Using IT as a Competitive Weapon

1. November 5, 2004 Mohammed Haque Kirk Garten Tom Webb Using IT as a Competitive Weapon

2. Using IT as a Competitive Weapon Agenda • Theories of the tools or “Levers for Competitive Advantage” that are afforded by IT • Case Studies of IT Applications – Weapons that hit their targets! • How is the “weapon” transformed? Are silicon chips and system analysts sufficient as weapons?

3. Using IT as a Competitive Weapon Weapons are tools for winning wars. Business is a war. Therefore, business needs weapons to WIN. (With sincere apologies to Plato and his theory of logic.)

4. Using IT as a Competitive Weapon Is it fair to compare warriors to managers? Terminology of War: Battles, strategies, tactics, resources, alliances, costs, and weaponry. Winning or Losing: Outcomes matter, with terminology measuring the escalation to victory, defeat, destruction, dynasty, even failure or death.

5. Using IT as a Competitive Weapon We have two purposes: • Review theories of IT that bear on its important role in business to help create competitive advantage, perhaps even sustained CA. We will support these with four case studies from recent publications. • Analyze more fully how IT actually becomes a weapon. That is, what must happen to transform the resources into weapons? Under what circumstances can competitive advantages be gained by the use of IT?

6. Using IT as a Competitive Weapon Theories of IT • The Resource Based View1 Attributes: Value Imitability Rarity Substitutability Appropriability Mobility 1 Wade, Michael, and Hulland, J., “The Resource Based View and IS Systems Research: Review, Extension, and Suggestions,” MIS Quarterly, Vol. 28, 1, March 2004.

7. Using IT as a Competitive Weapon Theories of IT2 • Transaction Cost Theory Economic model that assists managers in determining the most effective strategies for maximizing profits. What should we make? vs. What should we buy? 2 Williamson, O., “Comparative economic organization: The analysis of discrete structural alternatives,” Administrative Science Quarterly, 36: 1991, pp. 269-296.

8. Using IT as a Competitive Weapon Theories of IT • Core IS Capabilities for Exploiting IT3 Flexible Arrangements are Key: IS functions best “when a relatively small number of people with core capabilities protect and maintain the business’s ability to exploit new developments in IT.” 3 Feeny, D. and Willcocks, L., “Core IS Capabilities for Exploiting Information Technology,” Sloan Management Review, Vol. 39, Spring, 1998, p. 20.

9. Using IT as a Competitive Weapon Theories of IT • Porter’s Theory of Competitive Advantage4 Information technology affects competition when it: • Changes industry structure and alters the rules of competition. • Creates competitive advantage by creating new ways to outperform rivals. • Generates whole new businesses often from within a firm’s existing operations. 4Porter, Michael E. and Millar, Victor E., “How Information Gives You Competitive Advantage,” Harvard Business Review, July-August, 1985, pp. 1-3.

10. Using IT as a Competitive Weapon Theories of IT • Porter’s Key Concepts - IT Leading to CA5 First, Porter identifies “value activities,” the distinct elements of work involved that are either technologically or economically distinctive in performing its business activities. Then he shows that Information Technology can lower the costs in every one of the nine Primary and Support Activities of the “value chain.” 5Porter, Michael E. and Millar, Victor E., “How Information Gives You Competitive Advantage,” Harvard Business Review, July-August, 1985, pp. 3-6.

11. Using IT as a Competitive Weapon Theories of IT • Porter’s Theory of Competitive Advantage6 Information technology affects competitive advantage: • By lowering costs within the “value chain,” thereby enhancing the company’s competitive position within its industry, and • By expanding the company’s ability to differentiate its products or services from its rivals. 6 Porter, Michael E. and Millar, Victor E., “How Information Gives You Competitive Advantage,” Harvard Business Review, July-August, 1985, pp. 9-10.

12. Using IT as a Competitive Weapon Four Recent Case Studies in which IT has produced competitive advantages. Avnet Corp. Vanguard Group Smurfit-Stone Walgreens Corp.

13. Using IT as a Competitive Weapon Critical Differentiation The defining characteristic of a competitive weapon In each case study, the company uses IT to provide a distinct advantage that appeals to its customers. By applying IT solutions to its business processes, each company separates itself from its rivals. Target hit! Advantage “our side!”

