Lecture Text F. Warren McFarlan The New Strategic Wea.docx

Lecture Text
F. Warren McFarlan
The New Strategic Weapon:
Information Technology
(edited for clarity)
INTRODUCTION
OK, can we get started? For those few of you in the room whom
I've not had as a student,
my name is Warren McFarlan. I was trying to think about what
would be a good way of
organizing today. Since this is my fortieth year on the faculty
teaching Information
Technology, I thought it would be useful to think about what
has changed and what has
stayed the same. There are some very interesting themes about
stability and change. That's
what I want to focus on today.
What has stayed the same? First, the Luddites are still amongst
us. A pivotal article written
in 1966 in the Harvard Business Review by my mentor, who
brought me onto the faculty,
was called “The Myth of Real-Time Information.” It gave
enormous comfort to the AMPs
(Advanced Management Program attendees) in the 1960s who
didn't understand one hell of
a bit about what they were talking about. This gave them a

reason not to.
In the most recent issue of the Harvard Business Review, the
first article is “IT Doesn’t
Matter.” That is a very interesting article, and I will take you
through it this afternoon. The
words intellectual bankruptcy come quickly to mind. I have
produced a four and a half page
letter on some of the more obvious things. I'm meeting with the
editor of the Review to see
whether he wants to publish it or whether it goes to the New
York Times. But it's going in
one of those two places.
This theme remains. What has changed? There is a whole lot
more focus on how to think
about IT as a strategic weapon, how to align this technology
with the heart of corporate
strategy, and how to push things back and forward. The example
I use here is my newest
book, which came out in March, called Connecting the Dots,
written with one of my former
MBA students, who is a senior partner on the consulting side of
Deloitte. I'll talk about some
of the contents of this work as we go on.
We have a required course on IT in the first year. You can see
different parts of Harvard
have different views. The faculty and the required curriculum
on one side and the soon-to-
be-former editors of The Review on the other side.
WHAT HAS STAYED THE SAME?
The cost performance of technology
The single most important point has been the continuous

evolution of the cost performance
of this technology. This slide, which I've used and updated over
the last fifteen years, is the
most powerful explanation for why this has been and will
remain a turbulent area.
My doctoral thesis was the largest, most expensive, and most
useless simulation model ever
built. It took a half an hour on an IBM 7094, the fastest machine
of its time, to simulate six
months of a garment factory. The 7094 took up a room ten times
the size of this. It looked
F. Warren McFarlan
like a $10 million machine. Hundreds of lights winked, tapes
spun, disk arms went in and
out. You could see and feel the value.
By last year, all the power of that machine was in a seven-dollar
chip. It has been the
change in the cost performance that has enabled and enabled
and enabled. “IT Doesn’t
Matter” assumes that the game is over. We have zero evidence
on that. All the consensus
forecasts, in terms of material physicists, computer scientists,
and so forth, suggest that
last year's seven-dollar chip will be well under a dollar by 2007,

and will come in at about
one penny in 2017. Like all technologies, it will run its course.
But we stand perhaps twenty
years away from that.
At the same time, of course, we have the cost performance of
telecommunications moving
even faster. Many of you noticed last week that our three
regional telephone companies
finally shook hands and agreed on a common standard so that
we can deliver fiber into
every home in the United States on a standardized basis.
Copper, over the next thirty
years, disappears completely, and it's all fiber, and it's all
wireless. What that means is that
you blow down a three-hour movie in a quarter of a second. Out
of that three-dimensional
arrays and a whole variety of things come to happen.
Rapid technology change and vendor fragility
The point behind this is simple. We are able to do things
differently today than we were in
the past, and tomorrow we can, if we choose, do things
differently. Vendors come and go.
When I started, it was IBM and the seven dwarfs. Then we went
to the 1980s, and the heart
of the minicomputer industry was here in Boston: Digital
Equipment, Data General, Wang.
We were going to, in fact, annihilate Silicon Valley. We were
annihilated to the last body.
We are now building ourselves on biotech and we hope that
we've learned something from
our earlier experience.
Organizational resistance to change
Point two: organizational resistance to change. In the fifty-

fourth AMP, those days they put
together a fat yearbook for the program, pictures of the faculty
members, students, all that
kind of stuff. Underneath my picture—in those days, the hair
was a quite different color—
was a quote that went roughly as follows: “The dominant issue
in computer technology will
be the ability to implement human behavior change.” There are
very few things that I said
in 1968 that I am willing to be quoted on in 2003. That is one of
them. Everything this
technology does challenges, and allows things to be done and
organized differently, if we
want it to. The irony of my life, trained first as a physicist, then
as a computer scientist, is
that most of my life has been spent as an applied organizational
psychologist.
Organizational change is as much an issue in the cases that I
wrote in 2002 and 2003 as in
the cases of 1966, 1967, and 1968.
Stages theory
Stages. My colleague Dick Nolan wrote a wonderful Harvard
Business Review article in 1973
called “The Four Stages of Data Processing.” The initiative
phase, the growth phase, the
control phase, and then the maturity phase. It was a remarkable
article. Dick then began to
apply it to new technologies. We had stages five, six, and seven.
Before I was able to shut
him off in 1999, we were at stage thirty-seven. In fact, the
notion of how new technologies
as they come in require different handling at different points of
their cycle, that has turned
out to be a very robust finding that has lasted a long period of
time. Thirty years after that

