Information technology:

a new competitive weapon

Gregory L. Parsons

Recent developments in information technology and its

applications present a rich array of potential competitive
benefits to those companies astute enough to exploit them.
Yet few managements to date have either assimilated the
technology or discerned its full range of possibilities, the
author argues. He considers the effects of information
technology at the industry and firm levels and outlines a
framework for management to use in assessing the
technology's impact on their organization and integrating
it with their strategy to best competitive advantage.

Significant advances in the related technologies of computers, tele-

communications, data access and storage devices, graphic equip-
ment and software have created a wide spectrum of new opportuni-
ties for managers. The speed, cost, size and capabilities of the new
information technology (IT) continue to improve rapidly, and there
appear to be unlimited applications that could be "computer en-
hanced." However, in spite of this new wealth of technological
advances, the ability of most businesses to assimilate and apply IT
lags far behind the available opportunities. Although many authors
have noted this shortfall over the years, the effect in the 1980s of
this "strategic gap" is much more critical.^ Senior executives in-
creasingly feel that their businesses should receive more benefit
from technology investment, but few are able to articulate the
impact IT has or should have on their businesses.

In a recent study, three senior executives not directly involved in

the technology were asked to assess the impact of IT on their
businesses. A divisional president of a large industrial corporation
answered: "I think information technology contributes at least 3
percent of our bottom-line profit margins. Operationally, we
couldn't get through the week without the system support, and in
the marketplace I don't think we could hold our market share
' References appear on page 60.

SPRING 1984 45
without the technology. But this is mainly a gut feeling. I can't back
up these estimates with numbers or specific reasons."

The chief strategist for a major US bank said: "The technology is our
top strategic concern, not because it outweighs everything else, but
because we are unsure what to do with it. Although we have a
strategy for the marketplace, the technology issues seem to be
eluding us. On the one hand, it's important everybody agrees on
that, but then we end up doing projects based on a series of
piecemeal technical decisions. We can't seem to grasp the bigger
picture."

The chief financial officer of a large consumer goods manufacturing

company replied: "We've really cleaned up our data processing act
since the mid-1970s. The systems run well and now we're mainly
fine-tuning. I expect we'll be doing primarily maintenance pro-
gramming in the foreseeable future. I feel that we've gotten most of
the benefits from the technology currently available. As the cost
comes down, more projects will be financially justified and then
we'll do them."

From these remarks and those of many other senior executives, two
points are clear. First, the importance of IT varies widely from firm
to firm. Some see it as a top-level strategic concern; others as an
administrative convenience. Second, there is no commonly accepted
guideline or framework for measuring the importance of IT to a
business. Most planning approaches for this technology fail to take
into account its strategic relevance.^ Few executives could explain
why IT was as important as they believed it to be.

Clearly, IT is or will become a strategic concern for manyfirmsover

the nextfiveyears. It has been estimated that more than $1 trillion
will be spent on IT investments during that period. Already such
technical improvements as telecommunications, personal compu-
ters, computer-assisted manufacturing and computer-aided design
have made IT an increasingly important component of industry's
products, services and operations.
This article presents a three-level framework to help senior mana-
gers assess the current and potential impact of IT on their
businesses (see Exhibit I). Developed from the results of a two-year
study of more than a dozen companies, this framework focuses on
the opportunities forfirmsto use information technology to improve
their competitive positions. An understanding of how IT may af-
fect the competitive environment and strategy of the business will

46 THE McKINSEY QUARTERLY

Exhibit I The three-level impact of IT

Industry level Rrm level Strategy level

IT changes IT affects key IT affects
an industry's competitive forces: a firm's strategy:
• Products & services • Buyers • Low-cost leadership
• Markets • Suppliers • Product differentiation
• Production economics • Substitution • Concentration on market
• New entrants or product niche
• Rivalry

enable managers to direct IT resources to the firm's most important

targets.

Industry-level impact
At the global level, IT may alter the nature of the industry's pro-
ducts and services, its markets, and/or its economics of production.

