Posted: May 25th, 2022

IT Impact on Service Industry Performance

Strategic Planning in IT

IT Impact on Service Industry Performance

Cooperative Competitive

Competitive Advantage

Implementation of IT Innovations

1992 U.S. VALUE-ADDED AND EMPLOYMENT BY INDUSTRY

AVERAGE ANNUAL GROWTH IN GDP PER HOUR,

MAJOR SECTORS OF THE U.S. ECONOMY

Management TASKS IN BUREAUCRACY VS ADHOCRACY ORGANIZATIONS

This paper addresses the following problem statement: “Without information technology (IT), a business will not be able to compete globally in any industry, nor in any market it wants to enter. It will not be able to effectively and efficiently optimize its success.”

In order to evaluate this statement, a number of issues were examined. The rapid pace of technological change and the effects of technology revolution have launched the world into an era of organizations that are experiencing extraordinary growth in both the development and the dissemination of information and communications technologies. This paper reviews the current literature on the subject of the integration of IT into modern business entities. Successful use of IT in a company clearly requires numerous elements. IT planning must be made an integral part of overall strategic planning, a building block in the way the company does business. Management must understand that IT innovation does not always result in a measurable gain in traditional performance measurements. The concept of competitive cooperation is alive and well in many industries today. Cooperation on IT innovation can help place everyone in a better position to compete effectively, and indeed, at all. What all companies seek is a way in which to gain a competitive advantage. This occurs whenever a company can provide what its customers want, when and where they want it, and at a price they are willing to pay. IT will continue to play an ever-increasing role in that process. Finally, what it comes down to is the implementation of IT. When top executives in a company decide to adopt an IT innovation, they must be prepared to recognize that it requires much more than just vocal support. It requires a champion, support and appropriate resources.

Business and Technology Analysis

Introduction

Problem Statement: “Without information technology (IT), a business will not be able to compete globally in any industry, nor in any market it wants to enter. It will not be able to effectively and efficiently optimize its success.”

According to the American Heritage Dictionary of the English Language, information technology is defined as “The development, installation, and implementation of computer systems and applications” (2000). Information technology, hereinafter referred to as IT, is further defined in the World Economic Outlook as “…computers, computer software, and telecommunications equipment” (2001, p. 105). IT allows us to do things that we are not already doing, fostering innovation. It is all about exploiting the latest technologies to reach new and never-before-attainable goals. Unfortunately, recent history is littered with examples of failures to understand the real benefits of new information technologies.

Initially, 1950’s era IBM considered, somewhat shortsightedly, that the worldwide demand for data processing computers would be about 50 machines.

Twenty years later, mainframe computer manufacturers considered the minicomputer to be little more than a toy. In 1980, the personal computer received virtually the same reception. Conventional wisdom of the time was that needs were already being met by larger machines, so who needed a personal computer? As we now realize, the virtue of personal computers was not in their ability to do the same things that the larger machines already did, but in opening up entirely new kinds of applications (Wright, 1999).

Lack of inductive thinking about IT has become our new problem. Thomas Edison, who invented the phonograph, once said he thought its value lay in its capacity to allow “dying gentlemen” to record their last wishes. Marconi, who developed the radio, regarded his invention as a wireless telegraph that would operate point-to-point. He did not recognize its amazing potential as a broadcast medium.

The strength of the Xerox copier was not found in replacing existing copying technologies, but in performing services far beyond the reach of existing technologies. Xerox copying is simply an extension of Say’s Law. Jean Baptiste Say, a French economist, observed in 1820 that quite often supply creates its own demand. Once people understand that they can have something, they begin to feel that they cannot live without it. This is a good description of today’s information economy (Wright, 1999).

IT and the new economy it has created have set about saving time, one of our most valuable resources. Companies with products that deliver the greatest convenience are those that will find prosperity in the future. Speeding up transactions to save time for customers and suppliers also speeds up the process of competition. Companies must provide immediacy, meaning that goods and services must be available when customers need and want them.

While technological change is an ongoing process, there are times in world history when technological progress is especially rapid, resulting in new products and services, as well as decreasing prices of existing products with widespread uses. Examples of such periods include textiles and steam power during the industrial revolution, railroads in the nineteenth century, and electricity in the early twentieth century.

The effects of these technology revolutions most often occur in three main stages, which frequently overlap one another (WEO, 2001).

In the first stage, technological change raises the growth of productivity in the innovating sector. In the second, quickly falling prices encourage greater capital investment. In stage three, significant reorganization of production around the new capital goods embodying the emerging technology generally results. At the heart of today’s IT revolution are advances in materials science, which have led to growth in the power of semiconductors, and corresponding rapid declines in semiconductor prices.

Over the past forty years, the capacity of semiconductor chips has doubled roughly every 18-24 months. This phenomenon has come to be known as “Moore’s Law,” as a result of a prediction made in 1965 by Gordon Moore, then Research Director at Fairchild Semiconductor. In turn, cheaper semiconductors have allowed rapid advances in the production of computers, computer software, and telecommunications equipment, once again, leading to steeply falling prices within these industries (WEO, 2001).

The rapidly falling prices that have come to personify IT have stimulated amazing levels of investment in these goods and services. Today, we are living through an era of organizations in industrialized societies that are experiencing extraordinary growth in both the development and the dissemination of information and communications technologies. Across all sectors of the world economy, both public and private, with little regard for organizational boundaries, computer-based information systems are everywhere. Concurrently, many researchers have touted the dawning of a new age, calling it the information society or the information economy, in which society itself is on the verge of transformation through the use of IT (Bloomfield et al., 2000).

Methodology. This paper reviews the current literature on the subject of the integration of IT into modern business entities. The literature on the history of technology and the role of technological developments in economic growth is extensive. The economy’s information intensity has been trending upwards for over one hundred and fifty years. Office automation equipment has been used extensively and underwent rapid technological change long before the advent of computers. Other important economic innovations have enjoyed rapid price declines, just as computing services have done more recently.

These historical continuities are important because how recent developments in IT are viewed affects perceptions of the likely impacts of this technology on corporate success and daily life. If recent developments are viewed as unique, then the expectations of a large impact on productivity naturally follow. However, if recent developments are viewed as a steady continuation of past situations, then more reasonable and sustainable expectations logically follow (Sichel, 1997).

Much of the media coverage in recent years suggests that the latest developments in IT are unprecedented, and that a surge in productivity is certainly on the horizon. Some have said that “we may be on the cusp of that long-awaited productivity surge” (Rothschild, 1993, p. 17). This coverage echoes the commentary on computers, with extreme optimism being the standard fare in the media since the dawn of the computer revolution. Many researchers, beginning with Fritz Machlup and Daniel Bell, have assessed the importance of information in the economy (Machlup, 1962; Bell, 1973).

Review and Discussion of Results.

Strategic Planning in IT. The integration of IT planning and strategy with corporate strategy, along with the strategic use of information systems, has been of interest to management practitioners and researchers for some time. For example, from 1988-91, the issue of greatest concern to data-processing (DP) managers was that of integrating IT with corporate strategy (Price Waterhouse, 1989/90, 1990/1, 1991/2, 1992/3). This seems to reflect a long-standing preoccupation with the problem of tailoring IT to fit business needs.

