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IT: The Driving Force Behind Business Productivity and Growth
This article is found in the 2003 Resource Guide, a supplement to the December issue of DM Review.
Productivity has quickly become a popular buzzword in recent times. Given the uncertainties in today's economy, the drive for increased productivity by firms across industry sectors has taken on new dimensions as they seek to maintain and increase profits. Simply put, productivity is the rate at which firms generate output with available resources (e.g., labor, capital and materials), where increases in productivity are achieved when organizations produce more output with a given amount of resources or produce the same with a smaller resource base.
Productivity in the United States has been on the rise since the middle of the 1990s, as its annual growth rate doubled in comparison to that seen in the late seventies and eighties. Despite the recent slowdown in economic growth, productivity continues to be resilient, registering an astounding 8.4 percent for the first quarter of 2002.
A major component of this productivity engine has been the introduction of innovative information technology (IT) that began in the mid-1990s as the introduction of Pentium processing, complementary software applications, the increase in personal computer use by corporations and consumers, and enhancements in telecom infrastructure all came together to augment vast corporate IT infrastructures and established the Internet as a facilitator of commercial activity.
The result has been the proliferation of such terminology as "IT and Productivity," "The Information Age" and "The Information Economy." However, what does all of this really mean?
From a business perspective, these topics generally refer to the way in which organizations utilize prevailing technology to enhance the efficiency of their operations. Despite the seemingly intriguing nature of this process, the reality of the matter is that innovations in IT have not altered economic and business principles and have not created a magical solution for creating profits in the marketplace. Rather, these new technologies have augmented established processes by which firms produce and distribute goods to the consumer. IT also facilitates the creation and exchange of information within companies, between their subsidiaries, partners, suppliers, distributors and the ultimate consumer. From a general viewpoint, information technology has created new avenues in which to apply traditional economic and business theory. Enhanced information flow helps companies fine-tune product and service pricing, marketing and advertising activities, supplier and distribution operations, manufacturing operations, and consumer satisfaction rates, to name a few. Traditional economic and business principles such as consumer propensities, price elasticity, production costs, product differentiation, labor/capital optimization, competitive market structure and more, in conjunction with IT, play a vital role in achieving optimal efficiency of resource allocation.
Through the use of IT and appropriate theory, organizations seek to drive productivity through two dominant strategies. These include:
Proper implementation of one or both of these key initiatives can increase the efficiency of firms of all sizes and across industry sectors; however, these initiatives cover a wide spectrum of the IT sector. In order to more clearly describe the process of how IT can increase enterprise efficiency, we will first take a look at three specific strategic initiatives that have taken on a new dimension due to the availability of innovations in information technology.
Three Key Strategic Initiatives
The three initiatives include customer relationship management (CRM), supply chain management and market exchanges (often referred to as infomediaries). It must be noted that each of these strategic initiatives has been in existence for decades, and the introduction of IT has merely augmented the corresponding process. This is clearly the case with respect to CRM.
CRM refers to the process by which organizations seek to retain valued customers as well as attract new customers. The essence of this strategic initiative requires firms to provide those goods and services that customers and potential customers value over that of competitors. In the past, organizations often produced goods and services and then supported them with elaborate marketing and advertising campaigns to penetrate the marketplace. Today's availability of data repositories which store vital demographic consumption patterns along with query and reporting, OLAP and data mining software applications (which are available via LANs and Internet portals) enable organizations to gain a better understanding of customers' needs and enable them to meet those needs on a real-time and longer- term basis. Today's CRM doesn't involve a purely technical procedure; but the existence of state-of-the-art IT brings the principles of micro-economic theory (measuring consumer preferences and the propensity to consume) along with business strategy (advertising, marketing and flexible manufacturing) to a new level. CRM is prevalent across industry sectors; but, in general, financial companies and the services sector have adopted this strategy most aggressively.
