Over two centuries ago, James Watt invented the steam engine, unleashing the Industrial Revolution by cutting the price of mechanical work in half. Today, the price of information processing is being cut in half every two years -- the equivalent of five Industrial Revolutions every decade.
Information technology in all of its forms is transforming the economy today as surely as Watt’s device for pumping water out of mine shafts did then. We typically think about this transformation in terms of new products -- computing and communications goods and services, embedded computing in other goods, new information or entertainment products -- or as changes in the skills the economy demands (and that all too often our pre-teen age children have but our executives themselves lack).
But the transition to an Information Age economy is far more profound. To think of the computer, the microprocessor, and the digital constellation built around them as “just a technology” is like calling Watt’s steam engine “just a machine.” Cheap and ubiquitous information flows are changing the way companies are organized. They are forcing them to adopt new strategies and conceptions of what it means to be in business. They are changing our economy’s aggregate performance. And they are changing the culture of management and what the CEO is supposed to do.
To illustrate the wide ranging ramifications of this shift, consider the following five new rules for competing in the Information Age. They are not about bits or bytes, platforms or servers, or systems development -- the word “digital” appears in none of them. But while none of them are about technology per se, each of them is caused by the way epochal technological changes are reorganizing the economy. They are the new rules of business competition in the Information Age.
1. The most important thing a CEO does is to define the boundaries of his company. A generation of corporate managers was raised to see scale as a competitive ace-in-the-hole. Today, if not built on sustainable, value-creating skills, it is a potentially-fatal encumbrance.
Companies once integrated themselves vertically in an effort to control their production, meaning to manage internally all of the information associated with coordinating it. In an age of CAD-CAM, ubiquitous networks, and vibrant communications technology, why bother? Throw out everything that isn’t world-class -- or that you aren’t willing to bet will one day be world class -- and let other providers bring the rest to you.
The automobile industry is a good example. Seventy years ago, Ford opened its River Rouge plant. Iron ore and coal went in one end, finished cars came out the other. The plant produced its own electricity, rolled its own steel, stamped and milled its own parts and components.
Today, such a plant would be considered a bizarre industrial theme park. In fact, the key to successful operation in the auto industry today is dis-integration, not integration. Ford and Chrysler now produce about 25 to 30 percent of their own componentry. General Motors, in contrast, produces about two-thirds, much to its own detriment. Ford and Chrysler have wrapped their boundaries tightly around their skills in designing and engineering new product and marketing it, keeping assembly as the platform that allows them to control those activities. General Motors, in contrast, thinks of itself still as an “integrated” automobile manufacturer, meaning that it wastes its time and assets doing things that others could do better.
Here’s a prediction. In ten years, one of the leading worldwide automobile nameplates may well be Swiss -- that of Swatch, the watch manufacturer. Swatch is building an automobile production campus where it will co-locate its assembly plant with a series of component manufacturers, the logical destination of modern, network-based production. By drawing its boundaries around its true skills -- design, assembly, and marketing -- Swatch realized that it had more to offer than just watches.
The lesson of Swatch’s experience, like that of Ford and Chrysler, is that information technology has allowed every activity and every value-creating stage in every company to be subject to a market test. Drawing a boundary around what inside his company is truly sustainable and value-creating, therefore, is the most important act that a CEO performs.
2. Take a lesson from your opposite. The best service producers are those who act like manufacturers and the best manufacturers are those who act like service producers. That’s because information technology lets both of them do exactly that.
The difference between services and goods is that services can’t be inventoried. They have to be consumed when and where they are produced, as does the output of doctors, restaurants, and the kissing booth at the State Fair. This makes it hard for service producers to build scale in the way that manufacturers traditionally have, since inventories allow the timing of production and consumption to be reconciled, which gives goods producers some leeway over the flow of work.
But information technology has allowed service producers to “scale up” by allowing them to lever the service provider. The information system allows the doctor to extend himself through networked information management, remote diagnosis, and the like, just as the insurance claims processor, the loan officer, and the retail establishment can all “do more” because of the information systems at their disposal.
Have you ever noticed, in fact, how similar today’s banks and the automobile producers of the 1920's are? Both are just learning how to succeed using mass production. Henry Ford got the picture early in that decade. Banks are now just getting it. Today’s banks, thanks to the securitization of assets, an information technology trick, now make their money not by holding assets, but by originating them and then moving them to secondary markets. Their balance sheets, once fine asset residences, are now asset parking lots. Banks are financial asset manufacturing plants, producing a product of standardized and predictable quality in the most efficient way they can, just as Henry Ford did.
Meanwhile, the ability to learn more about the customer and his wants, to individualize production, and to manufacture things both faster and more flexibly is making manufacturing firms look like service companies. Consider Dell and Gateway, which now both manufacture for the customer, not for inventory. After all, a computer that sits in stock for six months depreciates about ten percent or more during its shelf life. The computer, therefore, has become manufacturing’s first perishable product. In essence, it must be consumed when it’s produced, meaning that the manufacturer must know who is buying each unit they produce, what they want, and when for each individual unit. The computer manufacturer has become the kissing booth at the State Fair.
In both cases, the capabilities of information technology drive the change. It lets service producers build scale, and lets manufacturers work more flexibly and individually. And it tells executives that they should spend some time learning about other ways of doing business.
3. Talk to capital markets. The old saw says you don’t go bankrupt because you lose money -- you go bankrupt because somebody else gets tired of your losing money. But capital markets’ perceptions are important regardless of whether a firm is going bankrupt or great guns, and need to be managed even more than ever in the Information Age.
