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BY CRAIG D. ELDERKIN Jack Bogle, founder of the Vanguard family of mutual funds, said that a decade ago he decided his company wouldn't be the technology leader in its industry. "We couldn't afford to be the leader," said the executive, who is in his late 60s and professes to know little about information technology. "These days," he said, "we have to be the technology leader. We can't afford not to be." Why the change? And is his attitude representative of something broader going on in the business world? To find out, Context and the Diamond Exchange, an executive learning program, jointly interviewed 30 top executives face-to-face for 60 to 90 minutes each--among them Mr. Bogle; Morry Weiss, chief executive of American Greetings; and Paul Allaire, chief executive of Xerox. Context and the Exchange also conducted 400 15-minute phone interviews with other senior executives. The answer is that senior executives have, in fact, adopted a surprisingly aggressive view toward technology. But the study, one of the broadest to date on executives' thinking about technology, also found a dirty little secret: Most executives talk a much better game than they play. Of executives who expected to begin a major effort in electronic commerce between now and the middle of next year, for instance, more than 30% didn't even have a Web site. The study found that executive teams often have trouble even conversing about how to use technology strategically because viewpoints about technology differ so strongly based on the type of job an executive holds. For instance, while senior technology executives believed in Moore's Law--a computer-industry rule of thumb that states that the cost of a unit of computing power will fall 50% every 18 months--non-technology executives widely disputed the assertion. In general, the survey found that two-thirds of respondents were kidding themselves about their ability to respond quickly to any technology-based change in their markets--which, of course, creates opportunities for their competitors if they can find ways to use technology to gain advantage. While changes wrought by technology hadn't produced enough of a visceral reaction to push many executives into action, the strategic implications of technology had clearly taken root intellectually. The executives interviewed for this study said:
In the case of Mr. Bogle and Vanguard, he used technology to drive all kinds of costs out of his business, cutting his operating expenses to .28% of the assets that Vanguard manages. That's a full percentage point below the industry average. Because Vanguard manages some $300 billion of assets, that percentage point works out to serious money--$3 billion a year in cost savings. But he still faces a major threat because financial advisers have begun a campaign to convince clients that mutual funds have become commodities. More important than picking a particular fund, advisers argue, is figuring what mix of mutual funds is appropriate given an investor's age, appetite for risk, need for cash, etc. If the advisers carry the day, they will become middlemen, keeping mutual funds from having the direct relationships with customers that can build loyalty and limit pressure on fees. The 69-year-old Mr. Bogle, who recently stepped down as chairman following a heart transplant, said Vanguard is trying to face down the threat by putting an electronic decision tree on its Web site that would let investors, on their own, walk through the choices that an adviser might help them make. In addition, Vanguard is experimenting with "spider" technology, so that someone signing onto its Web page would be greeted with an up-to-the-moment summary of his holdings. With big corporate clients, the fund family is installing video links so phone conversations become face-to-face and, thus, more personal. Buttressing Mr. Bogle's view that technology can be highly disruptive--for good or for ill--69% of the 400 respondents in the phone survey strongly agreed that "information technology is redefining the marketplace in ways that can either upset your company's plans or create new opportunities." (A rating of 8, 9, or 10 on the scale of 1 to 10 is considered strong agreement.) The average rating was 8, the highest in the whole survey. Similarly, a reasonably high 35% strongly agreed that "global competitors can spring up overnight" because technology has reduced the need for a physical marketplace. The mean response was 5.9. Perhaps the strongest indication that technology is being used for more strategic, external purposes is that only 38% said they would focus their information-technology spending on traditional, internal projects (cost-cutting, reengineering, and productivity improvements) over the next few years. 58% had made such projects their primary focus over the past five years. Meanwhile, the percentage focusing primarily on supporting sales and revenue growth efforts grew from 38% to 54%. Although the hypothesis going into this survey had been that many senior executives would be uncomfortable evaluating technology, the opposite was true. The vast majority of those interviewed face-to-face showed they had pondered the implications of technology. Dennis Chookaszian, chief executive of CNA, one of the nation's largest insurance companies, even began a detailed discussion of the technical capabilities of Intel's desktop videoconferencing system--at one point, correcting the interviewer on the number of frames per second that the ProShare system could transmit. Asked about what could be called "Gates' Law," 38% of those in the phone survey agreed strongly with the Microsoft chairman's assertion that all relevant information on customers, competitors, partners and one's own business will soon be instantly available. To illustrate what will increasingly be