How to Find Your Competitive Advantage

As global competition invades more and more markets, established companies are fighting tougher and tougher battles against commoditization. Whether their niche is business-process outsourcing, consumer electronics or air travel, management teams are asking themselves: How can our company continue to differentiate itself from our competitors?

The short answer is, either with customer service or radically lower cost. In today’s economy, both paths demand innovating with IT systems in ways the competition will find difficult to copy.

Despite the seeming obviousness of this idea, however, relatively few companies are making it happen. There is a persistent problem in the relationship between the IT department and the rest of the corporation that blocks the effective use of IT capabilities when it comes to differentiating core products and services. Allow me to suggest an approach to breaking through this barrier.

The challenge, in essence, is to align IT investment with business priorities. The problem is that businesses are remarkably foggy on what their priorities are. Ask any consultant. When consultants interview the executive team individually and ask each person what the corporation’s overall strategy is, they receive many thoughtful answers. Unfortunately, these answers rarely converge. The dirty secret is that most corporations do not have a unified corporate strategy. So, in effect, we are asking IT to align with something that does not exist, and we should not be surprised when the results are poor.

Obviously, the long-term fix for this is to align the corporation around a single strategy. But that’s not in IT’s power to accomplish. What IT must do instead is determine the pecking order of power among the various competing corporate strategies and align itself with the most powerful first, then the second most powerful and so on. There won’t be enough resources to fund everyone’s strategy, so it is important to get to the most important ones first. Of course, if you are lucky enough to work for a corporation that does have a unified strategy, you can probably stop right there.

But let’s say you are not so lucky. Now what? The first step is to sit down with the executive in charge of the highest-priority operation or P&L and have a heart-to-heart about the following questions:

When you look at our corporation’s performance in the marketplace, what companies represent our stiffest competition? (List two or three. Then answer the following questions for each competitor.) 1. What are they so good at? 2. Is our goal to equal or beat them at that? 3. Is there some other thing that we do, or could do, that they in turn would find hard to compete with? 4. Is it our plan to commit significant resources to such an activity?

Once you get those answers, find out how the executive would define: 1. your company’s primary competitive differentiator today; 2. its best chance for equal or greater differentiation tomorrow; and 3. the most important business initiatives under way to create that future competitive differentiation.

Stop there. Once you have this input, thank the executive for his time and explain that you would like to think about the IT implications of this strategy and come back with a plan to maximize the value from IT investments going forward. Back in your office, gather your best and brightest around you for the following exercise, which we will call core/context analysis.

Identifying Your Core Functions

In this exercise, something is core if, and only if, it contributes to the corporation’s primary effort to create competitive differentiation. All other activities, by definition, are context. For example, at Southwest

Airlines low-cost fares are core, and customer amenities are context.

Conversely, at United Air Lines customer amenities are core, and low-cost fares are context. At Domino’s Pizza, customer delivery is core; at Pizza Hut, it’s context. At Volvo, safety is core; at Ford it is context.

Now many context activities are extremely important, even if they are not differentiating. So to make sure we register this dimension as well, we also ask whether a given activity is mission-critical. Mission-critical activities may be core or context; their key feature is that falling short in their execution has severe negative consequences. For example, not losing customers’ luggage is a mission-critical task for all airlines, but core to none. Same goes for building a safe car; at Ford, hybrid fuel economy may be core, but the consequences of unsafe vehicles are totally unacceptable.

In light of this model, the most important processes to support are those that are both core and mission-critical. Even here, there is a subtlety that can be lost. Often, the goal of minimizing mission-critical risk can be at odds with increasing competitive differentiation. For example, suppose you could ship an ugly iPod by Christmas but would risk missing the holiday sales window to make a beautiful one. It is crucial that differentiation be given the priority. That is, if style is core (and at Apple it surely is) then one cannot sacrifice it, despite the risk. The reason is simple: Without competitive differentiation, the entire corporate strategy is bankrupt.

This doesn’t mean you can abrogate your responsibility to manage mission-critical risk, only that you must go out of your way to make sure it does not interfere with creating core processes. IT can help you create new core initiatives, but they are not always understood to be strategic at first.

Investing According to Analysis

Creating new core is the domain of pilot projects and skunk works. Typically, the company is still incubating the new capability, not exposing it yet to the marketplace at large, and not expecting significant revenue from it in the short term. That’s why it is not yet mission-critical. But it is incredibly strategic, particularly if you can shorten a new product or service’s time to market. Here’s where IT may be able to make a big difference, whether it is via converged communications and computing systems that speed collaboration, beta customer feedback systems that shorten cycle time, or supply chain management that supports rapid prototyping. But if IT resources are allocated by revenue contribution, then this quadrant will always get short shrift, and the company will lose precious time to market in an act of false economy. (That’s why it’s so important to allocate resources based on a core/context analysis.)

By contrast, putting IT in service to mission-critical context makes all kinds of sense to everyone involved. If competitive differentiation is not a key goal, then standardization is a great alternative, and nothing imposes standardization better than IT systems. Moreover, once processes have been standardized, they can be reengineered to extract resources either through automation or eventual outsourcing, thereby freeing up those resources to be invested in core activities.

The key here is to recognize that if a process is mission-critical but not core, then there is nothing to gain from differentiating its outputs. Therefore, user requests for nonstandard output need not—indeed, should not—be prioritized because they are not strategic. For example, users often argue that since the systems are being charged back to their budget, they should be entitled to get what they want for their money. Not so. It is not their money; it is the company’s money, and they have a fiduciary responsibility to get a good return on it. There is more strategic value in standardizing mission-critical context processes because it frees resources to invest in strategic differentiation elsewhere.

Finally, that leaves processes that are neither core nor mission-critical—facilities management, training seminars, office supplies procurement and the like. These cry out for outsourcing. Here, IT can make the biggest contribution by preparing the processes for service-level management. That is, prior to transferring the work to another party, IT can first determine what the standards of acceptable work product are, establish metrics that track to those standards and even pilot those metrics while the work is still in-house. Then when the work is outsourced, the company has a low-touch, high-reliability mechanism for ensuring vendor performance.

The goal of all this analysis is to fund next-generation innovation by migrating resources from context to core. This not only improves returns but also helps reduce resistance to change, since the resources being transferred are often the very people who would otherwise be obstructing innovation.

The biggest challenge is extracting resources from mission-critical activities. The key to success here is to win the line-of-business executive sponsor’s support for standardizing these processes. That can be done if you can demonstrate how IT can redeploy those resources in support of core initiatives. Armed with this analysis, you now can go back to the business executive with a plan designed, first, to accelerate initiatives targeted at competitive differentiation and, second, to manage risk while freeing up resources for next-generation innovations.