14. Using IT as a Competitive Weapon Avnet is a distributor of electronic components and computer products to industrial customers worldwide. The Company also distributes a variety of computer products to both end users & resellers. For the FY ended 7/03/04, sales were $10.24B.7 ____________________________________________________________________________________ Erased multiple ERP systems within its divisions, ridding itself of “an information-management and –propagation problem,” said Bill Chapman (CTO). New software layer allows supply chain management to flow at a pace that gives customers order pricing within 20 minutes instead of up to half a day. Linking its ERP to the ERPs of key business partners, especially some smaller players without internal IT resources, increased transaction speeds to long dreamed-of levels. 7 http://personal.fidelity.com/research/stocks/content/stocksindex.shtml, viewed November 1, 2004.

15. Using IT as a Competitive Weapon Avnet ___________________________________________________ CRITICAL DIFFERENTIATOR/BENEFIT TO CUSTOMERS: Contribution is CRITICAL because the painstakingly redesigned IT architecture allows faster business processes that enable collaboration with customers. Additionally, by providing entrée to Avnet’s own ERP, its “customers don’t have to change their business processes and systems to communicate with us,” says Bill Chapman. “It’s about doing business their way.”8 8 Foley, John, “Avnet Greases Supply Chain,” Information Week, September 20, 2004, p. 38, p. 90.

16. Using IT as a Competitive Weapon Vanguardis the number two mutual fund company behind Fidelity, but is closing the gap, claiming over $725 billion in assets under management. Vanguard’s fund options include over 100 stock, bond, mixed and international offerings. Its 2003 sales are estimated at $2.044 billion, a growth of over 30% from the year before. 9 ______________________________________________________________________________________ Innovative Vanguard uses IT to stay one step ahead of the competition by: • Making the jump years ago to herd inquiries to its strengthened Web site and away from its call centers. A large IT investment in Wave client-service desktop, allows customer-service associates to quickly assist phone-in clients. • Creating the on-line One Step program, which promotes increasing additional contributions by individuals as long as possible. Vanguard has enrolled nearly 11,000 new clients in the past 6 months. • IT brought deeper assistance to Vanguard’s business processes by enabling changes to applications in Web access, financial advising, CRM, and payroll software. 9http://www.hoovers.com/vanguard-group/--ID__43321--/free-co-factsheet.xhtml, viewed November 19, 2004.

17. Using IT as a Competitive Weapon Vanguard _______________________________________________________________ CRITICAL DIFFERENTIATOR/BENEFIT TO CUSTOMERS: Vanguard’s IT investments have helped create a most user-friendly website with notable revenue-enhancing capabilities. Putting easy-to-use tools in the hands of its customers helps them analyze their own needs and risk-tolerance, shift funds to more appropriate categories, and convert non-Vanguard 401-K funds into Vanguard IRAs. These unique customer-focused approaches are all IT-driven and support the company’s basic success strategy: Low cost funds, high customer satisfaction, revenue-enhancing products all aimed at the retirement goals of Americans.10 10 “Information Week 500, Banking & Financial Services,” Information Week, September 20, 2004, pp. 67-68.

18. Using IT as a Competitive Weapon Smurfit-Stone Container Corp. is the industry's leading integrated manufacturer of paperboard and paper-based packaging. Smurfit-Stone is the leading producer of containerboard, including white top linerboard; corrugated containers and more. Annual sales are $7.7 billion.11 _________________________________________________________________________________ Among many IT driven innovations, SSCC broke a century old hindrance, the “plant-centric” model of operating. This meant that the sales force and plant manager/capabilities determined how the market was served. Plants never shared jobs. Now they work as a network to produce the variety and quality and volume of items needed by a larger purchaser. The CIO showed how IT could allow plants in a region, or a “metroplex,” to share major jobs. Data management and new programs were required to allow inter-plant information to be shared, allowing sales reps to make the output potential of all plants in one region appear to be one single source to help the client. Smoothed and sped customer ordering, thus benefiting SSCC. 11 http://personal.fidelity.com/research/stocks/content/stocksindex.shtml, viewed October 29, 2004.

