Why IT gives business a competitive edge

Smart companies like JetBlue, NetFlix, and BNSF Railway are reaping sustained rewards by weaving IT into the fabric of their business

When Nicholas G. Carr wrote IT's obituary in his famous 2003 article, "IT Doesn't Matter," few thought IT would soon be returning from the dead. Carr's argument -- that IT was becoming commoditized and could no longer provide a competitive advantage -- struck a nerve and was parroted faithfully throughout the corporate world.

Fast-forward to the predawn of 2006, and even Mr. Carr is starting to change his tune. Nobody's partying like its 1999 again, but across many industries companies are demonstrating that IT can be a key ingredient in a winning business formula. Here, we highlight three such companies -- JetBlue Airways, Netflix, and BNSF Railway -- as market leaders that make aggressive, innovative use of IT.

Management gurus are also turning more bullish on IT as a source of competitive advantage. But they note that the game has changed, that IT alone cannot create sustainable advantage in a competitive global marketplace.

Nick Carr was half right," says Tom Davenport, Babson College professor and management guru. "You've got to combine IT with smart people and good business processes that are supportive of a distinctive capability the organization has."

Davenport rattles off a roster of companies -- Wal-Mart, Harrah's, Capitol One, Amazon, and Marriott -- that have "focused IT on what really matters to their business" to become tops in their categories. And he claims it may take a decade for their competitors to catch up.

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John Hagel, a high-profile consultant and co-author of The Only Sustainable Edge, goes one step further, claiming that emerging IT capabilities such as SOA and virtualization are enabling more cost-effective, incremental innovation than legacy hardwired systems ever allowed.

"None of the individual improvements will be sustainable; people will over time try to copy," Hagel says. "But if you keep moving forward, they'll never catch up. It's all about getting better [and] faster than others."

JetBlue: IT with a human touch

With several large U.S. airlines either in bankruptcy or on the brink, the airline business is reeling. Fuel costs are high, employees are grumbling, and discount carriers such as Southwest prevent competitors from raising prices.

Against this backdrop, New York-based JetBlue has soared from zero to more than a billion dollars in annual revenue in just less than six years. And IT has been a decisive factor in that growth, according to Tim Claydon, senior vice president of sales and marketing. "We were the first airline to be born in the Internet age," Claydon says, describing how the company uses IT to enable everything from home-based service reps, to seat-back satellite TVs, to paperless cockpits and all-electronic flight booking.

Although JetBlue is a low-fare airline, explains Claydon, IT's main contribution to competitive advantage has been in supporting a customer-friendly strategy. "We're in a service industry," Claydon says. "Even if the satellite TVs are what gets people on board for the first time, it's customer service that gets them to come back again."

Claydon notes, for example, that JetBlue's paperless cockpits -- the company gave pilots wireless laptops to replace the bulging briefcases they used to carry around -- free up pilot time so they can greet travelers from the front of the cabin. "It makes our pilots happier, less grumpy, more accessible, and gives them more time to interact with the customer," Claydon says.

And although the company has invested heavily to make its Web site and kiosks easy to use, Claydon adds that they don't want these to get in the way of customer interaction. "If you call 1 (800) Jet-Blue, you will not get caught up in IVR [interactive voice response] hell; you'll quickly be able to get through to a live human."

"The key to technology as strategic advantage at JetBlue is a very strong partnership between IT and marketing," says JetBlue CIO Todd Thompson, who used to report to Claydon but now reports to the CFO. "The technology doesn't get in the way of the brand." Thompson also notes that technology investments help keep costs low. "Our cost structure is as much of a competitive advantage as the JetBlue experience is."

Between the home-based agents and the paperless cockpits, Thompson estimates the company saves several million dollars a year. And whereas traditional airlines take in less than 40 percent of their bookings via the Web, JetBlue.com garners 80 percent. "A huge cost savings," Claydon adds.

How sustainable is JetBlue's IT advantage? "There's definitely some technology secret sauce," CIO Thompson says, specifically citing the sophisticated antenna for receiving satellite TV for passengers. And the company's 160-person IT team is working on a next-generation, componentized reservation system that will offer built-on-the-fly, custom vacation packages for customers.