Products and services. In some industries, IT may substantially

alter the product life cycle and significantly increase the speed of
distribution. Consider its effects on the products and services of the
publishing industry. As the industry moves to an electronically
based product, the time and space constraints for product develop-
ment and distribution are reduced. Authors and new sources are
preparing electronic manuscripts and text, which are sent to pub-
lishers onfioppydiscs or directly from computer to computer. Elec-
tronic manuscripts are edited on word processors, typesetting is
computerized, and graphics are generated by computers. Promo-
tional materials are distributed by telecommunications, and read-
ers can buy the product from the publisher's electronic data base.
The time lag between an idea for a new product and its mass
distribution could be virtually eliminated. Small publishers who
can adopt the technology have substantially reduced the product
development cycle, gaining a significant advantage over larger
competitors.

Markets. Information technology will significantly change the mar-

kets of some industries. For example, financial companies will face
a market of computer-literate consumers and businesses demand-
ing electronically based products and services. The cash manage-
ment systems already being offered by large banks are a new
IT-based product line. As traditional geographic market limitations

SPRING 1984 47
are erased by IT, financial services companies are obliged to com-
pete in a global market. The emerging technology for automatic
teller machines (ATMs), home banking and electronic funds trans-
fer is making more sophisticated financial products and services
possible and increasing overall demand.

Production economics. Information technology developments may

change the basic economics of production in some industries. In the
distribution industry, for example, businesses with computerized
warehousing and inventory control capabilities have the ability to
serve a national market and are breaking the industry pattern of
regional distribution. Such national distributors also enjoy other
advantages, such as economies of scale in marketing, software and
hardware. In contrast, businesses with manual operations are
limited to local markets by the control problems and high costs
resulting from their technological position.

Computer power
Information technology will also affect production economics in
some industries by changing the historical tradeoffs between stan-
dardization and fiexibility. Some equipment manufacturing plants
have already used IT to achieve unit costs that remain essentially
constant whether one unit or one million units are produced. This
new potential will effectively remove many of the traditional com-
petitive advantages in these industries. Information technology
will reduce historical economies of scale in some areas while extend-
ing them in others. Because of the monitoring, controlling and
coordinating potential of IT, larger and more efiicient facilities can
be built to capture new economies of scale by utilizing machinery,
space, energy and specialized labor more efiiciently.

In industries where IT is altering the nature of the business, tradi-

tional rules of competition will change, new economies of scale will
evolve, and entry barriers will erode in some areas and spring up in
others. There will be new competitors, new products and services,
new distribution channels, and different levels of demand and elas-
ticity. Product life cycles will be shortened, and the value-added
stream of the industry will be redistributed.

The impact of IT at the industry level ranges from major (e.g., in

banking) to minor (e.g., in the aluminum industry). To effectively
link IT to the strategic needs of the firm, management must gauge
IT'S impact at the industry level before it occurs, so that strategies
can be developed to position the firm appropriately in the new

48 THE McKINSEY QUARTERLY

industry setting. For example, given the current rate of develop-
ment in telecommunications and office technology, video conferen-
cing may become a major substitute for some business air travel in
less than 10 years, significantly affecting the airline industry's
business travel market. The crucial question for today's CEO and
strategist is: What impact will IT have on our industry over the next
five to 10 years in terms of products and services, markets and
production economics?

Firm-level impact
At the firm level, the impact of IT is determined by the specific
competitive forces facing thefirm.Michael Porter has described five
generic forces that form the industry structure and the competitive
"arena" for each firm in industry:^ buyers, suppliers, substitutes,
new entrants and competitors within the industry. The specific
manifestations of these forces faced by each firm in the industry
determine its profitability and range of potentially successful strat-
egies. This framework for competition provides a useful vocabulary
for defining the key issues facing a firm. By using it, management
can learn how IT changes an industry structure through the com-
petitive forces that shape that industry.

Forces at work
As it impacts the products, services, or operations of a business,
information technology may change the relationship between an
industry and its suppliers. For example, the use of sophisticated
quality control systems by the auto industry is forcing steel produc-
ers to become much more quality-conscious. This is even addressed
in contracts, and it will change the mix of suppliers. As industries
become much more dependent on information technology, the IT
supplier will become an important force for a firm to consider when
planning strategy. For example, it will be interesting to see how
firms react when they realize that a major cost of their operations is
dependent on IBM's pricing strategy.

