Information Technology (IT) pervades every aspect of a firm’s value chain as a vast electronic network of interconnected applications and data. Managers perceive the immense potential of this complex infrastructure to enhance products and processes and create altogether new ones. However, some have gone a step further and determined how to harness untapped IT business value again and again to create innovative and valuable applications by reconfiguring existing systems in new ways. Creative adaptation of existing functionality (such as broadband over power lines) to enable entirely new applications (such as real-time power grid monitoring) rules the day for these forward-thinking business leaders.
What separates successful IT innovators from others? Is luck a primary driver, or are there deliberate actions that management can take to raise the odds of success? Given substantial implications for business performance, we set out to explore this question by interviewing senior IS and business executives with demonstrated track records of extracting untapped IT business value from existing IT infrastructural assets. Our objective was to uncover underlying mechanisms linking organizational actions with innovation outcomes.
What we learned is that while serendipity can sometimes play a role, developing a specialized set of competencies, which we call an IT innovation platform, plays a much larger and decisive role. IT capabilities drive innovation by enabling organizations to redesign business processes, craft a competitive strategy, and identify and cater to customer preferences. As we discuss below, understanding what these competencies are, how they are developed, and how they work together holistically can yield significant new sources of growth and bolster performance. While our research is exploratory in nature and requires rigorous testing, we believe that this new perspective on IT business value expands managerial understanding of how to extract ever-greater value from existing IT assets.
Adaptation as a Source of IT Business Value
Pervasive IT such as networking, enterprise resource planning systems (ERP), and data warehouses offers myriad opportunities for adapting existing systems to valuable new uses. Bellwether technology firms such as Amazon and Google continuously mine available systems and data to generate valuable new uses, including novel services that delight customers. But IT adaptation is not limited to information-intensive or high-tech companies that were “born to innovate.”
Companies in a wide range of industries are applying this idea to generate new sources of organizational growth, and sometimes, transform their businesses entirely. For example, a tire re-treading firm was faced with the challenge of deciding when to schedule trucks for servicing. It was common for trucks to make several trips to the service center before the tires were certified to be in need of a retread. With the goal of improved customer service, the company matched its business requirement with its IT capability to deploy radio frequency identification chips (RFID) to measure tire conditions and tread thickness. RFID solved the operational issue, but the story doesn’t end there. Over time, the firm realized the value of the collected data and exploited it to provide consulting services for fuel efficiency, vehicle routing, and general fleet management, thereby creating new products that represent an ex post business option, an option to adapt an existing system that was not anticipated at the time of original system development. Other examples abound, including State Street in foreign currency trading and OnStar in vehicle telematics.2
To examine this phenomenon in more detail, we conducted a set of case studies. Results indicated that three faces of adaptationcustomers, people and creativity, and processescombine to form an IT innovation platform upon which successful companies create new sources of growth.
Case Studies
To incorporate as much variability as possible, we chose organizations in three distinct industries logistics, manufacturing, and education with different competitive conditions, customer dynamics, and strategic imperatives. What follows is a synopsis of our interviews, supplemented with material from secondary sources such as trade journal articles.
United Parcel Service: IT Cuts Out the Intermediary
United Parcel Service (UPS) brands itself as “Synchronizing the World of Commerce” a tall order for a company widely perceived to be a mere package delivery company. However, a quick scan of trade journal articles describing its business reveals that, indeed, the slogan is a reality. We interviewed a senior international manager, among others, to understand how UPS adapts information technology within key processes to satisfy customer needs.
UPS is committed to serving its business customers by synchronizing processes, including those linking manufacturers and retailers. UPS listens to the voice of the customer through managers assigned to specific customer accounts. These managers typically serve customers in the same industry, for example, retail or grocery, and gain insights into their operational needs. Through long-term engagement and deep knowledge of the customer’s business, UPS managers gain their trust and develop a partnering relationship.
With manufacturing spread over several overseas locations, one UPS customer spent an extraordinary amount of time and effort taking delivery of components into a distribution center, then repackaging and shipping the components to retailers. This is where the rubber meets the road in terms of customer focus: UPS was intimately involved with its customer’s business process, felt its pain, and set out to develop a win-win solution. It realized that its customer could realize huge efficiency gains if the products were shipped directly to retailers’ shelves. To develop a plan, UPS sales managers gathered a cross-functional team comprising engineers, accountants, and IS professionals to match this business problem driven by customer needs with available information technology infrastructure. IS professionals explored ways to integrate various information systems while operations managers tested the idea with a few key customers. To ensure financial viability, accountants conducted detailed cost analyses for the new IT-enabled service. All of this was made possible by leveraging existing organizational processes and competencies to solve new business problems.
What emerged was a new service in which UPS information systems connect with information systems of its manufacturers, vessel companies, overseas and U.S. customs agencies, as well as UPS ground and air transportation. As a result, customers are able to bypass their distribution center because UPS sorts, assembles, and repackages goods while they are in transit, allowing the customer complete supply chain visibility as well as the ability to direct and redirect goods in real time to any retail destination.a The result days in supply chain of customer goods dropped from 30 to 17 and overall costs to customer dropped by 40% was clearly a win for both UPS and its customer. (For an in-depth discussion of UPS’ capabilities see Kohli4).