Through the incorporation of supply chain management (SCM), organizations have continually strived to achieve optimal inventory levels, reduce back orders and stock-outs, and reduce defect rates and product returns. In fact, in the early 1990s, corporate America sought to achieve these efficiencies through the implementation of just-in-time (JIT) inventory processing. Today's state-of-the-art SCM systems take the former JIT implementations to a new level. With the use of electronic data interchange (EDI) systems to better understand supply and demand for products, ERP and quantitative/statistical systems to report system throughput and identify backlogs and sources of defects, and extranet technology to communicate with outsourced suppliers, corporations seek to reduce inventory levels to near zero while reducing back orders, stock-outs and returns due to defects. The result is increased productivity for firms as they achieve a more efficient allocation of productive inputs which, in this case, includes reducing plant capacity through outsourcing product components, reducing idle labor and machinery due to increased information on the supply/demand flow and mitigating wasted material from reductions in defects.
Prime examples of organizations implementing SCM are evident in the U.S. automotive industry. The big three producers have been staunch proponents of SCM as they constantly seek to increase productivity through the most efficient manufacturing processes available. In the computer industry, Dell Computer has consistently been a market leader as they have achieved efficiencies through implementing both CRM and SCM with success.
The third initiative augmented by IT is the utilization of market exchanges to achieve higher productivity. The evolution of the Internet has enabled businesses to acquire and supply goods and services in a more timely and cost-effective manner as these auction-based facilities attract a larger number of participants to one intermediary. The larger number of participants increases the market knowledge of those involved, thereby helping to achieve more efficient pricing and availability of goods and services. Once again, this seemingly new market structure takes its roots from more traditional business strategy, (e.g., investment market exchanges for financial securities and commodities) and corresponding microeconomic theory (e.g., simple supply/demand theory, competitive forces of market structure and cost reduction for factor inputs). Prominent infomediaries include Chemdex that operates in the chemical, medical and healthcare fields; MetalSite in the metals sector; and Hotels.com, a new entrant, in the hospitality industry.
These three strategic initiatives play a vital role in the world of commerce today and are largely the result of innovations in information technology. However, in order for organizations to continuously achieve higher productivity, they must maintain an effective understanding of the industry/marketplace in which they operate. By doing so, they can optimize operations by adjusting unsuccessful initiatives and building on successful ones. This process of reducing the uncertainties of proposed initiatives once again draws on the ability of corporations to implement IT components that collect and store the data which underpins the creation of information and ultimately enhances the knowledge of decision- makers. This process delves into the space of business intelligence which incorporates components such as data repositories, query and reporting, OLAP and data mining, along with complementary technology including LANs and knowledge portals.
These tools enable organizations to store data, create and distribute reports and perform bottom-line analysis by navigating through cubes of information. The result is the first wave of knowledge enhancement as users can more quickly view pertinent operational information and discover red flags according to functional or cross-functional areas. However, in order to achieve higher levels of productivity, organizations are increasingly relying on more sophisticated analytics or software applications that identify and quantify relationships between key variables that drive business processes. These higher end applications can include algorithms, equations and statistics that produce reliable models that describe business processes. These models often enable decision-makers to perform "what if" simulations on expected results to proposed initiatives. They also enhance forecasting, estimate customer propensities or expected activity rates and help explain employee performance, to name a few. Figure 1 depicts a simple "what if" analysis facilitated by data mining and quantitative modeling.
Statistical/quantitative-based analytics help augment supply chain and CRM initiatives mentioned earlier. The algorithmic capabilities of prevalent data mining methods enable organizations to more effectively identify target markets. By leveraging existing data on consumer activities, companies can reduce costs of marketing and advertising initiatives. Instead of running campaigns aimed at the general consumer (often incurring only fractional response rates), high-end analytics fine-tune the target market or identify those types of consumers more likely to respond to product and service initiatives. As a result, companies can aim campaigns at targeted audiences, thereby greatly reducing the cost of more elaborate and less focused campaigns while achieving double-digit response rates. Data mining also helps augment the 80/20 rule by enabling decision-makers to more accurately identify the percentage of clients that contribute the significant portion to bottom-line revenue.
