The Building Blocks of Corporate Agility
Deploying and managing business technology is often critical in establishing, or sustaining, a strategic position; not understanding the roles of business technology across a company’s product lines and markets can lead to inappropriate investment decisions.
Winning the 3-Legged Race: When Business and Technology Run Together, (Pearson Education, November 2005) shows how companies or networks of companies evolve their strategic positions. The book’s authors, Faisal Hoque, V. Sambamurthy, Robert Zmud, Tom Trainer and Carl Wilson, observed that two very different types of strategic actions are necessary: exploitative and exploratory behavior.
Building lean or agile organizations requires substantial investment and carries strategic risks. It is important to realize that while not all organizations need to be lean or agile, it is possible to exhibit both leanness and agility.
To explore these conclusions, the BTM Institute recently sat down with V. Sambamurthy, Eli Broad Professor of IT and executive director, Center for Leadership of the Digital Economy, Eli Broad Graduate School of Management, Michigan State University. Here's what he had to say:
Q. How integral is the role of an appropriate governance process in building an agile infrastructure within an organization?
An agile infrastructure has two parts at a minimum. First, there is a need to ensure that the enterprise architecture (including the process architecture) sustains the goal of enterprise agility. Second, the firm must ensure that its IT architecture (including the suite of enterprise systems and applications) sustains the goal of agility. In addition, the two architectures must be continually blended in order to identify digital opportunities for agile moves (e.g., launching new products, services, channels and markets). A governance process is very critical to the ability of developing agile infrastructures because business executives are the primary decision-makers in the domain of the enterprise architecture, whereas IS executives are the primary decision-makers in the IT infrastructure domain.
A well-developed governance process makes them aware of the decisions where they must take on authority and responsibility and decisions where they must collaborate with each other. A governance process ensures a process of lateral communication, collaboration and coordination across the two infrastructures. Since agility involves continual innovation with speed, surprise and success, a well-developed governance process ensures that the business and IS executives are able to make appropriate decisions in a rapid but accurate manner. A poor governance could result in business initiatives without adequate technology support, or technological initiatives not addressing a real business opportunity.
In order for an organization to be proactive vs. reactive, what processes must be in place to effectively sense and respond to situations that cannot be forecasted?
The key process to develop is intelligence capability that is both internally and externally oriented. A highly refined business-intelligence capability that enables a firm to analyze its transaction data and discover new market segments or product, services, pricing and channeling opportunities is needed. At the same time, firms must develop an external intelligence process whereby they can observe innovation opportunities among the emerging economic, technological, social and regulatory trends. Along with such a process, managerial foresight and the ability to ask the right questions as well as make sense of the intelligence analyses is critical.
Q. What are the differences and the needs of a firm employing both exploitative and exploratory strategic actions?
Exploitative strategic actions focus on developing world-class capabilities in specific domains and building business partnerships to gain access to complementary capabilities. With exploitative actions, firms focus on: (1) developing deep expertise in the areas of competency where the firm excels, and (2) developing business partner networks for access to other capabilities.
For example, Wal-Mart’s exploitative actions leverage its significant capabilities in logistics and merchandizing. As a result, it continues to invest in process excellence and technological sophistication for logistics capability. Note its leadership in RFID [radio-frequency identification] adoption, a technology particularly important for the logistics process.
Similarly, in an exploitative strategic action, a firm will focus on developing deep relationships with a few business partners who will provide it access to the complementary capabilities─logistics, product manufacturing or customer service. These deep relationships are utilized to motivate the partners toward continuous improvement in the associated capabilities and processes.
Exploratory strategic actions focus on developing future opportunities through innovations in business models, products, services or customer segments. Such firms need to develop a broader business partnership network. Compared to exploitative actions, firms seek to partner with firms that might have innovative capabilities or who might not have had a history of prior collaborations with the firm.
The number of business partnerships is also larger because they allow the firm to remain connected to promising ideas without being locked in by a limited number of new ideas. With an exploratory focus, firms must be far more active in scanning the external environment, not just for new ideas, but also for companies that might have new technologies or capabilities that could be important in the future.
