The IBM-Dell Profits Mystery
An article in USA Today by Kevin Maney addresses the mystery of why IBM and Dell are making money on what is seemingly a commodity. He begins with an analogy to help elucidate on Nicholas Carrs argument.
To understand Carrs argument, think of IT as cars and companies as teenagers. When I was in high school, hardly any boys had cars. So the ones who did own cars had a huge strategic girl-luring advantage over those who didn’t. Those boys were mobile. They could get to every party. They could make out in their cars. My friend Ed had a car that had gaping holes in the floor and belched smoke like an Iraqi oil well fire, and even that was a strategic advantage.
Today, in my neighborhood of the spoiled, every high school boy has a car. So having a car is no longer a strategic advantage. Having a Lexus might give you a bit of an edge over a classmate with a Hyundai, but it’s not even close to the gulf between a boy with a car and a boy with no car.
Bottom line: As a strategic advantage for teenage boys, cars no longer matter.
This is exactly what has happened with IT. Carr says that IT used to be a strategic advantage for companies because not every company had it. So Wal-Mart could jump ahead of Kmart, in part, by investing heavily in IT and making better and faster decisions.
But these days, great technology is cheap and plentiful, and every company has its share. So IT doesn’t matter because it’s no longer a strategic advantage. It’s essentially a cost of doing business.
And if that’s the case, who wants to spend a lot on IT? It’s like phone service or office stationery you want quality stuff for a low price, in bulk. Who does that better than anybody? Right now it’s Dell. And Dell is hotter than just about any technology producer.
But and this is a big ol’ BUT IT is different from most other products in one big way: The technology keeps changing and improving, often in great leaps.
If a tech company can keep coming out with really high-end, super-cool new technology, it can go to customers and offer something that will give them a strategic advantage over all the other mopes buying the commodity bulk stuff from Dell.
That’s the road IBM has taken. It pumps billions of dollars a year into its massive scientific research labs and builds big honkin’ machines like T-Rex, which it unveiled earlier this month. T-Rex is three times more powerful than previous commercial mainframes, and it starts at $1 million apiece.
In the market, IBM is increasingly winning the customers willing to take a risk on technology that might bring a strategic advantage, and Dell gets all the rest, who are just trying to keep from getting toasted by competitors.
In an interview in Business Week, Andy Grove says that we cant given glimpse the potential of IT.
In any field, you can find segments that are close to maturation and draw a conclusion that the field is homogeneous. Carr is saying commercial-transaction processing in the U.S. and some parts of Europe has reached the top parts of an S-curve. But instead of talking about that segment, he put a provocative spin on it — that information technology doesn’t matter — and suddenly the statement is grossly wrong. It couldn’t be further from the truth.
It’s like saying: “I have an old three-speed bike, and Lance Armstrong has a bike. So why should he have a competitive advantage?” Besides, it is outside of traditional commercial-transaction processing where info tech will have the greatest impact in the future.
[Carr is correct that commercial-transaction processing in the U.S. and parts of Europe is indeed mature.] Transaction-processing software or database software Revision 8 does not change from Revision 7 nearly as much as Revision 2 did from Revision 1. But that’s not [all] information technology. Ask yourself: Is digital distribution of music saturating? If it is saturating, what is all the hullabaloo about? Is digital electronics applied to warfare saturating? Then what is it that we witnessed a few months ago? You’re talking about different parts of information technology.
Also, not even commercial-transaction processing is uniformly used. Health care, an industrial segment that represents 15% of GDP, way underuses information processing. And a lot of the problems with health care would be improved if it used it to the same extent banks do. It doesn’t.
[Carr’s article struck such a nerve] because we are in the third year of a recession, and people are anguishingThe industry is in terrible turmoil. People are going in all different directions trying to find the magic answer. Somebody comes in and says: “There’s no magic answer because the whole industry’s dead.” But the industry is not dead.
The world is being turned into a digital representation. Distance means nothing if you have a digital infrastructure. Anything digital is borderless. You cannot put obstacles in the way of digital technology flowing everywhere. Everything that has an information element can be digital, increasingly inexpensively.
That leads to wholesale personalization of everything. MP3 players are personalization. Digital delivery allows you to make your own playlist. Same thing is happening in television, with personal video recorders like TiVo. The same thing is beginning in medicine, with diagnostics and personalization of treatment. This is information technology. And I submit to you, it is very, very early. We can’t even glimpse IT’s potential in changing the way people work and live.
Tomorrow: Phil Wainewright and Business Week