However, business needs in relation to IT have not remained historically static. The discussion has shifted from a focus in the 1960s and 1970s on improving administrative and productivity performance a 1980s and 1990s view that emphasizes contributing to the development and implementation of business strategy (Knights, et al., 2001). This shift is linked to better connectivity and cost-performance ratios in technology. It can also be tied to changes in applications: from data processing and management information systems, to individual and office support on PCs and office systems, and then on to electronic data interchange (EDI) and inter-organizational systems, platforms, and networks (Ward et al., 1990).

The ongoing convergence of computer and communications technologies, and the increasingly widespread use of databases, networks, and integrated systems requiring long-term planning perspectives, also stimulated interest in IT planning (Boynton and Zmud, 1987). Progressive hype and a follow-the-leader attitude have been sufficient to sustain a dramatic growth in IT expenditure in the early days of this technology revolution.

More recently, however, the large resource demands and the increasing dependence of organizational activity upon IT have focused managerial attention on cost-benefit calculations and rationally planned approaches to the use of IT.

Thus, the development of a sound IT strategy reflects a widespread concern with general strategic planning in organizations and businesses (Hoskin, 1990; Knights and Morgan, 1990; Mintzberg, 1994). A further impetus for change has been the growing understanding that the strategic use of IT can transform the competitive position of a company trying to succeed in a rapidly changing marketplace. These trends have pushed IT towards the center of strategic development and planning.

The assumed benefits of IT strategy formulation are better alignment with business needs, gaining of top management support and involvement, improved setting of priorities, more efficient budgeting and distribution of resources, and overall competitive advantage (Earl 1990; Ward et al., 1990). Many organizations claim to have their own approaches to the creation of business and IT strategies (Premkumar and King 1991).

Although the techniques used to articulate strategic plans vary in detail, the first step is significantly the identification of a firm’s business objectives and corporate strategy (O’Connor, 1993).

For example, a basic principle of strategic information planning is “if the business objectives do not change then the data the organization needs to use and the functions it needs to carry out will not change… therefore we can model the enterprise” (Goldsmith, 1991, p. 70). If no strategy is apparent, corporate planners are advised to create one (Remenyi, 1991; Ward et al., 1990).

There is considerable disagreement in the literature about the history of strategic thinking and planning (Ansoff, 1965; Hoskin, 1990; Knights and Morgan, 1991; Steiner, 1963). However, its impact of strategic thinking and planning on IT has been relatively recent. While the value of information as a resource and its important connection with strategy were recognized in the 1970s (Mason, 1984), few of the business strategy planning approaches at that time paid any attention at all to IT.

Traditional information planning was a simple exercise in resource allocation among shopping lists that were generated from the lower levels of the organization. Basically, it was incremental and bottom up, and in no way was it linked to an overall business strategy. Real discussion of IT in terms of strategy planning was not launched until the 1980s, following Porter’s (1980, 1985) several analyses of the nature of industry competition. He and others used the forces of industry competition, generic strategies (Parsons 1983; McFarlan 1984; Cash and Konsynski 1985), the value chain, and differences among industries in information intensity (Porter and Millar, 1985) to clarify the connections between IT and business strategy.

By the late 1980s, many companies had jumped on the bandwagon of using information systems strategically, and analytical frameworks mushroomed. The proliferation and popularity of these devices are a strong indication of just how much pent-up need there was in corporations in the 1980’s for advice and information on IT strategy. The problem was a lack of understanding and awareness of the potential of IT on the part of senior management. The solution appears to be straightforward and rational analysis of the potential impact of IT on companies and their industries, the use of analytical tools and techniques, and good examples of the strategic use of information systems in similar companies.

The assumptions are that problems can be analyzed and broken down into their individual parts, with the outcome being the development of rational solutions that can be put in place in a company through top-down executive decisions. By the end of the 1980’s, the idea that there could be measurable and sustainable competitive advantage from IT was subjected to growing skepticism (Clemons, 1986; Finlay, 1991; Scott-Morton 1991). About the time that the idea of an “information weapon” was being tossed around, it was becoming increasingly apparent that most strategic applications of IT were being quickly copied, and even improved upon, by competitors. The strategic advantages of the celebrated SABRE airline reservation system were even played down by its director (Hopper 1990).

In most cases, it eventually emerged that various strategic applications had actually been discovered by users and had evolved from mundane transaction processing systems, rather than from clever top-down analysis and planning (Andreu, et al. 1991; Cavaye and Cragg, 1993; Ciborra, 1991). Discussion also continued in the early 1990s about the so-called “productivity paradox,” which was illustrated by the fact that despite major investment in IT, which was by then at least 50 per cent of all capital investment in the U.S.A. (Keen, 1991), U.S. white-collar productivity had actually gone down (Franke, 1989; Scott-Morton 1991).

At this point in time, attention began to be drawn to the need to make organizational and structural changes in order to realize true productivity gains (Thurow 1992). This extended, of course, to the strategic use of IT to change organizations (Malone, 1985; Rockart and Short, 1989). Although not an entirely original idea (Beer, 1974; Checkland and Scholes, 1990; Galbraith, 1973; Huber, 1990), the MIT Management in the 1990s research program helped to popularize the idea that IT could be utilized to deliver a leaner, empowered, and more customer-orientated organization, something which fickle markets and global competition clearly demand today.

And it has been indeed in the first half of the 1990s that we have seen some of the long-standing predictions about the ‘impact’ of IT on organizations coming to be realized, with the redundancy of thousands of workers at a time, including whole layers of middle management, in industries such as computing and financial services which have had long experience with IT and built up a large investment in infrastructure, and which have found themselves exposed to much more difficult market conditions (Bloomfield, et al., 2000, p. 31).

Strategic IT investments permit companies to alter their positioning in the marketplace, redefine themselves, or survive unforeseen competitive incursions into their market space. Strategic systems tend to change many various elements of the customer, cost, and competitive relationship mix simultaneously. They do not have an impact solely on revenues or costs. For example, Dayton Hudson Department Stores made strategic investments in IT just as its whole industry was shifting toward discount chains, malls, and high-volume specialty chains.

It is impossible to totally measure the losses that this IT investment saved Dayton Hudson as its traditional markets declined, or how much the same IT investments may have contributed to its move into the discount Target chain (Bailey and Quinn, 1997). Strategic IT investments also are often what allow companies to introduce new services, which may in turn require expanded personnel or capital bases, especially in the short-term. If competitors match these new services quickly, duplicated investments may make the overall industry productivity growth look small, or even negative.

It is fully possible that a company’s competitive edge from an IT investment may last only a few months. For example, executives at Citicorp said they had invested nearly $100 million a year in order to maintain a timing advantage of only nine months over their competitors. However, just how much this positively affected their total yearly profitability is impossible to calculate. Information infrastructure investments in basic computer and communications facilities pose particular problems.

Companies can differ wildly in their assessments of the exact benefits they can and will derive from them. For some, infrastructures are simply considered to be a “cost of being in the business.” It is no more feasible to be in the mail order business without a telephone, or in the stock brokerage business without a computer, than it is to be a carpenter without a hammer. Not making these IT investments could cost all the profits from the business. But no reasonable executive will claim that all of his or her company’s profits could be said to result only from IT investments.