19. Using IT as a Competitive Weapon Smurfit-Stone Container Corp. ______________________________________________________________________ CRITICAL DIFFERENTIATOR/BENEFIT TO CUSTOMERS: “IT helps Smurfit build a better relationship with its clients,” says CIO Burdiss. By pioneering a regional approach to the sales/production process, Smurfit was able to satisfy large customers’ orders with one sales call. For over a century prior to this IT-enabled breakthrough, the “Plant-centric” model dominated the packaging materials industry. That is, each separate factory had its own sales force, specialty lines, and production schedules. IT demonstrated innovative capabilities that permitted data management coordinate inter-plant information to be shared, thus enabling SSCC to be seen as critically different and more appealing to large clients.12 12 Jim Burdiss, CIO, Smurfit-Stone Container Corporation, interviewed by phone by Thomas Webb, October 28, 2004.

20. Using IT as a Competitive Weapon Walgreensis principally engaged in the retail drug- store business. As of 8/03, Walgreens operated 4,224 retail drug- stores and three mail service facilities in 44 states & Puerto Rico. For the FY ended 8/31/04, net sales were $37.51B.13 ________________________________________________________________________ Walgreens identified convenience and high profit per customer transaction as its core strategy for success in the early 1970’s. With a substantial investment of over $400 million for a satellite communication system, called “Intercom,” it built a true “corner drugstore” that is still unique.14 When confronted with the opportunity to compete with Drugstore.com via internet sales, Walgreens sat back and did nothing… Until it could do it better. The result: even more convenience for customers with no loss of professional service. 13 http://personal.fidelity.com/research/stocks/content/stocksindex.shtml, viewed October 29, 2004. 14Collins, Jim, Good to Great, HarperCollins, New York, 2001.

21. Using IT as a Competitive Weapon Walgreens ______________________________________________________________________ CRITICAL DIFFERENTIATOR/BENEFIT TO CUSTOMERS: By investing heavily in IT, Walgreens became even more convenient to its customers. If, while on vacation in Boise, you need your prescription refilled, the corner Walgreens there will have your records from Sheboygan in seconds. How? By using the power of its enormous database together with the speed of its sophisticated satellite data delivery system, working together as “Intercom Plus.” This customer-focused differentiator is unmatched by any other company of its kind in the world.15 15 Collins, Jim, Good to Great, HarperCollins, New York, 2001.

22. Using IT as a Competitive Weapon Allowing for the probability that Porter, Willcocks, Wade, et. al. provide well-conceived analyses that describe IT’s basis as a Competitive Weapon, We nevertheless conclude that… Information Technology is NOT a competitive weapon.

23. Using IT as a Competitive Weapon Let us quickly add some definitions and some qualifiers to that! What is a weapon? Definition: 1. device designed to injure or kill, 2. something used as a way of getting an advantage in a situation16 16 http://encarta.msn.com/dictionary_/weapon.html, viewed October 27, 2004.

24. Using IT as a Competitive Weapon Is a 50 caliber machine gun a weapon? Under the first definition it is, however: It is merely an asset of questionable value if it is lying in the mud, sitting broken on a shelf, or put into the wrong hands.

25. Using IT as a Competitive Weapon Q: How does that gun become a weapon? A: When it is used in combination with… • Skilled human talent, trained to use it • Proper maintenance • A well-conceived strategy, one aimed at success

26. Using IT as a Competitive Weapon IT, by itself, is like that machine gun… It is an asset. Granted, it is an elegant, complex network of silicon, software and wiring, supported by professionals… But IT alone is not a weapon! Unless it is…

27. Using IT as a Competitive Weapon …used precisely and intelligently in support of an enterprise’s strategy of successful business processes. We believe Information Technology arguably can be the most effective modern business weapon, when used to support well-executed business processes.

28. Using IT as a Competitive Weapon Today… IT is an indispensable element of business weaponry. CEOs (Generals) direct the business and employ: • Strategy – the broad set of plans and directions that guide the business toward its goals. • Creativity – the ability to innovate and willingness to commit to finding new ways of achieving advantages over competitors. • Discipline – The strength to stick to rational methods, to conserve resources, and to enforce the execution of these concepts.

