The Real New EconomyClass 1: Intro and Course Overview
Diana FarrellCase summary by: Kalpana Samuel
Main Takeaways
- IT is a tool and not a solution.
- The success of IT investment depends on how well the IT efforts align with the business objectives and goals.
- Managerial practices should adapt to the new IT innovations that the company has put in place.
More in-depth Summary
The real new economy was exemplified by companies and industries that incorporated IT into their businesses in ways that enabled the firms to post great productivity gains. The three reasons for such gains were.
- IT enabled the development of new products and efficient business processes
- IT facilitated the rapid industry wide diffusion of innovations
- IT exhibited strong scale economies – its benefits multiplied rapidly as its use expanded.
The characteristics of the real new economy of the 1990’s are:
- Need to deal with severe competition
- Innovation
- Productivity Growth
The six sectors that reflected the “real new economy” in the US with a net contribution of 76% to overall productivity were
- Retailing
- Securities Brokerage
- Wholesaling
- Semiconductors
- Computer Assembly
- Telecommunications
The managers in these sectors had to innovate aggressively to deal with severe competition and were focused on finding creative ways of cutting costs and adding greater value to customers. IT was used as an effective tool in their business process innovation. It was not just that these firms invested in IT but rather these sectors leveraged new IT capabilities to create or improve existing business processes. Their creative uses of IT investments in their respective industries led to:
1)New Products and Processes:
These new products and processes benefited both the companies and their customers. An example of an information intensive industry that benefited greatly from IT capabilities was the securities brokerage industry. Firms like Charles Schwab and E*Trade introduced on-line trading thereby significantly reducing their workforce of brokers.
2)Diffusion:
As IT spread across a sector such as the retail sector it led to the sector adopting all of the following:
- Warehouse management and automation systems
- Bar code scanners and readers
- ERP modules for human resources, payroll and reporting
This pervasive influence of IT brought about by its diffusion across the sector resulted in great productivity gains. There is however a caveat to this kind of adoption in that this is something that can be copied and the advantage gained can be leveled across competing firms. The greater edge could be gained only by firms such as J.P Morgan Chase that coupled these IT advantages with their own distinctive strengths such as using IT for its automotive finance market. J.P Morgan Chase introduced its on-line DealerTrack system which dealers used to help customers find and close loans electronically. As DealerTrack was based on J.P Morgan’s existing advantages it could not be copied by industry rivals.
3)Scaling:
The benefits of IT grew several times over as scale increases. Hence the industries with high volume output and concentration enjoyed greater benefits. A typical example is retail banking in the US. US bank customers carry several more transactions than their German counterparts and hence the gains experienced by US banks were that much greater than that of the German banks.
Even amongst the companies in the six sectors mentioned above there was great variations in the levels of benefit accrued by IT investments. The three main reasons for the success of some firms over the others in the very same industry are the following:
1)Targeting the productivity levers that matter:
The levers that matter vary considerably from industry to industry. Focusing IT efforts and investments on the levers that matter is the key to great productivity gains. In retail banking customized lending, credit-card operations, and back-office transactions provide great boosts to productivity. On the other hand for consumer retailing, streamlining distribution and logistics is more crucial.
The challenge for the IT vendors in this case would be to learn how IT can enhance each of its customer’s business. The same usage and approach to IT usage will not work across industries as businesses vary in their productivity levers and services.
2)Getting the sequencing and timing right:
Sequencing - IT investments need to build on one another. Walmart is a great example of a firm that got the sequence of its IT deployment efforts just right. The company did the following in a sequence that built on the advantages of the previous step in the sequence:
- The company installed software to manage the flow and storage of products through its vast and widespread network of suppliers, warehouses and distribution centers.
- The company then focused its IT efforts on coordinating its operations more efficiently with its suppliers, building on the IT infrastructure already in place.
- Wal-Mart then invested in IT to plan the mix and replenishment of its goods.
- Finally, Wal-Mart built a data warehouse that pulled data from a range of sources to handle complex queries.
Timing – To lead or follow in the industry can be the difference between success and failure. A company should rush into IT investment only if it ties in with its own business goals and services. The investment should help the company differentiate the firm rather than being an add-on because everyone else is doing it.
The challenge for the IT vendors in this domain would be to help businesses get benefit from the sunk IT costs and provide the missing piece of IT that can make the great difference from wasted IT investment to productive IT investment.
3)Pursuing managerial and technological innovations in tandem:
Technological innovations will be of little or no value if the managerial and business practices do not adapt to these innovations. Wal-Mart would not have enjoyed the great benefits of IT innovations if it had not changed its relationships with its suppliers to exploit the technology.
The challenge for the IT vendors with regards to this aspect is forming learning partnerships with their customers so that they can tie in their technology products with managerial breakthroughs.
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