Tom Davenport on E-Strategy: The Next Killer App?

Strategizing about the role of IT in business has been a roller coaster during the past couple of decades. The ride really started in the early 1980s, when academics and consultants discovered a few managers who had–consciously or not–built their competitive strategies around key IT applications. Maybe you remember: American Airlines and United Airlines had their reservation systems. American Hospital Supply had its online ordering system. Frito-Lay had its handheld devices for the sales force. The realm of strategy as killer app lasted until 1990 when reengineering reared its head. For the next five years IT strategy would consist of redesigning business processes around the capabilities of technology. In the mid to late ’90s, new strategic thrusts came quickly: ERP, knowledge management, CRM. Late in the decade, IT strategy effectively became e-commerce strategy, or e-strategy. The only thing that mattered was how the Internet affected your business.

Today we realize that, just like every previous strategic emphasis, e-commerce can’t do all the heavy lifting. The most aggressive adopters of the Internet, as any burned stockbroker will admit, haven’t necessarily been successful in gaining profits or market share. Sure e-commerce is important, just like all of the other IT-enabled strategic opportunities that preceded it. Perhaps it’s even the most important of them all. But by itself, it’s not enough.

So what’s the new nostrum for using IT to slay your competitors? Is it still even reasonable to think about IT as such a weapon? Since the magic bullet of choice seems to change every few years, maybe we’ve simply been kidding ourselves about the strategic role of technology.

There is evidence of technology’s potent effects, and they lie in the continuing success of the companies that use them well. Think about it. Do you know of any companies that invested long term in IT that have gone out of business? In airlines, United and American have long been the IT innovators, and they’re the largest companies in their industry. In parcel delivery, FedEx has been an IT pioneer from the early days, and the resulting prosperity has been dramatic. UPS was originally quite weak in IT but then made a major strategic shift and invested heavily in technology for more than a decade. It’s no coincidence that UPS has become the primary delivery channel for Internet-procured parcels. In banking, State Street has pursued a technology-intensive strategy in its global custody business since the late 1960s when Bill Edgerly came to the company from IBM; it’s been more consistently profitable than any other U.S. bank. Then there’s Wal-Mart. And H.E. Butt Grocery and Wegmans Food Markets in the retail grocery industry. USAA and The Progressive Corp. in the insurance industry. Dow Chemical in chemicals. BP in the oil business. All of these companies have built their IT capabilities for the long haul, and their strategies have been much the better for it.

All that suggests it can take a while to build an effective IT strategy, and in fact it does. But that doesn’t mean new players can’t emerge. Cisco Systems is a great example. It’s got a hot product in Internet telecommunications equipment. But it’s also the best example of how to use both front-office Internet and back-office transaction systems in running a business. And it never stops looking for new ways to innovate with technology.

Other newcomers to the IT-enabled strategy club are General Electric and Harrah’s Entertainment. At GE, technology wasn’t initially high on CEO and Chairman Jack Welch’s list of management tools, but he’s discovered it with a vengeance. He says that “digitizing” GE’s business was the most important thing the company did and has vowed to keep major investments even through an economic slowdown. At Harrah’s, the senior management team–and particularly COO Gary Loveman–has been overseeing the development of an incredibly powerful marketing machine powered by database marketing, CRM, yield management and high-powered analytics. The company is now managing to attract customers without building the mind-boggling expensive casinos you find in Las Vegas today. And its financial performance is way up during the past couple of years.

What do these companies have in common? I’m glad you asked, because their approaches compose the new IT strategy.

Put your money where the money is. These successful companies make their IT investments in the core of the business, consistent with their product and service strategies. In almost every case, there’s a link between the technology and something the customer can see and buy.

Not always first, but always committed. Successful IT strategists aren’t necessarily the first movers on a new technology or IT-related management idea. Wal-Mart and USAA were slow out of the box with their Web capabilities, but they came on strong and will last. A hallmark of good IT strategy is long-term commitment–across generations of new technologies and managers. You can bet that Jack Welch is schooling his successor, Jeffrey Immelt, on the importance of IT to GE.

Maestros in the boardroom. These long-term, committed managers might be called maestros. The term comes from a book called Waves of Change, based on the early history of strategic IT, most of the research for which was done by Duncan Copeland. A maestro knows the business goals and enough technology to understand how it can advance the strategy. He also orchestrates the business and technological changes over the long term to bring about a transformed organization.

No killer app. The new IT strategy is a synthetic strategy that draws on multiple technologies and management approaches, not just one. The company that’s excellent at IT strategy today must excel at ERP in the back office, CRM and e-commerce in the front office, as well as data warehousing, mining and KM. Virtually every key process–internal and interorganizational–has to be reengineered through IT. Cisco was one of the first to successfully connect its ERP system with the Internet and has since added substantial CRM capabilities for customer service and an extensive portal for internal and customer-oriented knowledge management. Even with its lead, the company never rests: It recently went through another round of reengineering key processes to make better use of available technology.

It’s the information, stupid. Smart IT executives are really smart information executives. They know that all the IT in the world is useless unless it facilitates people using information to make better decisions or take actions that are in the interests of customers. The Earthgrains Co., a company that turned itself around with the help of a new ERP system, really prospered on the basis of the philosophy of Division President Bill Opdyke: “In God we trust; all others bring data.”

Of course, it’s still important to come up with a great strategy. But for many of these companies, the high-level strategic intent is fairly obvious. What’s important is a smooth conceptual flow among the intent, the company’s business model, the information it needs to pull it off and the technologies that generate the needed information. Once the concepts are in place, the long-term work of implementing a great IT-enabled strategy can begin.