IT Impact on Service Industry Performance. During the 1980s, U.S. macroeconomic measures indicated that there was only a 0.7% productivity growth in services, despite a virtual doubling of IT investments during that decade to $750 billion.

If these measures are valid, the apparent disparity between IT input and service sector performance, that confusingly labeled “productivity paradox,” has serious consequences for business and for the U.S. In general.

Services now account for four of every five U.S. jobs and three quarters of the value added in gross domestic product. If the information technology in which the service sector has invested so heavily does not improve its performance, future wealth generation, employment, wages, business profitability, and growth will all suffer (Bailey and Quinn, 1994, p. 36).

Explanations for the productivity paradox are numerous. One is simply that the weak performance of the service sector is unrelated to investments made in IT. Other explanations for the slow growth in productivity could be the maturing of the sector, inefficient regulatory practices, poor worker education, or more likely, wasteful or inefficient use of IT. On a more optimistic note, the payoffs from IT investments may have merely been delayed because software, network support, or training systems have not kept up with the rapid advancements in hardware.

According to a National Research Council report, IT has substantially improved the overall performance of the service sector. Unfortunately, the report indicated that the improvements happened in ways that neither government data banks nor company management can accurately measure. Gauging the convenience that is created by a computerized reservation system is very different from counting the cars that roll off an assembly line (Bailey and Quinn, 1994).

Between 1948 and 1973, several service industries, most notably communications, utilities, and wholesale trade, have significantly outperformed the manufacturing sector in measurable productivity growth. From 1973 to 1989, productivity increases in communications and utilities still showed up those in manufacturing, as well as in mining, construction, and the total goods-producing sector. But since 1973, measured productivity growth in manufacturing has exceeded the growth found in almost all other service industries.

This, however, must be interpreted carefully. Even the Bureau of Labor Statistics, which collects and analyzes productivity data, states that the measures for aggregate service sector productivity have serious limitations. Attempting to isolate the effects of a single factor, such as IT, only compounds the problem.

The key shortcomings in the measurements used include the fact that true output for many service industries are very hard to quantify. How can the units of output for a consulting, auditing, legal, fire fighting, or a museum enterprise even be defined, much less counted?

Secondly, for many key service industries, notably banking, education, health care, and government, output is actually measured by input. Thirdly, the effect of new products and quality improvements are very difficult to capture. For example, knowing exactly how many procedures a hospital performs each month is of little assistance, unless you also know how those procedures actually affected the patients’ health or well being. Additionally, standard databases either overlook or fail to keep up with the introduction of totally new services (e.g. new home health care, personal security, or entertainment concepts).

The fourth shortcoming of measurements of service productivity addresses the fact that competition often encroaches on the productivity benefits of the investing industry’s IT resources. For all of these reasons, standard data measurement may not give a true indication of how much individual service industries are actually increasing their levels of productivity through the use of IT.

In order to get past the issue that existing overall data does not reliably measure either productivity growth in services or the incremental contribution of IT to productivity, the NRC took a closer look at the benefits of IT within specific service industries. It focused on major users of IT, which account for about 27% of U.S. GDP and 35% of employment in the U.S. There appear to be wide variations among industries and very little relationship between IT investment levels and industry profits, growth, or productivity gains. (Bailey and Quinn, 1997).

All of the industries scrutinized by the NRC have made massive investments in mainframe computers, communications, software, data storage, networking, and distributed processing systems.

Once IT infrastructures were in place, the costs (including maintenance) became mostly fixed. Therefore, it paid off for each competitor to cut its unit profit margins when such cuts could increase incremental revenues. As demand rose (or as it declined in recessions) downward pressures on average prices and percentage margins were great, even though the services provided were viewed as having a higher absolute value to customers.

Wholesale Drug Industry: The NRC industry analyses identified many areas in which IT greatly improved industry performance without increasing profitability.

McKesson Drug, a $7.8 billion wholesaler that services retail drugstores, radically increased its number of services to customers during the 1980s. McKesson now provides extensive computer support, accounting, layout and display, and price sticker services for its drug retailers, all services which were previously extremely time consuming and costly for manufacturers and retailers alike.

Yet, as McKesson’s competitors began to match its service offerings, average wholesale margins in the drug industry fell from about 7% to 3%. Thus, in this case, the competition forced drug wholesalers to raise their IT investments, without allowing them to increase their profit margins (Bailey and Quinn, 1997).

Public Accounting Profession: As public accounting firms have automated their auditing practices, they too have improved their performance, handling audits more accurately and at substantially lower costs. Firms can quickly handle much more complicated transactions and tax implications on a global scale, freeing individual CPA professionals to provide more sophisticated advice on related accounting matters. Here again, competitive pressures have forced them to pass the benefits of decreased auditing hours directly along to their customers. As audit fees have gone down, firms have been forced into new service areas, such as consulting and executive search services, to maintain their level of revenues. (Bailey and Quinn, 1997)

Airline Industry: Airline operations rely heavily on IT for in-flight controls, maintenance and performance monitoring, safety systems, load management, communications, weather monitoring, and other critical operational activities. Additionally, IT is essential for reservations, sales, marketing, pricing, logistics, and support services like meals, baggage handling, or ground crews. Airlines have invested tens of billions of dollars in IT hardware alone, being sophisticated users of such systems. Revenue passenger miles increased from 254 billion to 433 billion during the 1980s, and airline safety records also improved during that same period (Bailey and Quinn, 1997).

Banking Industry: In the banking industry, IT has enabled tremendous transaction growth and has opened the door for a vast array of new products and services, from individually tailored loans and mortgages that can be closed in 15 minutes, to international “interest rate swaps” and virtually instant access to cash or loans in any world market. No major bank could operate effectively today with the manually entered records of the past. Nor could they successfully compete without the vast amounts of information on capital markets that are made available by IT (Bailey and Quinn, 1997).

Retail Industry: In the retail industry, general merchandise and supermarket chains like Wal-Mart and Safeway have become increasingly dominant. Highly specialized “category killers,” such as Toys R Us or Foot Locker, wholesale clubs, super stores, and heavily targeted chain boutiques, have also emerged as new and challenging forms of competition. All of these types of retailers are highly dependent on IT for the ongoing market analyses, broad geographic sourcing, and tight operating controls that they could not exist without.

Despite the clear benefits of improved price, choice, and convenience to customers, the average percentage profit margins in both wholesaling and retailing have generally decreased. Many companies that did not adapt to the new information age have disappeared, while the most successful survivors are often leaders in the effective use of IT (Bailey and Quinn, 1997).

Insurance, Telecommunications and Health Care Industries: The same pattern as outlined in other industries prevails in the insurance, telecommunications, and health care fields, as well. Although IT offers customers much higher quality, variety, convenience, reliability, and accuracy, service-provider companies have found it difficult, if not impossible, to capture these benefits as enhanced profit margins or increased output per employee.

However, the culprit is not always competition. In the $900 billion health care industry, for example, payment practices have encouraged overcapacity and discouraged efficiency in operations.

