Beyond Two-Speed IT – Part 2

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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.

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.

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.

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