Q. How is it possible for an organization to demonstrate both leanness and agility?
Managing leanness and agility simultaneously is not easy. Leanness requires an emphasis on continuous improvement and process excellence. Agility requires an emphasis on continuous innovation, creation of new processes and capabilities, as well as room for strategic experimentation. Both leanness and agility require investments and management attention, but the nature of these investments is different. Leanness focuses on standardization and reduction of variety in processes.
Further, external business partnerships are focused on the leverage of current capabilities and on motivating the business partners to invest in continuous improvement, [i.e.,] speed, cost, and quality. Agility focuses on a willingness to pursue new opportunities, often at the risk of cannibalizing existing business opportunities, and exploring new business partnerships that might bring new ideas.
To facilitate both leanness and agility, firms should recognize that their needs are different. Therefore, they must design appropriate organizational structures that facilitate attention toward leanness and agility in their process- and technology-management activities. For example, within the key processes, identifying responsibilities for process improvement and process excellence will ensure that certain executives are enhancing leanness. At the same time, having other executives responsible for process innovation facilitates agility. The activities of these executives should be supported through appropriate funding mechanisms.
Q. To what extent do investment levels across operating units reflect the role that business technology actually serves in enabling strategic positions?
First of all, investments in business technology in firms must be allocated across three different categories: enterprise investments, investments through the office of the CIO, and investments made through operating and business units. Though the relative proportion of funding from these sources might differ, firms should ensure that at least 40 percent of the total annual IT spend originates from the operating units. The enterprise spending is focused on large-scale initiatives that facilitate interoperability across the enterprise and build strategic enterprise-level information and process capabilities. However, business units are expected to use their sources of funding in specific business technology initiatives that will enhance their operating performance, e.g., enhance sales, reduce costs or improve regulatory compliance.
Though the roles of business technology in enabling strategic positions might vary, it is not clear that their business technology investment levels will vary significantly across the enterprise without creating resentment and governance problems.
What is more likely is their business technology priorities might be different and their access to ‘own’ funding [their own funding versus an organization’s overall funding] would enable them to pursue unique initiatives. Of course, the allocation of funding across the different categories would have to still be coordinated through an enterprise IT capital and operating expenditures approval committee, consisting of representatives from the corporate IT group as well as the operating units.
Q. Is strategic experimentation necessary as a means to better understand the roles served by business technology in acquiring and sustaining favorable market positions, and as a result, competitive advantage?
Strategic experimentation is one of the ways in which managers can better understand the roles served by business technology in acquiring and sustaining favorable market positions. Other ways include managerial intuition and foresight, vigilance about actions by competitors, and frequent dialogs with vendors to learn about emerging opportunities through technology.
Of course, strategic experimentation helps develop unique knowledge that the firm can leverage to greater competitive advantage. The downside is that experiments take time and money. Therefore, firms should evaluate when it makes sense to develop unique knowledge through experiments vs. leveraging external knowledge through vendor partnerships or observations of competitive actions.
Not all firms need to be lean or agile. Based on different levels of product/market competitiveness and stability, what are some of the risks associated within an organization that strives to be either lean or agile, when neither is required or applicable?
Significant emphasis on leanness locks in managers to a mindset obsessed with productivity, speed and continuous improvement. In doing so, they might blind themselves to new opportunities, or worse, ignore any ideas that might require the implementation of a new process or relationship. An excessive emphasis on leanness could cause firms to narrow their external focus and lose sight of fundamental shifts in business or technological environments. Over time, their cash flows could deteriorate.
On the contrary, significant obsession with agility could prove expensive and even cost a firm its competitive positions. Agility is expensive because of the magnitude of change and risk. Not all ideas are likely to be successful, and too much agility could drain the firm of money. More importantly, a perpetually agile firm could exhaust its managers. Externally, customers, vendors and suppliers could find the relationships with the firm to be expensive and difficult to uphold because of the frequent changes in products, services or relationships. Agile firms are more likely to become bankrupt because they are not able to establish and hold a position long enough to generate the needed cash flows.
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