article was written, it is as useful to today's chief information
officer as it was at that time.
Copyright © 2003 - 2 -
F. Warren McFarlan
Technical skill obsolescence
This is a rotten field in which to grow old on accumulated
wisdom. The technologies change.
When we made our huge surge to the Internet at the Harvard
Business School, from
October 1, 1995 to March 1, 1996, we had an IT department of
seventy-three people. How
many of them do you think made the transition? Four. They
were wonderful people that
went on to the next phase of their career. Fortunately, the Y2K
problem was all around and
so they disappeared with dignity in that era. We then brought in
a whole new set of
language systems.
One of the most interesting cases I wrote last fall was Pfizer.
Pfizer is a very IT-intensive
company. How many technology people do you think they have
writing code at the
pharmaceuticals division in Pfizer? Zero. It's all outsourced.

They spend a huge amount of
money in IT. They spend $1.4 billion. So we see that there's
some commitment to the
technology in a number like that. But the people at Pfizer
Pharmaceutical understand the
business, the human change processes. They bring in from a
network of 200 different
vendors the contractors, the packages, to work on different
pieces of the problem so they
don't have to get mixed up in worrying about how to keep those
people up to speed on the
new technologies. Different people do things differently in this
area, and it's going to keep
right on going.
Legacy systems
Systems developed in the past. They last far beyond any
conceivable human belief. The first
case study I wrote at the Harvard Business School in January of
1962 was on how to
balance a line of punch card equipment. The core issue in that
case was the quality control
issue posed by dangling chads. Three years ago, if you told me
there was any part of that
part of my life that was still relevant, I'd have asked what kind
of illegal substance you were
puffing.
Last November, I was meeting with the head of the Elections
Commission in St. Louis,
Missouri. We were chatting over a cup of coffee, and I said,
“How's your conversion problem
coming on punch card ballots?” He said, “What conversion?
We've got no money for that.
Ninety percent of the ballots in 2000 were punch card in the
state of Missouri, and they're

going to be 90 percent in 2004.” So when you tune in on
election eve, 2004, and you're
wondering where the next dangling chad problem is, you've
gotten a clue today that those
old legacy system run on in the heart of the Midwest.
You're saying, “That's what I'd expect from the public sector.
We from the private sector,
we're better.” Down at the Aetna Insurance Company last
November, how much Cobol code
do you think runs Aetna that was written prior to 1970? Code
thirty-three years old or older.
One hundred million lines of Cobol or earlier languages,
running along like Old Man River.
Nobody knows how or why it runs. Legacy systems. They have
been a problem throughout
my whole career, and I think a lot of these systems will make it
well into my retirement,
which is not imminent.
Efficiency, capacity, reliability, and security
Caregroup
Efficiency, capacity, reliability, and security have always been
dominant issues, and they are
front and center issues as we stand here in early June 2003. The
case that I taught that
made my students' hair stand up more than anything else this
last semester was a company
called Caregroup. Caregroup is the second largest group of
hospitals in Boston. One-third of
all faculty members of Harvard Medical School are part of
Caregroup: Beth Israel Deaconess

F. Warren McFarlan
Medical Center, Mount Auburn Hospital, and so forth. They are
the most sophisticated IT
medical institution east of the Mississippi River.
November 15. As a result of an unbeknownst-to-them hidden
interaction of pieces of Cisco
software, the entire hospital network went down for seventy-two
hours. Nothing, and I
mean nothing, happened for seventy-two hours. The physician
expert system, which when a
doctor prescribes a drug instantly sees what other drugs you're
taking and makes sure that
there are no lethal interactions, was gone. The emergency room
entry system didn’t work.
This case study is one of the most unusual ones I've written.
The opening sentence on page
one says, “November 21, 2002, John Halamka, standing in front
of the Board of Trustees at
Caregroup, said, ‘The good news is nobody died.’” This system
made the front page of CIO
magazine, the lead story February 15. As a CIO in a nonprofit
healing industry, John wanted
people to know so that others could learn and it would not
happen to them.
Eight hours after the system went down, a 747 from San Jose
airport took off with two and

a half tons of Cisco equipment in it, and twenty Cisco people
came. Over the three days,
they built the thing from top to bottom. That kind of operational
vulnerability, backup, and
security, these issues have always been there.
In l969, there were a dozen companies in my case studies that
went bankrupt because they
lost control of the back office. On Wall Street today, we have
the same operational
dependency. We worry a great deal about whether it is up all the
time. Is there adequate
capacity? Is there too much capacity?
Union Chimique Belge
For the closing case in my course this spring, the students spent
two days studying a
company called Union Chimique Belge, a 3 billion euro
company, UCB in Brussels. Total IT
management case. I interviewed the head of computer
operations. They had, of course,
outsourced their old mainframes to Hewlett Packard in
downtown Brussels, but there was
this huge, great big computer room. I was looking at it and in it
were 350 servers. So it was
just as full of blinking lights as it was twenty years ago. Three
hundred and fifty servers. I
turned to the young woman heading it and I asked her, “What
percentage capacity of these
servers are being used?” She said, “I have no idea. Why is that
important?” I said, “Based
on industry expertise, general knowledge, I bet you've got 300
too many servers in here.”
She said, “It couldn't be true.” I wrote a very hostile letter
following my review, and the
actual number you really needed was fifty-five servers, so I was

wrong by five.
We used to have controls over capacity. We had things called
hardware and software
monitors, and things of that nature. In the world of server farms
and so forth, fanned by the
server salesmen, they convinced us that they weren’t important.
But as things are being
used an average of 2 1/2 percent of the time, there may be some
money to be saved on the
table.
The strategic grid
This schematic I'm going to talk you through has been the heart
of what I've been worrying
about for the last twenty years. It is as important in 2003 as
when I first invented it back in
1980, while flying back from the West Coast. I was right over
Denver at 35,000 feet. I had
a glass of a stimulant in hand and was wondering why it is that
IT seemed to be more of a
concern to some management teams than to others. I drew out
on a napkin a version of
this grid that somehow summarized what I was seeing.
F. Warren McFarlan

