Sunday, August 4, 2013

Contemporary Perspectives on Strategy for the CIO!

In one of my previous blogs, I talked about the need for creating a discourse around capabilities. In other words, the need to move from the operational to the strategic focus with regards to IT. I also defined what capabilities are.

To understand the concept of capabilities better, it becomes quite relevant for the CIOs to understand the emerging perspectives around strategy.

Let me briefly explain how the strategy theories emerged over the years and the current developments in the area.

Strategy essentially deals with two important questions- what business should we be into? And how should we compete?

In the 60s and 70s, organizations’ endeavor to compete was primarily met by achieving economies of scale, thus creating entry barriers for others in terms of huge capital requirements to set a business and the resulting ability to compete on price. Large enterprises had an obvious advantage. They also used to be huge conglomerates, with very diversified business interests.  

In the 80s, this concept was taken further by giving additional perspectives on how to compete. Porter gave two generic strategies for competing – cost leadership (through economies of scale) and differentiation (by positioning oneself in a niche). Porter proposed that ‘positioning’ oneself in a specific niche, where competitive forces can be effectively reduced, provides the enterprise the power to charge a premium. This assumes that the customer has a need and different products’ positioning shall target the different aspects of the need (e.g. need of low cost or high quality or status enhancement etc.).

In the 90s many industries found the concept of positioning limiting, it grossly underscored the internal strengths of an enterprise. It further assumed that the competitive edge is solely depended on where one is positioning oneself (an external variable). Gary Hamel and C K Prahalad brought the focus internal by proposing the concept of core competencies and suggested that enterprises should identify what is their core competency and stick to that. This was also a major departure from the traditional diversified approach to doing business. Diversified businesses, many a time are present in unrelated businesses. These unrelated businesses usually had little to share with each other except the financial resources. 

Another important strategic perspective termed as resource based view (RBV) became popular at the same time. The resource based view proposed that it’s those resources, which are rare (others do not have them), valuable (to the customer), inimitable and immobile (they cannot be easily copied by the competitors). Resources are internal to an organization and can be physical, financial, social and human type. So, customer goodwill, employee skills etc. are type of resources.

The latest in the evolution is the Dynamic Capabilities perspective, which is more relevant to the high velocity organizations like IT, Telecom, Banking etc. The capability to create the resources which are rare, valuable, inimitable and immobile with speed and combine them in newer configurations is what gives the competitive edge and can be leveraged for business advantage.

The core competencies, the RBV and the Dynamic Capability perspective do not make the earlier positioning perspective irrelevant, but they extend it further by bringing the internal aspects of an organization. 

Information and communications technology has found an increasing relevance as this progression has evolved. While the cost leadership perspective clearly defines an operational side of IT, the positioning and the business capabilities required for the new strategic theories based upon internal strengths of an organization defines the strategic side of IT.  

How can IT create differentiation? One of the CIOs of a major auto components company shared with me that IT has helped them create a differential price mechanism for the buyer depending on the delivery time he desires (for faster delivery, they will charge a premium). The back end in that case needs to be completely integrated and in place, as some of these contracts attract penalty if the delivery is not made in time. Even there IT becomes a major driver. But can such differentiation be sustained for a long period of time is the real question?

The automational aspect of IT when leveraged to create the informational and transformation side of IT can further provide the organization create newer capabilities for the organization and at the speed the business environment demands.

So what should the CIOs do? CIOs should constantly explore..

How does and how can IT contribute to strategy? 

Does it merely provide efficiency benefits or does it do more than that?

How can IT support external positioning an organization is creating and defending?

Does IT help create differentiation? How does IT help sustain it?

Does IT support or create competencies, which can be core to the organization?

How is IT used in the organization, which gives it new capabilities, which can be leveraged for business advantage?

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