But in reality, Thompson admits, "You can duplicate a Web site, a kiosk, or dynamic packaging." JetBlue's edge really lies in the mind-set of using technology to innovate, he says, plus the laborious process changes the company has gone through -- in getting the paperless cockpit approved, for example. "We had to convince the FAA that we could keep the data current electronically," Thompson recalls.

Also, adds Marketing SVP Claydon, it doesn't hurt that JetBlue CEO David Neeleman sees the potential of technology. "He made the TV thing happen," Claydon recalls. "He understood we were going to have to do something to fully differentiate us. From a technology perspective, nothing was discounted."

Netflix: A logistical edge

In an age of instant downloads and video on demand, who'd have thought a service that sends DVDs through the mail would stand a chance? California-based Netflix has confounded the skeptics, growing to more than 3.5 million subscribers since launching in 1999.

Tom Dillon, the company's COO, attributes much of Netflix's success to using IT to hold down costs. "IT is not a strategic weapon in most companies," Dillon says. "But in our company, IT is the business. We live and breathe [the idea] that the way you get more competitive, lower your costs, and provide better service is through continuous improvement of the information technology."

Dillon, who oversees DVD fulfillment as well as "back-end IT" (everything but the Web site), says Netflix's Web site provides a better customer experience than its major competitor, Blockbuster.com, offering features such as customized recommendations and separate "queues" for each family member.

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.

"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.

"If you spoke with our CEO and CFO, they would tell you that IT is not only integral but has been one of our strategic advantages," says Jeff Campbell, CIO of BNSF. Campbell has developed a five-year IT plan dubbed the eSynchronous Railroad, which will leverage new technologies such as GPS and Wi-Fi on locomotives to enable real-time, event-driven management -- "as opposed to trying to tactically muscle the railroad business every day," Campbell says.

In the meantime, the $12.5 billion company has already launched a host of IT projects to push the envelope in three areas: customer satisfaction, railroad operations, and human resources.

For starters, says Campbell, "We focus on ease of doing business with us." BNSF worked with other railroads, for example, to develop a Web services application to provide one-stop shopping for customers who want to send shipments across multiple railroad networks but who previously had to get a separate rate quote from each carrier.

BNSF is the only railroad running "multiple channels of technology simultaneously in our customer portal," Campbell asserts, a setup that enables customers to track shipments, pay bills, and check an invoice status -- all on a single screen. "We've invested time and money in BNSF.com," Campbell says. "It's not just about lipstick; it's about the content as well, … taking out the railroad-speak, simplifying the intuitiveness of the Web site."

On the operations side, the railroad has replaced traditional paper-based systems for train and crew dispatching with a combination of voice and e-mail technologies to "optimize velocity, performance, and availability," Campbell says. "We used to have over 400 crew-callers," Campbell recalls, referring to those who assign crews to trains. "Now, all our outbound crew-calling is done by computer, and inbound is done by IVR with voice authentication if crewmen want to call in sick or for a schedule change. Today, we have less than 100 people in that area."

As for overall results, Campbell says, "Productivity in terms of gross ton miles and tons per employee has improved dramatically," partly thanks to IT investments. On the customer-facing side, the company has seen a "slow, sustained improvement in customer satisfaction scores" during the past two years.

But how sustainable are BNSF's IT competitive advantages? "We have a momentary advantage" when it comes to operations, Campbell responds. "We've spent the most on this and have the most advanced systems." As for the customer side, Campbell says, "I think we have a competitive advantage, just half a step. The runner-up that gives me a run all the time is Canadian National Railway."

Campbell is also quick to note that the technology journey has not been all straight-ahead. "In 1999, we got caught up in the hype, drank the Kool-Aid, and invested several million in an Internet startup to buy and sell rail capacity online, separate from the railroad," he recalls. "We thought capital-intensive old companies were has-beens."

The lesson learned? "Build the technology right in to the railroad," Campbell says. With the right IT, "Sometimes being an old railroad ain't bad."