That actually has turned out to be very helpful today. There are
two aspects of this
technology that deeply influence how you worry about it,
manage it, and control it. The
vertical axis is what I call the strategic dependence on existing
operating systems. How
important is it that your networks run 99.999999 percent of the
time with sub-second
reliability? For some people, like Caregroup, that is the bare
minimum. We need that
absolute, utter reliability.
Pfizer. How long does it take from the time you make an
invention until you get the product
to the marketplace? Eight to ten years. So we have a four-hour
breakdown tonight of the
networking service. In the big picture, how big a deal is that?
No big deal at all. People,
because they can't get on their machines, might actually have to
think. There could be an
intellectual brain flow by no longer data diddling.
In general, we've been climbing and climbing and climbing up
the vertical axis. In the world
of the Internet, there's much more need to run operationally all
the time. With that comes
backup, with that comes grid computing, better security, things
of that nature, as we climb
up there.
The horizontal axis: the strategic impact of the applications
development portfolio. How
important are the new software services in terms of what the
company has to do to survive?
Let's just take a very practical example: Pfizer. How important
do you think information

technology is to research? They spend 12 percent of their
research on IT. Twelve percent. It
is the core with which they differentiate and innovate. You give
me more cycles, you give
me faster bandwidth, and I can build more complex models. I
can handle vastly larger
volumes of data in a meaningful way and tease out important
kinds of things.
For last spring's AMP, I taught them ten classes on IT, and after
that I then asked them,
“Where is your company on this grid?” Forty-five percent of the
class said we're up here in
the upper right. We need virtually bulletproof reliability, and
our development is absolutely
critical, in terms of either being able to differentiate or to catch
up and stay in the game.
Again, that number is not 5 percent, and it's not 95 percent.
This stuff is fundamentally
more important at particular points in time to some
organizations than others.
Running down here in the lower left it’s 15 percent.
Development is nice; it's useful. If you
don't get to it for a year or two, it's not the end of the world. We
compete on other bases,
and if the network's going to a state of technical repose, again,
it is irritating but it is not
the end of the world. And on the diagonals, you have 20 percent
up here on the upper left.
Terribly important that it runs accurately, but not seen as a
major source of innovation.
This way of thinking has been around for twenty years. The
names of the applications
change as we move forward, as the new technology allows us to

do different things. In
general, we're climbing, climbing up on the vertical axis. But
understanding where you are
in this is absolutely critical.
Leadership
Finally, there has always been a need for leadership. Only the
name has changed. The DP
Manager became the VP of MIS, became the chief information
officer, became the chief
technology officer, and God knows what the next one will be.
You can do this in a complex
way. I said Pfizer has a $1.4 billion budget. Do you think
anybody's responsible for it? Nope.
My case is called “Pfizer's IT (The Virtual CIO).” It is run by a
committee of eight people.
But Pfizer has committees in many parts of their operation. And
like George Orwell, there
are many members of the committee and some are more equal
than others. And it works.
F. Warren McFarlan
The way you make it happen can be more complicated than you
think. But the need for
direction and leadership, these are the themes that run out of the
past.

Applications Development Portfolio
And finally, you have a portfolio of work. This thinking about
the IT portfolio has been
floating around since 1972. In the fall of 1972, I was up for
promotion. In about five weeks,
I was either going to be cut from the squad or be around to
inflict myself on you for the
next thirty years. I got a phone call from a senior associate dean
and the committee
wondering, “What have you been doing in your research for the
last nine months? Would
you on the weekend whip up a nice little report with your
current research findings?” I was
bitter. I came home and I told my wife, “I spent ten years at this
place, and it all comes
down to one lousy weekend.”
My wife, however, is a rather warm, friendly, practical person.
As she listened Friday night,
Saturday morning, she said, “Warren, I'm going to take the kids
off. We're going to go
shopping and see a movie. Here are a couple of pads of paper.
Why don't you see what you
can make out of it?” With the fear of hanging concentrating my
mind, about one o'clock I
conceived the notions of company-relative technology,
structuredness, and company-
relative size, a language system for looking at the risk profile,
and the contingency
management of a portfolio that, thirty years later, is still a very
important part of life.
Those are all things that have been around for a long period of
time.
WHAT HAS CHANGED?