Markets are information processing machines. They turn information into decisions. Capital markets are the cutting edge of this reality. They are deep, diverse, liquid in the extreme, and growing rapidly in international scope. And they are almost overwhelmed with information, so much so that it is becoming progressively harder for investors and their agents -- analysts, for example -- to master all of the nuances of every investment opportunity.
Capital markets, in response, are developing “brand names” -- information short-cuts, devices that provide consumers with shorthands that allow them to get the picture quickly. The word “Coke” on a can tells the consumer something important about the contents of the can. The fact that a company lists on the New York Stock Exchange tells investors something as well -- regarding the liquidity of the firm’s issues, the accuracy of the price they receive, the accounting standards the firm employs, the commitments it has made to open and honest information flows, and the like.
CEOs are becoming brand names as well. Al Dunlop, of course, is one extreme example. But the CEO who can cut through the information clutter by explaining the strategic intent of his firm, how it relates to real-world conditions, and what the next steps towards realizing it will be, turns himself and his company into capital market brand names, and will earn the returns that well-managed brands earn. Instead of focusing solely on quarter-by-quarter results -- as important as they are -- the CEO needs to build the firm’s identity as a brand name in the eyes of investors. This means taking the strategy documents that sit on shelves at headquarters and turning them into banners that explain the firm’s intent in vivid, exciting terms. The moment when the CEO starts to get sick of saying it is the moment his audience is just beginning to get it.
The moral: in the Information Age, you’ll be judged by the way you provide information.
4. Beat ‘em with the clock. The hallmark of the industrial era was cost reduction. Industrial technology and organization were virtually one-dimensional, a search for new ways to amass scale in order to make things cheaper.
Information technology, in contrast, has added dimensionality to production. It has created new ways for firms to compete, to differentiate themselves and their product, and to create shareholder value.
Time is one of these new dimensions, perhaps the most important. Informated business systems make the time expended in every aspect of a business both measurable and manageable. The time from order to shipment. The time from shipment to billing. The time it takes a customer to get a response from an 800-number. Better data systems make all of these ripe for ongoing, visible improvement.
There are then the time-intensive activities that are more deeply embedded in a firm’s processes. The product cycle is an obvious example. Firms and entire industries now brag about shortening the time-to-market for their new products, as if their new-found fascination with it represents evidence of enlightenment. Is this new focus a reflection of a higher plane of managerial consciousness? Are proto-amphibian executives sprouting legs and heading up to dry land?
No. They’re just using the new tools technology has placed at their disposal. The applications of digital technology to product design, to the configuration of shop floors or service delivery systems, and even to new product market research has made it possible to shorten the product cycle and juiced the reward to doing so.
And that same pattern holds for other “new dimensions” of competition. Asset utilization, for example, has been revolutionized by a host of information technology techniques, from the securitization of receivables to automated material handling to networked production of parts and components. Customer service, from call-in help-lines to the ability to customize individual units of product, has been similarly opened up. In fact, add up time-based competition, lean asset use, and heightened customer service and satisfaction and you get what the consultants call Total Quality management. Is TQM a new insight, a higher plane of consciousness, an evolutionary advance? No. It’s just what happens when information technology is used to help business compete. The new technology has created new dimensions of competition, and it’s up to the CEO to use them.
5. The right-brained economy is upon us. In the days of vertical, pyramidic information flows, the premier players were sharp-penciled Whiz Kids who could turns scraps of data into usable information. Today, they have been supplanted by right-brained intuitors who see patterns of information that they turn into decisions.
The pyramidic organization was created earlier in this century to do precisely what computer networks now do for a pittance -- to collect, process, verify, and distribute information. Owing to the failings of human nature, of course, pyramidic organization dwellers often did exactly the opposite -- that is, they husbanded information, withheld it, and regulated it. Paperwork, routine decisions, presentation materials, and all other manners of work floated through the organization chart like Hamlet's father, searching for that elusive last act that would allow them to reach their final destination.
But today, information networks make any type of information available to anybody within a firm, and the pyramid has become irrelevant. Corporate pyramid builders now share the fate of their ancient predecessors, entombed in the rubble of their creations.
Today, armed with a single fact, you can speak directly to probably more than half the population of the Earth. That fact, of course, is their phone number. We will soon have a comparable system for data. Anybody will be able to access and manipulate almost every conceivable type of fact. "Which of our inventories have the fastest turns?" "What are the truck versus rail rates for transporting a turbine from St. Louis to Chicago?" "How do the volatility of company earnings among our competitors compare to the spreads on their paper against the London interbank rate?" Each of these questions will be as easy as "Open the pod bay doors, Hal."
The skills that this evolution in technology will reward are, of course, the skills that are most complementary with the capabilities of the technology. When we are overloaded by data, the people who succeed will be those who know how to triage the flow and create something from it, rather than those who add to the clutter. Thus, ironically, the Information Age will reward not those who have a great deal of information, or know how to manage it, or even produce it, but who know what to do once they get it.
The power of information technology is automating the analytic, data-manipulating, left half of our brains. This improves the market power of the complimentary and creative right side. The technology will favor judgment, intuition, creativity, and insight -- right-brained stuff. No less a seer than Timothy Leary agreed before his death, stating: "Computers...will replace you only to the extent that you...think like a bureaucrat, a functionary, a manager, an unquestioning member of a large organization, or a chess player." Not too long after his departure, Big Blue beat Gary Kasparov, substantiating his point.
And so, the ultimate irony -- the Information Revolution may ultimately reward the artists, poets, and philosophers. People like them will be tomorrow’s CEOs, if not today’s.
We are all now creatures of the Information Age, guided by the suite of epochal digital technologies. They are changing the way business is done in ways that have seemingly little, but actually everything, to do with technology. Regardless of whether they know their way on the Information Superhighway, CEOs need to learn these, the new rules of the road.
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