Building differentiation via IT
BUILDING DIFFERENTIATION VIA IT
“.. IT is perceived as valuable by CEOs when it increases speed to market, fosters innovation, provides real-time information, improves productivity and uses information as a competitive weapon. But CEOs are also concerned about IT inhibiting change: IT leaders who can make only incremental changes seem to be creating inertia.” - The Gartner Scenario 2006- The Current State and Future Direction of IT
Michael Porter identified two key sources of competitive advantage
· Cost leadership
· Differentiation
Traditionally businesses have chosen to adopt one or the other strategy to achieve competitive advantage; While Information Technology (IT) is positioned to enable an organization to effectively pursue both a) cost leadership and b) differentiation IT must ultimately be aligned with the core strategy of the firm
The case for cost leadership via IT is has been better understood than differentiation. IT has been able to directly support cost leadership. To date organizations have been more successful at achieving cost leadership via IT – e.g. back end process automation, process optimization, strategic sourcing and other similar strategies than;
The case for building competitive advantage with IT via ‘differentiation’ requires IT organizations innovate themselves and work closely with new product / service innovation groups. Ultimately it is information that allows a firm to create a defensible position for itself against the five forces. The extent to which IT organization can provide competitive advantage via IT depends on the organization’s ability to drive value from “Information” component of the ultimate product / service.
A number of external and internal factors (forces) enable organizations to drive value from information - among them are
1) Adoption of enabling technologies (RFID, SOA) – Process innovation using these technologies
2) Increasing digital conversion
3) Smarter end consumers
4) Integration within the business partners in the ecosystem (M&A activity)
5) Innovation within the ecosystem
“.. IT is perceived as valuable by CEOs when it increases speed to market, fosters innovation, provides real-time information, improves productivity and uses information as a competitive weapon. But CEOs are also concerned about IT inhibiting change: IT leaders who can make only incremental changes seem to be creating inertia.” - The Gartner Scenario 2006- The Current State and Future Direction of IT
Michael Porter identified two key sources of competitive advantage
· Cost leadership
· Differentiation
Traditionally businesses have chosen to adopt one or the other strategy to achieve competitive advantage; While Information Technology (IT) is positioned to enable an organization to effectively pursue both a) cost leadership and b) differentiation IT must ultimately be aligned with the core strategy of the firm
The case for cost leadership via IT is has been better understood than differentiation. IT has been able to directly support cost leadership. To date organizations have been more successful at achieving cost leadership via IT – e.g. back end process automation, process optimization, strategic sourcing and other similar strategies than;
The case for building competitive advantage with IT via ‘differentiation’ requires IT organizations innovate themselves and work closely with new product / service innovation groups. Ultimately it is information that allows a firm to create a defensible position for itself against the five forces. The extent to which IT organization can provide competitive advantage via IT depends on the organization’s ability to drive value from “Information” component of the ultimate product / service.
A number of external and internal factors (forces) enable organizations to drive value from information - among them are
1) Adoption of enabling technologies (RFID, SOA) – Process innovation using these technologies
2) Increasing digital conversion
3) Smarter end consumers
4) Integration within the business partners in the ecosystem (M&A activity)
5) Innovation within the ecosystem
The next series of blogs will develop Points of Views regarding - How can organizations achieve differentiation based competitive advantage via IT?
Comments
It makes a lot of sense for Indian IT firms to not compete solely on cost, because as wages are rising in the job market in India, there will be increase in the costs of the IT firms. Also, many American software companies prefer software professionals who have had an experience in India, thus Indian IT professional are in demand and don't come cheap.
Posted by: Dilip Thadani | April 29, 2007 08:15 AM
Well said Dilip!
Competing on price is something that will move to different destinations than India. For instance, Brazil, Slovakia, China, etc. These markets may have their set of entrepreneurs who have an edge over the Indian service providers.
Thus, the sooner the Indian companies move up the value chain the better.
Wage inflation due to intense competition for employable talent has led to higher attrition rates for Infy (13.7%: ref: http://www.infosys.com/investor/reports/quarterly/2006-2007/Q4/FactSheet.pdf p.5.)
However, Infy has a relief from the fact that they are still doing better on attrition levels than many other service providers and certainly better than the MNCs who set up their shops in India.
It will be interesting to watch how Infy will handle the climb in the value-chain.
McKinsey has come up with a new parameter for performance now - "profit per employee". http://www.mckinseyquarterly.com/article_abstract.aspx?ar=1924
To accomplish this, Infy is facing a new challenge:
a. how to reduce attrition rate?
b. how to get higher value work and change the image from being a low-cost service provider to that of a reliable partner.
I wish they get it right to make it work through the next phase.
Posted by: Manik Patil | May 5, 2007 10:07 PM
‘Building differentiation via IT’ – presently customer follows a two step approach to achieve this. Step 1 is to get the business process re-engineering exercise done by BIG FIVE consultancy vendor (type 1) and step 2 is to get the recommended changes implemented by system integrators (type 2). The competencies of type 1 and type 2 vendors are exclusive. My opinion is that a minor change in this two step process will help customers achieve differentiation via IT. Rationale for quantitative business improvements as a result of BPR exercise needs to well understand by type 2 vendors to own it and successfully execute.
Companies like Infosys can fully understand and help the customer achieve differentiation via IT only if it completely or at least partially is a part of both the steps.
Infosys and other system integrators need to have the right team mix to execute end-to-end exercise, starting from business process re-engineering, suggesting the right technology and then achieving the targeted business objective via successful IT implementations. I feel that there are innumerable cases where system integrators do not care what the business objective of the initiative is and more importantly what is the rationale behind coming up magic improvement number given in the business case.
Posted by: Manish Agarwal | October 8, 2008 06:40 PM