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The strategic potential of information technology.

Everybody hears about the strategic potential of information technology. But, in spite of the fact that most organizations are rapidly upping their investment in IT, only a few have been able to use it to transform their businesses and to enjoy the competitive advantages IT can provide.

Beyond past experience

Why are so many executives having trouble getting the message that information technology can transform their business? For several reasons. The first is that none of us, in our lifetimes, have ever before experienced a fundamental shift in our economy. We are now moving from the well-understood industrial economy to the ill-understood information economy. As a result, the emphasis is shifting from creation of value through the mass-production and mass-distribution of tangible goods and services to consolidation of these functions, and we are competing instead with such intangibles as quality, manufacturing to customer orders, and instant distribution at the point of sale.

This economic transition requires companies to realize an incredible increase in productivity of traditional goods and services, an increase analogous to the increases in productivity realized in the transition from the agrarian economy to the industrial economy in the last century. In the U.S., the 48 percent of the labor force involved in producing agricultural products in 1865 was reduced to 4 percent by 1945, while overall agricultural output increased.

Fully automated operations, both in factories and in offices, are creating comparable increases in productivity. As a result, an economic base for the new information economy is now emerging in much the same way that the industrial economy was built upon the productivity realized through the mechanized farm.

Getting the transformation "message" means to understand the need to build the emerging economic base on consolidating the productivity of the existing economic base, a consolidation that is made possible by the incredible productivity increases that information technology is providing.

Creative destruction

One reason that "getting the transformation message" is hard is that transformation involves "creative destruction"--destruction of the old ways of doing business in such a way that business can be done while new ways of doing business are being formed. Today's executives must maintain high levels of EPS and ROI to satisfy investors, while they undertake initiatives involving the major IT investments required to survive in the highly competitive global marketplace.

We have identified the major factors in the shift from the industrial economy to the information economy, as illustrated in the figure on page 26. The "creative destruction," an essential aspect of the transformation, is apparent.

IT as strategy

Another reason that many executives don't get the message is that they don't understand the driving role IT is playing in this transformation. For the first 30 years, computers have played a tactical role. They were used to support the business as it was structured: to make traditional ways of doing business more efficient. Consequently, involvement with computer technology contributed little to executive advancement.

But IT drives the creative destruction of the attributes of the industrial economy and hence the process of transformation. So familiarity with IT and its capabilities is now becoming essential in top management.

To illustrate, as companies continue to downsize (to maintain higher levels of productivity with given labor inputs), they realize they will not require the number and mix of workers they needed in the past. Further, the smaller number of workers are required to carry out higher level tasks, which in turn requires investments in training and IT. Just as we leveraged manual labor with machines in the industrial economy, we are now leveraging machines with information and knowledge resources. And, of course, traditional reward systems change as well, often becoming more performance-based.

The examples go on. As companies achieve levels of quality never before possible, cross-functional integration becomes a new tenet of corporate structures. IT enables the cross-functional integration without loss of control.

IT for economic breakaway

In our experience so far, we have not found any one company that is creating strategic advantage by addressing all the factors of transformation. But by examining the strategies of a number of successful companies, we have identified a number of areas integral to using IT to create a strategic advantage.

* Empowering knowledge workers through IT--The transformed organization will be dominated by knowledge workers. One of the major issues facing us in the next decade is the design of the new workplace. Break-away companies are beginning to show us glimpses of what it will look like.

* Building cross-functional systems--The transformed organization will move away from the functional hierachy. It will be structured and managed by cross-functional processes that link the organization with its suppliers and customers and that permit global management. Building integrated cross-functional systems is counter-cultural to most organizations.

* Getting rid of paper--The transformed organization shifts from paper to the faster electronic form of communication.

* Being global--The transformed organization will be global. This is likely to be the greatest shift of all.

* Competing in time and knowledge--The transformed organization is competitive in cost and quality, as a given. It wins in the global marketplace by its relentless reduction in the time it takes to meet and satisfy unique customer needs. This capability is created by capturing and leveraging knowledge.
COPYRIGHT 1991 Financial Executives International
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Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Special Report: Information Technology
Author:Nolan, Richard L.
Publication:Financial Executive
Date:Jul 1, 1991
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