possible, Max Gould, the chief information officer of a large division of Aetna, described how the company used an administrative healthcare database to potentially reduce blindness among diabetics. A database of diabetics was checked against medical and pharmaceutical records to find those who hadn't been getting retinal eye exams. The search found 24,000 people. After several mass mailings, 2,700 visited doctors to receive an eye exam. Forty-eight eventually went on to start laser therapy. "We may have prevented them from going blind," the CIO said. The growing ubiquity of information was not, by any means, all good news. Only 22% of those in the phone survey felt strongly that they were doing a better job than five years ago in gathering crucial data on customers. The mean was 5.6. A minuscule 14% felt strongly that they were doing a better job of using the data they gathered. The mean was 5.2. In the face-to-face interviews, many said the growing availability of information was just changing their problems, not removing them. "The problem now is not, Can I get enough information?" said one chief executive, who requested anonymity. "The problem is too much information." Jim Unruh, who recently retired as chief executive of Unisys, said: "We used to have data but no information. Now, we have information, but we still need knowledge and insight." Ominously, 44% of those surveyed by phone felt strongly that, because of the spread of information, customers have gained leverage over suppliers of goods and services in the past five years. The mean response was 6.9. The feeling was especially high among transportation companies, telecommunications corporations, and utilities, where 52% agreed strongly that leverage had been lost. "Consumers are getting wiser. They understand the subtleties," one senior vice president said. Mr. Allaire, chief executive of Xerox, agreed: "The leverage has shifted to the customer. Their expectations get higher and higher, and they won't pay for your distribution system unless it adds value." The president of a large investment bank added that technology now makes it possible to find out about a competitor's product so fast and duplicate it so quickly that, in his industry, it's hard to hold on to customers through products alone. "There's probably been more change in the financial business in the last 10 years than in the 50 years or so before that," he said. "Even option derivatives, where there were high margins--it's amazing. That business was commoditized, I would say, in less than 5 years. Bing, bang, boom, and it was commoditized." Despite misgivings about the tidal wave of information coming at them, executives were very optimistic about how quickly they could generate Internet-related profits. Although just 4% thought they would produce significant earnings by the end of 1997, 37% expected to do so in 1998. A further 19% expected significant earnings to start in 1999 or 2000--for a total of 60% by the end of 2000. Going into the study, the hypothesis had been that many companies would be cautious about the Internet because they had been burned on hot technologies before. Instead, executives reported very good results with prior technology investments. 45% had a significant return on investment on "the most significant information technology project undertaken by your company." 41% reported a negligible gain or loss. Only 2% had a significant loss. So, instead of being cautious, 21% said they had already begun a major push to use the Internet for electronic commerce. A further 40% were "actively exploring" possibilities. In total, 65% expect to be conducting electronic commerce over the Internet by mid-1998. Customer service is even more popular: 30% said they have already launched a major effort in electronic customer service, and a further 40% said they'll begin one by mid-1998. Richard Carlsen, senior vice president and chief financial officer for the health care products unit of Schering-Plough, complained about losing leverage on pricing because the 20,000 distributors he had two decades ago have consolidated into fewer than 10. But he also said that collaborating electronically with the now-giant retail chains is letting him generate new revenue and keep costs down. Wal-Mart, he said, has done a phenomenal job of opening its information systems to suppliers--letting him, for instance, notice enormous sales of suntan lotion at a Wal-Mart in a small Florida town. Investigation discovered that the town was a popular resort and that the Wal-Mart store dominated the market. Someone from Schering-Plough persuaded Wal-Mart to greatly expand its display there. Now, even though Schering-Plough sells suntan lotion through 150,000 stores in the U.S., 0.5% of those sales come from that one Florida store. About 31% of the executives in the phone survey strongly agreed that relations with suppliers and distributors had become more cooperative over the past five years. And 37% said they have already begun a significant effort in using the Internet to foster collaboration with suppliers, customers and other businesses. Of those who had not yet done so, the vast majority expect to soon. More than 80% of all companies--and more than 85% of companies with at least $1 billion in annual sales--expect to be doing Internet-based collaboration by mid-1998. Still, the survey found that executives talk a much better game than they play. Despite all the optimism about profits on the Internet, about its strategic potential, etc., executives are doing little to learn how to take advantage of the blossoming public network for computers. For example, the phone survey included numerous questions on electronic commerce, customer service, and collaboration with other companies, and some 60% of the respondents said they either had already launched a major initiative or would do so soon. Yet, the phone survey found that:
When pressed, many executives agreed with the CIO who said, "We're more of what I'd call a fast follower" rather than a pioneer. Executives essentially said that the game is to be first to be second--even if that means they often wind up being second to be third, or even further behind. There seemed to be three main reasons why executives were doing much less than they reported when asked about their attitudes and approaches to technology:
The most startling difference of opinion concerns Moore's Law, a prediction that research-minded executives noted has been astonishingly accurate for three decades but that all other types of executives widely dismissed as untrue. Moore's Law, proposed by Intel co-founder Gordon Moore, states that the power of a computer chip will double every 18 months while the price of a unit of computing power drops by 50%. Among the many real-life examples of Moore's Law is the Cray supercomputer that was the world's fastest processor in 1977, when it cost $10 million. The Cray was the size of a restaurant refrigerator and weighed a couple of tons. Today, the same computing power is delivered by an Intel Pentium chip that is slightly larger than a fingernail. It costs a few hundred dollars. Because Moore's Law predicts that, two decades from now, the power of that Cray will be available for three or four cents, computer scientists say that the cost of a unit of computing power is headed toward zero. Except for a modest number of technology executives, those interviewed for this study had a different idea. Only 26% of all executives strongly agreed that "the incremental cost of a unit of computing power is headed toward zero." The mean was 5.8 on the 1-10 scale. Similarly, technologists said that the incremental cost of a unit of communications bandwidth is headed toward zero. There's some uncertainty about this idea--among other things, because of pricing anomalies created by regulation and because of near-term concerns about the capacity of the copper wires that connect homes to the phone network. Still, because the equipment that drives telecommunications costs and the availability of bandwidth is a collection of computers, theorists argue that, over the long term, the telecommunications industry will follow the same plunging cost curve as the computer industry. Again, executives disagreed. Just 22% strongly agreed that the unit cost of bandwidth is headed to zero. The mean was 5.8. When executives were asked in face-to-face interviews to explain the dis- crepancy between the track record of Moore's Law and executives' lack of belief in it, they said they don't live in the world of incremental units of computing power and bandwidth. They wrestle with high-level budget figures that include service and support, whose cost keeps rising. Because companies keep accelerating their purchases of information technology, even budgets for equipment keep climbing. "You show me the line in my budget that's declining," said the chief executive of an asset-based lender. An us-versus-them battle has developed. The chief information officer of a consumer products company showed the attitude of many CIOs when he said: "My senior management can't even spell 'Internet.'" Meanwhile, Robert Patin, chief executive officer of Washington National, a life insurance holding company, said that with few exceptions, he doesn't think CIOs as a group are to be fully trusted because, "they always overestimate the benefits of technology and underestimate the problems. They withhold the uglies." Even when a CEO decides to use technology to steal a march on competitors, getting the top few levels of a company on board takes an inordinate amount of time and energy. For instance, the CEO of a finance company said, "Technology is going to serve as a change agent, reshaping the culture." But he also added: "I'm not sure my top managers know that yet or agree with that." Some of the confusion related to the strategic uses of technology is simple lack of knowledge. Asked about possibilities for the Internet, the CEO of an investment banking firm said: "We've had a--what do you call it?--a page on the Internet, an address, or whatever, for six months and, at last count, we had 9,000 to 10,000 whatever you call them. I think we've yet to have our first trade." Realistically, he added: "We're not going to do anything of value on the Internet." Part of the uncertainty comes because the world of technology can change brutally fast. "It's almost like the advertising issue," said Mr. Weiss, of American Greetings, a greeting-card company. "I know half my advertising isn't working. I'd stop buying the useless half, but I'm not sure which half that is. (Some executives) invest in technology out of fear." He said executives are aware that they need to do something but aren't sure where to place their bets because they don't know "what the impact of the technology is or where it will be." Meanwhile, many technologies are in formative states--even a strong advocate of the Internet, the chief executive of a major computer company, acknowledged that "it's still chewing gum and baling wire." So bets have to be made with incomplete information. Yet risks are getting higher, many executives said. The head of a large business unit at a major bank said: "It used to be that you just worried about the hard drive crashing or mainframes burning. Now, it's the network--this incredibly huge, distributed thing" that is the heart of many businesses. Still, some of the confusion stemmed from something within the control of executives: They sometimes didn't think rigorously. For instance, even though, executives widely agreed that technology is redefining their markets, they also agreed that "technology is only a tool to implement strategy and does not assist in defining strategy." The mean response was 5.9 on the 