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Chapter 5 Digital business strategy
between a company’s investment in information systems and its business performance
measured in terms of profitability or stock returns. Strassman’s work, based on a study of
468 major North American and European firms, showed a random relationship between IT
spending per employee and return on equity.
To the present day, there has been much dispute about the reality of the productivity para-
dox. Carr (2003) suggested that information technology has become commoditised to such
an extent that it no longer delivers a competitive advantage. Carr says:
What makes a resource truly strategic – what gives it the capacity to be the basis for a sus-
tained competitive advantage is not ubiquity, but scarcity. You only gain an edge over rivals
by having something that they can’t have or can’t do. By now the core functions of IT –
data storage, data processing and data transport have become available and affordable
to all . . . They are becoming costs of doing business that must be paid by all but provide
distinction to none.
Carr’s argument is consistent with the productivity paradox concept, since although IT
investments may help in increasing productivity, this does not necessarily yield a competitive
advantage if all competitors are active in making similar IT investments.
Today, most authors, such as Brynjolfsson and Hitt (1998) and Mcafee and Brynjolfsson
(2008), refute the productivity paradox and conclude that it results from mismeasurement,
the lag occurring between initial investment and payback and the mismanagement of infor-
mation systems projects. Mcafee and Brynjolfsson (2008) suggest that to use digital technol-
ogy to support competition the mantra should be:
‘Deploy, innovate, and propagate’: First, deploy a consistent technology platform. Then sepa-
rate yourself from the pack by coming up with better ways of working. Finally, use the plat-
form to propagate these business innovations widely and reliably. In this regard, deploying
IT serves two distinct roles – as a catalyst for innovative ideas and as an engine for delivering
them.
More recent detailed studies such as that by Sircar et al. (2000) confirm the findings of
Brynjolfsson and Hitt (1998). They state that:
Both IT and corporate investments have a strong positive relationship with sales, assets,
and equity, but not with net income. Spending on IS staff and staff training is positively
correlated with firm performance, even more so than computer capital.
In conclusion they state:
The value of IS staff and staff training was also quite apparent and exceeded that of com-
puter capital. This confirms the positions of several authors, that the effective use of IT is
far more important than merely spending on IT.
The disproportionate allocation of spend to implementation was highlighted by the Financial
Times (2003), which said:
Prof Brynjolfsson and colleagues found that of the $20m total cost of an enterprise
resource planning (ERP) system, only about $3m goes to the software supplier and
perhaps $1m towards the acquisition of new computers. The $16m balance is spent
on business process redesign, external consultants, training and managerial time.
The ratio between IT investment and this ‘supporting’ expenditure varies across pro-
jects and companies. But, over a range of IT projects, Prof Brynjolfsson believes that
a 10:1 ratio is about right. Returns on these investments commonly take 5 years to
materialise.
The 10:1 ratio between total investment in new information management practices and IT
also shows that applying technology is only a relatively small part in achieving returns –
developing the right approaches to process innovation, business models and change man-
agement are more important, and arguably more difficult and less easy to replicate. Some
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Part 2 Strategy and applications
leading companies have managed to align investment in digital business with their business
strategies to achieve these unique gains.
For example, Dell has used a range of IT-enabled techniques mentioned earlier in the
chapter such as online ordering, the Dell Premier extranet for large purchasers, vendor-
managed inventory, adaptive supply chains, and build-to-order to gain competitive
advantage.
Research into the productivity paradox highlights the importance of considering the
information, people and technology resources together when planning for digital business
strategy and implementation. It also suggests that digital business contributes to productiv-
ity gains only when combined with investments in process redesign, organisational change
management and innovation.
Summary
1
Digital business strategy process models tend to share the following characteristics:
●
Continuous internal and external environment scanning or analysis is required.
●
Clear statement of vision and objectives is required.
●
Strategy development can be broken down into formulation and selection, a key
emphasis being assessing the differential benefits provided by e‑channels for
company and stakeholders and then selecting the most appropriate channels
for different business activities and partners (‘ right‑ channelling’).
●
After strategy development, enactment of the strategy occurs as strategy
implementation.
●
Control is required to detect problems and adjust the strategy accordingly.
●
They must be responsive to changes in the marketplace.
2
In this chapter a four‑ stage model is used as a framework for digital business strat‑
egy development. Key digital business issues within this framework are outlined
below.
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