Beyond Two-Speed IT – Part 2

Two-speed IT capabilities

Summary

Markets move at different speeds and in different directions, constantly reshaping the technology-related capabilities required by the business. In the second part, the difference between Customer Intimacy strategy and Operational Excellence strategy is used demonstrate that ‘differentiation’ is more than choosing Agile over Waterfall development.

The first part of this blog dedicated to market and business context is here.


 

Dell was founded in 1984 and was added to the Fortune 500 in 1992. Its key to success was building direct relationships with the customer via the internet. At the time, most competitors targeting consumers via analogue sales channels, such as brick and mortar shops. Selling directly to the customer also enabled Dell to build-to-order instead of the traditional build-to-stock model.

It kept waste to a minimum and allowed the customer to choose from a wide selection of configuration options. Dell’s pursued a customer intimacy strategy, contrary to the operational excellence strategy of its competitors (I). For the latter, price was the main differentiator while Dell targeted customer looking for choice and flexibility. Even though Dell changed its strategy around 2008, it is still a classic example of a customer intimacy focused business model.

Dell and its competitors all required a customer relationship management (CRM) solution, an enterprise resource planning (ERP) system and solution to manage the supply chain. At first sight, one might think that the choice between a customer intimacy strategy or operational excellence strategy only affects the customer-facing part of the company (e.g. Dell B2C, competitors B2B). Production, logistics and other downstream value chain activities remain shielded from the market.

This is not the case as Dell’s strategy translates into a build-to-order value chain, very different from build-to-stock. A build-to-order business model directly targeting B2C segments has to be far more agile and tightly integrated than a build-to-stock B2B business model. Walmart orders thousands of PC’s with a specific configuration, using an attractive price point as the primary differentiator.

The business model (necessitate and) shapes the IT business model

Also most law firms pursue a customer intimacy strategy, competing fiercely among each other to attract and retain customers. The accompanying high cost of customer acquisition results a drive to quickly increase the share-of-the-wallet (SOW). To do so, it is crucial adopt a strong customer-first mentality (Table 1). The specific wants, needs and journey of the customer is leading, the business processes and, therefore also the IT value propositions, follow. Here, the strategic context IT has to operate in is shaped by the drive of the business to offer a seamless extension of the customers’ business process or journey through domain knowledge, customization and flexibility.

From business strategy to IT positioning
Table 1: Translating business strategy into IT positioning (source: book Digital Manifesto).

The starting point for a company pursuing an operational excellence strategy is very different.

Cost leadership requires a standardized product portfolio enabled by a relatively uniform set of business processes and IT solutions. The compelling reason for customers to buy is not customization, but price. The strong focus on cost and economies-of-scale affects every decision the business and IT make.

Where the CIO employed by a law firm of hospital may opt for a best-of-breed sourcing strategy, the CIO of a telecom, budget airline or 3rd party logistics company will consider large scale outsourcing to leverage on the scale of IT service providers. Similarly, both CIO’s will make different choices regarding custom-build software versus commercial off-the-shelf (COTS) software, waterfall versus agile development, hard control versus soft control environment and so on.

In other words: the business context and strategy shape every aspect of the IT Business model.

 


Notes and references

(I) According to Treacy and Wiersema, a company has to focus on one of the following three generic value disciplines: Customer Intimacy, Operational Excellence or Product Leadership. The value disciplines are covered more in-depth in the book and here.

Beyond Two-Speed IT – Part 1

Two-speed IT capabilities

Summary

Markets move at different speeds and in different directions, constantly reshaping the technology-related capabilities required by the business. This blog is the first in a series covering the third principle of the Digital Manifesto.


 

Business IT convergence 101

When in New York, searching for a restaurant on your mobile yields those nearest to your current location. If your search history indicates you like Chinese food, the results will highlight those.

To create this kind of personalized experience, Google Now, Cortana and Siri combine several data sources, such as location and past usage patterns, to deliver a personalized experience. The capability to show the restaurants in New York instead of Moscow reduces the ‘search stress’ faced by customers and the saved time is a source of customer benefits.

