Sloan Management Review, 1/ 94, Vol. 35 ; No. 2 ; Pg. 73.
The business world entered the1990s highly skeptical of IT's benefits. The era of competitive benefits from proprietary systems is over, since computers have become as ubiquitous as the telephone. Essentially, there is no correlation between levels of investments in information technology and such business performance indices as sales growth, profit per employee, or shareholder value. We are on the threshold of fundamentally reassessing the logic for organizing business activities and reevaluating ITs potential role. The business logic of the 1970s and 1980s -- exploiting experience curve effects for achieving low relative cost through vertical integration -- may be inadequate for the 1990s and beyond because the emerging business environment calls for a strategy based on three intertwined elements: low cost, high quality, and fast and flexible response to customer needs.
The article presents a framework of IT-enabled business transformation, and derives implications and guidelines for management. The framework is based on two dimensions: the range of IT's potential benefits and the degree of organizational transformation. The benefits accrue in those cases where investments in IT functionality accompany corresponding changes in organizational characteristics. The framework proposes a hierarchy of five levels of IT-enabled business transformations.
Level One: Localized Exploitation
The first level is the basic one for leveraging IT functionality within a business. In many cases, decisions to deploy isolated systems (e.g., a customer order-entry system, toll-free customer service system, inventory control system, internal electronic mail system) are decentralized to the appropriate functional, operational managers. Typically, managers initiate and deploy these systems to respond to operational problems or challenges. This level is best viewed as the deployment of standard IT applications with minimal changes to the business processes. The chosen IT application either reduces the cost of a certain process or increases the speed of response to customer measured against past performance levels.
The weakness of this approach is that the competitors can easily imitate standard technical applications with minimal changes to the underlying business processes to neutralize sources of strategic advantages. It is important to evaluate the appropriateness of the performance criteria before deploying the IT application (and the corresponding organizational changes) and to recognize that no single IT application -- however powerful -- is strategic in its generic form.
Level Two: Internal Integration
The second level is a logical extension of the first, reflecting a more systematic attempt to leverage IT capabilities throughout the entire business process. This level involves two types of integration: technical interconnectivity (dealing with the interconnectivity and interoperability of the different systems and applications through a common IT platform) and business process interdependence (dealing with the interdependence of organizational roles and responsibilities across distinct functional lines).
Many firms allocate more attention and effort to technical interconnectivity than to business process interdependence. External technical vendors and systems integrators can carry out the operating tasks forensuring technical interoperability, but the responsibility for business process interdependence lies squarely within the firm. The lack of attention to creating interdependent business processes (with a supporting performance assessment system) weakens the organization's ability to leverage a seamless and interoperable technical platform.
Each firm should develop its own vision for internal integration after assessing the benefits of integrating current business processes. The logic for internal integration may reflect a transition toward fundamentally redesigning the business processes over a period of time. The company also needs to ensure that marketplace considerations guide internal integration efforts.
The first two levels are "evolutionary" because they require minimal changes to the business processes relative to the next three levels. Perhaps the most important decision is whether to be at level two of the transformational trajectory -- namely the automation of existing processes -- or to be at one of the three revolutionary levels, since they require fundamental changes in organizational routines.
Level Three: Business Process Redesign
The benefits from IT functionality are not fully realized if superimposed on the current business processes. IT functionality should not be simply overlaid on existing business processes but should be used as a lever for designing the new organization and associated business processes. A company should initiate business process redesign after ascertaining the significant changes in its key competitors' business processes. A careful analysis of the costs and benefits of the current design against a feasible set of options allows an organization to execute a coordinated plan for redesign. Benefits from business process redesign are limited in scope if the processes are not extended outside the focal organizational boundary to identify options for redesigning relationships with the other organizations that participate in ultimately delivering value to the customer.
