Ic3 Letter-8 New Economy

Marketing Technology Letter

October 2003 – NO.8

The new “new economy” ... ... and its consequences for IT suppliers While many IT products and services have become commodities, it is still possible for most industries to differentiate and win through technology-driven innovations that enable substantial productivity gains.

The virtuous cycle of the real new economy

During the bubble growth of the late 1990s, many gurus were claiming that the Internet was going to ‘change everything’. Today it is ‘fashionable’ to declare that IT and the web have not had much impact; last May, the Harvard Business Review (HBR) even published an article provocatively called “IT doesn’t matter”. As reasonable people would expect, the “truth lies somewhere in between” as stated in a new HBR article called “The Real New Economy”, published this month. The HBR article presents the results of a two-year study conducted by McKinsey across 20 industries in US, German and French corporations. This study shows that a new economy did indeed start in the 1990s but that it was spurred on by increasing competition and innovation rather than by the Internet. Actual productivity measurements show little correlation between productivity and IT investments except in six sectors where IT was an essential means to enable and support innovation in response to increasing competition. In these six industries - securities brokerage, retailing, wholesaling, semiconductors, computer assembly, and telecommunications - IT was a key catalyst in the virtuous cycle (sketched on the left) of competition, innovation and productivity growth. In these sectors, IT proved to be an effective tool in three areas: l) development of new products and of new business processes; ll) industry-wide diffusion of innovations (double-edged sword!); lll) increasing economies of scale with increasing volumes of transactions, output per customer and industry consolidation. The study also identifies three winning practices for IT buyers and their implications for IT vendors:

U.S. GDP

32%

Winning practices

68% all other sectors

The six sectors where the productivity gains are concentrated account for only 32% of the US GDP but they contributed 76% of the country’s gains.

24%

76%

U.S. Net productivity gains

Change is inevitable, except from a vending machine

CONTACT US :

IC3 Limited

Implications for IT vendors

[1] Concentrate IT resources where the productivity gains really matter

Focus on specific industry sectors, gain in-depth knowledge, and master the implementation details.

[2] Get their sequencing and timing right

Help customers find value in current and future IT investments

[3] Adapt the organisation to technological innovations that must be in ‘sync’ with managerial innovations. Get a business manager to lead IT implementation projects.

Become more than technology-driven and work with customers to identify and execute the necessary business changes. Partner with complementary third parties when necessary and appropriate.

In summary, because each industry is different, successful IT vendors in the years to come will have specialised in specific industry sectors, learned their economics, and established partnerships to master both technological advances and change management. Large IT vendors have already understood the importance of specialised consulting services (e.g. this month, IBM Global Services celebrated the anniversary of their purchase of PriceWaterhouseCoopers’ consulting unit and Hewlett-Packard revived an interest in bidding for Cap Gemini Ernst & Young). So. If you are a smaller supplier of IT products and services, the recipe for success is to focus (and differentiate) not only on your core competences but also on a limited number of industry sectors, or even segments. In addition, you should probably expect the winning practices to spread into companies of all sizes and you should vertically integrate with the right partners as soon as possible. For many of you this is common sense and a confirmation of what you have already experienced in the marketplace. But it is reassuring to have measured evidence from a prestigious firm such as McKinsey, isn’t it? www.IC3marketing.com

tel : +44 (0) 20 8339 0709

Copyright  IC3 Limited 2002 – All rights reserved

e-mail : [email protected]