IT Strategic Grid

IT strategic grid First, it is important to decide what sort of contribution IT makes to the organization’s strategy. This enables the senior management team to gauge how much and what sort of attention the development and running of IT systems should be given by themselves and by others. To make this decision it is necessary to look at two factors: strategic impact of application development and strategic impact of existing systems. For some organizations, the development of new innovative IT systems has a significant strategic impact; for others, they are more focused on installing off the shelf packages to enhance some aspect of internal performance. Similarly, some organizations are 100 per cent dependent on IT to maintain operational performance, such as manufacturing organizations. For others, it might take quite a period of time before a disruption in IT services would create a significant performance dip. The grid in Figure 8.1 is useful for assessing the organization’s current IT strategic position and thus deciding how much senior management attention needs to be spent on IT issues, and how IT should be managed. It is worth noting that the organization may change its position on the grid over a number of years.

Figure 8.1: IT strategic grid Source: adapted from Cash et al (1992) ‘Support’ organizations may spend a lot of money on IT, but they are not totally dependent on IT systems for operational success day to day, minute to minute. Neither do they gain strategic advantage from innovative application developments. A doctor’s surgery would qualify here. In this case, senior management can be quite distant from the IT planning process. ‘Factory’ organizations are completely dependent on the smooth running of their IT systems. For instance, a manufacturing unit might grind to a halt if the IT systems were to fail. However, with this type of organization, innovative applications developments, although important, are not crucial to the organization’s ability to be competitive, except when its performance starts to lag behind competitors, and a move to the ‘strategic’ quadrant occurs. ‘Turnaround’ organizations are those in which innovative applications developments are crucial to the firm’s strategic success, but the day-to-day running of IT systems is not so critical. This might for example be an organization developing e-learning packages. The other classic examples are DHL, UPS and Fedex, who all offered customers the ability to go online and check the status of packages that were being dispatched. This gave them tremendous strategic advantage. In this case IT planning needs substantial effort, and needs to be linked closely to organizational strategy. ‘Strategic’ organizations such as banks and insurance companies are those in which innovative applications development brings significant competitive advantage and day-to-day processes are highly dependent on the smooth running of IT systems. In these types of organization, there is a very tight link between business strategy and IT strategy, and the head of IT normally sits on the board of directors.

The strategic grid model is an IT specific model that can be used to assess the nature of the projects that the IT organization has in its portfolio with the aim of seeing how well that portfolio supports the operational and strategic interests of the firm. The CIO plots projects and systems from the IT organization’s portfolio on a two dimensional graph. The X axis represents impact of the project on IT strategy. One way of expressing what we mean by this is: what options does this project offer the firm by way of affecting one of Porter’s five forces in our favor? Does it change the nature of competition in our market, affect the bargaining power of buyers or suppliers, raise or lower the barriers to entry into our market, or change switching costs for our products and services? Does it enable us to offer completely new products and services, or enable us to substitute one of ours for one of someone else’s in the eyes of their customers? The Y axis represents the impact of the project on IT operations. One way of expressing this is to say that projects that are high on this axis improve the efficiency or quality of our existing systems and business processes, or lower their costs. The graph is usually drawn like so:

Another way to think about the two axes is in relation to Argyris’ organizational learning styles: single loop and double loop learning. Impact on operational ability is like single loop learning: incremental process improvements on what we already do. Impact on strategy is like double loop learning: look for a completely new process. McFarlan divides the grid made by these axes into four quadrants:

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Support: low operational impact, low strategic impact. This quadrant is about local process improvements for individual users. Factory: high operational impact, low strategic impact. This quadrant is about operational improvements that affect large portions of the firm, and are aimed at improving performance or decreasing cost. Turnaround: low operational impact, high strategic impact. This quadrant is about exploiting new technologies to provide strategic opportunities. Strategic: high operational impact, high strategic impact. IT organizations that have most projects in this quadrant understand that IT can both improve core operations of the firm while simultaneously generating strategic options.

Evaluation for use by CIO The CIO can use the strategic grid to assess business/IT alignment, to assign appropriate governance and oversight to individual projects, and to select projects and systems for outsourcing.

After plotting all projects in the portfolio on the grid, the CIO assesses where the bulk of them lay: that is how IT is being used in the organization. This will indicate how well aligned IT strategy is to business strategy, and can be used as either a confirmation that the IT org is doing what is expected of it by the business organization, or as a wake up call. If the projects that the IT organization is working on are not where the CIO expects the them to be, then they can see what kind of changes need to be made. Secondly, different quadrants demand different kinds of project governance: support quadrant projects can be handled by IT specialists and individual end users; factory quadrant projects should be handled by a business executives and IT executives working together; turnaround quadrant projects should be handled by business executives, IT executives and emerging technologies development groups; and strategic quadrant projects should be initiated, defined and managed at the top levels of the firm. The failure of many projects may come about because the quadrant they lay in was misidentified and inappropriate governance was applied to them. Thirdly, the CIO can use the position of a project in the grid to assess how good a candidate it is for outsourcing. Support and factory projects are good candidates for outsourcing largely due to economies of scale that outsourcing vendors might be able to offer, access to skills and best practices that the IT org may not possess, and increased time to market/implementation. Turnaround and strategic quadrant projects should be outsourced with caution; the firm may choose to outsource such project to access rare skills, resources or applications or to work around an out-of-control IT organization.

