3/19/12

BCG - Expert Interview

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Expert Interview

Frank Felden
Partner & Managing Director Cologne Insight into how companies are using IT in innovative ways to gain competitive advantage. In the following interview, Frank FeldenBCG s worldwide segment leader for IT strategyexplains how IT strategy has become a critical component of business strategy. He describes how companies are using IT in innovative ways to gain competitive advantage in their industries and even fundamentally change the nature of competition in some industries. Please describe your position within BCG as well as your background. I am a partner and managing director in BCG s Cologne office. I have been working on IT-related projects for more than 15 years. My work has focused on the technology, media, telecommunications, and banking industries. I graduated from RWTH Aachen in Germany with a degree in computer science. What does IT strategy mean for a company, in specific terms? Ideally, IT strategy is the part of an overall business plan that defines the company s objectives in using IT, describes targeted IT environments (for instance, business processes, information, applications, and technologies), and sets out plans for reaching targets and meeting goals. Companies have been developing IT strategies since at least the 1970s, but today s IT strategies are very different from those of the past. Years ago, they generally described plans to automate various business processes. Many started with financial and accounting functions and worked gradually through areas such as sales, marketing, operations, human resources, and research and development. A typical objective was to reduce the cost of a business process by replacing employees with computers. Today, an IT strategy might still include plans to automate a business process, but these plans usually appear under a new name, such
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BCG - Expert Interview

as digitizing the business. IT strategies are no longer limited, however, to internal administrative mechanisms. There is a focus on developing new IT-enabled business capabilities, such as data mining to gather consumer insight or positioning a company to rapidly integrate an acquisition. The most exciting IT strategies plot ways to construct entirely new business models, as TiVo, Netflix, eBay, Apple, Amazon.com, and Google have done. Through the economic downturn, IT organizations focused primarily on cost reduction. Now that the global economy appears to have turned, what is the next area of focus for IT? Many companies have turned their attention to growth, and IT organizations are being called on to support and, in some cases, drive that. Companies expect IT to enable new products, new business models, new and better customer experiences, and innovation in general. In short, companies want IT to provide the platform for transformation. The CIO, as the key formulator of IT strategy, has a major part to play in this and is, in many respects, uniquely situated to create value for the company. But can IT strategy really transform entire industries? It certainly can. Most IT strategies today focus on how to use IT to achieve sustainable advantage against well-known competitors in the industry. But some companies go beyond this, generating approaches that are disruptive in that they alter the nature of, for example, products, distribution channels, value propositions, and players. Take, for example, digitization in the media industry. This development changed the media world as we know it. The MP3 format was developed by a group of researchers at the Fraunhofer Institute for Integrated Circuits in Germany. At the time, the people working on that format apparently paid little attention to markets or business models. Nonetheless, this novel way of compressing audio data sparked a revolution in the music industry. Visionary players such as Apple changed the rules of the industry by picking up on this development very early on and transferring it into a product that satisfied emerging customer needs. Applea company that was building computers and was not a key player in the music industrygained sustainable competitive advantage by making IT an integral part of its business model. Apple s aggressive and creative use of IT has helped it subsequently conquer and reinvent other industries as well. In short, Apple has institutionalized the ability to transform industriesand IT has been a key enabler. BCG continuously analyzes current and future trends and has developed a framework to help clients understand how they can exploit trends in a way that allows them to change an industry. In many companies, the IT organization s strategy has been to adopt an industrialized modelthat is, design highly specialized centers of excellence with favorable economies of scale and tight process controls to ensure that the outputs are of high quality. Doesn t such a strategy tend to stifle IT innovation? We believe that the industrial model works very well for network management, data center operations, help desks, and traditional software development. But a completely different management model is needed to create IT-enabled business innovation. We refer to being multimodal, or having the ability to operate using disparate models simultaneously. The IT innovation process should not resemble a factory; rather, it should be like a research and development lab or a start-up technology company. BCG s IT-innovation tool kit includes frameworks for organizing innovation centers and designing innovation management processes. How do you help clients decide on and devise plans to achieve their target visions for IT? We believe that enterprise architecture is the best term for describing the agreed-upon vision of how IT will be used in a company at
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BCG - Expert Interview

various points in the futuresuch as one year out or three years out. Enterprise architecture allows IT and business leaders to create blueprints from different angles. It is very much like a set of architectural drawings for a house. Each describes a different facetsuch as floor layout, electricity, plumbing, or landscaping. In enterprise architecture, plans are drafted for business processes, information, applications, computing environments, networks, and other aspects of a company. We help our clients develop enterprise architectures and determine which projects will be needed to achieve their vision. We work with them to develop rigorous IT-portfolio-management mechanisms, which help them manage the life cycle of a projectfrom proposal and approval, through design and implementation, to postimplementation reviews that check to make sure that the promised business values were achieved. One of the tools we use to help IT organizations maximize their potential is the Capability Maturity Framework, which gives companies a concrete sense of how advanced their IT organization s capabilities are across all relevant processes, including strategic planning, innovation management, enterprise architecture management, and portfolio management. The framework, which is being adopted by a number of leading organizations, was developed by the Innovation Value Institute, a global consortium of more than 40 organizations that is seeking to create a gold standard for IT management. What do you find most exciting about IT strategy? In a world where business as usual has been blown to bits, practitioners of IT strategy are faced with very difficult challenges. Think about social networks and the huge impact they have already had on such activities as recruiting, marketing, and advertising. IT strategists who can make sense of the technological changes, predict how they will affect businesses, and design brilliant IT-enabled business strategies will be highly prized by CEOs and other top leaders. To me, this is very exciting.

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