The new technology will also change the level of sophistication of

some industries' suppliers. Suppliers of funds to financial institu-
tions are more and more sophisticated (and consequently more
powerful), because information technology allows them to monitor
and redeploy investments with astonishing ease. Competitively,
firms in industries where supplier relationships are being altered
by IT must be concerned with the consequent effects on suppliers'
relative power.

SPRING 1984 49
Information technology will also affect the buyer relationships of
industries as new products, services and distribution channels
evolve. Buyers in the banking industry can now choose products and
services from a variety of channels. The buyer/industry relationship
has been fundamentally changed by ATMs, point-of-sale terminals
(POSs) and electronic home banking. The product mix of industries
has also been altered as firms have packaged information around a
basic service. For example, a large distribution company now offers
its retail customers computer-generated inventory management
reports on a fee-for-service basis.

The technology also affects the rate of substitution in some indus-

tries. For example, a large overnight carrier, recognizing that elec-
tronic mail may largely substitute for paper-based communica-
tions, is developing an electronic-based business. The life cycle of
many products will be speeded up by shortening the development
process through computer-aided design (CAD) and computer-aided
engineering (CAE). Firms that succeed by duplicating competitors'
products at low cost will respond to product innovators much more
rapidly and accelerate the substitution process.

Information technology affects the rate of new entry into industries

by negating existing entry barriers or creating new ones. For exam-
ple, in the banking industry, IT-based access to banking services
has seriously eroded the traditional entry barriers enjoyed by many
branch offices. In the distribution industry, IT has created new
entry barriers by requiring investment in extensive computer and
telecommunication networks, needed to control costs in large-scale
multilocation distribution facilities. In effect, IT has created a new
scale-economy barrier which the new entrant must overcome in
order to price competitively and still be profitable.

Finally, information technology changes industry structure by

affecting the rivalry bases among competitors within an industry.
By introducing a new competitive weapon into various settings, IT
sparks outbreaks of firm warfare. Recently, American and United
Airlines have used their reservation systems to gain competitive
advantage by listing their own fiights ahead of competitors'. Cer-
tain securities brokerage firms have exploited IT to introduce a
radical form of cost competition through telecommuriication and
computer-based discount brokerage. In the banking industry, lead-
ing banks see smaller competitors joining forces through shared
ATM networks. Clearly, IT may intensify rivalry in many indus-
tries in yet unforeseen ways.

50 THE McKINSEY QUARTERLY

 Creating competitive advantages
Managing information technology, then, is a vital element of a
firm's strategy and part of its competitive domain. While presenting
challenges or threats to afirm'sestablished way of doing business, it
also presents opportunities for gaining new competitive advan-
tages. Information technology resources can be used as competitive
weapons to improve a firm's position in its competitive environ-
ment.

Buying power. Strong buyer power can reduce the profitability of an

industry - for example, if customer groups are very concentrated or
if they purchase large volumes relative to the industry's total sales.
When a handful of buyers represent an industry's entire market,
then the importance of each buyer to each selling competitor is so
great that concessions are a way of life for the industry and potential
profits are reduced. Buyers also have significant power if the cost of
changing suppliers or changing to a substitute product is low. The
absence of "switching costs" between an industry and its buyers
can result in reduced profitability.

There are two ways in which information technology can be a

strategic weapon for reducing buyer power. First, it can often great-
ly increase the ability of firms to raise switching costs for buyers,
making it more costly for them to change suppliers. For example, a
large medical supply company has provided on-line order entry
terminals and inventory management software for customers. As
the customers' systems are integrated with the supplier's, it be-
comes much more difficult for customers to order from a competitor.
If customers change suppliers, they incur testing and implementa-
tion costs and the cost of retraining personnel and developing new
procedures. The more sophisticated the systems, the greater the
switching costs and the less power buyers have to switch indiscrimi-
nately to a competitor.

Maximizing profits
Second, IT represents a strategic weapon for dealing with powerful
buyers by enablingfirmsto develop buyer information systems that
determine the profit potential of various buyer groups. All indus-
tries have certain customers who are extremely expensive to service
relative to the average customer; also, somefirmsare well suited to
service some customer groups but not others. But it is usually very
difficult for a manager to determine the overall attractiveness to his
business of a current or potential market segment.

