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"Organizational IQ: How Smart Companies Use Technology For World-Class Performance"

An Interview With Haim Mendelson, The General Atlantic Partners Professor of Electronic Business and Commerce Codirector, Center for Electronic Business and Commerce Stanford Business School

Synopsis: Now, more than ever, making smart decisions-fast-is crucial for organizations to survive and thrive. Even being one or two percent more effective in decision-making and implementation is enough to set an organization on track to pull ahead of its competitors. Organizational IQ analyzes an organization's ability to use information to make smart, fast decisions. More than a theory, Organizational IQ and its five key dimensions are based on comprehensive academic research and on the results of a landmark survey of 164 organizations worldwide, which were corroborated by multiple case studies.

1. What is Organizational IQ in a nutshell?

When you start to think about an organization as if it were an information processing system-such as a computer system-then you begin to realize that there are smart (or "high IQ") ways of processing information and not-so-smart (or "low IQ") ways of processing information.

To break it down into greater detail, there are five dimensions that define Organizational IQ:
1. External Information Awareness-taking information from the outside environment and truly using that information in decision-making.
2. Effective Decision Architecture-ensuring that the people with the best information and perspective make decisions at the right level.
3. Internal Knowledge Dissemination-making information available whenever and wherever it's needed-both horizontally and vertically within the organization, across geographical boundaries and over time.
4. Organizational Focus-filtering information so that the most relevant information is used in decision-making, so that information overload is avoided and the business structures and processes are simplified.
5. Information Age Business Network-understanding that an organization does not exist in a vacuum, but needs to operate as part of a network with customers, suppliers and partners.
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2.

How did you identify the "high" and "low" IQ companies?

The concept and the five dimensions of Organizational IQ were tested using data from a landmark survey of 164 organizations from around the world that was conducted by a partnership between Stanford University, McKinsey & Company and the University of Augsburg. We measured the five dimensions along with measures of financial and operational performance and distinguished between smarter companies, that rated higher on doing those five dimensions well, and lower IQ companies, that rated poorly on the same dimensions. We shared the results of the survey with each of the participating companies.

Interestingly, there was a difference between the reactions of high- and low-IQ companies to our survey results. When companies that rated most poorly learned of their lower IQ results, their executives argued with the findings and defended their current business practices as "good enough." These companies were not as open to learning as the high-IQ companies.

But those companies with the highest overall ratings were most interested in how they could improve over what they were already doing, focusing on those few dimensions where they didn't reach top performance. They sought self-improvement and looked for ways to get better. And in today's competitive environment, even an improvement of one or two percent can make a real difference to an organization's long-term survival.
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3.

Your book aptly points out that Information Age principles, such as information awareness, decision architecture, and knowledge dissemination-are vital to a high Organizational IQ. Why, in your opinion, are these information principles now more vital than ever to companies? How can technology enhance or support the value of information within a company?

Everywhere we look, we see increased velocity in decision-making, in change, in just about any area we can think of. There are three reasons for this increased velocity: better and more widespread use of technology, increased competition, and greater interdependence among companies. Better and more widespread technology means that we can process and manage information much more effectively than ever before-which is critical because the amount of information we have to manage also continues to increase more and more rapidly. Increased competition makes it difficult for companies to differentiate themselves and demands faster, and more effective, information response. Increased interdependence increases the complexity of information management, raising the bar for all. Everyone-from customers to partners to suppliers-demands more and better information, and having access to it increases the interdependence organizations, and even economic regions, have on one another.

Information must flow not just within an organization, but also across larger networks that include the organization's partners, suppliers and customers. In fact, the ability to manage and use external information-that is, information from outside the strict boundaries of the organization-is more important now than it ever was before. As you can see, all three reasons feed into each other while adding to the increase in information velocity and diffusion.