29. Using IT as a Competitive Weapon The CIO, the chief IT strategist, must manage, train, and motivate the human talent - the troops – using: • Training – The right knowledge imparted to the right people in the right roles. • Intelligent Innovation – A culture of continual process innovation and strategic creativity. • Resource deployment – Efficient use of the right resources put into play in support of the fundamental business processes.

30. Using IT as a Competitive Weapon Whether resources are examined using the Resource Based View, the Transaction Cost Theory, or any other framework of IT analysis, the key to gaining competitive advantage using IT resources is simply this: Put them to effective use in support of the business’s strategy for success.

31. Using IT as a Competitive Weapon KEY SUCCESS FACTORS17 • Top Executive Engagement • IT and Business Strategy Alignment • IT Governance • Application Delivery and Management • Selective Outsourcing • Vendor Management • Talent Management • Business Enablement 17”Key Attributes of the World-Class Information Technology Organization, A Competency Diagnostic Tool,” from the Working Council for Chief Information Officers, of the Corporate Executive Board, distributed by Jim Burdiss of Smurfit-Stone Container Corporaton.

32. Using IT as a Competitive Weapon Top Executive Enthusiasm Studies show that unless the leadership of the organization are fully committed, enthusiastic, and engaged in the IT process, and especially in major projects, the organization will likely not benefit from the investment in IT. The commitment has to be seen by the entire organization as important and worthy of the extra effort and sacrifice to make it work. “Support from senior non-IT Executives,” third in 2003, was ranked number one by both IT and non-IT executives in 1993-1997.18 This highlights the need for business executives to be aware of, and supportive of, technology innovations. Support means that business executives: • Recognize the value of information technology, • Define and communicate the vision and strategies that include a role for IT, and • Serve as active sponsors and champions for IT projects (provide leadership and funding). 18 Luftman, J., and McLean, E., “Key Issues for Executives,” MIS Quarterly Executive, Vol. 3, 2, 2004, pp. 99-100.

33. Using IT as a Competitive Weapon Top Executive Commitment “Clearly, the CIO needs to seek solid support from the CEO and others in the C-suite. More and more, business executives recognize that they need to be more engaged in IT projects. It’s the only way that IT can be taken seriously, from top to bottom.” 19 19 Jim Burdiss, CIO, Smurfit-Stone Container Corporation, interviewed by phone by Thomas Webb, October 28, 2004.

34. Using IT as a Competitive Weapon Top Executive Engagement Clear indication that the elite performing companies in the good-to-great study attach the highest priority to top executive engagement in support of initiatives: “Indeed, one of the crucial elements in taking a company from good to great is somewhat paradoxical. You need executives, on the one hand, who argue and debate – sometimes violently – in pursuit of the best answers, yet, on the other hand, who unify fully behind a decision, regardless of parochial interests.”20 20 Collins, Jim, Good to Great, HarperCollins, New York, 2001.

35. Using IT as a Competitive Weapon Collins’ research into good-to-great companies reveals what high performers think about technology in general and about IT specifically... • Technology used as accelerator of momentum A core finding was that the Good to Great companies used technology as an accelerator, or enabler, of momentum, of increasing performance. While all of the good-to-great companies possessed technological sophistication, it was never any technology per se, that was responsible for their excellent performance. Rather, it was “the pioneering application of carefully selected technologies” that made the difference. • Use of Technology, specifically IT, useful only when strategically used A fundamental concept discovered in all eleven companies was called “the Hedgehog Concept” by Collins and his researchers. By this, they mean a “single organizing idea, a basic principle or concept that unifies and guides everything.” By taking one simple concept and doing it with excellence and imagination, these companies succeeded brilliantly in a world made far too complex by faddists, futurists, and fear mongers.

