Is IT Value Intrinsically Linked to Organizaitonal Strategy?

Revenues of Inditex Group, Spanish parent of the global Zara fashion store chain, grew from 756 million euros in 19941 to 13.8 billion euros in 2011, a compound annual growth rate (CAGR) of 19%. The number of stores has risen from 424 to 5044 over the same period (CAGR 16%). Comparatively the apparel industry in the US grew 1.9 in 2010 and the entire apparel industry grew 5.83% in 2011.

Zara’s competitive success is the result of good strategy. In “Good Strategy, Bad Strategy: The Difference and Why It Matters” author Richard P. Rumelt identifies three necessary components of the kernel or core of a good strategy2:

1. A diagnosis of the main competitive challenges,
2. Guiding policies that address the diagnosis, and
3. Coherent set of actions that implement the policies

Zara, once a low-cost manufacturer, correctly diagnosed that as the industry moved toward low-cost manufacturing centers in Asia, a shorter supply chain with design and manufacturing remaining in Spain could compete by 1) remaining close to customers and 2) rapidly responding to quickly changing fashion trends.

Zara designed a coherent set of actions across the company to adapt and respond to these insights. Designers create new designs in two weeks. Manufacturing remained in Spain. Designers work closely with manufacturing to ensure the new design can scale up production quickly with reasonable controls on cost. Store managers watch customer trends closely and enter orders nightly via hand held terminals. Orders ship daily regardless of percent utilization of the vehicles (other stores will hold the shipment until the truck is full). The entire system is designed to keep feedback loops as short as possible.

The company does not advertise in order to shape or explain customer value. Instead Zara listens and responds to changing customer preferences much more rapidly than competitors. Inventory is kept small and discounting due to overstocks are lowest in the industry. Where is IT in this story? IT is not central to the organization, and spend is lower than the rest of the industry. Information Technology is used, for example, to optimize logistics routes to reduce shipping times and reduce CO2 emissions. IT support operational processes as at most organizations, and as a public company is used to manage risks. The technical environment is intentionally maintained as simple as possible and the number of applications are minimized in order to reduce costs and risks.

Zara is just one example of how Information Technology supports the organizational strategy. It is particularly revealing because the organization actually has such a strategy, but it is not the only example. Wal-Mart Stores have been analyzed in great detail already, but one point worth examining is Wal-Mart’s use of bar-code scanners. The adoption of bar-code scanners is almost synonymous with Wal-Mart Stores, but the firm did not invent even become an early adopter. Kmart began adopting bar-code scanners at the same time as Wal-Mart in the early 80’s, and they were in use in grocery stores before that. However, Wal-Mart seemed to benefit more than anyone else. The firm integrated bar-code data into its logistics system faster than its competitors, and traded its bar-code data with suppliers in return for product discounts.3 The important point for Wal-Mart is the use of bar-code data integrated with and supported the rest of Wal-Mart’s logistical system as part of a integrated and self-reinforcing design. They were not one CIO’s pet project that was tangential to the rest of the organization.

Organizations try to provide superior value to customers over a sustained period of time. However, this is insufficient. The organization tries to capture a significant portion of that value in a way that is difficult for competitors to imitate. As an internal Type I or Type II provider, the IT organization in general needs to support and enhance the strategy of the organization. Operational excellence (warranty) is at times necessary but is never sufficient. (Indeed the sole focus on operational excellence is a race to the bottom, as all industry participants have to spend more to produce decreasingly differentiated products.) Utility as defined in ITIL is not useful. More utility is not better.

Enough utility to enable, support, and integrated with the organization’s competitive differentiators is what we seek to create. The CIO deserves a seat at the table. As both information and technology change, improve, increase, and differentiate, the need to have the CIO at the table will only increase, both to manage risks and to define and improve the organization’s strategy. In addition, IT will need to execute that strategy as part of a coherent and integrated set of actions across the organization.

1 Spanish pesetas converted 166.386 ESP/EUR, the official exchange rate when it was converted in 1999.
2 Bad strategy, by contrast is not the absence of good strategy. Rather bad strategies are fat analysis documents that fail to focus resources and actions, or are performance targets that fail to diagnose underlying competitive challenges to growth.
3 Good Strategy, Bad Strategy: The Difference and Why It Matters