SPRING 1984 51
For example, because of the insurance industry's tradition of pro-
viding full service to all business customers, there has been no
attempt to match products to customer segments in order to maxi-
mize profit. Consequently, most insurance companies have poor
information to answer such crucial questions as "How much does it
cost to service a particular market segment?" or "How should our
customer portfolio be pared to fit our particular capabilities?" To
address these critical issues, a large insurance firm is building an
extensive claims database to go beyond actuarial calculations in an
attempt to determine which potential markets will be most profit-
able. As the overall cost of servicing insurance customers increases
significantly due to deregulation and competition, buyer selection
becomes a key issue, and the strategic application of IT resources
will provide a competitive advantage.

Supplier power. Strong supplier groups may reduce much of an

industry's potential profits. The suppliers of an industry include the
sources for raw materials, machinery, capital and labor. Suppliers
will be powerful either if they are highly concentrated or if the
buyer faces very high costs when attempting to obtain information,
to shop, or to negotiate.

Information technology represents a strategic opportunity for a

firm when it can be used to mitigate the factors driving the power of
suppliers, thus improving the firm's competitive position. For ex-
ample, IT can be used as a viable alternative for high-priced labor.
Recent developments in robotics and computer-aided manufactur-
ing reduce not only the cost of labor but its power to demand
industry profits.

Information technology can also be used to avoid high switching

costs. One of the major problems facing the banking industry is its
inability to strategically manage its largest single cost - the cost of
money. The sources of funds for a bank include customer deposits,
money markets, certificates of deposit, and others. The interaction
of various interest rates for these sources creates a complex problem
for bank management, especially during times of extreme interest
rate volatility. A bank that lacks comprehensive information sys-
tems to monitor and evaluate its current and future money position
is at a severe strategic disadvantage in dealing with its major
suppliers, the financial markets. Information technology is a criti-
cal tool to help the banking industry respond more effectively to
fiuctuations in these markets. Currently, the lack of strategic IT
severely limits the ability of many banks to quickly gather, process
and decide on optimal funds sourcing.

52 THE McKINSEY QUARTERLY

Because of historical and economic conditions, many industries are
subject to intense supplier power. Although some of this power is
uncontrollable, the strategic application of IT often represents a
potential competitive advantage.^

Substitution. The existence of cost-effective substitutes for a pro-

duct (e.g., margarine or butter) may limit potential profitability in
an industry. In some instances, a substitute product can virtually
eliminate an industry, as happened when the silicon-chip-based
calculator replaced the electromechanical adding machine. Both
existing and potential substitutes will reduce the overall demand
for products and the profitability that will result from serving the
remaining demand. This reduction in profitability results from
price competition with substitutes, the cost of advertising against
them, and product innovation directed at substitutes. However, an
industry, or a firm within an industry, can often increase its own
market by offering its products as substitutes to another industry's
buyers.

Enhancing product potential

Information technology becomes a potential strategic factor in deal-
ing with the competitive force of substitution when - by lowering
the cost, or improving the perceived performance of a product, or by
increasing or decreasing its range of functions - it affects the
buyer's decision to substitute or not.

One example of substitution based on IT involved a large brokerage

firm that developed a new financial product to support a range of
product features through a sophisticated information system.
Although the product features were available separately in other
products, this product's combination of features and easy customer
use made it an effective substitute for many existing products in
spite of the price premium. This product has been extremely suc-
cessful and now has a host of imitators.

New entrants. For existing competitors, new entrants present a

concern because they will extract some of the industry's profits. For
example, increased competition can be touched off by new entrants
who use price-cutting tactics to gain market penetration, as the
Japanese did when they entered the US automobile market. Unless
industry demand grows fast enough to accommodate the new en-
trants, average profitability will decline. New entrants are espe-
cially devastating when they do not have the same objectives or
constraints as existing industry participants.

