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Integrating Business and IT Strategy:
Reframing the Applications Development Portfolio
Professor Michael Earl
Centre for the Network Economy
CNE WP08/2002
Integrating Business and IT Strategy
Reframing the Applications Development Portfolio
Michael Earl
London Business School
One obvious effect of e-commerce has been a reassessment of both the process and content of respectively competitive strategy and IT strategy. In the e-commerce space, especially in pure play Internet businesses, both these strategy domains seem to be enacted as one, with an emphasis on strategy-making by teamwork and strategy implementation through rolling plans (Earl and Khan). More widely, it can be argued that to have business strategy separate from an IT strategy is folly (Earl 2000). Not only do we need to ensure we are developing IT applications and building IT infrastructures to support the current business strategy; we also should be re-examining how the business strategy should change because of the threats and opportunities presented by IT – either in the way we do business or in the business positioning we choose. In other words (fig 1), IT both shapes and supports business strategy.
Fig.1: The IT-Business Strategy Connections
Whether firms choose to integrate their formal business and IT strategies or not, they certainly need to integrate their business and IT thinking. We know that there are several methods, styles or processes that firms adopt in strategy-making (Mintzberg, Earl 1993, Segars and Grover) and some are more likely to achieve such integration than others. So one practical means of ensuring a degree of integration takes place is to devise and use a tool for either assessing an application development portfolio ex ante or reassessing it ex post – or both. In other words, the framework I will propose can be seen as a planning tool or as an audit tool. I call it the T-Portfolio.
The underlying premise of the T-Portfolio is that at all times, firms are competing on two time horizons. They are very much engaged in daily battles for, and current initiatives in, the present. Indeed, several theories and models of competitive strategy, for example, the work of Porter (1980), are principally oriented towards visible and tangible timeframes. Likewise, as IT has evolved to the point where infrastructure and applications underpin business operations there has to be a focus on the present and near-term in IT Strategy as well.
However, not just because of the promise of ever-emerging new technologies which pose new business threats and opportunities, but because other exogenous and endogenous factors change too – demographics, politics, economics, consumer attitudes and behaviour, management and organisational philosophies, innovation and creativity – businesses are competing for the future and longer term. Some more recent work on competitive strategy, for example, (Hamel and Prahalad, Hamel) has been oriented towards the future and towards revolution rather than evolution. This has seemed especially relevant in the context of new media, e-business and apparent indicators of a “new economy”.
In other words, firms have to compete for both today and tomorrow (Abell) and it seems likely that both the content and process of today strategies differ from those of tomorrow strategies. Thus the T-Portfolio looks for a balance in investments that are competing for today and competing for tomorrow – or put another way for evidence that IT is both supporting business strategy and shaping it.
Competing for Today
In the “theory” and practice of IT strategy-making, there are different, or perhaps complementary, views on how to align the applications development portfolio with business strategy. The “top down” school usually has as its starting point explication of a firm’s business strategy, followed by identifying applications to support the different strategic thrusts. Alternatively, candidate application ideas may be validated against the espoused business strategy. If, as argued earlier, most business strategies are framed in the current dynamics of competition, the result is essentially an applications development portfolio which meets today’s needs, even if it implies a three year or more timeframe for implementation.
The “bottom up” school usually has as its starting point solicitation of user suggestions and ideas. The merit of this process is that such proposals are mostly grounded in the needs of daily business and the experience of using and deploying existing systems. As many managers learn by doing, or from experience, such a process can be a rich and relevant source of application ideas. Once again, however, the time orientation is the present.
A more emergent school of IT strategy-making, sometimes called “middle out” or “inside out”, rests on local experimentation and innovation, the use of informal, ad hoc or formal teams to generate ideas, unplanned accidents and surprises, and evolutionary developments from existing systems. The results can be as much oriented towards the future as the present, possibly providing a mechanism of continuity which links the two. However, the “middle out” school is not explicitly focused on the future.
In other words, most IT strategy-making tends to be grounded in the present rather than the future – or more graphically today rather than tomorrow. This is partly a function of executive and organisational mindsets and the focus on short-term performance as much as the orientation of most schools of IT strategy-making. However, if it were different, it would suggest misalignment rather than alignment with business strategy because, to repeat, competitive strategy is rightly at least as much concerned with the daily battles of the market-place and the current strengths of internal resources as it is with carving out a different or new future. Short-term survival is a precondition of longer-term renewal.
