Frustration and Fallacies
The new millennium has been marked by disappointing trends and widespread
skepticism concerning IT innovation – especially evident in disillusionment over
e-commerce contributions to enhancing corporate revenues or differentiating
customer service. Cost reduction and systems flexibility drew far more
enthusiasm from CEOs and CIOs alike, concluded our prior CIOSE position
paper. The bursting bubble had shredded the Internet's image.
To be sure, the collapse had been long predicted by the best business savants (notably Yale economist Robert Shiller in Irrational Exuberance). Yet the duration of disinterest and depth of anger remain unsettling. Perhaps they result partly from the failure to accurately assess the fiasco’s root causes. Instead, most discussion remains mired in ideological and academic fallacies which fault the Internet and IT generally, although a gullible generation of executive management and chirping Wall Streeters probably did the damage on their own. A better analysis of lessons learned could give enterprises a valid basis (perhaps even strategies) for moving forward again.
So we'll warm up by exposing four widely cherished fallacies. And contrast them with the current wisdom and intriguing e-commerce achievements of several CIOSE member companies. That should set the stage for our upcoming – surely enlightened - discussion of innovative strategy setting around the Internet.
Fallacy No. 1: The pundits assumption that a powerful new technology alone can be disruptive. McKinsey’s Dr. Richard Foster authoritatively suggests this in Innovation, the Attacker’s Advantage (1986) "I don’t know of any comprehensive statistics that would stand up to academic scrutiny, but my feeling is leadership changes hands in most cases when discontinuities strike. A change in technology may not be the No. 1 corporate killer, but it’s certainly among the leading causes of corporate ill health." Unfortunately for his thesis, Dr. Foster then devotes nine pages to the artificial heart, a technology that still hasn’t taken hold. But in fairness, his view broadens: "Technological change necessitates significant organizational change. Again and again, companies lose their way not because of weak strategies but because of strong cultures."
Foster is half right: Successful new technologies are often accompanied by profound organizational dislocation. But typically that dislocation is mandated because a painfully disruptive new business model has emerged in the technology’s wake. In essence, the new technology alone isn’t truly "disruptive" - until and unless - it forces radical change in the prevailing business model.
Looking backwards, it’s obvious that e-commerce hasn’t yet forced nearly the disruption to accepted business models as that wrought by the personal computer. After all, the PC players (with help from Unix) obliterated an entire minicomputer industry that had been hugely successful only one decade earlier. Conversely, Internet-based e-commerce seems to be enhancing, rather than disintermediating, the existing sales practices and distribution channels of establishment players.
The PC industry upended more than technology when it substituted standardized microprocessors for custom-designed logic circuitry. By shattering the prevailing business model, first Compaq, and then Dell, slashed gross margins below 25 percent. Their lean financial model savaged the minicomputer companies, whose paunchy 60 percent gross margins had funded proprietary operating systems, expansive R&D, ample customer handholding, and comfortable profits.
By 1994, price pressure from the new PC industry had driven minicomputer gross margins to 40 percent and essentially squashed Digital Equipment. The SG&A burden alone was 36 percent; R&D was 12 percent. “The best we could hope for was a permanent 10 percent loss,” groaned the Digital executive responsible for "business transition."
Lou Gerstner (accurately) reminisces in his autobiography: "After Unix cracked the foundation, the PC makers came along swinging wrecking balls." And the damage couldn’t be repaired. Remember Wang, Data General, Unisys, DEC? "Even those companies which were rescued survived as also-rans, found a merger partner, or put themselves up for sale."
Contrary to the buoyant expectation of three years ago, the Net doesn’t change everything. Well yes, it could still force enormous business upheaval but that won’t occur purely because of better networking technology or even because more PC owners are networked.