SPRING 1984 53
Entry barriers are the major structural components of an industry
that slow or exclude new entrants. Although entry barriers take
many forms, sizes and shapes, they all create a more favorable
situation for an existing industry participant (based on costs, repu-
tation, service, technology, or some other characteristic important
to success in the industry) than for a potential entrant. Entry
deterrents are tactics or processes that an industry or a firm can
employ to make a potential entrant reconsider his entry. For exam-
ple, deep price cutting during a new entrant's test marketing can
not only confuse the test market results but also act as a deterrent
by emphasizing the industry incumbent's relative cost advantage.
Entry barriers and deterrents are key aspects of an industry's
continued success. Without continual maintenance of the barriers,
new entrants will sneak into the industry, usually at the most
profitable segments of the market. Afirm'sstrategy must also take
into account entry barriers because a new entrant will often target a
vulnerable competitor. Industry leaders are particularly responsi-
ble for maintaining entry barriers and creating deterrents. A firm
thinking of entering a new industry must consider the entry bar-
riers to be overcome and any potential retaliatory action by the
violated industry. There are a number of ways to penetrate a new
industry, including undertaking joint ventures and acquisitions,
focusing on a nonthreatening industry niche, or developing new
technology that circumvents historical barriers.

Costs of membership
Information technology can be used as a strategic element to deal
with new entrants, both offensively and defensively. For example, a
major insurance company has continually led the industry by build-
ing and maintaining a large on-line telecommunications network to
its agents. As new, increasingly sophisticated insurance products
are rapidly introduced, this network will continue to grow as an
entry barrier. Agents must now have much more on-line support,
training and promotional backup, and this network provides that
support, without which a new entrant will not compete effectively.
Another example is a large financial service company that has
built a reputation of quality service and offers the greatest geo-
graphical coverage of any competitor. This quality of service and
ability to serve customers worldwide are built on IT capabilities,
which constitute a capital barrier and support a reputation barrier.

Information technology will also be used by industrial firms trying

to achieve new manufacturing economies of scale relative to com-

54 THE McKINSEY QUARTERLY

petitors, new entrants and substitutes. The potential of these firms
to gain scale economies using IT will depend on the possibility of
going beyond stand-alone applications, its predominant industrial
use so far. To develop new scale economies, IT must be viewed as an
organizing concept to use when redesigning the manufacturing
process. New economies of scale will only be achieved by identifying
the strategic impact of IT and deploying IT resources to achieve the
desired competitive effect.

Rivalry. Industry rivalry can vary from extremely intense "guerilla

warfare" to a relaxed "country club" approach. Very intense rivalry
depletes the industry of some potential profits, because actions
detrimental to the entire industry may occur as competitors strug-
gle to the death for an advantage. For example, because of intense
rivalry, airline companies are price cutting far below their real
costs. Although one competitor may eventually win, the entire
industry suffers.

Dealing with competitors strategically, however, does not always

mean destroying them. To operate effectively over time, most
industries require a group of good competitors. Having proper
competitors allows a firm to earn more profits, develop more new
markets, and create better entry barriers than it could alone. For a
firm to cope strategically with the competitive force of rivalry,
management must identify when to compete, when to cooperate,
and how to do so effectively.

Competing cooperatively
Information technology presents major opportunities for companies
to affect the degree of inter-firm rivalry and the methods used to
deal with it. Firms can both improve their own competitive position
and benefit the entire industry by utilizing IT-supported data, IT
distribution channels, and potential IT links within the industry. In
the banking industry, the new technology represents a tremendous
strategic opportunity for individual firms to deal with increasingly
intense rivalry. For example, smaller rival banks may share a
common group of ATMs against a market share leader. In the
airline industry, shared reservation systems are a way to improve
overall service to the consumer. In the railroad industry, standard-
ized data and communications networks between firms offer a way
to improve railroad transportation service. Other examples of coop-
erative IT use by rivals include computer-to-computer connections,
joint IT ventures, and shared software.

SPRING 1984 55
Since IT presents a virtually unlimited opportunity to structure the
relationship between a firm and its competitors, it should be a vital
component of any strategy for dealing with rivals. The key, of
course, is to know which IT relationships should be cooperative and
which should be competitive.

Having analyzed the specific forces that shape its competitive en-
vironment, a firm can estimate the importance of IT as a competi-
tive resource, pinpointing where it can be used to alter a competitive
balance or parry a competitive thrust.

