, therefore cannot become the basis for abnormal returns (Carr, 2003) These components of information technology are commodities. They aren’t scarce, therefore cannot become the basis for abnormal returns (Carr, 2003) Commodities Can Be Sources of Risk Commodities Can Be Sources of Risk

What is a commodity Well specified Well specified Available to all Available to all Uniform in quality Uniform in quality

Moore’s Law Each new generation of chips (released about every 18 months) packs 2x components into the same surface area to create 2x power Gordon Moore about 1965

Computer Processing

Similar Trends for Storage, Transport Storage Storage HDD~$0.80 per gigabyte HDD~$0.80 per gigabyte USB pen drives~4 GB for ~$ USB pen drives~4 GB for ~$ Network Network Since 1975 the carrying capacity of a strand of fibre optic cable has increased 1 million fold and is doubling every 16 months (Gilder’s Law). Since 1975 the carrying capacity of a strand of fibre optic cable has increased 1 million fold and is doubling every 16 months (Gilder’s Law).

Innovation as the basis for abnormal returns Economic Theory Economic Theory Returns to investors Returns to investors Industry required rates of return Industry required rates of return Innovation to increase value or reduce costs Innovation to increase value or reduce costs Imitation Imitation Non scarce resources can’t be the source of returns Non scarce resources can’t be the source of returns Faster price declines for IT (McFarlan 2003) don’t matter, per se. Faster price declines for IT (McFarlan 2003) don’t matter, per se. However they can be the source of loses However they can be the source of loses Ergo Carr’s argument about defensive IT investments Ergo Carr’s argument about defensive IT investments

I: The Mainframe Era (1950s-70s) Computing was centralized Computing was centralized Computing was very expensive Computing was very expensive Information access was primitive (batch, dumb terminals) Information access was primitive (batch, dumb terminals) IT considered a budgeted expense (project by project) IT considered a budgeted expense (project by project) Automation of back-office operations Automation of back-office operations Management Information Systems (management reports) Management Information Systems (management reports)

II: The PC Era (late 1970s and 1980s) Personal computing on employee ’ s desktops Personal computing on employee ’ s desktops Decentralization of organizational computing Decentralization of organizational computing Increase of organizational computing power Increase of organizational computing power Untrained IT-users take back control of Information applications Untrained IT-users take back control of Information applications Decision support systems, e.g., spreadsheet models for decision making Decision support systems, e.g., spreadsheet models for decision making Recognition of strategic value of IT Recognition of strategic value of IT

III: Network Computing (1990s to Present) Availability of high bandwidth computer networks Availability of high bandwidth computer networks Information sharing inside and outside the firm Information sharing inside and outside the firm New strategic opportunities for using IT New strategic opportunities for using IT Client-server computing model / IT architecture Client-server computing model / IT architecture Global networks Global networks End to end supply chain integration End to end supply chain integration

IT as the Basis for Innovation History of IT has been the history of a series of new uses History of IT has been the history of a series of new uses IT matters only as a tool for innovation (Brown and Hagel, 2003) IT matters only as a tool for innovation (Brown and Hagel, 2003) Faster and more substantial price decreases for IT create opportunities for disruptive innovation (McFarlan). Faster and more substantial price decreases for IT create opportunities for disruptive innovation (McFarlan).

General IT Strategy for the CEO —McFarlan 2003 New applications for IT create opportunities to: New applications for IT create opportunities to: Create cost savings and efficiencies Create cost savings and efficiencies Walmart Walmart Incrementally improve org structure, products and services Incrementally improve org structure, products and services Carsdirect.com Carsdirect.com Create strategic advantage through chg in scope, partnerships, change rules of competition, new IT based services Create strategic advantage through chg in scope, partnerships, change rules of competition, new IT based services JITTA, distributed organization JITTA, distributed organization HSBC, the world’s local bank HSBC, the world’s local bank

Continued Strategic Advantage Opportunities--Strassman Zero marginal costs create opportunities for returns Zero marginal costs create opportunities for returns Commodity components constitute reduced portion of IT investments Commodity components constitute reduced portion of IT investments IT provides opportunities to extend firm’s knowledge IT provides opportunities to extend firm’s knowledge Standards the basis for cost effective innovation Standards the basis for cost effective innovation Unique applications to fit business processes Unique applications to fit business processes No evidence that IT innovation near end of growth cycle No evidence that IT innovation near end of growth cycle

Sustainable Advantages Better understanding Customer—Broadbent et. al Better understanding Customer—Broadbent et. al CRM CRM Orienting IT investments to achieve strategic goals, Skaitis 2003 Orienting IT investments to achieve strategic goals, Skaitis 2003 CSF CSF Improve the way that businesses work together, Pike 2003 Improve the way that businesses work together, Pike 2003 Supply chain management Supply chain management

New technological wars VOIP telephony VOIP telephony Digital convergence Digital convergence Virtual organizations Virtual organizations Global supply chains Global supply chains Customer integration Customer integration

Challenges for Senior Managers How much should we spend on IT? How much should we spend on IT? Which business processes should receive the investments? Which business processes should receive the investments? Which capabilities should be firm-wide? Which capabilities should be firm-wide? How good should IT services be? How good should IT services be? What security processes? What security processes?

An Obvious Inference? IT more than 50% of all capital investments IT more than 50% of all capital investments Competition within the firm for resources Competition within the firm for resources IT nowhere near mature enough to be considered a commodity IT nowhere near mature enough to be considered a commodity