TAL Apparel: Baked-in IT Culture
TAL Apparel Group is a worldwide leader in the production of stylish, comfortable, and functional clothing for preeminent global brands. Headquartered in Hong Kong, TAL leverages its 60 years of experience to provide innovative products, such as wrinkle free and stain resistant garments, that leverage a variety of innovative process and product technologies. Behind the scenes, TAL has developed one of the most extensive and agile IT infrastructures in the industry, supporting its goal of providing unparalleled customer service.5 Through constant IT linkages with customers’ business activity, TAL can recognize patterns of sales and the impact of promotions. In doing so it works closely to serve customer needs. Our interview with a managing director based in Hong Kong highlighted various themes that illustrate how challenging and valuable IT-based innovation can be.
To deliver high-quality products on-time and on-specification, TAL leverages various forms of information technology. Indeed, over the years TAL has developed a “baked-in” IT culture that embeds itself throughout the organization to fulfill and exceed customer expectations. The result is high alignment between information systems and business functions, so much so that it is difficult to see where one ends and the other begins. Supporting this alignment, TAL services its ERP systems with a large in-house IT staff, given the large investment it has made in developing novel and valuable business functionalities. These competencies did not emerge overnight: they have taken decades to develop.
When it comes to the impetus for leveraging IT to create business value, TAL is unequivocal: “We know we need it, and the reason we know we need it is for servicing our customers. Our customer wants to have supply chain visibility in terms of where we are in the manufacturing process.” Clearly, TAL is intimately aware of its customer processes and agile in responding to their needs.
Given TAL’s emphasis on superior customer service, using IT as an enabler and adapting systems to fit new purposes is a continuous process. Interestingly, the biggest barrier to making this happen is not technology or process issues per se, but people issues, in particular, their ability to change their day-to-day activities to support new ways of doing things.
Regarding enablers for leveraging existing IT to effect change, TAL’s supply chain excellence turned out to be a key factor in partnering with its customers. In particular, TAL realized it needed an internal champion among its customers who would promote innovations undertaken by TAL. In addition, TAL stays ahead of its customers by scanning cutting-edge applications on the horizon. In doing so, it maintains flexibility in developing new business opportunities to help its customers.
Ross School of Business: IT Supports Dynamic Student Population
The Stephen M. Ross School of Business (RSB) is consistently rated among the top business schools worldwide. Its mission to lead in thought and action focuses on both the development of intellectual capital and its application to improve the practice of management. IT is not explicitly mentioned in the school’s vision, but it is an important enabler of its success. During our interview with its chief technology officer, we learned that Ross IT takes a proactive approach in identifying select technologies that align with the school’s mission. A unique feature of Technology Services at the Ross School relative to UPS and TAL is the multiplicity of constituents students, staff, faculty, alumni, visitors, etc. and the two-year turnover of MBA students. This raises unique challenges as well as opportunities to leverage the dynamic user population in anticipating needs, experimenting, and integrating IT and business processes.
One requirement of IT is that it must support a distinctive feature of the Ross MBA, multidisciplinary action projects (MAP) that place MBA students on-site in organizations worldwide for weeks at a time to tackle real business problems. RSB realized that it must leverage existing infrastructure, such as course bidding systems, to accommodate a student population that spends a portion of its first year of study away from Ann Arbor. With action-based learning, RSB experiments with ways for students to use IT within MAP teams, necessary when some students are in Michigan while others are in Bangalore, Shanghai, or Copenhagen.
Aligning IT with work processes and the larger organizational culture to meet student needs is challenging in an arena in which IT is a relatively separate organization without the embedded matrix-type architectures seen in large global corporations. Given this challenge, IT leadership is critical to bridging the gap between the technical aspects of information systems and the business and aesthetic dimensions, such as user design or going beyond functionality to understand how an application will be used by a student. As the CTO noted: “I think it is a challenge to find the combination of the tech with the art [in IS employees]. Mostly you find people that are more tech than art… It is critical to signal that they can create something, but it’s not always easy to identify those that can meld the tech with the art to enable a clear vision of the future and design applications accordingly.”
RSB experiments with IT behind the scenes so that it can respond to customer needs at an opportune time. Providing new interfaces to old applications illustrates the mindful evolution of IT adaptation. RSB realized that students did not always want to carry laptops around. Although RSB had proactively experimented with personal digital assistants and smart phones, this seemingly simple idea took years to develop because of a gap between student requirements and what the technology could deliver. The available processes and technologies for these requirements did not match. However, instead of dismissing the idea, it remained a strategic option until such time as the demand for mobile applications emerged in concert with technological innovation in mobile computing such as the iPhone – RSB is poised to release more than twenty applications for use with leading mobile platforms. This is but one example of how RSB develops strategic IT options that can be rapidly deployed to a dynamic student population at an opportune time.