The impact of IT on strategy

Successful firms position themselves relative to industry forces by
effectively implementing one or more of three generic strategies:

I Overall cost leadership on an industry-wide basis;

II Differentiation of products a n d services on a n industry-wide

basis;

f Concentration on a particular m a r k e t or product niche.

The new information technology can enhance a firm's ability to

execute a particular generic strategy. For example, a large financial
service company holds its cost leadership position in t h e industry
because of a sophisticated application of IT t h a t substantially re-
duces the cost of t r a n s m i t t i n g and processing transactions. A manu-
facturing firm h a s distinguished its products by achieving levels of
quality control and precision t h a t competitors cannot match. The
key to its advantage is a quality control information system and the
heavy u s e of computerized machine tools, which provide much
greater accuracy while tripling productivity.

Information technology can contribute to a generic strategy in a

variety of ways, because the successful execution of such a strategy
requires the broad support of all functional areas in a firm. This is a
unique characteristic of IT, distinguishing it from those technolo-
gies t h a t m a y affect a manufacturing process or product character-
istics, but not other functional areas in a firm. Information technol-
ogy is utilized for experimentation support in research laboratories;
for computer-aided design and engineering in engineering depart-
ments, and for production control i n factories; for m a r k e t analysis
and distribution support in marketing departments; as a sales tool
in the field; for office record keeping; and for planning in executive

56 THE McKINSEY QUARTERLY

offices. In the long term, nearly all functions of all firms can be
computer-enhanced to some degree. The strategic issue is: Given
scarce resources of time, money and staff, which applications are
most important to automate?

Supporting strategies with IT

In general, firms pursuing an overall cost leadership strategy
should use information technology to reduce costs either by impro-
ving the productivity of labor or by improving the utilization of
other resources, such as machinery and inventory. Firms following
a differentiation strategy should use it either to add unique features
to the product or service directly or to contribute to quality, service,
or image through the functional areas.

Information technology applications that contribute to a cost

leadership strategy are very different from those that support a
differentiation strategy. IT applications can substantially reduce
costs in the functional areas of engineering, design and manufactur-
ing; they can also be used to reduce waste significantly, to im-
prove productivity, and to identify marginal customers.

Conversely, a strategy to achieve a differentiated position in an

industry has a very different set of requirements: perceived unique-
ness in design, brand image, technology, product features, customer
service, dealer networks, or some other category. Usually, firms
pursuing a differentiation strategy are most successful when they
establish uniqueness in several categories. For example, a distribu-
tion company specializing in periodicals is perceived among
nationwide periodical distributors as the most sophisticated and
highest-quality distributor in the industry as a result of having
differentiated itself in service reliability, responsiveness to custom-
er needs, and additional product features primarily through its
computer systems.

Information technology can support a differentiation strategy in a

variety of ways. It can contribute to superior customer service by
providing historical customer profiles and by increasing the availa-
bility of spare parts with a dealer inventory system. It can contri-
bute to high quality through the use of quality control systems and
computer-aided manufacturing systems that providefiexibilityand
improved responsiveness to customer needs. It can create better
product designs, satisfying both manufacturing and marketplace
requirements. In some instances, it can also provide access to mar-
kets that would otherwise be too remote to service. Exhibit II shows

SPRING 1984 57
Exhibit 11 IT applications that support generic strategies

Generic strategies
Low cost Product differentiation
Product design Product engineering systems R&D data bases
& development Project control systems Professional work stations
Electronic mail
CAD
Custom engineering systems
Integrated systems for manufacturing
Operations Process engineering systems CAM
Process control systems Quality assurance systems
Labor control systems Systems for suppliers
Inventory management systems Quality monitoring systems
Procurement systems
Quality monitoring systems

Marketing Streamlined distribution systems Sophisticated marketing systems

Centralized control systems Market data bases
Econometric modeling systems Graphic display systems
Telemarketing systems
Competition analysis systems
Modeling systems
Service-oriented distribution systems

Sales Sales control systems Differential pricing systems

Advertising monitoring systems Office/field communications
Systems to consolidate sales function Customer/sales support systems
Strict incentive/monitoring systems Dealer support systems
Customer order entry systems

Administration Cost control systems Office automation to integrate

Quantitative planning & budgeting functions
systems Environment scanning &
Office automation for staff reduction nonquantitative planning systems
Teleconferencing systems

how IT applications should be chosen to support the firm's generic

strategy.