Fear of malpractice suits has prompted many doctors to overuse various diagnostic systems and treatment procedures. It is clear that IT has also permitted more rapid emergency responses, earlier and more accurate diagnoses, less invasive procedures, better patient monitoring, improved life support systems, better treatment procedures, and even cures for formerly untreatable conditions.

These are benefits that few patients would willingly forgo. However, it still appears that aggregate data about the medical care industry show little evidence of increased efficiency and productivity. Across many other service industries, increasing complexity, physical decentralization, and growth in transaction volumes, resulting from lower handling costs, have often masked great performance gains. In virtually every major service industry, the rate of new product introduction has exploded, as has geographical dispersion of operations (Bailey and Quinn, 1997).

What has actually happened is that IT has changed the boundaries and the definitions of most service industries. Today, new players often venture into what were once exclusive territories.

Private telephone carriers have sprung up to provide value-added services or handle long distance traffic. Corporate networks sell their unused capacity to other private buyers. Many companies now perform their own credit, savings, exchange, and payment functions, tasks that used to be the sole province of banks.

Airlines are now one of the largest retailing segments for goods, lodging, and tours. In industry after industry, IT has become essential for survival and growth, resulting in clearly enhanced convenience and value to their customers. Often, this has occurred without showing either traditionally definable growth in industry financial returns or measurable productivity increases. An illustration of U.S. value-added and employment numbers by industry is provided in Table 1 at the end of this report, while Table 2 shows annual growth rates in GDP per hour for major sectors of the U.S. economy (Bailey & Quinn, 1997).

Executive Decision Making on IT: When asked how they made their IT investment decisions, and how they measured their own results, the executives in these industries did not focus on productivity alone, but instead pointed out such factors as revenue stability, risk avoidance, growth potential, strategic flexibility, or market share. One of the most frequently cited reasons for investing substantially in IT was to expand or defend market share.

For specific companies, market share is an excellent indicator of successful performance. It is also a good measure for marketing, purchasing, and bargaining power within an industry. Increased market share generally provides flexibility, predictability, and cost savings to an individual company. While IT investments that seem to merely shift the market shares within an industry from one firm to another will show no measurable benefit in total industry statistics, they are very likely crucial to survival for any single firm.

Executives also appear to make IT investments in order to avoid catastrophic losses, such as those that might occur from airplane crashes, liability suits, or environmental disasters. These investments can provide very real gains to a company and its customers, but they often do not show up anywhere, except as increased investments, in company measurable company accounts. At times, IT investments make companies more flexible, by assisting them to survive rapid and unforeseen changes, such as more regulation or an increase in market or operational complexity.

This was certainly the case with computerized reservation systems for airlines, fuel logistics systems for utilities, and intelligence systems for commodity traders. Occasionally, companies invest to provide themselves with the future flexibility to allow for the creation of products not yet planned or even conceived. This was the case with back office investments in banking and insurance companies. Other times, IT investment may enable a company to restrain costs while providing greater transaction volumes, variety, and location availability in its services. This was the benefit of the advent of automatic teller machines (ATMs) in retail banking (Bailey & Quinn, 1997).

It is also apparent that IT can improve working conditions. Many firms, especially large retailers, wholesalers, hotels, and rental operations, invest in IT infrastructure to generate information that will provide far greater efficiency and reliability in operations management, helping to avoid undue fluctuations in sales, profitability, or employment. Some firms may invest in IT simply to attract better and more qualified employees (e.g. R&D establishments), to increase employee flexibility and job satisfaction (e.g. professional firms), or to improve worker safety (e.g. utilities or transportation).

IT can most definitely help to eliminate burdensome and repetitive tasks (e.g. maintenance), make jobs more attractive to workers (e.g. accounting), shorten training cycles considerably (e.g. fast foods), or greatly improve morale (e.g. hospital critical care units). IT is a powerful tool for companies that specialize in life-critical operations, where the efficient and timely management of data can enhance the safety of employees, customers, and the general public (Bailey & Quinn, 1997).

IT helps companies to tailor their services to the needs of their individual customers in order to serve them more quickly, pleasantly, responsively, accurately, or completely. Such personalization serves to strengthen the bonds of customer loyalty and usually increases revenue stability, while at the same time lowering marketing and post-sale service costs. By guaranteeing more reliable performance, minimizing errors, improving consistency, and enhancing customer perceptions about services (which many customers find more important than price, in their decisions to make purchases), IT can improve value.

Companies also make decisions to invest in IT in order to improve quality, though again, few of them can measure in financial terms the effects of those improvements. What is the exact value to a customer of receiving a monthly bank statement within 48 hours, as opposed to a week, or that of a neater and more professional letter? What is it worth to be able to select from among 100 financial service products rather than 50. How is the value measured of a shorter wait, a more accurate sales slip, or a more relaxed and friendlier clerk in a checkout line?

Comparing the value of one sort of service today with that of another sort of service in the past is especially difficult. What is the relative worth of today’s more precise analytical and diagnostic capabilities in medicine or design, versus yesterday’s less powerful but sometimes less expensive methods? Quality is also very hard to measure because it often depends heavily on actions taken by the buyer, actions that are out of the control of the service provider.

Superb educational, health care, consulting, or financial services can be totally useless, if the buyer does not follow up properly. A savvy buyer can convert even poor quality services into astounding successes, as the great success of various graduates of poor school systems so often illustrate. Then too, the actual quality of a service may not be known until a very long time after it is delivered. This is particularly true in surgery, dentistry, or insurance (Bailey & Quinn, 1997).

Even then, the final quality may depend primarily on whether the customer followed up, kept well informed, or even had good luck. The customer will always perceive, and therefore receive, any service’s value in terms of the actual outcome, not merely those aspects over which the service provider might have had reasonable control. One important panel finding in the NRC study was that, in the various large companies surveyed, decision making for IT investments resembled that for other any other complex advanced-technology project, either within the specific company or in other high-tech industries.

Whenever possible, these executives used standard measures for projecting their financial returns and the paybacks from both R&D projects and major IT programs.

When meaningful financial measures were not available, for whatever reason, they leaned toward using engineering or quality metrics to assess the extent of a project’s impact. However, even so, they could seldom separate out the specific contributions of IT, as opposed to the impact of other supporting investments, such as employee training or marketing programs, in generating a specific result. This finding led to more general observations about the way in which executives make their decisions about IT.

Just as with R&D, they depend heavily on both intuitive and non-financial measurements, as well as formal financial justification. Most companies can estimate cost reduction relatively precisely when they substitute IT for more labor-intensive processes or even utilize it to allow the shutdown of an entire facility. The impact of new products is significantly more difficult to predict, although they are often easy to measure afterward.

Companies are have an especially difficult time in predicting or measuring afterwards the effect that major strategic investments have had. Specific types of intangible output (e.g. increased flexibility), certain diffuse or delayed benefits (e.g. those from word processing, desktop communications, or spreadsheet use), or marginal quality improvements also present problems for measurement. Companies have a hard time reporting a satisfactory quantitative technique for assessing the overall impact of IT investments on profits, and few even try such a justification on a routine basis (Bailey & Quinn, 1997).

