Information Technology and Growing the Value of Your Firm
This article is part of a series on what causes a firm’s value to increase
If you are like me and are not an information technology (IT) expert or aficionado, then you probably scrape by understanding the ins and outs of the waves of new IT the best you can. You call on your IT experts to train you on what you need to know from a technical standpoint, and make do until the next IT wave emerges.
But IT and the waves of new IT that we can count on to happen every year, if not every six months, have huge potential for helping to grow the value of your firm, which is the topic of this series of articles started last year for the Forum. As such, IT can be very strategic, as well as allowing us to perform daily tasks at ever increasing productivity and efficiency.
This fascinating story started in 1993 with the meteoric rise of the World- Wide-Web (www). Before then, there was a tradeoff between the reach of information and the richness of information. We could have one, but not the other. In other words, we could have very rich information but not information that had wide reach. Think of your expert sales person calling one-on-one on your customers. Information sharing and communication could be very deep and rich, but your sales team could call on only a handful of customers every day. Or we could have information that had far reach, but it could not be rich. Think of the thirty second advertising spot on national television. Even a very creative Super Bowl advertisement, while reaching millions of people, cannot be deep and rich in information and communication.
The www shattered this historic tradeoff. After 1993 it was possible to have both high reach and highly rich information and communication that in most cases cost almost nothing after initial IT infrastructure investment. Philip Evans and Thomas Wurster wrote a landmark book in 2000 titled Blown to Bits: How the New Economics of Information Transforms Strategy. This book set off a firestorm of rapid new thinking about the role of IT and strategy and I would like to add helping firms increase their valuation.
Some of the early thinking turned out to be very wrong. For example, in 1993 it was predicted that “brick and mortar” retailers would go out of business if they did not switch to the www. “Clicks would replace bricks” was the mantra. We now know this to be false – most retailers have embraced bricks and clicks together.
The thinking then shifted to the view that many industries would see “middle men” in their industry chains go out of business. Savvy IT oriented businesses would go direct via bypassing the middlemen. This has happened to some degree, but not nearly to the extent predicted. For instance it was suggested back then that car dealerships would not be needed anymore and would cease to exist. It was suggested all the car manufacturers needed to do was have great virtual showrooms, customize cars for buyers on their websites and then deliver the vehicle directly to the customer. All that was finally required would be a way to service the vehicles. This never happened either. While this is still an opportunity or threat, depending on your viewpoint, replacing middlemen has not happened to the extent predicted.
The next wave of IT and strategy thinking started suggesting it was possible for a company to shed itself of many of its assets and become primarily a “brand owning company”. These firms would manage the brand only and that was the function of the corporate office. These super marketing companies could then outsource all other assets and capabilities to outside vendors and manage them through a super web of suppliers, manufacturers, joint ventures, etc. Think Coke, Pepsi and Nike. But a funny thing happened on the way to these kinds of companies not having any assets – in 2012 Coca Cola re-acquired its largest bottling group and once again owned those assets.
So in this historical sojourn, you might be asking what is the big deal about IT, strategy and firm valuation if all the predictions have not happened? Will the “cloud” provide its own predictions?
My answer is this: the waves of new IT that will be ever forthcoming have a real possibility to lower a firm’s or even industry’s cost position and/or help customers have a higher willingness to pay (WTP) for your products and services. Firms like Apple enjoy IT contributing to lowering costs and increasing customer WTP at the same time. To be caught off guard with each emerging new IT wave and its possibility for sea change in your industry and for your firm is to drastically increase your risk exposure. And as we discussed in a previous article, taking on risk contributes to value destruction. Those companies who embrace the emerging IT wave changes and quickly embrace their impacts favorably on cost position and customer WTP will grow their valuation.
Next Up: The “Laws” of Strategy