Online Extra: Q&A with UC Berkeley's Hal Varian

Information technology is highly flexible. Unlike railroad tracks, it can be easily repurposed

Hal Varian, dean of the School of Information Management & Systems at the University of California at Berkeley, has long argued that Internet businesses have to adhere to established economic rules, most notably in Information Rules, a book he co-authored with economist Carl Shapiro in 1998. Now, following the excesses of Internet investing, Varian's challenge is to convince companies not to go too far in the other direction by dismissing the benefits of the Net. Varian spoke recently with BusinessWeek's Heather Green. Here are edited excerpts of their conversation:

Q: What different leadership style or strategies are needed now?

A:

My advice to people is go back to the basics, look at how you're doing things, see how you can use this technology. The past few years were all about buying a lot and putting things in place because the competition was doing it. Now everyone is slowing down and the challenge is how can we extract value from this?

Take the example of electric motors. It shows how people historically always have to learn how to adapt old processes to new technology. When plants were water-powered, everyone hooked the belt [of their different machines] to the [main water-powered] shaft. They were organized in a straight line tied to the shaft. So, when the electric motors came along, they were still organized that way. But electric motors gave them more flexibility to redo their assembly lines and plants. They had to rethink where they put machines, how to take advantage of the new flexibility.

Q: What are the key CEO skills now?

A:

I think it comes down to getting the details right. In many cases, it's about following up to see if your grandiose project has hit its desired end. Is it something that's helping people getting their jobs done? A lot of people went out, got consultants, set up an Intranet site, and then they forgot about it. The issue is follow-through.

What's needed now is management that's very detail- and process-oriented. I also think that we have overdone alliances and acquisitions. I think people will say, we did too much of this. A lot of companies will be looking at their lines of business and asking: Where am I successful and where am I not? The secret to being successful is knowing when to shoot the ponies.

Q: How do you describe the tech cycle we're in now?

A:

In the 1880s, more miles of railroad track were laid than in any other decade. In the 1890s, more railroad companies were in bankruptcy than in any other decade of American history. It was a classic story: Overinvestment in railway tracks led to an excess supply that, in turn, led to all-out price wars.

History could repeat itself. But there's a big difference between investment in fixed capital, like railroad tracks, and flexible capital, like information technology. After you lay railroad tracks, the only thing you can do is send trains down them. But after you lay optical fiber, you can send lots of things down it: voice, data, music, video, transactions, and so forth.

There wouldn't have been an oversupply of railroad tracks in 1890 if they could have been magically changed into highways to support the nascent automobile industry. Information technology is highly flexible. Unlike railroad tracks, it can be easily repurposed. This flexibility means that "excess" investment in information technology, if indeed there is an excess, may not cause the same economic problems that we have seen in investment booms and busts of the past.

Q: How do you get people involved in making Net programs work?

A:

If I were in this situation, I would set up an incentive system for awarding employees. You have to have everyone in your business looking for ways to do improvements. The challenge comes in prioritizing and making it happen. It's hard to do. You look at revenue centers and most of these aren't that.

That's what the challenge is: looking at what could be. That's the issue of prioritization, the issue of improving communication skills, making things work more effectively, and keeping the process moving. Those are core management skills, and we should be able to do this better now than before.

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