The analogy with other forms of R&D is also striking. Most technical breakthroughs take years or even decades to achieve tangible paybacks, with company and industry indicators, in the meantime, revealing low (or negative) paybacks. Just as with IT, few companies routinely attempt to evaluate the overall impact of all of their R&D projects. Instead, they appraise their effects on a project-by-project basis, in terms of how well each project supported other strategic goals within the company.

With both R&D projects and IT programs, payoffs are very likely to be uncertain in both their scale and timing. Companies readily admit uncertainties. They also admit that they make investment errors in both situations. Nevertheless, successful companies can and do apply rigorous, although not always mathematically precise, analytical procedures in allocating and evaluating their investments IT, just as others do for R&D.

The executives interviewed in this study readily admitted to making mistakes in IT investments. Some reported serious misjudgments about early systems, mismanagement in specific cases, and even poor implementation of their IT systems. Notable problem areas are in planning cross-functional or cross-divisional systems, failing to provide for retraining and continuous upgrading or worker skills, underestimating the software support that will be required by new systems, and failing to follow up on IT installations with new systems for organizations, performance measurements, and rewards (Bailey & Quinn, 1997).

Such shortcomings certainly decrease the efficiency of IT installations in many companies, but, for the most part, total performance gains enabled by IT clearly outweigh the costs, not to mention the alternative costs of various other available options. Certainly the results from IT investments could be better in many cases. While some 80% of the companies interviewed in the NRC study felt that they had received anywhere from adequate to high returns from IT performance, less than 30% demonstrated that they had thoroughly developed IT strategies.

More than 70% had customer-based metrics for measuring quality performance, but could not yet convert them into true financial measurements. Many companies also admitted that they made early errors by not reengineering various processes prior to installing IT, but this shortsightedness was rectified in most cases. More than 50% of the companies had experimented with new organizational forms at the time they implemented new IT systems, but few had followed through thoroughly by developing new performance measurement and reward systems in support of those investments.

Despite the current inability to measure in financial terms the productivity growth induced by IT use, both in government and in industry, by nearly all accounts, IT has substantially enhanced performance in service-based companies. Although many companies are far from perfect in implementing IT in their organizations, better managed companies evaluate and allocate IT investments in ways that appear very comparable to those that are used for other technologies and in other industries (Bailey & Quinn, 1997).

With U.S. service-sector productivity comparing quite favorably with that of competitor nations, most notably Japan, Germany, Britain, and France, there is little reason to believe that American corporate management has been either uniquely inept or overly shortsighted in the incorporation of IT into their businesses.

Historically, big technological breakthroughs, from the steam engine to aircraft to nuclear plants, take quite a long period of time to pay off.

That is turning out to be the case for IT, as well. Although there is no real evidence that IT has been handled any less favorably than these other technologies, IT is unique is that its outputs tend to be intangible and very hard to measure. That is almost certainly one huge cause of perceived problems in IT payoff.

The issue today is to learn from the past and to improve IT investment payoffs in the future, both by correcting management shortcomings and by developing better metrics for output and performance measurement, both at the company and at the aggregate industry and economy levels (Bailey & Quinn, 1997).

Cooperative Competition. The growing access to and importance of information flow is transforming old-line, traditionally hierarchical firms into flatter, more horizontal organizations emphasizing flexibility, coordination, on-time production, and long-term relationships with their suppliers and customers. R&D relationships extend across firms through horizontally organized networks that are redefining traditional corporate boundaries. Perhaps somewhat ironically, the same firms that cooperate in R&D activities subsequently end up competing aggressively against one another in product markets (Golden, 1994).

Corporate strategy today requires “cooperative competition,” a framework that enhances mutual performance, while at the same time shaping the form that competition takes. In that sense, cooperation and competition do not represent alternative approaches to relationships, instead, both elements are always present to some extent. The cooperative component enhances competition by enabling both parties to be more effective. At the same time, the structure of cooperation limits the scope of acceptable competitive behaviors.

The insight that competitors may also cooperate in research networks, in order to compete effectively in product markets, captures the essential impact of the information revolution on many levels of strategy. The key aspects of today’s new organizational network structures include shifts from hierarchical to more horizontal relationships and a growing emphasis on long-term cooperation, both driven by the need and possibilities for more complete and timely communication (Golden, 1994).

As Anthony Carnevale, reporting on the work of the Hudson Institute’s Workforce 2000 project, argues, “the workplace is being transformed by networks that build from individual work teams through links across organizations. Internally the organization is itself a network of interlocking teams, and externally it is part of a network extending across suppliers, consumers, research organizations, financial backers, and government regulators in input-output, R&D, finance, and policy networks” (Carnevale, 1991, p. 86).

As a result, jobs are being redefined by the requirements for greater coordination, both inside and outside the enterprise. The core company is itself a network, linking strategic insight at the center to more autonomous points on the periphery, which are in turn connected to still other networks (Reich, 1991). The critical tasks of this network involve the exchange and processing of information, which creates a new set of critical skills and increases the services component of total output.

Products end up being composites, produced by networks in which brokers draw on routine components and services in some locations, and specialized problem-solving and problem-identifying skills in others. The new networks extend far beyond the traditional exchange of goods and services across enterprises to include the expanding cooperation in R&D (Bressand, 1989). The number of interlocking research agreements among corporations in the IT industry has been exploding over the last ten years.

Separate groups of arrangements across IT firms are dominated by regional groups of Japanese, European, and U.S. companies, although the linkages also extend across regions (Hagedoorn and Schakenraad, 1992).

This same transfer of technology across horizontally linked Japanese firms goes beyond the traditional keiretsu, or business group, structure. Ken-ichi Imai calls the new configurations “network industrial organizations” to emphasize the central role given to creating and exchanging information within such enterprises (Imai, 1991, p. 220).

Individual firms cannot afford the enormous costs, nor can they bear the high risks of remaining at the cutting edge of all the technologies that may be integrated in new products. Neither can they take a chance on missing a breakthrough that might create whole new product lines. Sharing proprietary information has enormous risks, but the risks of isolation from new technologies and new ideas are even greater. Inter-organizational network structures permit the development of the trust that is needed for balancing exchanges over an extended period, without the inflexibility that inevitably creeps into hierarchical organizations (Golden, 1994).

Competitive Advantage. Competitive advantage always goes to the company that is best able to deliver the right product or service to the marketplace at the right price and the right time. The critical question is how can IT contribute to any firm’s timely development and delivery of new products and services? Exactly how can a company then maintain the resulting competitive advantage? To answer these questions, it is important to focus on two elements of these issues, how successful firms incorporate IT into their corporate and business strategies to achieve competitive advantage, and how they define, deploy and nurture the organizational structures that flow from these strategies (Chan and Heide, 1992).

Whenever a product or service creates more value for the consumer than does a competing product or service, it earns a competitive advantage. One way to achieve competitive advantage is to use IT as organizational support for a company’s products or services (regardless of whether they are technology-based). As in the case of firms producing IT products or services, a short development cycle also frequently applies to firms that use IT as a supporting function to gain their competitive advantage (Vesey, 1991).

The “strategic necessity” hypothesis was developed by Clemons as a result of findings that the applications of most information systems, regardless of the original intent of the developer, have not proven to be sources of long lasting competitive advantage (Clemons, 1988).

