Why IT gives business a competitive edge

But he asserts that the true source of the company's competitive advantage is Netflix's investment in proprietary software for inventory management, logistics, and shipping. In 1999, for example, when Netflix had 75,000 customers and was using packaged software for customer support, Dillon says the company had 100 staffers in support. Today, with 3.5 million subscribers, Netflix has just 45 support people, thanks to Web self-service and home-brewed support software that enables reps to handle higher volumes.

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"We firmly believe in building IT from scratch; this is a custom business," Dillon explains. "If you want to get it done exactly the way you want, build it yourself." On the logistics and shipping side, Netflix originally began with an Oracle ERP system, which it still uses for financials. But the company quickly realized that "it was too big and bulky and was hindering innovation" in shipping DVDs, Dillon says.

So Netflix wrote its own system, designed to enable its 37 shipping centers to provide one-day delivery of 1.3 million movies per day. Processing time is the critical factor, Dillon explains, because the DVDs all get returned in the morning and must be turned around quickly to meet tight postal service deadlines. "You need to run a big supply-and-demand algorithm that says who are the customers I now owe a movie to, what inventory do I have at what locations, and then generate 1.3 million orders," Dillon says.

Netflix's software completes that batch process each day in about 25 minutes, claims Dillon, thanks to proprietary algorithms that run entirely in memory. "With normal IT, this could easily be a two- or three-hour job, but we don't have that kind of time. It's about fine-tuning IT so you minimize any wasted steps."

Dillon adds that the company is hooked on continuous improvement and measurement. "We have more metrics than I've ever seen in any other company," he says. "I'd say one thousand we look at on a continuous basis." And top management, including the CEO, pull raw data straight from the warehouse and analyze it in Microsoft Excel or Access "because a polished executive information system would be too costly."

How do lower costs translate into competitive advantage for Netflix? Dillon estimates that the company's fulfillment costs are about half what Blockbuster's are, which enables profitability at a lower price. "Every penny counts in a high-volume business," Dillon says. "As we keep lowering our cost, we're able to lower our price. It's [a] very elastic market; so, the lower the price, the more our market grows."

BNSF Railway: Customers first

Texas-based BNSF Railway -- formerly Burlington Northern Santa Fe -- is one of the largest North American railroads, and arguably the most successful in terms of profits, operating efficiency, and other metrics.

Railroads may seem like relics, but these days they're taking on a new cachet and are starting to win business back from trucking companies, thanks mainly to investments in new technologies that make them more efficient and easier to do business with.