1-10 scale. Those questions were intended to be mutually exclusive--either technology has strategic implications or it doesn't. Instead of just picking one answer, executives seemed to be saying that, while they see technology as heavily disruptive, they are only using it as a low-level tool, not as a weapon that could disrupt the businesses of competing companies. For one, the chief executive of a direct marketer waxed eloquent about the prospects for mass customization. He said that Volvo, for instance, could make cars that had only the features that a particular buyer wanted. Because each car would be manufactured rapidly after it was ordered, inventory costs would plunge, and dealers wouldn't have to discount to dump cars that no one wanted. Customers would be happier with their cars. Companies, by dealing directly with customers, would get insight into how to design future cars. So, the executive was asked, how was he mass customizing his business? He stopped cold, looking like he'd been slapped in the face. "I never thought about that," he said.
There was an elemental division between the executives who were experimenting with new technological possibilities and those who weren't. The experimenters felt themselves under attack. Those who were standing pat did not. About two-thirds of the 400 executives interviewed by telephone either indicated that they weren't seeing new competitors in their markets or, if their markets were changing, didn't see technology as a driving force. In many cases, they agreed that information technology would change their markets-for instance, by allowing global competitors to spring up overnight by marketing or selling over the internet. But merely thinking about potential problems wasn't enough to drive executives to action. The others, those testing new ways of using information technology, typically had seen a new competitor appear unexpectedly, and they suspected that technology had played a role. The experimenters were very likely to say that they had achieved a major advantage over a competitor through technology-but were extremely likely to feel that a competitor had gained an edge over them. Based on cluster analysis, the 400 executives fell into six groups, four of which were doing little exploring of their technological options and two of which were quite active. With a little license, the four less active groups could be called:
The two groups actively exploring technology are:
These 50 executives were smug about the stability of their businesses. They were unlikely to believe that computing and bandwidth costs were declining rapidly on a per-unit basis, that traditional channel relationships were becoming obsolete, and that information assets were increasing in value. At the same time, the Fat and Happy believed they were gathering all necessary data on customers and were making maximum use of the data. THE VALKYRIE These 57 executives saw themselves as conquering heroes. The Valkyrie indicated they were getting maximum use of data, were gathering all necessary data and had gained a significant advantage over competitors through technology. The group was off the charts in terms of how little it worried about unknown global competitors springing up. The Valkyrie's confidence meant that they were unlikely to be experimenting with electronic commerce, collaboration, etc., despite the value these executives said they placed on information. Of all the clusters, this group was least likely to be testing technology's possibilities. THE CONFUSED These 89 executives seemed to understand the new, low-cost forces of the digital world but didn't see how they could use technology to their advantage and were doing little to explore their options. They agreed that computing and bandwidth costs were declining on a per-unit basis, but only saw technology as a tool to implement strategy, not a factor in setting strategy. The executives didn't feel they had gained a significant advantage over competitors through technology or were getting maximum use from their data. THE WHISTLERS IN THE DARK These 69 executives were a puzzle. Members indicated that they saw lot of fundamental, technology-based changes but expressed no fear of them. This group believed that computing and bandwidth costs were plunging on a per-unit basis and that transaction costs were diminishing. Yet the group doubted that unknown competitors could spring up overnight, that the Internet could be used for competitive positioning, and that customers have gained control over their relationship with sellers. They were only modestly aggressive in testing technology ideas. THE DESPERATE DROWNERS These 82 executives saw themselves sinking in a sea of competitors and were trying to grab a lifeline-which they felt technology could provide. The executives believed very strongly that unknown global competitors were springing up and felt somewhat strongly that competitors had gained significant advantage through technology. At the same time, the group felt that technology was more than just a tool for implementing strategy. Because of the fear, the group was extremely likely to be testing electronic commerce, customer service, etc. over the Internet. THE DON'T-LOOK-BACK-BECAUSE-SOMETHING-MAY-BE-GAINING-ON-US These 45 executives were less focused on specific competitors but were sure that their markets were changing an that technology played a major role. This group felt exceptionally strongly that unknown global competitors could spring up overnight. This group believed firmly that the Internet could be used for competitive positioning and that investments were becoming riskier. The group doubted that it was gathering all necessary data on customers and was getting maximum use of the data. The Don't-Look-Backs, together with the Desperate Drowners, were easily the most inclined to information technology actively.