This is, of course, only to be expected. A company that is earning supernormal profits attracts competitors, and unless the firm creates a new competitive advantage or advantages for itself, it will eventually lose its market edge (Chan and Heide, 1992).

When information systems are integral to the product or service, they become necessities for the long-term survival of every competitor. This means that the company that chooses not to use these systems is going to be at a serious disadvantage and will inevitably suffer failure. Firms that decide to use IT as a competitive advantage in this way are generally pursuing cost leadership strategies (Porter, 1980), and typically are primarily concerned with market size and share, tight controls, process investment, ease of manufacture, width of product line, and are willing to accept potential early losses. The company expects its IT investment to create a competitive advantage for it, as it works to become a more efficient and effective organization.

Other firms recognize that the need to minimize the time required to design and produce a new product creates new organizational challenges. These firms view speed as a source of competitive advantage. For example, Benetton’s electronic communication system, which links its field agents to its headquarters, allows the company to make changes to their inventory in ten days, changes that take most retailers months. Similarly, Benetton’s American counterpart, The Limited, boasts the world’s largest and most automated distribution center and instantaneous data links among the company’s retail outlets, distribution centers, and far-flung factories (Peters, 1987).

It has been illustrated that firms who are able to get products to market first, may reap up to 30 per cent more profit over the product’s life cycle than a later arrival will (Vesey, 1991). Companies using this strategy emphasize product innovation or differentiation (Porter, 1980), where niche markets, shortened lead times, and spiking product life cycles are the rule rather than the exception. The strategic emphasis that a particular firm selects depends upon its own strengths and its position within the marketplace, as well as management’s view of its competitive environment.

In order for an information system to work to a firm’s advantage, a market-oriented company must focus on providing services that will enhance its relationship with its customers and suppliers. Regardless of the product or service produced, a serious competitive advantage can be gained through a well developed and finely integrated IT system.

It is important to keep in mind that expectations should be realistic and that competitive advantage could very well be limited, given the fast-moving environment businesses must operate in today.

Most documented uses of strategic information systems have been by oligopolies, which have significant financial resources available for investment in IT. For example, the SABRE online reservations system, developed by American Airlines, has given the company a competitive advantage in gaining market share (Wiseman and MacMillan, 1984). The use of IT has been demonstrated as being very effective in locking out the competition in oligopolistic markets.

However, investing in IT alone will not automatically reap benefits. It is the creative, ingenious, and often intuitive, use of various new technologies, and the willingness to make a long-term commitment and investment that actually creates competitive advantage for the oligopolist.

A local monopoly is yet another market type that can benefit from IT. Unlike the case of the oligopolist, however, the role of IT in gaining competitive advantage in this situation does not necessarily involve trying to gain market share.

Rather, the role of IT here is to strengthen the relationship between the organization and its customers and suppliers, in order to successfully maintain the foundation on which the monopoly is built. As an example, the basis for a local hospital’s monopoly is its relationship with doctors in the area. The doctors use the hospital facilities to treat their patients, supplying services to their patients through the hospital’s investment in equipment, supplies, staff, and rooms.

Thus, if the doctors (here, the suppliers) are provided with computer terminals or centralized answering services or some other form of information services, the hospital can facilitate the doctors’ efforts to gain a better “competitive” position. If doctors can lower their own and their patients’ cost in terms of time commitment, or if they can provide their patients with greatly improved services, then there is no incentive for the doctor to shift hospitals. This type of support helps to strengthen the relationship between the supplier and the monopoly, which is essential to the business’s survival.

Aside from market share, environmental pressures that stem from the globalization of products and markets create ever more demanding challenges. In today’s global environment, the need for and uses of IT systems are quite widespread. Advances in telecommunications have spurred much greater competition in most industries, and the expansion of IT over the last 20 years has changed forever the way business is done. Timely information management has indeed become the key to business survival (Chad and Heide, 1992).

The automobile, freight, airline, telecommunication, and financial services industries are but a few examples of industries that have been greatly affected by the information revolution. While firms once competed primarily within a single economy, today’s companies have competitive boundaries that are no longer synonymous with their national boundaries. This blurring of economic and national boundaries is expected to do nothing but accelerate over the next few decades.

The success of American Airline’s SABRE system, for instance, has been the impetus for some of its European competitors to develop their own online reservation system. One system, Amadeus, is a joint venture between SAS, British Airways, Air France, and Lufthansa. The consortium has invested over $6 billion in the design, development, and implementation of this reservation system (Wiseman and McMillan, 1984). Their goal is to achieve the same market share advantage that American Airlines achieved with SABRE, while using a European customer base. With the integration of the European market, ever more European firms will follow this strategy and form consortia to gain a competitive advantage (Chan and Heide, 1992).

In a traditional production-oriented firm, generating a large volume of standardized products, both complex and simple technologies are utilized. In this type of environment, tasks generally consist of highly specialized single operations, semiskilled workers are employed, and production flows in a straight line (Woodward, 1965). With the advent of IT, however, such tasks are no longer necessary. In fact, IT is basically used to shorten the time-to-market for a wide range of products and services, from airplanes to retail sales.

Rather than designing, building, and testing a new airplane wing in a wind tunnel, engineers are now able to design and test the wing’s aerodynamics using computer-aided design (CAD) software. This substantially reduces not only the design and development time, but also the costs associated with a longer timeframe. Through the creative application of IT, retailers like Wal-Mart have significantly reduced the time that a product remains in their inventory pipeline.

Because of the shortened time to go from market knowledge, to the design table, and finally to the buyer, IT allows a company to operate much closer to the customer, improve its product and service quality, attain more rapid product development (or redesign and development), and decrease production cycle times. This provides firms with the opportunity to focus on creating customer and supplier value and to gain that all-important competitive advantage (Chad and Heide, 1992).

In order to actually achieve these benefits from IT, the firm requires a highly skilled, professional workforce, one that is grounded and trained in teamwork, and able to act or react quickly. Rather than having only individuals who are prepared to perform a single activity within a functional area, firms now require workers who are comfortable dealing with tasks and issues that cross various organizational boundaries. The team’s performance, rather than that of an individual, is critical. Continuous improvement is the watchword.

Instead of sticking to hierarchical approaches to organizational decision-making and communication, the information age company must use “adhocracy” within a unit. The evolving professional nature of the workforce enables the organization to use professional norms as its control mechanisms. While a traditional chain of command is used in a hierarchy to direct the flow of information and decisions, the necessary chain for the large organization in the information age has become a network. The overriding organization goal becomes reducing the time-to-market, while simultaneously and continuously improving quality (Chan and Heide, 1992).

Table 3, included at the end of this work, compares the management tasks of planning, organizing, directing and controlling under both types of organizations. This shift in the location and direction of the management functions, from a top-down, bureaucratic approach to a center-out, adhocratic one is designed simply to create an organization whose response time is shortened, while customer service is enhanced. This is accomplished through the use of IT’s ubiquitous personal computers or work stations.

These desktop tools allow the professional to be in touch with others within the same work unit, while providing access to professionals in other sub-units. In addition, IT tools make decentralized decision making possible, without sacrificing the power of a central computer. A networked structure makes communications both interactive and non-constrained, with respect to unit boundaries. The removal of boundaries provides makes it easier to open up communications, which in turn increases the speed of communicating.

