The Slippery Nature of ‘Strategic’ IT

The word ‘strategic’ in IT discussions reminds me a lot of the use word ‘lean’ within my home discipline of operations management.  Both are frequently used, clearly positive, and often held up as goals.  And both are vague, and used so frequently and loosely that they’ve ceased to have any clear meaning.

I firmly believe that IT can be an irreplaceable contributor to competitive advantage, but I don’t believe that this advantage comes from slapping the ‘strategic’ label on a particular system or application, even one that’s valued by customers, revenue enhancing, and necessary for the rollout of new products or services.  A system with all these attributes can be a strategic necessity, which is very different than a strategic resource.

Eric Clemons and Michael Row pointed out that bank ATM machines allowed retail banks to offer a new service (24 hour access to cash), are beloved by customers, and bring in additional revenue¹.  They pretty quickly became strategic necessities; banks had to get ATM networks to stay in business. 

So they got them, either by building their own or joining alliances.  Once they became widespread ATM networks could no longer be called strategic resources, which need to be not only valuable, but also rare, inimitable, and non-substitutable –  the so-called ‘VRIN’ attributes².  Oil wells and diamond mines are perhaps the ultimate strategic resources. 

The VRIN attributes define a high bar, and most information systems just don’t get over it.  A study William Kettinger, Varun Grover, Subashish Guha, and Albert Segars examined thirty companies that put in place ‘strategic’ systems and found that only seven of them were associated with above-average revenue and profitability in two later time periods.³  A recent survey by Peter Weill and Sinan Aral found an interesting reversal.  While ATM machines were losing their status as strategic resources, “much of the advantage [in financial services companies now comes] from higher efficiency in executing basic transactions and providing infrastructure to foster innovation.”⁴  It seems, in other words, that strategic resources can be very hard to identify in advance.

Of course, there are some examples of IT that starts as a strategic resource, and stays that way.  Google’s combination of smart algorithms, vast storage capacity, and processing muscle gives it the ability to return high-quality search results, even in the presence of many attempts to game the system.  This infrastructure is clearly a strategic resource for the company.  I wrote a case on the Japanese cab company MK Tokyo, which developed a system to let consumers find immediately find and dial the closest cab using their Web-enabled phones.  MK has been awarded a patent in Japan for the system, thus taking care of the imitability issue. 

I also wrote a case about Spain’s Inditex, which owns the worldwide chain of more than 750 Zara stores.  These stores are tightly synchronized with Inditex’s vertically integrated production and distribution facilities, allowing great variety, flexibility, and speed while keeping costs low (Kasra Ferdows, Michael Lewis, and Jose Machuca wrote an HBR article about the Zara business model).  The IT that facilitates such tight synchronization, however, is simple to the point of being primitive.  For example:

- Point-of-sale terminals in stores run on DOS and are not networked
- One terminal has a dial-up modem, which is used to transfer files (via the ftp protocol) to and from headquarters
- The same modem is used to transmit digital order forms to and from PDAs, which employees carry through the stores while deciding what to order
- Short-supply clothes are allocated to stores manually, not by an algorithm.
- Back-office activities (purchasing, manufacturing, distribution, accounting, etc.) are not supported by a comprehensive ERP system.

In short, it’s very hard to identify any technology at Zara that meets the VRIN criteria, but the company’s IT supports a business model that has generated enormous value (Inditex’s market capitalization is higher than that of the Gap, a company with more than twice as much revenue) and so far proven impossible to imitate.  This suggests that as we think about strategy and IT we might want to focus less on individual systems, applications, or other discrete pieces of technology and more on two topics:  the capabilities IT provides once it’s up and running, and how these capabilities are folded into business successful business models and competitive strategies.

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¹Clemons, E. K. and M. C. Row (1991). "Sustaining IT Advantage: The Role of Structural Differences." MIS Quarterly 15(3): 275-292.
²Eisenhardt, K. M. and J. A. Martin (2000). "Dynamic Capabilities:  What are They?" Strategic Management Journal 21: 1105-1121.
³Kettinger, W. J., V. Grover, et al. (1994). "Strategic information systems revisited: A study in sustainability and performance." MIS Quarterly 18(1): 31-58.
⁴Weill, P. and S. Aral (2006). "Generating Premium Returns on Your IT Investments." MIT Sloan Management Review 47(2): 39.