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HBR AT LARGE
Doesn’t
Matter
by Nicholas C.Carr
As information technology’s power and ubiquity have
grown, its strategic importance has diminished. The
way you approach IT investment and management will
need to change dramatically
I
N 1968, ayoung Intel engineernamed
Ted Hoff found a way to put the circuits necessary for computer processing onto a tiny piece of silicon. His invention of the microprocessor spurred a
series of technological breakthroughsdesktop computers, local and wide area
networks, enterprise software, and the
Internet-that have transformed the
business world. Today, no one would dispute that information technology has
become the backbone of commerce. It
underpins the operations of individual
companies, ties together far-flung supply chains, and, increasingly, links businesses to the customers they serve.
Hardly a dollar or a euro changes hands
anymore without the aid of computer
systems.
As IT’S power and presence have expanded, companies have come to view it
as a resource ever more critical to their
MAY 2003
success, a fact clearly reflected in their
spending habits. In 1965, according to a
study by the U.S. Department of Commerce’s Bureau of Economic Analysis,
less than 5% of the capital expenditures
of American companies went to information technology. After the introduction of the persona] computer in the
early 1980s, that percentage rose to 15%.
By the early 1990s, it had reached more
than 30%, and by the end of the decade
it had hit nearly 50%. Even with the recent sluggishness in technology spending, businesses around the world continue to spend well over $2 trillion a
year on IT.
But the veneration of IT goes much
deeper than dollars. It is evident as well
in the shifting attitudes of top managers. TXventy years ago, most executives
looked down on computers as proletarian tools – glorified typewriters and
41
HBR AT LARGE • IT Doesn’t Matter
calculators-best relegated to low level
employees like secretaries, analysts, and
technicians. It was the rare executive
who would let his fingers touch a keyboard, much less incorporate information technology into his strategic thinking. Today, that has changed completely.
Chief executives now routinely talk
aboutthe strategic value of information
technology, about how they can use IT
to gain a competitive edge, about the
“digitization” of their business models.
Most have appointed chief information
officers to their senior management
teams, and many bave hired strategy
consulting firms to provide fresh ideas
on how to leverage their IT investments
for differentiation and advantage.
Behind the change in thinking lies a
simple assumption: that as lT’s potency
and ubiquity have increased, so too has
its strategic value. It’s a reasonable assumption, even an intuitive one. But it’s
mistaken. What makes a resource truly
strategic – what gives it the capacity to
be the basis for a sustained competitive
advantage-is not ubiquity but scarcity.
You only gain an edge over rivals by
having or doing something that they
can’t bave or do. By now, tbe core functions of IT – data storage, data processing, and data transport – have become
available and affordable to all.^ Tbeir
very power and presence have begun to
transform them from potentially strategic resources into commodity factors of
production. They are becoming costs
of doing business that must be paid by
all but provide distinction to none.
IT is best seen as the latest in a series
of broadly adopted technologies that
have reshaped industry over the past
two centuries – from the steam engine
and the railroad to the telegraph and
the telephone to the electric generator
and the internal combustion engine.
Eor a brief period, as they were being
built into the infrastructure of commerce, all tbese technologies opened
opportunities for forward-looking com-
panies to gain real advantages. But as
tbeir availability increased and their
cost decreased-as they became ubiquitous-they became commodity inputs.
From a strategic standpoint, they became invisible; they no longer mattered.
Tbat is exactly what is happening to information technology today, and the
implications for corporate IT management are profound.
Vanishing Advantage
Many commentators have drawn parallels between the expansion of IT, particularly the Internet, and the rollouts
of earlier technologies. Most of the
comparisons, though, have focused on
either the investment pattern associated with the technologies-the boomto-bust cycle-or tbe tecbnologies’ roles
in resbaping the operations of entire industries or even economies. Little has
rights to a new packaging material that
gives its product a longer shelf life than
competing brands. As long as they remain protected, proprietary technologies can be the foundations for longterm strategic advantages, enabling
companies to reap higher profits than
tbeir rivals.