Open standards and global interconnectivity
First, open standards. For those of you who graduated before
1995, we didn't bother you
much about the research project going on in the government,
although it had been going
there since 1969, starting with ARPA, which was in fact the
predecessor to today's Internet.
With that, the world changed. For those of you I had in 1994
and earlier, we talked about
competitive systems. We talked about SABRE. We talked about
American Hospital Supply.
We talked about Otis Elevator, Frito Lay, but they were all
closed, proprietary systems. If
American wanted to control a travel agency, it was an American
terminal in that travel
agency. With the open systems, suddenly, with that protocol,
you were able to interrelate
anywhere with anyone.
The simplest way to describe it is with the most useful
application Harvard Business School
has developed for me in the last year. It's called WebMail. Up
until a year ago, for the last
four years, anytime I went on a trip I had to carry the bloody
laptop with me, and since
September 11, worry about getting it through security and all
that kind of mess. Just
painful. The last trip I made—Hong Kong, Shanghai,
Johannesburg, and Beijing—was to
thirteen different places. Each time, either in the airport lounge
or in a hotel business
center—in one case a Harvard Business School office in Hong
Kong—I just dialed on the
Internet, typed in http://webmail.hbs.edu. On the screen
appeared the picture of Baker

Library with a little tagline for me to put in fmcfarlan.
Underneath it, the tagline for me to
put in my password. Hit the send button and two seconds later
the last weeks of
unanswered e-mail messages were in front of me. Simply
answer them, hit the send button,
and the response went out. If I didn't care about it anymore, I
simply hit delete. And it went
right around the world. There was no way that could have been
done in the world before
1995. It changed. It changed absolutely everything as we came
to this massive
interconnectivity. Changing completely the way companies
operate.
F. Warren McFarlan
The opening case that I used for my last AMP, and for my
MBA, was a company called Li &
Fung. Connie would know them, but not many. Li & Fung is a
publicly traded, Hong Kong-
based, family-founded company, 100 years old, $5.5 billion in
sales this year, with 5,400
employees. Now, Hong Kong—when you think of the centers of
global technical excellence,
does Hong Kong make your list? Hell, no. Great place to get
suits. Wonderful tours of the

harbor. Trading. Money moving back and forth.
Fung is Hong Kong based and they call themselves today a
sourcing company, a trading
company, where 69 percent of their sales are in the United
States. Their customers are the
300 largest retailers in the United States. They have a network
of more than 4,000
factories, scattered across China, India, Southeast Asia, North
Africa, and the Caribbean.
Sixty-three offices in thirty-seven countries. Three-quarters of
their stuff in textile, soft
goods, and the rest of it in hard goods.
In 1995, if you had a quality control problem in a factory in
Bangladesh, and you needed
headquarters' opinion on it, the best you could do was to put
some swatches of the
offending fabric in a DHL package and send it on to Hong
Kong. Forty-eight hours later, it
would be there. You could then look at it, have a telephone
conversation, and figure out
what to do.
By 1997, they had a completely browser-enabled Intranet that
tied all sixty-three offices
together around the globe. If there was a quality problem in
Bangladesh, they simply took
ten pictures of the fabric with a digital camera, put them on the
Internet, and fifteen
seconds later the pictures were in Hong Kong and you were able
to have a discussion. A
Hong Kong-based company doing this in 1997, a year and a half
after Netscape got started.
This is going on at world-class time schedules. That's my point.
We think that in the United

States, because we invented these major companies—IBM,
Cisco, HP, Oracle, Microsoft,
Sun, and so forth—we are also the leading experts in the
applications of this technology.
That is wrong. This stuff is going on almost simultaneously
right around the globe.
William and Victor didn't waste any time trying to renovate
their IT department. They
simply went to a local software vendor, outsourced the
development of this stuff, and bang,
it was up and running. By 2000, it was a complete extranet to
their major customers. If the
offending fabric was going onto goods for The Limited in
Columbus, you simply hit the send
button, on went the ten pictures to Columbus, and you could
have a three-way discussion—
time zones permitting—sometime in the next five minutes
between Bangladesh, Hong Kong,
and Columbus.
Extended enterprise in an open systems world
Open standards, global interconnectivity. At every step along
the way, what we talk about
today is the extended enterprise in an open systems world.
Those ominous initials—BPO.
business process outsourcing. The best case we have on that is
Nortel. I knew what a
company was in 1978. I knew what belonged inside and what
belonged outside. Accounting
departments are part of a company. It's been that way forever.
What did Nortel do? They
outsourced the entire thing to PricewaterhouseCoopers. They
said they can do it better, the
Coopers part of Price Waterhouse. They outsourced the entire
back office of the HR

department. They sent their data center, 2,300 people, to CSC.
As in this networked
society, they went back and took pieces of activity, peeled them
off, and pushed them in
other directions.
All over the landscape, we see this stuff going on, creating
efficiencies. It flows on and on.
F. Warren McFarlan
HEB and P&G
My MBA students worry a great deal about the six cases I’ve
written, including last fall, on
HEB. HEB, the number ten grocery chain in the United States,
standing for H. E. Butt, a
privately held grocery company in San Antonio, Texas. What is
of interest in this? For my
MBAs, I started by asking them, “Grocery, is this a high-tech
industry or a low-tech?” They
said, “Warren, give us a hard question. This is as low tech as it
comes.” They had visions of
long checkout counters, kids yelling, dirt, everything floating
around on Saturday afternoon.
I'm going to take you on a quick, bing-bang trip through this. In