Firms hope technology will allow a "great leap backward" toward personal service. Asked were technology could create opportunities to go on the offensive, the 30 top executives interviewed face-to-face for the Digital Strategies survey repeatedly talked about using technology to develop relationships. Some executives even suggested that the economy is moving away from a focus on generating huge volumes of individual transactions. Instead, as one chief executive put it, the economy is taking "a great leap backward" toward an emphasis on service that builds relationships over a customer's and a company's lifetime. Those relationships—the hallmark of business for centuries—can, if managed efficiently through technology, be extremely profitable and can generate much more loyalty than exists among customers today, some executives suggested. The other principal ideas offered in the in-depth interviews were:
Asked about relationships, Rakesh Kaul, chief executive of catalog retailer Hanover Direct, responded elliptically. He said that anyone pondering the business opportunities available over the Internet might think about popcorn. Theatre owners, he said, really aren't in the business of showing movies; they want to sell popcorn, which carries much higher profit margins. Mr. Kaul said that any retailer "who just sells the customer what he initially thinks he wants," such as movies, "only covers the overhead"—and the problem with the Internet is that it's set up just to help people find what they want. What retailers need, he said, is a way to help with "upselling." In the catalog world, a good operator can offer enough suggestions that 30% of the time a caller will buy 30% more than he intended to order—a 9% average increase in the sale. Really good operators can produce 15%, Mr. Kaul said, "and just about all that drops straight to the bottom line because there aren't any significant additional or marketing costs." So, he said, the Internet needs to move away from the "frictionless" world of commerce envisioned by technologists and toward something that helps him create a relationship with the customer. He said that Internet video, as it improves, could, in fact, let an operator show a customer a piece of clothing he hadn't considered and greatly increase the prospects for upselling. "You have to have the link between salesman and the customer, not just the computer and the customer," Mr. Kaul said. Others who focused on relationships were largely driven by need. A senior vice president at one of the nation's largest banks worried that "interest rates will be commoditized." At the moment, we get away with paying 2% for deposits and charging 15% for loans. There's absolutely no reason for that." He's expecting a "fundamental redefinition of our business that could really change our cost equation and marketing appeal"—and he thinks that taking a new approach to data is the key to preparing the bank. He said he can't understand why all his bank's information is organized by product—meaning that a customer might get a series of statements on his credit card balance, savings and checking balances, the outstanding amount owed under a home loan, etc. Instead, the executive wants a single statement that would show a customer's net credit or debt position with the bank. He argued that this statement—organized by customer rather than by product—would not only help customers but would let the bank understand customers better and win more of their business. (He wasn't all that sanguine, though, about his bank's capacity for switching quickly to a customer-centric view. Far from being willing to try ideas in the market and then quickly correct problems, he said the bank's model for doing business is "Ready, Aim, Aim, Aim….") Christie Hefner, chief executive of Playboy Enterprises, said she's willing to offer on-line customers incentives for information about themselves, so she can use technology to build profiles of individual customers and tighten her relationships with them. "For now we've concluded that you shouldn't require people to register, because it's too big a turnoff," she said. "But we don't see any reason why you can't give people a benefit if they will give you information—whether that's free time or a discount off something or merchandise or whatever." She added that the on-line environment could create real opportunities for Playboy by allowing for interaction—say, chat rooms involving the magazine's models. She said many people are also interested in outtakes from old photo shoots, which can be catalogued and easily made available on-line. "The Internet could be our biggest business ever," she said. Many executive agreed that they desperately need to learn more about customers so they can market more exactly. As on senior banking executive said, "A customer-dominated world is kind of messy, but we need to use technology to get away from thinking about a Model T for everybody." Thinking about the possibilities of technology, the executive said he could imagine doing things that would address two major sacrifices that customers make—the time spent in grocery stores, and the cost of groceries. He said that some manageable variety of staples, such as milk, bread, and diapers, could be delivered directly to customers living within a certain radius if a warehouse—a great leap backward to the days