CIO of the Future 2012 Masterclass - The Gap Between Business And IT

The CIO of the Future 2011-2012
The Gap Between Business and IT

Strategic Consistency
between IT and Business

Professor dr. Christopher J. Voisey
c.voisey@nyenrode.nl

5 November 2012

Leadership • Entrepreneurship • Stewardship

info@nyenrode.nl +31 (0)346-291 291 www.nyenrode.nl

2

Value creation and capture

Willingness-to-pay

Buyer’s Share

Price

Value Created

Firm’s Share

Cost

© Dr. Christopher J. Voisey

3

Competitive advantage
•  A firm has a competitive advantage over its rivals if it has
driven a wider wedge than competitors between the
willingness to pay it generates among buyers and the
costs it incurs
>  A customer’s willingness to pay for a product or service is the maximum amount of
money that a customer would be willing to part with in order to obtain the product
or service.
•  To create an advantage, a firm must configure itself to do
something unique and valuable
•  Competitive advantage usually comes from the full range
of a firm’s activities – from production to finance, from
marketing to IT/ICT and logistics – acting in harmony

4

Advantage: options for strategic positioning
System Lock-In

Dominant Exchange
eBay, Yellow Pages, Visa/ Proprietary Standard
MasterCard Microsoft, Intel, Cisco

Exclusive Channel/Restricted Access
Coca-Cola, Walls, rural Wal-Mart

Horizontal Breadth Enabled Through Low Cost
Fidelity, Amazon Effective Use of Southwest Airlines, Nucor
Technology
Total Customer
Solutions Best Product
Redefining the Customer Customer Differentiation
Relationship Integration Sony Wega, Rolls-Royce,
Disney, McDonald’s SAS, Château Lafitte
HP Enterprise
Services
Source: Adapted from Hax (2001; 2010) © Dr. Christopher J. Voisey

5

Example of customer segmentation: DMK

Source: Hax (2005)

6

Activity-system map of IKEA
•  A company’s strategic
position is contained in
a set of tailored
activities designed to
deliver it
•  In companies with a
clear strategic position
a number of higher-
order themes (shaded)
are implemented
through clusters of
lightly linked activities
(unshaded) Adapted from Porter (1996)
Activities directly affecting the customer experience and value
proposition shown in orange


Dynamics of Strategy: The Games of Competitiveness

7

A firm exists within an industry landscape of many
peaks and interacting choices
To improve long-run prospects a firm may
have to step down and tread through the a
valley III. Create a new
emerging rock?

?
II. Find a new
emerging rock?
I. Compete on the
current rock?

Decision 1 Decision 2

IV. Change the underlying
landscape to create new rocks


8

Tightly-bound sets of choices with
high profitability

…harder to go down, harder for others to climb (imitate)


Dynamics of Strategy: The Games of Competitiveness

9

The management team must guide their firm to
a high point on a rugged and fog-enshrouded
landscape

Where is the high ground?

10

Mission and objective (ends)

•  Mission: Why do we exist? The underlying
motivation for being in business
>  an insurance company might define its mission as:“to provide
financial security to consumers”
•  Objective: The precise outcome that will drive the
business over the next five years or so
>  Boeing: from being the largest player in the aircraft industry to being
the most profitable


11

What is your mission?
•  Mission: Why do we exist?
The underlying motivation
for being in business
•  NEM: “Be the preferred
partner for custom-made
solutions in the field of
industrial, utility, and
heat recover steam
generators and related
equipment.”


12

What is your objective?
•  Which objective is
likely to maximize
shareholder value
over the next several
years?
•  Specific
•  Measurable
•  Time-bound …by 31 December 2014?


13

What is your scope (domain)?
•  A firm’s scope encompasses four dimensions:
>  Vertical integration
>  Customer
>  Offering (product or service)
>  Geographic location
•  These four dimensions vary in relevance


14
14

How will you deliver your advantage (means)?

•  The complete definition of a firm’s competitive
advantage has two parts:
>  External: a statement of the customer value proposition (answer to
why customers will buy your product or service)
>  Internal: the unique activities or the complex combination of activities
that allows the firm alone to deliver the customer value proposition


15

Identify your sources of competitive advantage
There is no universal key to success, but three main categories of competitive advantage are from:

•  Positions

•  Capabilities

•  Values

What are your current sources of
advantage and which new sources
must you acquire to deliver your
customer value propositions?


16

What are your positional sources of advantage?
•  Brand name
•  Customer relationships
•  Government protection and
support
•  Status
•  Distribution channels
•  Geographic incumbency
•  Installed base and de facto
standards
•  Gatekeepers in the flow of goods
or information


17

What capabilities are your sources of advantage?

Examples
•  “Low cost” from having
learned how to combine
inputs more efficiently than
other firms
•  Merck: a leading
pharmaceutical with a
capability for extraordinarily
productive R&D
•  Georgia-Pacific: knows how
to make high-quality paper


18

Which values are your sources of advantage?
What we believe in…
How we will behave…

•  E.g., respect individual
differences, sustain the
environment
•  Lycos CEO Davis: an
abiding belief in the virtues
of hard work and frugality
“People don’t bring
their pets to work
or play football in
the cafeteria here.”