36. Using IT as a Competitive Weapon IT as Enabler via IT/Business Strategy Alignment The 3rd-ranked of the eleven Good To Great companies is Walgreens, which developed SCA and maintained from 1975 through today. How did it proceed? • First, re-defined business success strategy. “Most convenient drugstore in its markets with high profit per customer visit: Simple concept and doable.” • With fanatical consistency it set about to put stores in every conceivable convenient location, sometimes moving stores a half-block to get a corner lot, other times, putting in up to six stores in a square mile in a downtown population center. • Walgreens also went about revamping its product lines to provide high-convenience/high-profit services (one-hour photos) and products (food items, cosmetics).

37. Using IT as a Competitive Weapon IT and Business Strategy Alignment “The most important element in the transformation of IT into a competitive weapon is the alignment of IT with the business’ strategy. While simple in concept, it is really very hard to accomplish.”21 21 Jim Burdiss, CIO, Smurfit-Stone Container Corporation, interviewed by phone by Thomas Webb, October 28, 2004.

38. Using IT as a Competitive Weapon IT and Business Strategy Alignment “IT plans linked to business plans,” ranked fourth [in importance in a major study of IT/business alignment enablers and inhibitors]. This finding “demands that IT participate in creating business strategies and that the business participate in creating IT strategies. Both IT and non-IT executives need to see the benefits of mutual cooperation and of a close working relationship in the strategy formulation process… But the participation needs to be frequent and both IT and the business need to listen to each other, communicate clearly, and learn to leverage IT resources to build competitive advantage.22 Having linked plans include: • Defining and supporting an effective IT governance process, • Establishing binding IT-business partnership, relationship & trust, • Effective marketing of the value of IT, • Sharing of knowledge to get the job done, • Having access to appropriate people, and • Effective use of IT to business liaisons.” 22 Luftman, J., and McLean, E., “Key Issues for Executives,” MIS Quarterly Executive, Vol. 3, 2, 2004, p. 100.

39. Using IT as a Competitive Weapon IT Governance How does Governance enforce alignment with strategy? IT Governance establishes basic ground rules: • Who provides input regarding decision-making? • Who makes the decision? • Who pays for the project? • Who does the implementation?

40. Using IT as a Competitive Weapon IT Governance How does Governance impact an organization? IT Governance is the responsibility of senior management and business unit leaders to insure that: • IT’s projects and investments are aligned with the business strategy; that IT delivers the functionality and services in line with the organization’s needs. • IT brings new technologies that will enable the organization to do new things that were never before possible. • IT-related services and functionality are delivered at the maximum economical value and in the most efficient manner. In short, the firm’s resources are used responsibly. • All risks related to IT are known and managed, and that IT’s core resources are secured.

41. Using IT as a Competitive Weapon IT Governance Critical Success Factors from Control Objectives for IT (COBIT) from the IT Governance Institute illustrates how governance provides discipline and supports business/IT alignment…23 • IT governance activities are integrated into the enterprise governance process and leadership behaviors • IT governance focuses on the enterprise goals, strategic initiatives, the use of technology to enhance the business, and on the availability of sufficient resources and capabilities to keep up with the business demands • IT governance activities are defined with a clear purpose, documented, and implemented, based on enterprise needs and with unambiguous accountabilities • Management practices are implemented to increase efficient and optimal use of resources and increase the effectiveness of IT processes • Organizational practices are established to enable: sound oversight; a control environment/ culture; risk assessment as a standard practice; degree of adherence to established standards; monitoring and follow up of control deficiencies and risks • Control practices are defined to avoid breakdown in internal control and oversight • There is integration and smooth interoperability of the more complex IT processes as problem, change, and configuration management • An audit committee is established to appoint and oversee an independent auditor focusing on IT when driving audit plans. and review the results of audits and third-party reviews. 23 http://www.itgi.org/template_ITGI.cfm?template=/ContentManagement/ContentDisplay.cfm&ContentID= 5557#499,45,ITGovernance Guideline, viewed October 23, 2004.

42. Using IT as a Competitive Weapon Application Delivery & Management IT organizations benefit by basing project management and application delivery/management processes on best in class standards. High quality, cost-effective applications result when standards are based upon: • Software Engineering Institute’s Capability Maturity Model (CMM) • Project Management Institute’s Project Management Book of Knowledge (PMBOK) • ISO 900X processes and other quality management methodologies

43. IT as a Competitive WeaponApplication Delivery & ManagementProcess improvements will result from use of SEI CMM standards.24 24Rifkin, Stan, Founder and Principal, Master Systems, Inc., “Climbing the SEI maturity model makes a difference on software projects,” presented at the International Conference of the Israel Society for Quality, Jerusalem, November 1996.