This openness then stimulates cooperative decision-making, which, finally, improves the quality of decisions made. In short, the networked structure creates the opportunity for a company to improve the flow of communications and, simultaneously, to take advantage of the untapped expertise of professionals both within and outside the specific work sub-unit (Chan and Heide, 1992).

Implementation of IT Innovations. Good IT innovations provide managers with more or better information for decision making. Examples of IT innovations might include installation of a new human resource information system or a materials requirements planning system (Krumwiede and Roth, 1997). In order to successfully implement any IT innovation, corporate managers must gain an understanding of the stages of the implementation process. Various organizational change models have been proposed, with a notable stage model having been refined to describe specific cases of IT innovation (Cooper and Zmud, 1990).

Their proposed stages for IT implementation are classified as follows:

1) Initiation – The initiation process begins when there is either external or internal pressure to change an existing system or function. This pressure leads to analyzing organizational problems and possible solutions. Most companies do not consider changing major systems very easily or very often. Generally, someone from upper management ends up driving the change because of a belief that a particular information need is not being met.

The initiation stage may also be generated by someone who is lower in the organization, someone who may be more intimately familiar with various system limitations or possible solutions. Assuming that there are good reasons for a firm to desire a better IT system, there also must be a sense of urgency to provide the impetus to go through the effort and expense of making a change.

2) Adoption – When agreement is reached that the new IT innovation is a possible solution for a company’s needs, the next step is to gain approval and negotiate for the resources required for implementing the system. In this stage, proponents campaign for the resources needed to implement the change. This stage requires a “champion” in top management, someone that has significant budgetary and organizational clout and who can and will push the project forward and get the necessary funding and cooperation.

If a champion for the IT innovation does not exist, it is unlikely that the project will proceed.

Any new IT innovation should be integrated with the company’s top priorities. By focusing on a key decision at a pilot site for a certain product line, and comparing ABC results to traditional cost information, proponents can show the potential impact of the ABC information on specific decisions. When an IT innovation is demonstrated as being useful for making important decisions, the chances for gaining sufficient commitment and resources for successful implementation are more likely.

3) Adaptation – Once the resources are approved, IT implementation enters the adaptation, or analysis stage. In this stage, the implementation team studies the resource costs and links them directly to activities and cost objects (e.g., products, customers, etc.). The team’s focus should be on identifying the drivers for overhead costs. Standard TQM (Total Quality Management) principles of teamwork, customer satisfaction, and process analysis are helpful at this stage.

The organization should be divided into self-managed teams made up of information users and information providers for a given process that will be affected by the IT innovation. Team members must have the time and training that are required to document, measure, and improve upon the process being addressed. A critical barrier that can arise at the analysis stage is a failure to clearly define the objectives and scope of the project.

An elaborate and well-designed new IT process will not be used if it provides information that is irrelevant to management. Clearly defining the objectives and scope of the IT project very early in the analysis stage is an essential factor for implementation success. Another barrier at the analysis stage can be the complexity of many business processes. Many cost drivers may be identified by the team members, but if too many drivers are used, the model quickly becomes too complicated for easy understanding.

4) Acceptance – At the acceptance stage, members of the organization are induced to commit to use the new IT innovation. The goal of this stage is to get key decision makers to agree that the relevant IT information should be used in their decisions. Acceptance will absolutely not occur if these individuals do not understand or agree with the information. The key to overcoming barriers at this stage is to educate managers and employees about the value of the new system. Specific data must be provided to upper management and key information users in order to illustrate that the new IT system meets the original objectives.

5) Routinization – At this stage, usage of the IT innovation occurs as an everyday, normal activity. The routinization (or action) stage occurs when the IT system finally starts making an impact in an organization. The cost model is accepted by at least a few key managers, who start to consider it a normal part of the company’s management information system.

The biggest barrier to reaching the action stage is gaining overall acceptance of the model. Once this is achieved, there are still a few roadblocks to overcome. If new information is added to what is already available, users of the information may suffer from “information overload.”

Additionally, information providers may not be able to handle the extra maintenance requirements of the new system.

Another common reason for lack of action based on IT information is that the environment is altered after the adoption or analysis stages. If a company is suddenly plunged into a state of crisis or industry upheaval, the IT model may no longer meet its needs. Sometimes it is necessary to go back to the analysis stage, to avoid attempting to implement a model that meets a low-priority purpose and leading to a lack of action.

6) Infusion – Finally, at the infusion stage, an increased organizational effectiveness is gained by using the IT application to support higher-level organizational tasks. Most IT innovations end at the routinization stage, if they even get that far. Occasionally, however, a new system is implemented that has a huge impact on a company’s effectiveness. Instead of just performing the old tasks faster or more efficiently, whole new levels are reached as the new system is used in an integrated and comprehensive manner. When this stage is reached, the innovation is considered to be infused in the organization.

The lines between these stages are not always clear and distinct, but an understanding of the general stages is important because the factors that affect forward progress in implementing IT innovations do differ from stage to stage.

As with anything new, barriers to implementing IT may occur. These barriers are generally caused more frequently by behavioral and organizational issues than by environmental and technical considerations (Krumwiede and Roth, 1997).

Discussion

Successful business organizations today are facing an increasingly uncertain environment, one that is fraught with the potential for potentially disastrous missteps. Many environmental factors are significantly affecting business organizations, including those listed here:

Competitive Environment: increased uncertainty due to the evolving global nature of competition, as well as significant and rapid technological shifts

Customer Environment: altered customer expectations with respect to product and service timeliness, availability and quality

Supplier Environment: changing relationships with suppliers reflecting a more cooperative style

As the world’s businesses move from a nationalistic perspective to one that is much more trans-national, companies and organizations must learn to internally accommodate the resulting external changes. The economic dislocations fostered by a shift from nationalistic to global focus are compounded, as businesses are required to change over from a predominately stable industrial model to the informational model, based on the ability to respond rapidly to market changes (Chan & Heide, 1992).

Within this increasingly dynamic environment, the firms best able to handle the newer shortened time horizons must create their own competitive advantages. IT, whether utilized as tools or products or services, provides the most feasible method for meeting this challenge. Thus, the information savvy organization will use emerging, cutting-edge technology to improve internal operations and provide greater value for an increasingly discriminating customer. A customer who both expects and demands rapid response to changing needs.

The simple creation of better value for customers, however, will not guarantee a company’s ultimate survival. In order to cope effectively with today’s new environmental uncertainties, organizations must organize themselves differently. IT can provide a foundation and the necessary human and process linkages that are needed for survival. For example, a centralized network that connects all the facets of the larger organization, while simultaneously nurturing the small, customer-focused sub-units within the company, can serve as both a foundation and as structural support.

The resulting web of interconnected small groups will allow companies to be in the position to quickly supply just what the customer wants, when and where the customer wants it, and at the price that the customer is willing to pay. As business organizations seek a competitive advantage in the twenty-first century, they must first organize themselves, through the efficient use of IT, to deliver value in order to reap real and long-term profits from their enterprise.