The business has a similar expectation. When requesting a new IT solution, the context, such as stable versus emerging market, or having little or intense competition, is at least as relevant as the functional need. An application with a world-class user experience and feature set is a failure when launched after the competition has seized the market.

At solution-level, the business context has to be reflected by both the design (e.g. non-functional requirements) and realization and support processes (e.g. Waterfall versus Agile development). While these operational are important, they are by themselves point solutions.

To maximize the return on investments in technology, the IT business model as a whole has to be tuned to the context the business operates in.

Differentiation (e.g. focus on cost or speed-to-market) is, first and foremost, a strategic topic. An IT and business operating models optimized for Customer Intimacy in an analogue market are very different from one optimized for Product Leadership in a fast moving digital market (I) Similarly, the strategic context embodied in the choice of the business to position itself as an extrovert Prospector or more introvert Defender reaches far beyond the development approach (II).

 


Notes and references

(I) According to Treacy and Wiersema, a company has to focus on one of the following three generic value disciplines: Customer Intimacy, Operational Excellence or Product Leadership. The value disciplines are covered more in-depth in the book and here.

(II) Prospector and Defender strategies refer to the model by Miles and Snow. The Miles and Snow typology is covered more in-depth in the book and here.

Incremental End-to-End Change

Continuous change

Summary

Digitalization reshapes business models and value chains, requiring a continuous and coherent flow of organizational and technological optimizations to remain ahead of the curve.


 

Change constantly 

Rationally, every executive, manager and employee understands that the company they work for has to remain in touch with market realities and act accordingly. The constant stream of companies struggling with strategic, earnings, liquidity or even a “Chapter 11” crisis is therefore counter intuitive at first sight.

However, even at personal level, one can observe something similar. The more ordinary the skill set of the employee, the more likely the job can be automated. Despite the widespread public attention for this trend, many employees still lack a sense of urgency. It is part of human nature to think bad things only happen to others (I). Market and technology shifts don’t affect them or the company they work for.

Until, eventually, the pink slip arrives. Then the need to change is no longer an abstraction.

When a company or individual hits the proverbial wall, radical change is required. This type of change is infrequent, disruptive, forced and of strategic importance.

When the company or individual remains aligned with its external environment, change can be incremental. Incremental change is continuous, focused on improvements, bottom-up and emergent.

Change end-to-end

The second key ingredient to surf the digital wave instead of being drowned by it is adopting an end-to-end approach. Numerous companies, including retail giant Walmart, initially underestimated the impact of the internet and mobile on their business model. It is more than adding a web shop module to the existing website.

In other words, incremental change should not be confused with isolated point initiatives. This important point is covered in the McKinsey article ‘Modernizing IT for a digital era’.

“Historically, companies have favored an incremental approach to modernizing IT—that is, addressing the most immediate points of pain and then subsequent issues as they occur. However, the threat of digital disruption is creating an urgent need for companies to modernize IT systems end to end, with the big picture in mind.

End-to-end modernization, or a holistic approach to tackling system upgrades, completely redefines how a company thinks about IT. Under this approach, the technology organization is no longer just a shared service; IT becomes a critical part of the company’s DNA, and IT leaders become trusted partners, not just service providers.”

However, the article still treats the business and IT as two separate domains, whereby IT leaders are responsible for technology. In reality, the business and IT domains increasingly converge or even fuse, reflected by the skill set and leadership style of the executives. No longer ‘we’ and ‘them’.

Change as one team

Companies are quickly learning that digitalization requires the business and IT to adopt a joint end-to-end change program. The McKinsey article touches upon the point by calling IT a critical part of the company’s DNA, but comes short of identifying the true key success factor of strategic change in a digital era: recognizing and acting on the interdependence between business and IT.

 


Notes and references

(I) This behavior is known as optimism bias, unrealistic optimism or comparative optimism.

(II) Please note that one person may perceive a specific change as incremental while the same change is perceived as radical by another.