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Know Your Advantage

Know Your Advantage

The survey work we did recently on IT strategies highlighted a serious problem: most IT strategies are strong on how IT delivers applications and infrastructure but weak on how it contributes to enterprise advantage. Completing the IT strategy requires defining that contribution

Most CIOs have a delivery strategy, strong on the what, without much on the why. A good IT strategy needs both.

Conventional wisdom has it that IT strategy is such an old chestnut there's nothing more that can possibly be said about it. Unfortunately, conventional wisdom is wrong.

Fighting with one arm tied behind your back might be a fun thing to do when you're sparring with children. But it's an odd thing for enterprises to do when they're constantly in the ring with champion bruisers looking for a knockout. Yet this is exactly what many enterprises are doing when they don't write a complete IT strategy.

The survey work we did recently on IT strategies highlighted a serious problem: most IT strategies are strong on how IT delivers applications and infrastructure but weak on how it contributes to enterprise advantage. Completing the IT strategy requires defining that contribution.

Complete strategies look inward and outward. A contribution strategy (how IT contributes to competitive advantage) illuminates how an enterprise gains and holds some advantage over its competitors through the application of some aspect of IT such as better information usage, superior costs and so on.

Contribution strategies contain decisions about which customers, markets, products, operations and IT are going to be invested in and which are not. These decisions, taken together, set the enterprise strategic direction, and IT's role in it. For each of these decisions, the strategy answers two questions: What is the contribution of the decision to the enterprise goals and objectives? And how will the business deliver that contribution?

The first question sets the strategic value and importance of the decision. The answer to the second question defines the changes and resources needed to realize that value. To get there it's important to remember that neither the IT folk nor the business folk have the luxury of thinking in splendid isolation from each other - it requires real teamwork.

A complete strategy is the sum of many parts. The secret to a good contribution strategy is working collaboratively with other parts of the business both influencing their thinking about what is possible due to IT, and getting an early warning about the direction they are likely to head. In the end, each part of an enterprise has its own portion of the strategy: customer strategies, sales strategies, service strategies and fulfilment strategies collectively define how the enterprise competes and wins a sustainable advantage.

Some of you may ask: Isn't operational excellence (straightforward cost reduction) enough? Unfortunately no. The problem with a simple (low) cost target is that it is easy to copy. What is really needed is a more complex combination of things such as people, products, training and logistics that mean a better front-line execution than competitors, or greater insight into customers born of better more up-to-date data and widespread belief that information is power - as well as the right tools to analyze it

Creating a contribution strategy requires frameworks and the right climate. Creating a contribution strategy that delivers sustainable competitive advantage takes two important ingredients: the right framework for finding and exploring opportunities, and the right climate for cooperation with the business.

There are many frameworks to choose from. In our research work, it is possible to divide them into two sorts: those that are mostly financial planning frameworks and those that are mostly strategic planning frameworks.

Of the first sort, the most commonly used is the return on capital employed (ROCE) framework. ROCE indicates the efficiency and profitability of a company's use of capital assets like equipment and machinery. It's the amount of money tied up in these business assets. Companies with a high ROCE gain higher market values than companies that need more capital to generate the same earnings. The ROCE rate should always be higher than the rate the company borrows at, otherwise any increase in borrowings will reduce shareholders' earnings. IT can have a marked impact on this.

Of the second sort, strategy frameworks created by management gurus prove popular. One such, created by Michael Porter, tackles the question of business position head-on: its management trade-offs and its internal consistency. It deals with three dimensions involving market positioning and internal performance. IT has an impact on all three of these areas too.

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