Summary

Strategic Planning in IT: The integration of IT planning and strategy with corporate strategy, along with the strategic use of information systems, has been of interest to management practitioners and researchers for some time. The ongoing convergence of computer and communications technologies, and the increasingly widespread use of databases, networks, and integrated systems requiring long-term planning perspectives, also stimulated interest in IT planning.

Thus, the development of a sound IT strategy reflects a widespread concern with general strategic planning in organizations and businesses. A further impetus for change has been the growing understanding that the strategic use of IT can transform the competitive position of a company trying to succeed in a rapidly changing marketplace. These trends have pushed IT towards the center of strategic development and planning.

The assumed benefits of IT strategy formulation are better alignment with business needs, gaining of top management support and involvement, improved setting of priorities, more efficient budgeting and distribution of resources, and overall competitive.

IT Impact on Service Industry Performance: During the 1980s, U.S. macroeconomic measures indicated that there was only a 0.7% productivity growth in services, despite a virtual doubling of IT investments during that decade to $750 billion. Explanations for this productivity paradox are numerous. The first and most simple explanation is that the weak performance of the service sector is unrelated to investments made in IT.

Other explanations for the slow growth in productivity could be the maturing of the sector, inefficient regulatory practices, poor worker education, or more likely, wasteful or inefficient use of IT. On a more optimistic note, the payoffs from IT investments may have merely been delayed because software, network support, or training systems have not kept up with the rapid advancements in hardware. Across many service industries, increasing complexity, physical decentralization, and growth in transaction volumes, resulting from lower handling costs, have often masked great performance gains.

In virtually every major service industry, the rate of new product introduction has exploded, as has geographical dispersion of operations.

What has actually happened is that IT has changed the boundaries and the definitions of most service industries. Today, new players often venture into what were once exclusive territories. Despite the current inability to measure in financial terms the productivity growth induced by IT use, both in government and in industry, by nearly all accounts, IT has substantially enhanced performance in service-based companies. Although many companies are far from perfect in implementing IT in their organizations, better managed companies evaluate and allocate IT investments in ways that appear very comparable to those that are used for other technologies and in other industries.

Cooperative Competition: The growing access to and importance of information flow is transforming old-line, traditionally hierarchical firms into flatter, more horizontal organizations emphasizing flexibility, coordination, on-time production, and long-term relationships with their suppliers and customers. R&D relationships extend across firms through horizontally organized networks that are redefining traditional corporate boundaries.

Perhaps somewhat ironically, the same firms that cooperate in R&D activities subsequently end up competing aggressively against one another in product markets. Corporate strategy today requires “cooperative competition,” a framework that enhances mutual performance, while at the same time shaping the form that competition takes.

In that sense, cooperation and competition do not represent alternative approaches to relationships, instead, both elements are always present to some extent.

The cooperative component enhances competition by enabling both parties to be more effective. At the same time, the structure of cooperation limits the scope of acceptable competitive behaviors. The insight that competitors may also cooperate in research networks, in order to compete effectively in product markets, captures the essential impact of the information revolution on many levels of strategy. The key aspects of today’s new organizational network structures include shifts from hierarchical to more horizontal relationships and a growing emphasis on long-term cooperation, both driven by the need and possibilities for more complete and timely communication.

Competitive Advantage: Competitive advantage always goes to the company that is best able to deliver the right product or service to the marketplace at the right price and the right time. Whenever a product or service creates more value for the consumer than does a competing product or service, it earns a competitive advantage. One way to achieve competitive advantage is to use IT as organizational support for a company’s products or services (regardless of whether they are technology-based). As in the case of firms producing IT products or services, a short development cycle also frequently applies to firms that use IT as a supporting function to gain their competitive advantage.

Implementation of IT Innovations: IT initiatives involve several stages, each with unique barriers to be overcome. By not addressing the organizational barriers at each stage, advancement to the higher stages will be deterred and may result in little or no success. Top management can and must play a major role by actively providing cross-functional support and adequate resources, as well as by assessing whether the IT initiative supports the firm’s overall strategic focus.

Conclusion

Successful use of IT in a company clearly requires numerous elements. IT planning must be an integral part of overall strategic planning, a building block in the way the company does business. Management must understand that IT innovation does not always result in a measurable gain in traditional performance measurements. Often, as has been illustrated in the service industry, and it is difficult to state that there is any company in today’s highly competitive world that is not involved in providing service on some level, the gains come in preventing loss of market share, and staying in the game itself.

The concept of competitive cooperation is alive and well in many industries today. Cooperation on IT innovation can help place everyone in a better position to compete effectively, and indeed, at all. What all companies seek is a way in which to gain a competitive advantage. Doing whatever a company does better, faster, more efficiently and in the way the customer wants it done – that is the only way companies can gain a true competitive advantage. IT will continue to play an ever-increasing role in making that happen.

Finally, what it comes down to is the implementation of IT. Talk is cheap. Companies simply must walk the walk. When top executives in a company decide to adopt an IT innovation, they must be prepared to recognize that it requires much more than just vocal support. IT success stories require at least one high-level champion to secure the necessary cross-functional support, and even to take ownership of the innovation.

That champion must be someone with significant budgetary and organizational clout to support the project and gain commitments for the necessary funding and interdepartmental cooperation. Front-line managers must be provided with the time and the resources to successfully implement any IT innovation.

Both the providers and the users of information must be educated about and vested in the implementation of an IT innovation, in order to translate it into a true and sustainable competitive advantage in the marketplace.

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Table 1. 1992 U.S. Value-Added and Employment by Industry

Value Added (Billions of Dollars) of Total

Employment

Millions of Units) of Total

TOTAL ECONOMY

Agriculture, forestry, fisheries

Mining and construction

Manufacturing

TOTAL GOODS SECTOR

Finance, insurance and real estate

Retail trade

Wholesale trade

Transportation and public utilities

Communications

Other services

TOTAL PRIVATE SERVICES

Government and government enterprises

TOTAL SERVICES SECTOR

Source: Bureau of Economic Analysis, “The National Income and Product Accounts of the United States,” series in the Survey of Current Business. Value-added data from August 1993, table 6.1C, p. 87. Employment data from August 1993, table 6.4C, p. 89. “Other services” include health care and delivery, business services, legal services, hotels, and recreation.

Table 2. Average Annual Growth in GDP per Hour, Major Sectors of the U.S. Economy

1948-1973

1973-1989

Business

GOODS PRODUCING

Farming

Mining

Construction

Manufacturing

Durable goods excluding nonelectrical machinery

Nonelectrical machinery

Nondurable goods

SERVICE PRODUCING

Transportation

Communication

Utilities

Trade

Wholesale

Retail

Finance, insurance and real estate

Services

GOVERNMENT ENTERPRISE

GENERAL GOVERNMENT

Sources: Survey of Current Business, April 1991, NIPA, tables 6.2 and 6.11; nonelectrical machinery hours from Bureau of Labor Statistics.

Table 3. Management Tasks in Bureaucracy vs. Adhocracy Organizations

Bureaucracy

Adhocracy

Planning Top Down

Sub-Unit Based

Organizing Hierarchy of Functions

Separate System of Interacting Sub-units

Directing Chain of Command

Networked Sub-units

Controlling Formalized Procedures

Professional norms

Source: Chan and Heide, 1992

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