1989 who's their number
one competitor? Wal-Mart. Bentonville, Arkansas. Wal-Mart—
those of you who read the
recent Fortune magazine article on them—America's largest
company—will recall that in the
heart of the article they described themselves in an interesting
way. “We are a technology
company. We are a technology company that happens to be in
the distribution business.”
On November 1, 1989, they launched a new partnership with
Procter & Gamble. The day
Charles Butt, seventy-sixth AMP heard about that, he saw the
hour of the death of HEB. He
saw that it's possible that Wal-Mart could get cost efficiencies
that they had not been able to
get before they could price predatorily, and they'd be stuck.
Two days afterwards, HEB in
Cincinnati struck a deal with Procter & Gamble to be the second
company doing what they
just agreed to do with Wal-Mart. The HEB system came up one
week after the Wal-Mart
system, so for all purposes, they were coterminous.
Very simply, in the grocery industry, every product has on it a
standard bar code, a unique
bar code for manufacturer and for product type. Designed in the
late 1960s, by the late
1980s it was just a normal part of life. HEB put a scanner on the
back of every one of their
warehouses and depots, and as a case of merchandise left the
depot to go to an HEB store,
that information was sent directly back to Procter & Gamble.
P&G got a huge amount of
data that they hadn't gotten before. P&G was told that we want
97 percent in-stock rate, in

the source, in the depots, and you decide when to ship what.
They picked a single price, the
lowest price the previous year for the whole year, and with that
the decision rights as to
when to ship what passed from HEB across to Procter &
Gamble.
It was an enormous success. For P&G, it meant they were
suddenly sending nothing but full
truckloads to HEB. For HEB, they got rid of a department of
people and drove their costs
down. This thing unfolded between 1990 and 1994. By 1994,
they had sixty-two of their
suppliers running this. They had gone from 11.4 inventory turns
per year to 38.6. The
warehouses were three-quarters empty, except that because
company had doubled in the
meantime, they were only half empty.
If Wal-Mart had had that cost edge, minus that inventory and so
forth, they could have
absolutely eaten them alive. By 1995, you've got that in place.
This is built on shipments
from depots to stores. What does P&G really want to know?
Who's buying? What's
happening at the store checkout counter? And what do you have
at every checkout counter?
Scanners. Between 1995 and 1997, live scanner data was picked
up, packaged, and sent to
Procter & Gamble.
If you can tell Procter & Gamble when their stuff is being sold,
what antisocial concept do
you come up with? We used to order from you. We'd receive the
goods. We'd pay you. We'd
put the stuff on the shelves. People would pay us. That was the

old model. The new model
is that we're going to give you the privilege of delivering your
products onto our shelves,
and when they're sold, once a week we'll send you cash.
Inventory goes negative. Three
and a half days, that one even got Charles smiling. All good
news. More and more efficient.
F. Warren McFarlan
And then October 1, 1999. George Shaheen, Managing Partner
of Anderson Consulting, now
Accenture, earning $4.5 million, resigns, becomes CEO of a
small Internet home grocery
store. The Wall Street Journal's Charles Reese says, “What the
hell's going on here?” On
October 8 Goldman Sachs raises $1.2 billion for George
Shaheen. One point two billion to
take this on-line Internet concept and drive it right across the
United States, so people don't
have to come to grocery stores anymore. It'll be delivered
directly to you. What do you
think Charles thought about that?
It twitched the family’s third-generation CEO. It could die on
his watch. HEB really manages
their money tightly. I mean, they are cheap. They know where a

dime goes. They spent $20
million to develop heb.com, to start December 14, 2000, to be
able to beat this thing. In
case a quarter of the grocery shoppers went that way, they
wouldn't be wiped out. They
watched, and they watched. While they spent, they watched.
And George Shaheen and his company, called Webvan, ran
through $600 million and $1.2
billion and nothing was making any money. He ran through
another $300 million. Nobody
was making any money. I suddenly stopped getting the Goldman
Sachs investors reports
about what a great investment this was. It was a core holding on
January 1. By July 1,
they'd never heard of it. One week before heb.com went live,
they pulled it. They said we
don't need it; the world has changed. Not 25 percent of the
grocery shoppers are going this
way right now, but .25 percent of the grocery shoppers. Some
day, but not now.
Extranet—Cisco
In terms of reaching outside, another pair of cases I taught my
MBA students was on Cisco.
Cisco, who went from 1993 sales of $500 million to $20 billion
in 2002, who went from zero
business-to-business sales across the Internet in 1996 to $18
billion in 2002—65 percent of
whose products they never touched, as it's an Internet-
facilitated shipment from the
supplier directly to the Cisco customer. Eighty-two percent of
the customer service is done
across the Internet. A company with 18 million internal Web
pages.

That's the first case. The second case is one that I wrote last
year. Cisco China. Cisco China
is a $1 billion operation of Cisco. How do you think Cisco
China runs? Just exactly like Cisco
U.S. My Cisco China case has four exhibits at the end, all of
them in Mandarin Chinese, all of
them in my newest book, Seizing the Strategic IT Advantage in
China, which you can't read.
Connie can read it, but none of the rest of you can read it. One
of my Chinese students
looked at me and said, “Warren, I don't understand this.” She's
got the Chinese case in one
hand, and the English case in the other. It's the same words. It's
exactly the same. It's just
in Mandarin.
This stuff is running on a global basis. The applications are
taking place in a global world.
For Cisco, the most important part of that case comes at the
end, when we talk about the IT
department being an outward-facing department, not inward.
From the time I entered the
field, IT people thought of the customers as the inside part of
the firm completely until
1980, and mostly until 1996. Customers meant the users inside.
Today it is an outward-
facing activity.
That's what the Cisco story is all about. Their CIO spends 25
percent of his time dealing
with real cash-paying customers, out in the field. Cisco is a
node, a node in an
interconnected global network.
Legacy systems: Cisco
Underlying this, however, are the problems of the past. What is