Level Four: Business Network Redesign
The first three levels have focused on IT -enabled business transformation within a single organization. These levels -- either implicitly or explicitly -- assumed that the boundary of the focal organization is fixed or given. IT -based advantage accrues if (and only if) the firm deploys its own version of interorganizational systems. There is absolutely no evidence that deploying proprietary interorganizational systems per se provides any competitive advantage. So, while IOS is an efficient conduit to exchange important information between trading partners, it is the organization's capability to leverage these systems to create interdependent processes or enhance decision making, or provide distinctive value-added that leads to effectiveness.
The real power of IT for any firm lies not in streamlining internal operations (efficiency enhancements) but in restructuring the relationships in the extended business networks to leverage a broader array of competencies that will deliver superior products and services. It is clear that any systematic attempt to reposition a firm has implications for the firm's business scope -- the fifth level of the transformation.
Level Five: Business Scope Redefinition
The fifth level of transformation directly addresses the question: "What role -- if any --
does IT play in influencing business scope and the logic of business relationships within the extended business network?" Some business tasks may be eliminated (such as repetitive quality control steps, billing invoices, preparing delivery slips, and so on), some tasks may be restructured optimally across organizational boundaries (joint design or collaborative manufacturing), and some tasks expanded (value-added services that are rooted in IT functionality).
Managers should increasingly demonstrate that it is both efficient and effective for carrying out the set of business processes inside and also demonstrate how it coordinates with the business processes outside -- through the use of IT applications for enhanced coordination and control. IT capabilities greatly enhance and facilitate such attempts at combining the required competencies on a flexible basis. The flexible combination of different fragments of activities to provide customers with the required products and services is fundamentally enabled by superior information processing capability.
IT is not simply a utility like power or telephone but a fundamental source of business scope reconfiguration to redefine the "rules of the game" -- through restructured business networks (level four) as well as redesigned business processes (level three). Thus the core logic of organizational strategy involves the three higher levels of the transformational framework with business processes designed (level three) to support the logic of business scope definition (level five) and the specific positions in the business network (level four).
Strategic Management Challenge: Exploiting IT Capabilities
There is no one best level for all companies because each level indicates potential benefits that are consistent with the organization's exploitative capability. The evolutionary levels (one and two) are transitions toward creating the new strategic logic that reflects and exploits the potential of the revolutionary levels. IT's potential benefits are directly related to the degree of change in organizational routines (strategies, structure, processes, and skills). Thus, a critical issue in deciding on the desired transformational level is to evaluate whether the managers view IT capabilities as a source of opportunity to redefine their strategies or as threat to the status quo. Assessing where leading competitors are positioned within this framework is very useful not only for creating awareness of the limitations of the status quo but also for gaining commitment.
A company can approach business process redesign from two different (and sometimes
contradictory) perspectives: "seek efficiency," which focuses predominantly on rectifying current weaknesses, and "enhance capabilities," which aims to create strategic capabilities for future competition. Both are valid, but managers should understand the context favoring one over the other before embarking on business redesign.
When a company seeks efficiency, the boundaries of the current strategy (business network and business scope, reflecting levels four and five in the framework) are fixed and given. Thus the main objectives of redesign are to achieve operational excellence within the boundaries. Such an approach is perfectly valid under conditions where we do not expect a radical redefinition of business scope through fundamental realignment of business processes within the business network.
The other avenue to business process redesign, namely, "enhance capabilities," starts with the articulation of business scope and the corresponding logic for business network redesign to specify which business processes need to be redesigned and under what guiding conditions. This approach starts with a careful and focused analysis of how the organization is likely to be positioned in the business network before deriving the objectives and requirements for business process redesign.
IT will have a profound impact on businesses. Successful companies will be differentiated by their ability to visualize the logic of the new business world (level five of the transformation model) and leverage IT to create an appropriate organizational arrangement -- internal and external (levels three and four) -- to support the business logic. Management's challenge is to continually adapt the organizational and technological capabilities to be in dynamic alignment with the chosen business vision.