InfrastiTJctural technologies, in contrast, offer far more value when shared
than when used in isolation. Imagine
yourself in the early nineteenth century,
and suppose that one manufacturing
company held the rights to all the technology required to create a railroad. If it
wanted to, that company could just
build proprietary lines between its suppliers, its factories, and its distributors
and run its own locomotives and railcars
on tbe tracks. And it might well operate
more efficientiy as a result. But, for tbe
broader economy, the value produced
When a resource becomes essential to competition but
inconsequential to strategy, the risks it creates become
more important than the advantages it provides.
been said about the way the technologies influence, or fail to influence, competition at the firm level. Yet it is here
that history offers some of its most important lessons to managers.
A distinction needs to be made between proprietary technologies and
what might be called infrastructural
technologies. Proprietary technologies
can be owned, actually or effectively,
by a single company. A pbarmaceutical
firm, for example, may hold a patent on
a particular compound that serves as
the basis for a family of drugs. An industrial manufacturer may discover an
innovative way to employ a process
technology that competitors find hard
to replicate. A company tbat produces
consumer goods may acquire exclusive
by such an arrangement would be trivial compared with the value that would
he produced by building an open rail
network connecting many companies
and many buyers. The characteristics
and economics of infrastructural technologies, whether railroads or telegraph
lines or power generators, make it inevitable tbat they will be broadly sharedthat they will become part of the general business infrastructure.
In the earliest phases of its buildout,
however, an infrastructural technology
can take the form of a proprietary technology. As long as access to the technology is restricted-through physical limitations, intellectual property rights,
high costs,or a lack of standards-a company can use it to gain advantages over
rivals. Consider the period between the
Nicholas G. Carr is HBR’s editor-at-large. He edited The Digital Enterprise, a collec- construction of the first electric power
stations, around 1880, and the wiring of
tion of HBR articles published by Harvard Business School Press in 2001, and has
written for the Einancial Times, Business 2.0, and the Industry Standard in addition the electric grid early in the twentieth
century. Electricity remained a scarce
to HBR. He can be reached at ncarr@hbsp.harvard.edu.
42
HARVARD BUSINESS REVIEW
IT Doesn’t Matter • HBR AT LARGE
resource during this time, and those
manufacturers able to tap into it – by,
for example, building their plants near
generating stations – often gained an
important edge. It was no coincidence
that the largest U.S. manufacturer of
nuts and bolts at tbe turn of the century.
Plumb, Burdict, and Barnard, located its
factory near Niagara Falls in New York,
the site of one of the earliest large-scale
bydroelectiic power plants.
Companies can also steal a march on
their competitors by baving superior insight into the use of a new technology.
The introduction of electric power again
provides a good example. Until the end
of the nineteenth century, most manufacturers relied on water pressure or
steam to operate their machinery. Power
in those days came from a single, fixed
source – a waterwheel at the side of a
mill, for instance-and required an elaborate system of pulleys and gears to
distribute it to individual workstations
throughout the plant. When electric
generatorsfirstbecame available, many
manufacturers simply adopted them as
a replacement single-point source, using
them to power the existing system of
pulleys and gears. Smart manufacturers,
however, saw that one of the great advantages of electiic power is that it is easily distributable-tbat it can be brought
directly to workstations. By wiring tbeir
plants and installing electric motors in
tiieir machines, they were able to dispense with tbe cumbersome, inflexible,
and costly gearing systems, gaining an
important efficiency advantage over
their slower-moving competitors.
In addition to enabling new, more efficient operating metbods, infrastructural technologies often lead to broader
market changes. Here, too, a company
that sees what’s coming can gain a step
on myopic rivals. In the mid-i8oos, wben
America started to lay down rail lines in
earnest, it was already possible to transport goods over long distances – bundreds of steamships plied the country’s
rivers. Businessmen probably assumed
that rail transport would essentially follow the steamship model, with some incremental enhancements. In fact, the
greater speed, capacity, and reach of
MAY 2003
the railroads fundamentally changed the
structure of American industry. It suddenly became economical to ship finished products, rather than just raw
materials and industrial components,
over great distances, and the mass consumer market came into being. Companies that were quick to recognize the
broader opportunity rushed to build
large-scale, mass-production factories.
Tbe resulting economies of scale allowed them to crush the small, local
plants that until tben had dominated
manufacturing.