the Cisco problem today? I
attended a speech last October by their new CIO. Everything I
showed you in the last two
F. Warren McFarlan
slides he confirmed. But he then went on to tell the group, “Our
number one problem is the
batch-oriented legacy systems of the past. Just because
something comes up on a screen
doesn't mean it's accurate up to the minute. If you update your
inventory file once a day,
by 10:00 at night it can be quite out of balance with what the
reality is of your
commitments.” And they're going back in a very hard, painful
way, having to redo that kind
of stuff.
Clicks and bricks
The first case I teach is about Charles Schwab, the most
electronically enabled of our
discount brokers, with 300 branches around the country. Now,
sitting in my home outside
Boston in these days of open systems, do you think I could open
an account at Schwab
from home? Absolutely. Dial in schwab.com, bing, bing, bing.
Do you think, if I want, I can
initiate from my PC at home an electronic transfer of a 401K

from Fleet Bank to Schwab?
Sure. Would I do it? Hell no. I need what I call a dog ceremony,
lots of sniffing around down
in a branch office. Do these people feel like my kind of people?
Is this mafia north? Is this
some form of a Chinese Tong going around? And if I like it,
then I'll do business. To this
day, 70 percent of all new accounts at Schwab are opened face-
to-face by human beings
dealing with human beings in an office. But 86 percent of their
trades are done across the
Internet. Clicks and bricks, drawing the line in different ways.
Until three years ago, the lousiest Saturday of the year was the
first Saturday in May. My
wife would flip over the calendar and say “A-ha Warren—time
for the annual shopping of
suits at the Andover Shop.” That is eighteen holes of golf that
will never be played. We walk
up to the Andover Shop in Harvard Square. I see two fabrics in
the window. I say, “If we
can conclude this in fifteen minutes, we may yet get the back
nine in before sundown.” Hell
no, thirty-four more fabrics are brought up, including two from
the basement, before, as a
matter of sheer obstinacy, I insist on the original two.
At that moment, Charlie, our friend the tailor, would arrive,
greet my wife warmly by first
name, say nothing to me, but simply slap a tape measure on my
waist, look at a card in his
hand, and say, “A-ha, a prosperous year indeed, I see.” My wife
would say, “I told you so.”
Non-vintage moment, as far as I was concerned.
Three years ago, first of March, midnight at our house,

everybody asleep, I dial onto the
Internet to zenia.com, the online suit manufacturer. Click on
into the fabric section. Look for
fabrics almost identical to the ones I have. Some things I'm
adventurous about, but not
that. Hang the jacket on a hanger on the filing cabinet. Hunt
through the styling patterns to
find one that looks identical to the one I have. Then some
requests for quantitative data. I
gave them the real numbers, not the ones I merchandise around
the house. Then there was
a small credit card transaction. April 28, I come home and my
wife says, “There's this big
Federal Express package. What's this all about?” I said, “Good
news, Karen, turn over the
calendar: we have a 9:00 a.m. tee time on Saturday.”
Different people have different value-added propositions, and
resistance to change goes on
in different ways.
Literate users
Twenty years ago, our users included in the AMP were illiterate
in IT, and you knew it.
Today, you're still illiterate, but you don't know it. Fresh from
combat experience with
desktop PCs, shopping on the Internet, word processing, e-mail,
you're practitioners of the
information age. But you don't know squat about what it takes
to design a robust system
that will run twenty-four hours, seven days a week, fifty-two
weeks a year, handling all the
odd-ball requests. There’s a wonderful case I taught my MBA
students, a large project

Copyright © 2003 - 10 -
F. Warren McFarlan
management case. About forty minutes into the class I turned to
one of my students and
said, “Valerie, how much do you think this is going to cost?”
He said, “This is a complicated
system. I don't think I can get it done over the weekend on my
Macintosh. This feels more
like a two- to three-week job, month at the outside.” The actual
cost to the company: $16.8
million. Because you use it, doesn't mean you understand
intuitively what it costs, what it
takes to build something that runs reliably in a bulletproof,
error-proof fashion, every step
along the way.
Planning: IT portfolio alignment
In 1973, I talked about the applications portfolio. I talked about
the risk of it. I talked about
how different projects require different kinds of management
processes. At the other end of
my career, this new book is about how to do a better job of
exercising and aligning your
portfolio of IT against the real strategic needs of the company.
The kinds of things we worry
about here include chunking.
Chunking
Some of you come from organizations where there's great

stability. Priorities don't change,
and you can plan a long way into the future. Those are places
where you can do two-,
three-, and four-year projects. In other organizations there's
huge volatility in budgets on a
month-to-month and quarter-to-quarter basis. You start a three-
year project, and a third of
the way down priorities change—like the case I was working on
this morning—and you have
to write off everything spent, with no benefits. If you come
from a volatile environment, you
design it in little pieces so that if there's decommitment, you
have something in place.
Cultural overload
Twenty individually justified good projects do not make a good
portfolio. If eight of those
projects all turn the same functional area inside out, the
additive impact of it is simply
undoable and you've got to go back and look at the portfolio and
see where and how the
totality is, in fact, being impacted. And that may mean half of
what you want to do you
can't do, or you've got to restructure it.
Common threads
The best way to describe this is with our friends at Pfizer. In the
research department, there
are twenty different proprietary databases that people can get
into. To get into the
proprietary database you have to have a unique password. That
may mean that the typical
person might have fifteen passwords. I'm only a professor. I'm
not a line manager like you.
You would have no trouble keeping track of fifteen passwords.
It is beyond my ability. So