One of the real advantages of high-end analytics is that the methodologies produce more reliable results than standard reporting mechanisms because of the incorporation of statistical and mathematical techniques to analyze data. These more robust software applications can also play a key role in enhancing the very popular and widely adopted Six Sigma philosophy of achieving increased efficiency. In a nutshell, the Six Sigma process seeks to reduce the variance between actual and expected outcomes of processes across functional areas of an enterprise. In other words, managers formulate expectations over outcomes of a particular process, and actual results often do not fully match expectations. The difference is a variance. Six Sigma is the methodology by which decision-makers seek to enhance the outcomes of processes (e.g., reduce customer attrition) and also reduce the variance of those outcomes. Many individuals often affiliate Six Sigma with manufacturing processes and the goal of reducing defect rates; however, the "Six Sigma way" actually is applicable to numerous operations within an organization. High-end analytics enhance Six Sigma as they enable managers to perform "what if" simulations for strategic initiatives; and they also help measure the outcomes of initiatives, giving statistical reports of corresponding operational results. Leading companies such as GE, Motorola and 3M have been staunch proponents of this productivity-enhancing philosophy, and more recent trends have included healthcare providers, pharmaceutical companies and general marketing activities for numerous firms. In fact, a CRM initiative can be categorized as a Six Sigma implementation. Figure 2 provides an illustration of how companies identify variances and set goals using the Six Sigma philosophy. In this case, they seek to reduce the error rate of process outcomes which is the area above the upper variance threshold (UVL). The key is to achieve outcomes in the range between the average expected outcome (X) and the lower and upper variance thresholds (LVL and UVL).
Avoiding Negative Returns
Despite the host of innovative technologies that have surfaced over the past few years and given the productivity that has been achieved by many organizations across industries, one must keep in mind that mere purchases of IT systems do not insure success. In fact, many organizations have experienced lackluster results from major IT initiatives that have become net losses for their bottom lines. There are a number of factors that cause this, but the major problems generally involve a mismatch between the technology and the people who implement and use it. Some points of consideration include:
IT departments can purchase top-of-the-line systems; however, if key management does not fully support the investment initiatives, what you have is idle, underutilized technology or potential shelfware (technology that doesn't even make it out of the box). This point is closely related to the next major factor leading to negative returns - a disconnect between IT and non-IT staff. Poor communication between the end users of new systems and technical staff that support them poses a serious challenge to productivity initiatives. This factor can result in problems involving data (source, storage, format) to systems use (lack of understanding), to name a few, where the ultimate result becomes idle and underutilized technology.
The next point of concern stems once again from the breakdown in communication between business users and IT personnel and involves the acquisition of improper technology. In this case, improper refers to systems that are simply not designed to solve designated problems. Potential points of consideration are scalability and integration of systems and outright functionality (e.g., the use of reporting software to perform customer scoring for CRM). This may be one of the most detrimental factors to corporate productivity because the problem not only involves an increase in cost from the initial investment, but also additional costs needed to correct the problem.
The final point of concern involves more of a breakdown in effective IT utilization by decision-makers. A prime example of this is evident in recent CRM implementations where, in certain cases, management has experienced negligible returns relative to the costs of complex systems. Productivity through CRM is not a simple undertaking. The strategy of retaining clients and attracting new ones involves complex business and economic theory including elements such as competitive practices, price elasticities, dynamic consumer behavior and product differentiation tactics through marketing. Often when managers do not see the gleaming increases in revenue or profitability, the culprit quickly becomes the ineffectiveness of the system when, in reality, the system is only as good as the strategy that it facilitates.
To overcome these pitfalls and to achieve the greatest efficiencies from new initiatives requires the incorporation of effective management techniques - a management process that is technology-specific, strategy-specific and an overlap of the two. In other words, the knowledge gap between business strategists and technical staff needs to be narrowed. Does this mean that business managers need to become versed and proficient in technical processes and specifications and technicians need to be fluent in the forces of supply and demand, product differentiation and financial theory? No. However, the two sides need to become more aware of what makes each of them tick. The world of academia has responded to the call for this corporate demand for hybrids. The number of graduate business programs that offer IT management concentrations, some of which address particular processes (supply chain, knowledge management and e-commerce initiatives) is on the rise. The result of this should be individuals that are not only versed in business strategy, but also the tools that enable them to facilitate these initiatives in the information economy.
For more information on related topics visit the following related portals...
CRM, Supply Chain and Strategic Intelligence.
Stephan Kudyba, Ph.D., is the founder of Null Sigma Inc., an analytic consulting company, and a faculty member in the Department of Management at New Jersey Institute of Technology. Dr. Kudyba is the author of the books Data Mining and Business Intelligence: A Guide to Productivity, Information Technology, Corporate Productivity and the New Economy and Managing Data Mining: Advice from Experts.