Indeed, when shocks arrive – business mistakes, economic recessions, political surprises, much as being experienced as I write this article in the fall of 2001 – the need is to focus on the present, to ensure survival. So there are periods when a viable application development portfolio is dominated by today, not tomorrow. The left hand side of Fig.2, the T-Portfolio, therefore will have more content, where the emphasis is on IT supporting the business or competing for today.
Today Investments
At any time, most business executives would have more confidence in an application development portfolio which had some short-term deliverables or quick wins. Most CIOs would want the same, because they know that their credibility – a key to survival (Earl and Feeny) – is improved by having a stream of deliverables. So ideas that generate rapid payback, help make life easier, or are a basic necessity, should be present in every portfolio. They may be generated by any of the three “schools” outlined above, but are particularly likely to be outcomes of “bottom up” processes. These quick wins or essentials we can call the basics (fig. 3) – or more colloquially “low hanging fruit”. They are not “Killer applications”, but they are useful basic systems.
However, the crux of strategic alignment thinking is to ensure there are IT applications which support the thrusts of competitive strategy. These are the killer applications. Here “top down” processes do help in identifying and selecting them. Perhaps the critical success factors method (Rockart) is the obvious logic to employ because, in short, we seek a set of IT investments which enable achievement of operational goals critical to business success or superior performance. And if such seemingly strategic ideas are generated by more “bottom up” or “middle out” processes, we can assess and rank them against a rubric of critical success factors.
Thus the today side of the T-portfolio also should have a set of IT projects which are seen as pillars of competitiveness. Earl’s (1993) study of IS Strategic Planning suggested that successful IS/IT strategies comprised just there or four themes pursued over several years and we might expect most of these themes to be ones of current competitiveness.
In allocating capital expenditure, the competitiveness cell should far outweigh the basics cell. This is where applications should be classified as either “competitive necessity” systems or “competitive advantage” systems (Clemons and Row ).
Competing for Tomorrow
The argument that IT can shape business strategy as well as support it has become more potent with the arrival of the Internet and e-commerce. Two claims are often made. First, potentially these ‘new technologies’ can lead to firms repositioning themselves as industry boundaries change and value systems are reconfigured; and they can enable new ways of doing business by exploiting network structures and information richness. Second, because this is new territory, all the options are not yet known or understood; therefore elements of both imagination and learning by doing are required.
The first claim suggests that any application development portfolio which claims to be strategic, or is also concerned with tomorrow, should comprise some investments which are carving out new positions and new ways of doing business. Otherwise, a firm may be blindsided by more perceptive and nimble players. The second claim suggests that necessarily some projects will have to be seen as “soft”, either rather creative and speculative (options if you will), or more experimental where the goal is as much about discovery and learning as about pursuit of a definitive commercial payoff.
Most IT strategy-making and the resultant strategies do not score highly on either creativity or experimentation. The same could be said for business strategies, although recently more attention has been paid to these issues – at least in the literature (Mintzberg and Lampel).
In the case of IT strategy-making, there are often calls for visions and visioning, but examples still tend to be grounded more in the present than in the future. If the intent is shaping business, this is where imagination, scenarios, brainstorming and storyboards take over from analysis, success factors, continuous improvement suggestions and feasibility studies. Of course, the scenarios or storyboards have to make business sense, but you are not likely to hit upon novel and different ideas by starting with business analysis. As one French designer[1] puts it “virtuality can influence reality”. To imagine futures may lead IT strategists, and business strategists, to discovering an exciting yet realistic strategic vision. Sometimes such imagination may even be mediated by technology and new media – as the above quotation suggests.
One rationale for an experimental approach as well is that the future, and thus viable strategies, are uncertain and unknowable and therefore may need to be discovered by doing. A related argument is that in rapidly changing times – for example in the e-commerce boom – strategy is a race to learn. Therefore learning devices such as experiments make sense. Indeed, experimentation is not entirely unknown in the information systems domain; prototyping is one obvious example. However, here we are concerned with prototyping the future. The tomorrow spirit is “let’s see if we can change the paradigm and if it makes sense”, rather than the more usual today spirit of prototyping, namely “let’s see if this application will work and discover how to make it work”.
So a balanced T-Portfolio will have some content on the right hand side of Fig. 2, where IT is being deployed to shape the business, ensuring today and the present do not background or drive out tomorrow and the future. One would not expect as many or even as large IT investments targeting tomorrow as those targeting today. After all, the future is more uncertain and portfolio approaches to strategic decisions are usually to do with managing risk. Nevertheless in periods of excitement about the future, where directions seem to be unfolding rapidly, one would hope to see some IT investments being made on the right hand side of the T-Portfolio.