how do you think I solve it? I have one password for the home
security system, the
vacation home security system, the bank account, the Fleet
Asset Management account, the
password to get into the Harvard e-mail system, etc., etc. Pfizer
discovered the same thing.
So what they do is you have one master password, you sign up,
and they authorize you as
to which systems you're allowed to get into or not get into, and
every month they change
that password. So you remember one. Going back and doing it
smarter.
The alignment of long-term and short-term needs
If everything in your company hinges on meeting earnings for
the next two quarters, and 90
percent of your IT portfolio is strategic projects whose benefits
are not going to be in place
for three to four years, there's something wrong, and you've got
to go back and change it
and put it back into place. This is what we're worrying about
here, better ways of thinking
about putting the plans together.
Copyright © 2003 - 11 -
F. Warren McFarlan

First-mover, fast-follower
Understand who you are. You may choose like Schwab did in
their industry to be first, if
you're large with many other assets like brand and financial
pockets. Or you can wait like
Merrill Lynch did to see which way the wind moved, and then
be able to move with force
and power.
But again I come back to why “IT Doesn't Matter,” is wrong. In
this world, the standard has
gone way up. I wrote a pair of articles in the mid-1980s in the
Harvard Business Review
that turned out to be actually reasonably influential, talking
about IT as a competitive
weapon. One of my colleagues at the University of Pennsylvania
a year and a half later
came back and wrote a very insightful article criticizing my
articles. He pointed out that
most of my examples were first-movers in the industry. For
those who came behind it was a
strategic necessity for them to say either I'm going to stay in the
industry and do it, or I'm
not. Different people can play this out in different ways. If
you’re not in the game, however,
you may simply die. And it's in this world that all of these
complicated infrastructure issues
really matter.
Outsourcing
Outsourcing is here. It's a very, very complicated kind of thing.
In Boston, for example,
John Hancock, the oldest IT shop in the city, outsourced two
weeks ago to IBM. Shut down
an operation built in 1958, and off it goes into the IBM grid.

And the software development
goes on in a different way, as we continue to do an industrial
restructuring, always with a
massively higher uptime.
TRANSFORMING TECHNOLOGIES
What group of colleagues on our faculty do I find most useful?
They are the group that
stands the furthest away from me intellectually. They are our
business historians who, in
studying other past societally transforming technologies, have
come upon some very
interesting insights. The best of all the books is not one I've
written, it's this one by Al
Chandler, now in his mid-eighties, our preeminent business
historian: A Nation Transformed
by Information. How Information has Shaped the United States
from Colonial Times to the
Present.
Al starts the information war in 1700. What was the problem the
United States had in 1700?
A deeply religious nation. Our ministers were frustrated. They
only got twelve hours of
airtime on Sunday. That was not enough to motivate the
faithful. They needed to have
assignments for them the other six days of the week. The only
way they could do that was a
massive national program of literacy. So literacy became a
dominant U.S. priority. By 1750,
we were the most literate nation in the world by twenty
percentage points. Now, with this
newfound literacy, do you think we spent our evenings at the
fireside reading the Bible? Few

outliers did. But the hotheads in Savannah said, “We don't like
the English.” They created a
pamphlet-touring industry. The sent pamphlets up to the
hotheads in Boston and said, “See
what you can do.” And we got excited, and we dumped tea in
the water, and wrote our
pamphlets and sent them back down to Savannah. And in no
time at all, with the law of
unintended consequences, literacy allowed a complete
communication across the thirteen
colonies, and the English went back home in 1783.
When they left us in 1783, there were sixty-three Royal Post
Offices in the United States. By
1830, there were 15,000. The post office and the postal system
were the Internet of the
first three decades of the nineteenth century. And then came the
first of the great
transforming technologies: the first line of rail was laid in 1831.
Our network was built out
Copyright © 2003 - 12 -
F. Warren McFarlan
Copyright © 2003 - 13 -
by 1910. Most of these technologies take four generations,
eighty years to play out. And

when was the biggest impact of the railroad? It was after the
Civil War. Almost always it is
in the second forty years. The first forty years you apply the
technology to the world as you
know it, and then you began rejuggling, transforming, and
reshaping. And you can go right
on with that with automobiles, electricity, telecommunication,
and aerospace.
IT: most people believe that the computer era began about 1955.
That was the year IBM
came out with the 701, 2, and 3, and Univac came out with the
Univac 1. We're now some
forty-seven years into this, and it is ironic that forty years into
it, in 1995, there was this
deep convulsive shock of the Internet in which how we applied
it was turned inside out. You
go back to my cost chart, and I look at my younger colleagues
with some degree of envy.
Because it is clear that my career has been spent in the least
interesting part of the
information age. My generation will be known for having
created the Y2K problem, and
happily the resolution thereof.
Just when it's getting really exciting, maybe another decade,
and I'm out of the game. This
thing will run out of steam somewhere in 2025, 2035. But that's
why I don't like the article,
“IT Doesn't Matter.” It is our ability to wrap our hands around
much larger databases in
much more sophisticated ways, in faster transmission networks,
that allows us to continue
to change, not forever, but for us in this room, for most of the
rest of our professional
lifetimes.