19

Business strategy – concepts and linkages
Mission

Ends
Objective

Scope Domain

Advantage
External Activities
Means
Internal

Capabilities Positions Values

Sources

20

Criteria for assessing a strategy

External Consistency
>  Does the strategy tap opportunities and neutralize the threats of
the outside world in an effective and unique way?
Internal Consistency
>  Do the parts of the strategy fit together well to form a whole that is
greater than the sum of the parts?
Dynamic Consistency
>  Does the strategy call on the firm to do today what is required to
succeed tomorrow?


21

Testing your business strategy
Mission

External consistency Ends
(Our customers) Internal consistency
Objective
(Our activities and sources)

Scope Domain

Advantage
External Activities
Means Dynamic consistency
Internal (Tomorrow)

Capabilities Positions Values

Sources

22

Edward Jones’ Succinct Strategy Statement

Jones aims to “grow to 17,000 financial advisers by
2012 [from about 10,000 today] by offering trusted
and convenient face-to-face financial advice to
conservative individual investors who delegate their
financial decisions, through a national network of
one-financial-adviser offices.”


23

“conservative”
Our investment philosophy is long-term buy and hold.
We do not sell penny stocks, commodities, or other
high-risk instruments. As a result we do not serve day
traders and see no need to offer online trading.

We charge commissions on trades because this is the
cheapest way to buy stocks (compared with a wrap fee,
which charges annually as a percentage of assets)
when the average length of time the investor holds the
stock or mutual fund is over 10 years.


24

“individual”
We do not advise institutions or companies.

We do not segment according to wealth, age, or other
demographics. The company will serve all customers
that fit its conservative investment philosophy. Brokers
will call on any and every potential customer.

Stories abound within Jones of millionaires who live in
trailers – people all the other brokerages would never
think of approaching.


25

“investors”

Our basic service is investment. We do not seek to
offer services such as checking accounts for their
own sake, but only as part of the management of a
client’s assets.


26

“who delegate their financial decisions”

We do not target self-directed do-it-yourselfers, who
are comfortable making their own investment
decisions. We are also unlikely to serve validators,
who are merely looking for reassurance that their
decisions are correct.


27

Competitive Advantage through Differentiation
Edward Jones Product/Service Sale Online Competitor Product/Service Sale

Willingness-to-pay
say, $120 Buyer’s
EJ Trade Share:
Price: $100 $20

Value
Created: Edward
$100 Jones’s
Share:
$80 Buyer’s
Share:
Cost of a trade $0
say, $20 WTP =
Online Online
Trade firm’s
Value Price: $8 Share:
Created: $6
Cost of a trade $2
$6


28

Edward Jones’s Activity System

Source: Harvardbusinessonline

29

Edward Jones and IT
•  Historically a satellite-based IT/ICT system
•  Traditional aversion to technology between broker and the
customer
•  Financial advisors prohibited from using PCs
•  No customers may trade online
•  Recent online access to customers’ accounts
•  Direct email communication between brokers and customers
not allowed

Key: increasing technological sophistication does not imply increasing financial
sophistication and that customers have the time to decide their own investments


30

What element of Edward Jones’s strategy should
it change?
Strategy
Element
Change
to…

Pricing
Wrap
fees
and
nothing/trade

Product
scope
Add
op2ons,
IPOs,
hedge
funds,
long-‐term
care
insurance
to
meet

the
needs
of
HNW
individuals
and
re2rees

Location
Shi@
to
metropolitan
areas
and
office
buildings

Service
Begin
to
offer
2ered
service
to
different
customer
segments
e.g.,

spend
more
2me
and
bundle
pricing
to
HNWs

Financial
planning
Offer
a
complete
financial
planning
service

Customers
Give
up
accep2ng
everybody
who
walks
through
the
door
and
start

targe2ng
HNWs,
or
at
least
the
mass
affluent

FAs
Start
hiring
more
sophis2cated
FAs
who
can
deal
with
the

complexi2es
of
re2rement
and
distribu2on

St.
Louis
Move
some
support
personnel
into
the
field
as
specialists

Compensation
Increase
the
payout
to
junior
brokers
to
stop
them
job
hopping,
and

start
paying
for
the
book
of
re2ring
brokers
to
stop
them
being

stolen

Technology
Add
Internet
capability
to
customers;
redefine
“convenient”
to
mean

24/7

Marketing
Increase
na2onal
adver2sing
to
match
compe2tors


31

Strategic consistency
•  Strategy is about choosing to serve customers in a
way that rivals cannot
•  Good strategy delivers sustainable competitive
advantage
•  Identifying a firm’s strategy is a necessary prior to
evaluating that strategy
•  The strategy’s essence must be communicated and
easily internalized by everyone in the organization


32

Strategic consistency
•  Strategy is about making trade-offs
•  Tradeoffs involve making choices
>  Providing more (or less) of A necessitates less (or more) of B
>  Serving customer X better (or worse) means serving customer Y worse (better)
•  Tradeoffs substantially increase the cost of imitation
•  Tradeoffs cause competitors to not want to imitate


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