What this all translates to is that small differences in an organization's ability to assimilate, manage and use information for smart decision making can translate into a large difference in performance. Now, just a one or two percent difference in the ability to manage information effectively for smart business decision making can mean the difference between survival and growth... or extinction.
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4. Because business conditions change now at a faster rate than ever before, your book points out that the speed and quality of both decision-making and decision-implementing cannot be compromised if a company is to have a high Organizational IQ. Why are speed and quality so critical?

Speed is driven externally-by customers, partners, and suppliers needing and demanding more and better information faster, not to speak of competitive pressures. But the quality of that information is driven internally in an organization. And quality information is the result of information architecture design decisions. It's critical to support an architecture and infrastructure that allow for the appropriate quality of information.

The challenge is to make fast and effective decisions. The smarter and faster those decisions are, the better. In small companies, it's easy to see the importance of fast decision-making, but it still applies to large companies. In large companies, it takes a longer time to see how Organizational IQ affects the success and growth of the company, but the effect is actually stronger.
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5. How can technology help a company develop a higher Organizational IQ by enabling smarter and faster decisions?

Technology enables capturing and sharing information-from within the organization, as well as from customers, partners and suppliers. Technology provides the "digital nervous system" that has to match what I call the organizational nervous system. Organizational IQ combines both. Thinking about it differently, an organization's IQ reflects both the explicit and implicit knowledge needed to support decision making at all levels.

Consider, for example, how organizations can use technology to track products as they move through the supply chain. Wireless tags enable us to know where each pallet is as it travels through the supply chain, giving us a degree of visibility that wasn't available before. We can use this information to dramatically cut down inventory and waste. We can even track individual units as they are taken off the shelf, giving companies an unprecedented ability to make decisions that are truly driven by demand. Altogether, such matching of demand and supply can reduce costs by anywhere from 10 to 40 percent. On the other hand, the volume and velocity of information generated by such a system require both technology and organizational readiness that will overwhelm quite a number of companies. Organizational IQ measures the ability of a company to take advantage of such innovations.

To truly take advantage of information, an organization must be able to reconfigure its business processes and operations to make better decisions based on the information gained and analyzed. The bottom line is that companies with high Organizational IQ will be able to drive and take advantage of such new technologies, whereas low-IQ companies won't be able to compete.
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6.

How important is embedding IT within corporate strategy for achieving high Organizational IQ?

The ability to manage information is a key differentiator today. Reaping the benefits requires an alignment of strategy, organization and technology. To achieve such alignment, both IT and business unit leaders must be involved in crafting and implementing the organization's information strategy.

It's also important to create an architecture that enables gathering information from customers and suppliers and all elements in the supply chain-not just internal information. A strategy for implementing such an architecture must be part of the overall corporate strategy in order for an organization to achieve a high Organizational IQ-and thus survive and thrive in today's business world.
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7. How do the executive programs that you direct help executives understand and apply the concepts of Organizational IQ within their own companies?

The Strategic Uses of Information Technology program is geared toward senior technology leaders together with leaders from the business side. The program reflects the "three-legged stool" perspective that we discussed-strategy, technology and organization must come together to create competitive advantage. Today, technology and business are really one and the same. In the program, we look at case studies of companies that have applied these principles-and some that didn't. We generalize the lessons from these companies so participants can come back and increase the IQ of their own organizations. One of the fascinating aspects of these case studies is how the lessons get richer as you apply them to a variety of seemingly unrelated industries. And, the program helps participants expand the spans of their own networks to include Stanford, the business leaders who speak at the programs, and most importantly-the other participants.
    Haim Mendelson, PhD, is the General Atlantic Partners Professor of Electronic Business and Commerce, and Management, at the Stanford Graduate School of Business and Codirector of Stanford Business School's Center for Electronic Business and Commerce. As a consultant to leading high-tech firms and financial institutions, Professor Mendelson is world-renowned for his expertise in the area of electronic business and commerce.
 
Additionally, Professor Mendelson co-directs Stanford's Strategic Uses of Information Technology program, which focuses on the use of new and established technologies to reshape organizations and enable new business strategies.
     


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