The Challenges of Technology

The technological challenge faced by businesses operating in an interconnected global economy is to strike a balance between technology investments which are intended to improve a firm’s market offering or those which aim to improve the efficiency and effectiveness of internal and external business processes. Innovation technologies are essential to growth-oriented market offerings, and they require regular investments to maintain a competitive edge. Firms frequently invest in technologies to innovate only as a short-term reaction to a change in the competitive landscape, and therefore play a continual game of follow the leader with their competition. One could make a case that following a market leader is not a detrimental strategy because it eliminates the cost associated with continuous research and development. This is true only if the organization has the ability to match the competition’s offering rapidly. It can be surmised that technology investments are not simply a case of selecting a vendor and making a purchase, rather, it is a continuous process of assessing the capabilities offered by technology and determining their applicability to a firm’s value proposition. The impact on value is either enhancing the offering to customers or increasing the performance of the firm for shareholders. To complicate matters, the continual onslaught of competition coupled with the ever-changing level of customer expectations make investments in technology an integral part of the firm’s profitability equation. Overinvesting in technology can be detrimental to short-term profitability and longer term viability, as experienced by dot-com firms such as the US grocery home delivery service Webvan. Webvan’s technological sophistication was superior to its competitors, but its cost structure – burdened with large capital expenditure in technology – thwarted the returns on investment expectations of short-term investors. Conversely, organizations such as the United Kingdom’s Tesco employed the same basic operating model for home delivery, using the Internet as an order processing system and not pursuing complex inventory sorting technologies, simply using lower cost manual labour to pick the products directly off the shelves. Tesco realized that with wafer-thin margins on grocery products, the additional cost of electronic warehousing, cross-docking and automated picking could not be justified until the number of people using the Internet to place orders increased the volume of transactions to offset the cost. The lesson learned is that the underlying business model is sound, as demonstrated by Tesco; however, the investment in technology is directly proportional to the revenues and profits generated by the volume of the transactions. Therefore, one could surmise that when more consumers adopt the Internet as a primary mechanism for grocery purchases, the volume will rise to a point at which a firm like Tesco will have to make a technology investment decision.

The relationship of profit per transaction to volume of transactions processed is often used as a method of justification. However, organizations need to measure and understand this relationship in order to anticipate efficiently and proactively the rise and fall of transaction volumes due to changes in the competitive environment. During the closing years of the twentieth century many firms made substantial investments in eCommerce technologies, justified by the exuberance of the Internet’s potential to open new markets. In fact, during the course of several lectures, when participating senior technologists were asked which method was used to justify their website projects, they almost invariably responded that they had a website because ‘everyone else has one’. Unfortunately for dot-coms, such as Webvan, Peapod and Streamline, the technology to process the considerable forecast in transaction volume was significantly ahead of consumer demand. Consumers in high-profile niche segments demonstrated their interest in transacting business using the new medium, but the switch to using the Internet for everyday purchases by the majority of consumers did not occur at the same rate. Seemingly, this pseudo overcapacity has left numerous firms with a new capability that is often misunderstood and rarely capitalized on. This capability, which can enable ‘business agility’, will be discussed in Chapter 2.

Regardless of the intent of technology investments, firms are tasked with the additional burden of sometimes purchasing technology solely to maintain technological parity with suppliers, distributors and customers. For example, when adapting to the world of eCommerce, a firm’s business processes may demand a higher level of automation to integrate with the methods of a supply or distribution chain. Moreover, technology should be assessed within a framework of operational obsolescence to determine their applicability to the business processes they serve. All technologies are temporary, and the duration of their operational usefulness is proportional to the cost of maintenance and their ability to interoperate with other technologies. A small stand-alone computer directing a plasma cutter in a steel mill has a much longer operational life because it does not require the additional functionality of the next generation of hardware and software. The plasma cutter’s computer enjoys this longevity of purpose because it is an isolated technology application only requiring data from other systems to complete its assignments. This condition is commonly referred to as an ‘island of automation’, in which the system either completely stands alone or is integrated by data transfer only. The simplicity of its interface and its non-dependence on additional functionality insulates the plasma cutter’s computer from the continual process of hardware and software upgrades. This is why one can observe these isolated technologies running outdated operating systems and requiring little software maintenance. Unfortunately, this technological state is only true if no additional functionality is required by the plasma cutter or the operating computer. In this scenario, when change does occur, it is usually a major refitting or total replacement of the mechanical device (that is, plasma cutter) and/or the controlling computer.

Another challenging aspect facing technology organizations and technology users is the set of decisions governing the application of technology as a consequence of a merger or acquisition. Any instance of two firms coming together triggers a review of the various technologies employed by both firms to determine if consolidating and standardizing to a common technology offers any additional economy to the organization. These sets of decisions typically occur within the technology organization, but are increasingly becoming part of the management decision process prior to a merger or acquisition. The ramifications of these activities and the role that technology plays will be discussed in section 2.8.

The final set of challenges which organizations face with regard to technology is assessing the value of adopting a new business model as a result of the introduction of a new technology. Many firms, seduced by the Internet’s siren song, learned that adopting a new business model must be tempered by the firm’s ability to maintain a viable and sustainable margin of profit. Technologies such as the Internet create a catalyst for business to readdress the value added to products, the structure of the organization needed to provide support services, and the entire process that the organization uses in order to add value.