The trap tbat executives often fall
into, however, is assuming that opportunities for advantage will be available
indefinitely. In actuality, the window for
gaining advantage from an infrastructural technology is open only briefly.
Wben the technology’s commercial potential begins to be broadly appreciated,
huge amounts of cash are inevitably invested in it, and its buildout proceeds
witb extreme speed. Railroad tracks,
telegraph wires, power lines – all were
laid or strung in a frenzy of activity (a
frenzy so intense in the case of rail lines
tbat it cost hundreds of laborers tbeir
lives). In the 30 years between 1846 and
1876, reports Eric Hobsbawm in The
Age of Capital, the world’s total rail
trackage increased from 17,424 kilometers to 309,641 kilometers. During tbis
same period, total steamship tonnage
also exploded,from139,973 to 3,293,072
tons. The telegraph system spread even
more swiftly. In Continental Europe,
there were just 2,000 nules of telegraph
wires in 1849; 20 years later, there were
110,000, The pattern continued witb
electrical power. The number of central
stations operated by utilities grew from
468 in 1889 to 4,364 in 1917, and the average capacity of eacb increased more
than tenfold. (Eor a discussion of the
dangers of overinvestment, see the sidebar “Too Mucb of a Good Thing.”)
By tbe end of the buildout phase, tbe
opportunities for individual advantage
are largely gone. The rush to invest leads
to more competition, greater capacity,
and falling prices, making the technology broadly accessible and affordable.
At the same time, the buildout forces
HBR AT LARGE • IT Doesn’t Matter
users to adopt universal technical standards, rendering proprietary systems
obsolete. Even the way tbe tecbnology
is used begins to become standardized,
as best practices come to be widely understood and emulated. Often, in fact,
tbe best practices end up being built
into the infrastructure itself; afrer electrification, for example, all new factories were constructed witb many welldistributed power outlets. Both tbe
technology and its modes of use hecome, in effect, commoditized. The only
meaningful advantage most companies
can hope to gain from an infrastructural
tecbnology after its buildout is a cost
advantage – and even that tends to be
very hard to sustain.
That’s not to say that infrastructural
tecbnologies don’t continue to influence competition. They do, but their
influence is felt at the macroeconomic
level, not at the level of the individual
ccjmpany. If a particular country, for instance, lags in installing the technology – whether it’s a national rail network, a power grid, or a communication
infrastructure – its domestic industries
will suffer heavily. Similarly, if an industry lags in harnessing the power of
the tecbnology, it will be vulnerable to
displacement. As always, a company’s
fate is tied to broader forces affecting
its region and its industry. The point is,
however, that the technology’s potential for differentiating one company
from the pack-its strategic potential inexorably declines as it becomes accessible and affordable to all.
The Commoditization of IT
Although more complex and malleable
than its predecessors, IT has all the hallmarks of an infrastructural technology.
In fact, its mix of characteristics guarantees particularly rapid commoditization . IT is, first of all, a transport mechanism-it carries digital information just
as railroads carry goods and power grids
carry electricity. And like any transport
mechanism, it is far more valuable when
shared than when used in isolation. The
history of IT in business has been a history of increased interconnectivity and
interoperability, from mainframe time44
Too Much of a Good Thing
As many experts have pointed out, the overinvestment in information
technology in the 1990s echoes the overinvestment in railroads in the
i86os. In both cases, companies and individuals, dazzled by the seemingly unlimited commercial possibilities ofthe technologies, threw large
quantities of money away on half-baked businesses and products. Even
worse, the flood of capital led to enormous overcapacity, devastating
entire industries.
We can only hope that the analogy ends there. The mid-nineteenthcentury boom in railroads (and the closely related technologies ofthe
steam engine and the telegraph) helped produce notonly widespread
industrial overcapacity but a surge in productivity. The combination set
the stage for two solid decades of deflation. Although worldwide economic
production continued to grow strongly between the mid-i87osandthe
mid-i89os, prices collapsed – in England, tbe dominant economic power
oftbe time, price levels dropped 40%. In turn, business profits evaporated.
