April 11, 2001, 11:53 AM — MORE THAN A YEAR AGO, German software giant SAP sat atop the booming worldwide market for enterprise resource planning (ERP) software. Today, startups like Dallas-based i2 Technologies and Ariba in Sunnyvale, Calif., are zooming past SAP to capture the Web-based market for linking customers and suppliers. SAP's mistake? It didn't grab an opportunity that lay just beyond its field of vision.
Although SAP is by no means a corporate graybeard, having soared from anonymity in the 1990s to dominate the ERP market, it fell into the same trap as many large companies. As business "" strategist Gary Hamel writes in his new book, Leading the Revolution (Harvard Business School Publishing, 2000), SAP was so busy riding its existing business model, it forgot to stay alert for the next bend in the road. "In the age of revolution, opportunities come and go at light speed," Hamel says. "Blink and you've missed a billion-dollar bonanza."
Perhaps SAP became hooked on its own rhetoric -- that automating internal operations and wringing every spare dollar out of an existing business model is a worthwhile goal in itself. As stockholders for mainstream companies like Campbell Soups, Dow Chemical or RJR Nabisco are discovering, such streamlining tactics go only so far. The name of the game today is radical innovation, according to Hamel. Without an entirely new approach to creating innovative business concepts and generating new wealth, companies are going to be left in the dust of the e-industry stampede, and so are any CIOs who mistake technological innovation for the real thing.
Hamel, a slightly built 45-year-old with longish-gray hair and tortoiseshell glasses, hardly looks the revolutionary part. He runs his own consultancy, Strategos in Menlo Park, Calif., and is affiliated with the London Business School. When he travels, he stays at the best hotels and dines at the fanciest restaurants. However, when Hamel starts talking about the need for corporate change -- as he recently did with Senior Editor Alison Bass over breakfast at the Four Seasons' Fifty Seven Fifty Seven Restaurant -- he speaks with the fervor of a zealot, a zealot who knows there's no time to waste.
CIO: Your book talks about companies that are riding a dying business model and don't even know it. How can companies recognize that they're about to get kicked in the pants by an upstart competitor before it happens?
HAMEL: One of the important signs is when a companny's earnings are growing faster than its revenue over a significant period of time. These companies are relying on cutting costs, ERP, reengineering and stock manipulation to squeeze greater efficiency in their earnings. We did a study and looked at all the companies from 1993 to 1996 that had a ratio of earnings growth to revenue growth of more than 5 to 1 and found in the subsequent three years that ratio had dropped to .8 to 1.
In other words, earnings were no longer growing faster than revenue, and it wasn't because their revenue growth had suddenly taken off. It was because their earnings growth had collapsed. What you have here is a world of very smart CFOs and CIOs who have continued to wring the last little bit of efficiency out of a dying business model, but at some point that game runs out. You're trying to get blood from a stone.
Isn't it true that investments in new technologies are important to give companies a competitive edge in today's market?
Over the last five or six years, companies have spent billions of dollars on information technology and yet all this investment "" has not shown up in their operating margins. I believe that investment is enhancing efficiency, but it isn't really showing up in competitive advantage. What's happening here is akin to an arms race. Everyone is competing to satisfy customers in shorter and shorter amounts of time. One company says, "Let's spend $50 million on IT so that we can serve our customers in 18 hours." Its competitor says, "I see your $50 million, and I'm going to raise you $10 million so that I can satisfy mine in 16 hours." It's like the Soviet Union and the United States. Each is building bigger missile stockpiles, but the underlying strategic balance does not change.
Today, the only thing that counts about a strategy is how it's different. The question I would put to an IT executive is, "How much of your IT investment is actually creating new-to-the-industry competitive advantage? Not playing a game of catch-up, not part of an arms race, but a new and unique competitive advantage."