McFarlan & McKenney – The Strategic Grid It is interesting to look at a company at any point in time to try to determine how that company is using IT. IT can be used simply to support current operations. It might be a vital part of data processing, where the alternative, ie to revert to manual methods of processing, is simply unthinkable. IT might be absolutely vital in terms of how the company does its business currently and how it sees its business model developing in the future. McFarlan and McKenney, in 1983, devised a very useful grid for assessing a company’s use of IT – see Figure 1. Figure 1: The McFarlan & McKenney Strategic Grid

The grid has four quadrants built around two straightforward questions: a. How important does management feel the current IT systems are to the company? b. How important does the company think future developments in IT will be for the company, ie the impact of future IT developments on its way of doing business? Depending on the responses to these questions, a company can be placed in the four quadrants as follows: 1. Low Current: Low Future Impact. IT has little relevance and simply supports existing processes. 2. Low Current: High Future Impact. IT will feature more on the business agenda in the future. The company believes that IT will have a major impact on their business model in the future and IT is in a turnaround role i.e. IT will be a key feature of future strategic planning. It may not have played such a role in the past. The example of the supermarket industry is interesting. The retailing industry is often given as an example of how IT has become critical to operations. EFTPOS technology (ie Electronic Funds Transfer at Point of Sales) is the scanning technology we all see at the checkout counter. However, this technology not only indicates the price of the goods being purchased and computes the bill, it also updates the supermarket’s stock records and may be on-line to the supermarket’s suppliers who are immediately notified of the levels of stock (Electronic Data Interchange). The supermarket can also use the data collected from loyalty cards at the point of

sale for marketing purposes. Payments both from the customer and to the supplier are automated electronically. So IT is a key part of operations. However, all the players in the retail industry currently have EFTPOS technology and it couldn’t really be argued that it offers any major source of competitive advantage. Whilst EFTPOS technology is in the factory role, the retail industry can see major changes in the future in the terms of how we, the consumers, do business with the industry, ie e-commerce and the development of web-based retailing, home shopping etc. Consequently, the business model in the future will be completely different and IT will have a new role to play. Therefore retailing is placed in the turnaround quadrant. 3. High Current: Low Future Impact. Here IT is said to have a Factory Role. It is important in terms of day-to-day operations but it is not felt that there are any major IT developments on the horizon that will fundamentally alter the nature of the business. Here, the key issue is the maintenance of existing systems. 4. High Current: High Future Impact. In this quadrant, IT plays a crucial role both in terms of its current role and in terms of how future IT developments are viewed as impacting on the organisation. IT is said to have a strategic significance. It is mission critical (ie the company is not going to be in business at all without using IT effectively to deliver its products and services both now and in the future). The role IT strategy plays in the formulation of the overall business strategy is critical. It is likely that most questions you will face in this paper will involve companies that are either in the turnaround or strategic quadrants. The question will give you sufficient information to determine the role played by IT and therefore to determine the strategic significance of IT to the company. This shows the application of your knowledge to the specifics of a question. For companies in the factory role, the key issue will be the security of their systems, back-up procedures, standby arrangements and disaster recovery plans. It is possible to view a single organisations use of IT and see how different IT applications within that organisation can have different roles (ie it is possible for a single company to have different IT applications that occupy different quadrants at any one point in time). Take the example of a car manufacturer. The automated payroll system would be a good example of the support role. It would be a pain if the computerised payroll were to fail but it would be possible to revert to manual methods of processing. Payroll has no strategic impact. The software governing Computer Integrated Manufacturing might be viewed as having a factory role, ie it has key operational implications but the technology is routine and no major developments might be expected. In the turnaround role, we might classify EDI links (Electronic Data Interchange) and the software governing the links with their suppliers. EDI technology has been around for some time but major developments might be on-line and web-based procurement and the development of extranets. In the strategic role we might place the manufacturer’s Customer Relationship Marketing (CRM) software. The interface with customers has current strategic significance (ie it is mission critical) but again developments in e-commerce and the way the customer deals with the manufacturer (i.e. possibly by-passing the dealer and buying on-line) means that changes in this area need to be carefully monitored by the company.

Joe Peppard provides an alternative version to the Strategic Grid (the Applications Portfolio). The same logic applies. He calls the Low Future: High Current Impact – '‘Key Operational' and the Low Current: High Future Impact – 'High Potential'.