Companies watched the value of tbeir products erode while tbey were in
the very process of making them. As the first worldwide depression took
hold, economic malaise covered much ofthe globe. “Optimism about a
future of indefinite progress gave way to uncertainty and a sense of agony,”
wrote historian D.S. Landes.
It’s a very different world today, of course, and it would be dangerous
to assume that history will repeat itself But with companies struggling to
boost profits and the entire world economy flirting with deflation, it would
also be dangerous to assume it can’t.
sharing to minicomputer-based local
area networks to broader Ethernet networks and on to the Internet. Each stage
in that progression has involved greater
standardization of the technology and,
at least recently, greater homogenization of its functionality. Eor most business applications today, the benefits of
customization would be overwhelmed
by tbe costs of isolation.
tion for a fraction of the cost? But it’s
not just the software tbat is replicable.
Because most business activities and
processes have come to he embedded
in software, they become replicable, too.
When companies buy a generic application, they buy a generic process as
well. Both the cost savings and the interoperability benefits make the sacrifice of distinctiveness unavoidable.
IT is also highly replicable. Indeed, it
is hard to imagine a more perfect commodity than a byte of data – endlessly
and perfectly reproducible at virtually
no cost. The near-infinite scalability of
many IT functions, when combined
with technical standardization, dooms
mO5t proprietary applications to economic obsolescence. Wby write your
own application for word processing
or e-mail or, for that matter, supplychain management when you can buy
a ready-made, state-of-the-art applica-
The arrival of the Internet has accelerated the commoditization of IT by
providing a perfect delivery channel for
generic applications. More and more,
companies will fulfill their IT requirements simply by purchasing fee-based
“Web services” from third parties similar to the way they currently buy
electric power or telecommunications
services. Most of the major businesstechnology vendors, from Microsoft to
IBM, are trying to position themselves
as IT utilities, companies that will conHARVARD BUSINESS REVIEW
IT Doesn’t Matter • HBR AT LARGE
trol the provision of a diverse range of
business applications over what is now
called, tellingly, “the grid.” Again, the
upshot is ever greater homogenization
of IT capabilities, as more companies
replace customized applications with
generic ones. (Eor more on the challenges facing IT companies, see the sidebar “What About the Vendors?”)
Finally, and for all tbe reasons already
discussed, IT is subject to rapid price deflation. Wben Gordon Moore made his
famously prescient assertion that the
density of circuits on a computer chip
would double every two years, he was
mailing a prediction about the coming
explosion in processing power. But he
was also making a prediction about the
coming free fall in the price of computer
functionality. The cost of processing
power has dropped relentlessly, from
$480 per million instructions per second (MIPS) in 1978 to $50 per MIPS in
1985 to $4 per MIPS in 1995, a trend tbat
continues unabated. Similar declines
have occurred in the cost of data storage
and transmission. The rapidly increasing affordability of IT functionality has
not only democratized the computer
revolution, it has destroyed one of the
most important potential barriers to
competitors. Even the most cuttingedge IT capabilities quickly become
available to all.
It’s no surprise, given these characteristics, that IT’S evolution has closely
mirrored that of earlier infrastructural
tecbnologies. Its buildout has been every
bit as breathtaking as tbat of the railroads (albeit with considerably fewer
fatalities). Consider some statistics. During the last quarter of the twentieth
century, the computational power of
a microprocessor increased by a factor
of 66,000. In the dozen years from 1989
to 2001, the number of host computers
connected to the Internet grew from
80,000 to more than 125 million. Over
the last ten years, the number of sites
on the World Wide Web bas grown
from zero to nearly 40 million. And
since the 1980s, more than 280 million
miles of fiber-optic cable bave been installed – enough, as BusinessWeek recently noted, to “circle the earth 11,320
MAY 2003
times.” (See the exhibit “The Sprint to
Commoditization.”)
As with earlier infrastructural tecbnologies, IT provided forward-looking
companies many opportunities for competitive advantage early in its buildout,
when it could still be “owned”like a proprietary technology. A classic example
is American Hospital Supply. A leading
distributor of medical supplies, AHS
introduced in 1976 an innovative system
called Analytic Systems Automated
Purcbasing, or ASAP, that enabled hospitals to order goods electronically. Developed in-house, the innovative system …
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