IT Doesn’t Matter

Proprietary vs Infrastructural

Strategic resource

What makes a resource truly strategic—what gives it the capacity to be the basis for a sustained competitive advantage—is not ubiquity but scarcity. You only gain an edge over rivals by having or doing something that they can’t have or do.

Proprietary technology vs Infrastructural technology

A distinction needs to be made between proprietary technologies and what might be called infrastructural technologies. Proprietary technologies can be owned, actually or effectively, by a single company… Infrastructural technologies, in contrast, offer far more value when shared than when used in isolation.

Economics of Infrastructural technology in mature stage

The characteristics and economics of infrastructural technologies, whether railroads or telegraph lines or power generators, make it inevitable that they will be broadly shared — that they will become part of the general business infrastructure.

Economics of Infrastructural technology in early stage

In the earliest phases of its buildout, however, an infrastructural technology can take the form of a proprietary technology… In actuality, the window for gaining advantage from an infrastructural technology is open only briefly.

Economics of Infrastructural technology at the end of buildout phase

By the end of the buildout phase, the opportunities for individual advantage are largely gone. The rush to invest leads to more competition, greater capacity, and falling prices, making the technology broadly accessible and affordable.

How to gain advantage in mature stage

The only meaningful advantage most companies can hope to gain from an infrastructural technology after its buildout is a cost advantage — and even that tends to be very hard to sustain.

Macroeconomic level

That’s not to say that infrastructural technologies don’t continue to influence competition. They do, but their influence is felt at the macroeconomic level, not at the level of the individual company.

IT

IT is similar to infrastructural technology

Although more complex and malleable than its predecessors, IT has all the hallmarks of an infrastructural technology. In fact, its mix of characteristics guarantees particularly rapid commoditization.

Benifits of customization «< Costs of isolation

For most business applications today, the benefits of customization would be overwhelmed by the costs of isolation.

Costs of customisation

The near-infinite scalability of many IT functions, when combined with technical standardization, dooms most proprietary applications to economic obsolescence. Why write your own application for word processing or e-mail or, for that matter, supply-chain management when you can buy a ready-made, state-of-the-art application for a fraction of the cost?

Buying srevices instead of building them in-house

More and more, companies will fulfill their IT requirements simply by purchasing fee-based “Web services” from third parties — similar to the way they currently buy electric power or telecommunications services.

There are many signs that the IT buildout is much closer to its end than its beginning.

1. First, IT’s power is outstripping most of the business needs it fulfills.
2. Second, the price of essential IT functionality has dropped to the point where it is more or less affordable to all.
3. Third, the capacity of the universal distribution network (the Internet) has caught up with demand.
4. Fourth, IT vendors are rushing to position themselves as commodity suppliers or even as utilities.

Operational risk

The operational risks associated with IT are many — technical glitches, obsolescence, service outages, unreliable vendors or partners, security breaches, even terrorism — and some have become magnified as companies have moved from tightly controlled, proprietary systems to open, shared ones.

More IT spending != More earnings

Studies of corporate IT spending consistently show that greater expenditures rarely translate into superior financial results. In fact, the opposite is usually true.