July 2004 | Commentary | IT Matters

IT Doesn't Matter? Better Run That By Wal-Mart

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In his May 2003 Harvard Business Review article, "IT Doesn't Matter," Nicholas Carr famously claims that information technology, much like the railroad and the electricity grid before it, has become an infrastructure tool that doesn't confer any strategic benefit. Carr's main point is that because IT is ubiquitous and increasingly less costly than in previous years, it no longer represents a scarce resource.

Carr specifically cites Wal-Mart as an example of a company that has been able to turn a temporary technological edge into an enduring advantage. Yet, he later states, "the smartest users of technology"—here again, Dell and Wal-Mart stand out—"stay well back from the cutting edge, waiting to make purchases until standards and best practices solidify."

Carr's argument appears to be quite reasonable on the surface. But how does it account for Wal-Mart's mandate to its top 100 suppliers to begin adding RFID tags to all pallets and cases by January 2005? Clearly Wal-Mart, together with a few other large retailers and the Department of Defense, is a pioneer in this field.

Wal-Mart is clearly not "waiting until standards and best practices solidify" before mandating the use of RFID technology. Despite the fact that RFID reader technology itself is immature, Wal-Mart and others are forging ahead with adoption. EPC Global, the body responsible for promoting global RFID standards, isn't due to release its UHF Generation Two standard for the communication protocols between the tags and the readers until December 2004.

And what about the costs? RFID tags currently cost between 50 cents and one dollar each. Large-scale adoption will push the cost down to maybe a few cents per tag, and this will undoubtedly drive the cost of adoption for later comers much lower.

Thus, Wal-Mart, with its early massive push into adopting this technology, seems to be striving for everything Carr cautions against. Is Wal-Mart making a monumental error? Is Carr wrong? Or is there some other explanation?

Before we answer these questions, let's look at what Wal-Mart stands to gain by adopting RFID. Wal-Mart's one distinguishing proposition is to provide goods to its customers at lower prices than its competitors. It achieves this through vast bargaining power and very streamlined and cost-efficient operations. Maintaining an efficient supply chain that minimizes or eliminates out-of-stock conditions, theft, and counterfeiting is critical to achieving competitive advantage.

Wal-Mart stands to save almost $8.4 billion per year once RFID is fully deployed, according to analysts at Sanford C. Bernstein & Co. The bulk of the savings—$6.7 billion—comes from reducing the labor costs of scanning bar codes manually. A good $600 million, however, comes from reducing out-of-stock conditions due to a more efficient supply chain.

With numbers like these, it is plain to see why Wal-Mart is taking an early lead on RFID despite all the associated risks. Besides, with its large bargaining power, Wal-Mart can afford to ask its suppliers to pick up their end of the cost.

Information technology serves as an enabler—a tool that allows companies to frame and execute on their strategy. IT itself is not the strategy. Wal-Mart has clearly absorbed this message. It has been pursuing RFID for more than 12 years, just as it has consistently used technology to shape and execute its strategy. In the case of Wal-Mart at least, IT clearly matters.

So, how do we reconcile this with Carr? Quite simply. Carr defines IT as the technologies used to store, process, and transport information—disks, processors, and networks. Taken in this limited sense, what he says is correct. A company would not seek competitive advantage by adopting a particular Wi-Fi standard, for instance.

It is the vision to pursue technologies that provides competitive advantage. And it is wise to optimize business processes and information with the tools that technology provides. That's the value of IT.

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