of the milkman. But the price of the goods, he said, would be lower in stores because technology could handle orders efficiently, and the inventory that local stores would have to carry would be diminished. "The issue isn't computer-literacy. It's market-literacy," he said. "You have to think about the customer in a new way." When it comes to planning, some executives said they are facing changes as fundamental as any they've seen in a long time. Morry Weiss, chief executive of American Greetings, a greeting-card company, said the Internet could increase sales because people could send greetings on the spur of the moment, even at the last second, without having a chance to lose the impulse to buy. Still, he said that he realized that the Internet could change the nature of distribution and make a channel available to anyone with an idea for a greeting card. That change would remove a major advantage his company has because of its strong network of retailers. So Mr. Weiss said he's been forced to realize that his core competence is the content of the cards and to start planning for the day when cards will be printed at home or sent in electronic form over the Internet. (In fact, American Greetings recently announced an agreement to distribute its content over the Internet.) Executives are also changing the way they approach investments in information technology because it's changing so fast. In the past, they might have tried to find technologies that they were confident would last indefinitely or at least find a supplier—perhaps IBM—that they thought could carry them well into the future. Now, many executives said they are moving to a shorter planning horizon. They're also building specific business cases that justify a particular technology expense even if that technology becomes obsolete quickly and is replaced by something else. "We've been trying to give ourselves at least the assurance that whatever investment we make is going to hold up for three to five years," said Richard Carlsen, senior vice president of the health care products unit of Schering-Plough. "It really doesn't have to last us much more than that. We're not shooting, like we used to, for a system that's going to last 10 to 15 years." When executives were asked whether they could use the Internet to gain some advantage over competitors, many said it's too hard to predict just how the Internet will develop. The head of an information services company said, "Technology never comes into play the way pundits predict. We still go home, and, yes, we have the Internet, and we can get these crazy facts. We can compare bills electronically, and we can analyze a fixed-rate versus a variable-rate mortgage. But most people still go home, put their feet up, and watch Roseanne." Given the uncertainty, some executives felt the need to win by having a better sense of the timing of changes based on technologies such as the Internet. Many of the executives, though, said they can't even guess the timing well. So they are evolving a more adaptive approach—figuring out ways to make sure investments in the technology don't get too far ahead of revenues, they can succeed no matter how the Internet plays out. Many executives said they are developing hybrid strategies. A large retailer, for instance, was trying to move customers to the Internet at their own pace. It planned to continue to stock 60,000 music titles in its stores, while offering access to a further 40,000 for those ordering on-line. A bank executive said he was using a hybrid telephone/Internet strategy for customer service—betting on the Internet in the long term while betting on the telephone in the short term, but trying to give customers enhanced service using either option. The tricky part seems to be figuring out how to rework distribution channels to take advantage of the new economics of the Internet in the intermediate and long term, without getting creamed in the short run. One executive, for instance, laid out a compelling vision for car companies. They should, he said, combine dealerships into test-drive centers with no inventory, sell directly to customers, and manufacture cars exactly to customer specifications only as they are ordered. But h acknowledged that, at the first hint of such plan, dealers would revolt and throw their allegiance to some other manufacturer. Similarly, Robert Patin, chief executive of Washington National, an insurance company, said he wanted to sell direct to customers over the Internet, which would let him cut costs and learn lots more about what customers want. But, he said, "the industry is so dominant today by distribution that every time management tries to change something, the system of independent agents promptly kicks management in the groin. We feel under siege, and yet we think there's real opportunity here. It's a great time to be a schizophrenic." Asked how long he thought he would need so he could solve the distribution problem, Mr. Patin expressed the fear of many executives: "I don't have as much time as I think it is going to take." Indeed, Washington National recently agreed to acquired by Conseco.
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The role of technology is moving from an internal focus
(e.g., cost-cutting and reengineering) to an external, more strategic one (e.g.,
marketing, sales and customer service). 