44. IT as a Competitive Weapon Application Delivery & ManagementProcess improvements will result from use of SEI CMM standards.25 25Rifkin, Stan, Founder and Principal, Master Systems, Inc., “Climbing the SEI maturity model makes a difference on software projects,” presented at the International Conference of the Israel Society for Quality, Jerusalem, November 1996.

45. IT as a Competitive Weapon Selective Outsourcing A competitive, effective IT organization: • knows its strengths and weaknesses, • plays them to its advantage through selective outsourcing. Leadership must identify its core IT capabilities, which include: * IS/IT leadership * business systems thinking * relationship building * architecture planning * informed buying * vendor management * contract facilitation * contract monitoring * ability to “make it work” • These nine core IS Capabilities “are required to underpin the pursuit of high-value-added applications of IT and to capitalize on the external market’s ability to deliver cost-effective IT services.”26 • Once an IT organization has determined its core IT capabilities, its leadership must face the challenges of deciding what to outsource and what to keep in-house. These decisions are based on proprietary business and/or technical knowledge, the current IT organization’s business and technical knowledge, and total cost of the project. 26 Feeney, D., and Willcocks, L., “Core IS Capabilities for Exploiting Information Technology,”Sloan Business Review, Vol. 39, Spring 1998, p. 11-15.

46. Using IT as a Competitive Weapon Selective Outsourcing The analysis of whether to outsource is about value. Will the company realize significant value from the decision to outsource? And will it be able to manage and leverage that value to maintain or improve its competitive position? If the decision will not result in increased value or cost reductions, or if it will not provide some other significant benefit, then outsourcing is not a good choice.

47. Using IT as a Competitive Weapon Vendor Management When an IT organization decides to outsource, it must effectively manage the vendor relationship to insure it receives value for its investment. It is through: • Informed Buying • Contract Facilitation • Contract Monitoring • Service Level Agreements and • Vendor Development that the IT organization holds its vendors accountable, and assures that it will receive value from the outsourcing agreement.27 27Feeny, D. and Willcocks, L., “Core IS Capabilities for Exploiting Information Technology, Sloan Management Review, Vol. 39, Spring, 1998, pp. 14-15.

48. Using IT as a Competitive Weapon Talent Management Retention of its core IT knowledge base is critical, in the long run, for the business; it must protect its assets first, and then build upon the business’ core IT capabilities. • IT Staff Development (IDPs, PIPs, training) • IT Leadership Development • IT Performance Management (incentives tied to fulfillment of strategic goals) • Selective use of vendor expertise to sharpen existing staff’s skills and to obtain new skill sets

49. Using IT as a Competitive Weapon Business Enablement The fundamental role of IT is to efficiently provide the business with required information that is both accurate and timely. Further, well managed and designed IT should: • Facilitate collaboration among distributed staff, across geographical or business units • Enable improvements to enhance and/or automate business processes • Proactively scan for and exploit new technologies in support of the business

50. Using IT as a Competitive Weapon Business Innovation to Aim for Sustained Competitive Advantage Erik Brynjolfsson of MIT’s Sloan School of Management, says that the roots of America’s productivity surge lie in a “genuine revolution in how American companies are using information technology.”28 Good companies are using IT “to reinvent their business processes from top to bottom.” To firms that reinvent, or even simply try to improve, their business processes, there are surprising benefits. “The software that runs many business processes has become an important competitive weapon.” Strategic innovation may not require any new products or new technologies. “Operational innovation,” in Michael Hammer’s words from the April 2004 HBR, can add to shareholder value, meaning competitive weaponry focused on producing competitive advantage. Both process innovation and strategic innovation will often account for more competitive advantages than entirely new products or technologies. Innovation and invention have to take place continually and systematically. No single innovation can convey lasting competitive advantage. 28“Special Report on Business Innovation,” The Economist, April 24-30, 2004.