Let me simply say that it is an absolute pleasure. I will tell all
of you that you haven't
changed a single bit in terms of the alertness when I had you as
students. I will make no
comments, however, about hair color or amount thereof, on the
assumption you won't
make a similar comment about me. It's great to have you back.
Lecture TextF. Warren McFarlanThe New Strategic
Weapon:Information Technology
This week we move to another discussion. The topic is
ostensibly information technology as a strategic influencer and
imperative, but, on another level, the lesson can and should be
used for any disruptor to the strategy and business model to any
one company or an entire industry. While the articles listed
have to do with “tech” (laptops vs tablets, different handheld
devices, IT itself), consider what are the real disruptors here. Is
it really just the things (technology) or is it the ideas of what
the technology brings (different cultures, ideas, stakeholders,
purposes to business)? Are we in a paradigm shift away from
the “corporate” entity and enterprise to “collective
individuality”? There is an old line that goes “No man is an
island”. But, given the distributed nature of information and the
underlying technology that makes that distributed information
possible, is that statement still true? Should it be? Is it a “good
thing” that these technologies are proliferating and changing
things?
The discussion can and should look at for-profit, non-profit, and
governmental agencies (top include the military). But, also take
a step back and look at the underlying cultural changes that
allow the technology to proliferate. Is the thesis of Milton
Friedman, that the corporation exists solely for the benefit of
the shareholder, still valid? Consider what you have been
reading and discussing for the last 6 weeks. Can Toyota exist
and thrive in an individualistic society? Could McDonald’s?

How can they and any other corporation adapt to the changes
that are occurring?
Or, as an alternate thesis, is “collective individualism” where
the individual has the ability to act on behalf of themselves
within a collective corporate body (as an employee or owner,
shareholder, or non-owner stakeholder) the “new corporate
norm”? How can any corporate entity adopt and coopt this new
norm into their respective enterprise strategies? Should they?
What are the risks if they choose to ignore this new corporate
norm? Or if they adopt quicker than the society, or their
targeted audience, as a whole?
I realize there is not a lot of guidance in the syllabus, but, part
of that is to give you the greatest leeway in developing a
dialogue. Use your own experiences. Where do you see your
own companies headed with technology, and especially with IT
in the workplace? Do you think your company or organization is
“doing it right”? What would you like to see done differently?
Why?
Also consider that IT is expensive, both from an adoption
perspective and implementation perspective? How do you pay
for IT? Is the cost worth the benefit? Or the risk of adoption or
non-adoption? Will it provide a strategic advantage? Or is it
just a cost of doing business?
As you can see, from a few simple little lines and some
suggested (okay, required) readings, the strategic implications
are vast, and possibly overwhelming. Start with your own
experience and company. Then look at your industry. Then
discuss with your colleagues and look at their industries. And
then look at industries you are not familiar with.
Tablet’s: The New Laptop or PC?
Website:
http://online.wsj.com/news/article_email/SB1000142405270230
3491404579390981100620274-
lMyQjAxMTA0MDEwOTExNDkyWj#printMode
Apple Vs Samsung Patent Lawsuit

Samsung smartphone Galaxy J SC-02F, left, and Apple's iPhone
5s are seen in Tokyo. European Pressphoto Agency
A federal judge on Wednesday denied a request
from Apple Inc. AAPL +1.23% to barSamsung
Electronics Co. 005930.SE +1.87% from selling smartphones
and tablets in the U.S. that infringe on Apple patents.
Apple had sought a permanent injunction against certain
Samsung products after a judge and jury found in May that the
Korean firm had infringed on three of its patents in a high-
profile intellectual property dispute. The jury awarded Apple
nearly $120 million in damages—a fraction of the $2.2 billion
that it was seeking.
On Wednesday, U.S. District Judge Lucy Koh in San Jose,
Calif., said Apple hadn't "satisfied its burden of demonstrating
irreparable harm and linking that harm to Samsung's
exploitation of any of Apple's three infringed patents." An
Apple spokeswoman declined to comment on the ruling.
"We welcome today's ruling," a Samsung spokesman said. "We
remain committed to providing American consumers with a
wide choice of innovative products."
The ruling isn't a surprise because Apple has struggled to win
injunctions against Samsung during its series of high-profile
patent disputes between the companies.
Apple has won two verdicts from federal juries in California
that Samsung had infringed its patents on the iPhone and iPad.
The Korean company has been ordered to pay damages totaling
more than $1 billion from the two trials. Samsung has said it
would appeal both decisions.
Apple has yet to collect a dime from either case and it hasn't
gotten what it really wanted: a far-reaching injunction on sales
of certain Samsung phones and tablets. Apple recently dropped
its appeal of a ruling denying it an injunction against nearly two
dozen Samsung products from the first trial, in 2013.
The inability to score an injunction has eliminated one of the
main ways for Apple to inflict pain on Samsung. The damages,

while sizable, won't significantly hurt Samsung, which holds
about $60 billion in cash.
The acrimonious feud between the two companies may be
coming to a close. Earlier this month, the two sides agreed to
dismiss all patent disputes between them in courts outside the
U.S.

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