How Much Does Information Technology Matter?

By CIO Update Staff

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In May 2003, The Harvard Business Review published an article by a former editor, Nicholas Carr, titled "IT Doesn't Matter."

The reaction from industry chief executives was immediate.

"Hogwash!" said Steven Ballmer of Microsoft. "Dead wrong," said Carleton Fiorina of Hewlett-Packard. Craig Barrett of Intel responded forcefully, "IT matters a whole lot."

Now, a year later, Carr has replied to his critics with a new book, "Does IT Matter?" (Harvard Business School Press).

It's a good book. Carr lays out the simple truths of the economics of information technology in a lucid way, with cogent examples and clear analysis.

His basic point is straightforward. At one time, information technology was so expensive and so difficult to manage that companies could make large amounts of money simply by being able to make systems work. (Think IBM).

Companies that lacked the skills to manage information technology effectively suffered compared with competitors that had mastered those skills. But over the years, as information technology has become cheaper and more manageable, this source of competitive advantage has been reduced and perhaps eliminated. Hiring knowledgeable employees is much easier than it used to be, and the tools to manage this technology are far more powerful than they were a few short years ago. Nowadays anybody can set up a Web server, or an accounting system, or an inventory management system.

The ability to manage technology effectively is no longer the barrier to entry it once was. Hence, it no longer serves as a source of competitive advantage.

So it is with every new technology. When electric motors became small enough to drive individual machine tools, it became possible to set up assembly lines and greatly improve productivity.

According to Carr, knowing how to use information technology is like knowing how to run an assembly line. It is a utility now, like telephone service or electricity.

Asking whether information technology matters is like asking whether electricity matters. In one sense it certainly does -- without electricity, commerce would grind to a halt. But skill in the management of electricity isn't particularly useful to most companies, since electricity is now so cheap and so commonplace that it can't really be a source of competitive advantage to anyone.

Profit comes from scarcity. Companies that can provide products or services that others can't provide can charge premium prices. As more and more companies are able to supply something, competition works its magic and forces prices down.

See the complete story on NYT's Web site (registration may be required).

Hal R. Varian is a professor of business, economics and information management at the University of California, Berkeley.

This article was compiled and edited by CIO Update staff. Please direct any questions regarding its content to Allen Bernard, Managing Editor.