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When IT Isn't Strategic, Bad Things Happen

How different things might have been at the likes of People Express and DHL if their IT executives had educated their senior business execs.

What happens when CEOs don't understand the power and competitive value of information technology? In some cases, their companies go out of business or become marginalized. Consider these examples.

People Express, one of the first low-cost airlines, began in the early 1980s with only six airplanes, offering $23 flights between Newark, N.J., and second-tier cities Buffalo, N.Y., and Norfolk, Va. PE initially was too small and niche to attract the attention of the big airlines, but when it began to compete directly with them by flying from Newark to San Francisco, Los Angeles, Chicago, and Minneapolis, their reaction was swift, information-based, and, for PE, terminal. (In 1986, Texas Air purchased PE and later folded it into Continental Airlines.)

PE's founder and CEO, Donald Burr, had not understood the power of IT to let competitors immediately match or undercut its prices, so he had underinvested in it while building out the airline network. For example, American Airlines, with its advanced pricing systems, matched the PE fare between Newark and Chicago, taking enough customers from PE that its flights became unprofitable. AA's CEO, Robert Crandall, understood that IT is strategic, and its CIO, Max Hopper, was one of the most innovative of that era.

We can forgive Burr’s oversight. In the early '80s few CEOs understood the power of IT, and there were few senior IT officers (this was before the CIO title came into existence) in a position to influence business strategy.

DHL's Fatal Flaw

Not so by 2003, when DHL entered the U.S. domestic pickup and delivery market, which was dominated by FedEx and UPS. DHL came to the U.S. with incomplete airline and truck transportation networks, requiring significant capital and management attention. But DHL didn't invest nearly enough in its computing systems. Consequently, it couldn't manage its airline and truck operations effectively, price its services correctly, and, critically, provide customers with accurate information about their shipments. DHL got crushed.

DHL’s on-time delivery reliability was 10% to 15% lower than FedEx's and UPS's. When customers called to ask about a late delivery, DHL’s tracking systems were so inadequate that it often had no choice but to ship a replacement. It’s not surprising that customers returned to FedEx and UPS despite their higher prices. (By January 2009, DHL exited the U.S. domestic pickup and delivery market. In six years it had lost about $10 billion.)

I have no knowledge of how DHL reached its investment decisions, but its having insufficient customer-facing systems was fatal. FedEx and UPS have trained shippers and customers alike that knowing where their shipments are is almost as important as having them in hand. A good customer service agent with real-time information can save a business relationship when a shipment is going to be a day late.

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Tracking and customer service systems should have been DHL's highest priority, and the CIO should have pushed hard to get enough investment. Maybe he or she did and the CEO didn't listen. In contrast, when a visionary CEO, Fred Smith, started FedEx in the early 1970s, he made the strategic decision to invest in IT and has appointed world-class CIOs ever since.

Kodak's Outsourcing Decision

Kodak, which invented the digital camera in 1975, is being destroyed by the digital camera. How could this happen? Perhaps one factor is its lack of an impactful IT organization.

I remember well the stir it caused when Katherine Hudson outsourced Kodak's IT in 1989. Outsourcing has many advantages and advocates, but the one thing you lose is the ability to groom knowledgeable, committed technical leaders. If Kodak had decided to invest in its IT people, some of them could have pushed new digital products and services sooner. As it was, as the digital camera era was just beginning, Kodak outsourced its one group that understood digital technology.

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Lexie Liang
Lexie Liang,
User Rank: Apprentice
10/25/2011 | 3:31:06 PM
re: When IT Isn't Strategic, Bad Things Happen
Great stories! Thank you for sharing your insight on strategic IT as a CIO.

I believe it takes both sides - CIOs and senior management team - to use IT strategically and efficiently. More and more companies are expecting IT to be the differentiator in business competition. In order to achieve that, we need to examine our IT strategies frequently. Here are a bit of my thought on rethinking about IT effectiveness: http://www.4tegroup.com/blog/2...
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