Platform for Adaptive IT Innovation
We used Qualitative Comparative Analysis to synthesize and extract meaning from our case studies6 (Figure 1). An overarching theme that emerged from the analysis was that new sources of value emerge when organizational competencies are matched with customer requirements within key business processes. In particular, three dimensions of adaptation comprise what we term an IT innovation platform: customer focus, nurturing individual creativity, and process focus (Figure 2). Each requires specific components and results in outcomes that are of interest to organizations (Figure 3).
Customer Focus. Each firm that we studied was resolutely focused on its customers’ current or potential needs. This makes intuitive sense because developing new information systems that aren’t tied directly (product, customer process) or indirectly (backend internal process, etc.) to fulfilling customer needs are of limited business value. Managers in the firms we studied invest significant time, effort, and attention in understanding customer processes so that they can identify specific areas in which they can add value in a win-win approach. UPS recognized that its customers incurred significant expense in establishing distribution centers. TAL leveraged its baked-in IT focus to connect its customer with other suppliers using its IT infrastructure. RSB understood student preferences and proactively experimented with IT to be ready to pull the trigger when the time was right. This intensive focus on customers creates value-added offerings as well as new business opportunities by adapting existing IT assets for valuable new uses.
People and Creativity Focus. Companies successful at IT adaptation went beyond the cliché of recognizing the value of their employees to adopt an active, demonstrable appreciation and support of people and their creativity. For these reasons, we view the people and creativity dimensions jointly. We found a strong bias toward allowing people to experiment with new ideas. A UPS manager encouraged the team members to “get 7 out of 10 things right, rather than getting 3 out of 3 right.” Fostering cross-functional interaction unleashed team creativity, in part via a recognition of each others’ constraints.1 TAL’s experience suggests that to take advantage of human creativity an organization must overcome resistance and develop an appropriate culture, which does not happen overnight. In some cases an outsider’s perspective helps team members conceive creative and novel solutions. RSB underscored the importance of creating a balanced portfolio of talent spanning both technical and business domains.
Process Focus. If the business process reengineering revolution of the 1990’s taught us one thing, it is that automating broken processes simply means that the wrong things get done more efficiently.3, 4 Organizations in our study viewed process redesign as a form of adaptation. They recognized that in most situations there was sufficient data within their organization; the key was to integrate processes so that information is leveraged appropriately in usable and valuable ways. UPS managers estimate that more than half of its IT investment can be classified as “systems integration,” rather than new systems development. Both UPS and TAL recognize that process excellence requires standardization and dissemination of best practices across the organization. Each organization in our study takes advantage of integrated data and systems to align its capabilities with customer needs. For example, TAL integrates sales information from retailer transactions and leverages it for improving its own planning and manufacturing activities.
Finally, we found that successful organizations have demonstrated astuteness in feeding upon each focus to support the other. For instance, a customer focus allowed organizations to create capabilities which, when aligned with business processes, created a superior product or service. Similarly, improved processes enabled greater customer intimacy, in turn leading to a pervasive understanding of the customer’s processes and an early recognition of the capabilities needed to support them.
Lessons for Managers
Here, we offer prescriptive guidelines for managers based on the preliminary findings presented herein.
- It is not difficult to achieve one-shot successes in innovating with IT. However, based on the companies we studied, we have found that continuous, successful IT innovation requires the development of systematic processes aligned with the organizational context. This takes time, but appears to be well worth the investment.
- Customers may not always know what they want. Understanding their business well enough to anticipate and offer solutions to problems that they have yet to recognize is a critical piece of the IT adaptation puzzle. As one of our interviewees put it: “A successful IT manager listens to customers, tries to understand the business/process challenge, and then builds a solution around that, versus building exactly what customers think they want.”
- Data are conceptual and intangible. It is not always easy to envision how to convert data to business value. However, developing a data culture among employees driven to innovate by leveraging existing data and information to drive new sources of value is well worth the investment. Incentives and rewards that go beyond the financial dimension are critical components of a successful IT innovation platform, especially with regard to employee creativity in cross-functional problem identification.
- Adapting IT assets for new sources of value means looking beyond the walls of the organization. Develop internal data capabilities and assign technical-business cohorts to find value-added uses of organizational capabilities. Untapped value often lies at the intersection of business needs and IT capabilities and is uncovered when business problems collide with technical prowess.
- As with any investment, developing an IT innovation platform is not without risks. However, when compared with the costs of developing completely new systems with considerable failure rates, the adaptive path may be quite a bit less risky. Nonetheless, risks include poor alignment between capabilities and customer requirements, poor IT execution ability, and inadequate attention to redesigning work processes to match new IT adaptations.
- Low-tech can be high-tech. None of the firms we examined is considered a technology product company such as Google or Intel, yet each has mastered the science and art of continuously adapting IT to generate new sources of organizational value. The idea that any firm can flourish without developing the necessary competencies to support an IT innovation platform is a relic of the past.
Acknowledgements: We thank Ted Ley, UPS; Dr. Harry Lee, TAL Apparel Group; and Ed Adams, Stephen M. Ross School of Business for their generous support of our study, without whom this research would not have been possible.
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