Systems symbiosis
The strategic success of IT projects within a firm depends upon how
well they support the firm's competitive strategy. One firm follow-
ing a low-cost strategy gained little strategic benefit from a compu-
ter system that offered many options and much fiexibility but was
very expensive to operate. Over time, the overall cost leadership
strategy of the firm continued to narrow the product line and to
streamline operations, requiring the functional areas to standard-
ize and limit options. Meanwhile, the large, expensive, multi-
option system ran counter to the firm's strategy. As a result, it was
only partially used and parts of it were never implemented. Now the
users in operations want to scrap the system, which makes it diffi-

58 THE McKINSEY QUARTERLY

cult for them to meet their functional objectives as dictated by the
cost leadership strategy. Instead, they want to buy their own pack-
age, which will run on a minicomputer.

In firms where IT developments are linked to a specific strategy,

users are enthusiastic about implementing the systems that help
them carry out their assignments within the overall strategy. Sys-
tem designers must realize that the strategic benefit of a system will
only be realized if multiple functions and levels within the organiza-
tion accept the system and are commited to use it. Effective strategy
requires coordination of many interfacing functions; management
must consider such factors as supporting subsystems, personnel and
compensation in order to ensure that an IT system will contribute
significantly to its strategy. For example, highly sophisticated IT-
enhanced tools for selling insurance will not be effective unless
salespeople are hired, trained and motivated to use the systems.

Understanding and commitment

Although IT applications should clearly be consistent with company
strategy, little attempt is made in manyfirmsto understand how IT
will affect their strategic position in the industry or how it might
support their business strategy. For example, a number of major US
banks have recently removed their top information systems execu-
tives. Despite a variety of explanations, the underlying reason was
that IT was not being managed in a manner consistent with the
banks' strategic needs, because neither banking nor information
systems executives understand how IT affects their business, and
neither can articulate how computer hardware and software should
support or extend the banks' ability to make money.

Technical experts who for years have expressed concern over

whether afirm'scomputer systems met its needs have rarely under-
stood those needs of a business from a competitive viewpoint, since
they have not perceived IT to be in the competitive domain of a
business. Despite this general lack of strategic direction, however,
firms in many industries are using IT to their competitive advan-
tage. As technology continues to evolve rapidly, becoming a major
factor in more and more industries, firms must begin to manage
information technology strategically. The framework presented
here suggests the first steps managers should take to link IT to a
firm's competitive environment and strategy.
By understanding when, where and how information technology
will affect thefirm,management can develop an explicit IT strategy

SPRING 1984 59
that makes the necessary tradeoffs and directs resources to take
advantage of opportunities and mitigate threats. Without such
understanding, firms will continue to ride a speeding technological
roller coaster, spending more money and acquiring new hardware
without sound business justification.

REFERENCES

See S.C. Blumenthal, MIS — A Framework for Planning and Development, Englewood
Cliffs, NJ, Prentice-Hall, 1969; C.H. Kriebel, "The Strategic Dimension of Computer
Systems Planning," Long Range Planning, September 1968; F.W. McFarlan, "Problems in
Planning the Information System," Harvard Business Review, May-June 1971; and F.W.
McFarlan, J.L. McKenney and P. Pybum, "Information Archipelago — Charting the
Course," HarvardBusinessReview, January-February 1983.
See E.R. McLean and J.V. Soden, Strategic Planning for MIS, New York, John Wiley &
Sons, 1977.
See M.E. Porter, Competitive Strategy, New York, The Free Press, 1980.
See W.J. Abernathy, K.B. Clark and A.M. Kantrow, Industrial Renaissance, New York,
Basic Books, 1983.

Gregory Parsons is assistant professor of business administration at

the Graduate School of Business Administration, Harvard Uni-
versity. This article is reprinted by special permission from the Fall
1983 issue of the Sloan Management Review. Copyright © 1983 by
the Sloan Management Review Association. All rights reserved.

60 THE McKINSEY QUARTERLY