Tomorrow Investments
Experiments (Fig. 4) are those projects which make some sense in today’s context and may turn out to be really innovative and with further investment might shape the business of tomorrow. Therefore, they are low in both supporting today’s business and, initially at least, in shaping tomorrow’s business. They are not “bankers” in r.o.i. terms; nor are they “killer apps” because their impact or success is far from certain. They are experiments which may turn out to be winners, may suggest another experiment or incremental investment in due course, may turn out to be just mildly useful for a time at least, or may be short-lived and “written off to the learning budget”. Accordingly, two or three true experiments may be the maximum any one business unit should tolerate, even in the best of times.
Visions are those projects which are bold moves to create new strategic positioning or some new source of competitive advantage. They are thus high in potential for shaping the business of tomorrow. Unless there is no thread back to the current business or business context – and most strategic thrusts or visions ex post are seen to be connected to the present or past – they also will make increasing sense in terms of supporting today. At the least there is a good story to tell now. However, because these are “big bets” or “strategic investments”, any T-Portfolio would not contain more that one or two such visions.
Retrofitting a Case Study
British Airways has been pioneering ideas of e-business for some years[2]. In early 2001, the e-business division of British Airways (BA) was assessing its portfolio of projects, both completed and under development, looking for focus and seeing what it had learnt so far. It can be imagined that with the severe shock faced by airlines in the fall of 2001 that BA may have wanted to assess the e-business portfolio once more as all investments and costs came under scrutiny. One way of doing this could be to use the T-Portfolio as an audit tool, no doubt emphasising today and survival over tomorrow and industry leadership. Indeed in teaching the BA case study[3], this exercise can be done vicariously. While deeper knowledge of BA and/or the case study would help in understanding and evaluating the contents of Fig. 5, we can see how the exercise might work.
The underscored projects or applications are those I select to justify the classification. E-working, in the basics cell, is about use of the internet and BA’s intranet to convey company information to employees, to provide answers to frequently asked questions, to automate training and so on. It should reduce administrative costs, simplify daily work activities and improve information flow across the corporation. It is thus a basic investment, useful – probably valued over time – but probably will not make or break BA’s competitiveness.
E-procurement, in the competitiveness cell, may promise more than it achieves, as others have found, but with potential to reduce costs in an industry where profits are not easily made, to reduce spares and consumables replenishment time, and to improve co-ordination in the aircraft supply chain, it can be seen as an important defensive action in the daily battle for competitiveness.
“Queue Buster”, in the experiments cell, is a new technology experiment where a cybernaut-like check-in agent uses around the body keyboard, display unit and battery to complete on the spot check-ins. Sort of “wacky”, it represents an experiment to re-engineer a core sub-process with advanced technology and learn what might be possible, including user and customer reactions.
Opodo.com, in the visions cell, is an important joint venture across European airlines to create an online travel portal. I classify it in the vision cell because it attacks other non-airline portals in the internet space, it is explicitly designed to exploit network structures to sell air travel related services as well as seats on planes, and it is one move, among others, to disintermediate travel agents.
BA might conclude from Fig.5 that the portfolio has a good balance between today and tomorrow. Today-focused projects outnumber tomorrow-focused ones, which makes sense when the company is seeking to restore profitability in a highly competitive market-place. However, as BA recognises that e-commerce and the Internet represent threats as much as opportunities in the next few years, they could be expected to maintain investment in some low risk experiments and in one or two visions for changing their position in the marketplace. If capital becomes heavily rationed and today’s performance and cash flow dominate the agenda, then a second hard look might be taken at the experiments and business performance targets set for the vision projects as well as the competitiveness ones.
Conclusion
It is conventional wisdom and practice to think of the information systems plan as an applications development portfolio. Suggestions have been made over the year about the structure of these portfolios, for example looking at project risks (McFarlan) or application types (Earl, 1989). As the theory and practice of strategy-making, in both the business and IT domains, have evolved it is perhaps useful to revisit these ideas.
One perspective is time. In bad times we worry that the short-term drives out the long term. In heady times, the emphasis seems often to be the reverse. The T-Portfolio attempts to explicitly and formally examine how a firm is competing for today and for tomorrow. It seeks both to ensure that each timeframe is not subjugated by the other and to provide a tool to engage in executive discussion about the appropriate balance at different times.
It also recognises that IT can both support and shape business strategy. Often it is the support aspect which dominates executive-thinking in both business and IT strategy-making. As a planning tool or an audit tool, the T-Portfolio may help ensure these twin enabling contributions of IT are properly examined. It would seem able to accompany any style or process of strategy-making.