A Magic Quadrant – Differentiation vs Cost Leadership Strategies with IT Spend

Business guru Michael Porter espoused for generic competitive strategies: industry-wide differentiation, focused differentiation, industry-wide cost leadership, and focused cost leadership. Let’s think about Porter’s ideas in the context of tech spending.

Differentiation Strategy

Companies that seek industry-wide differentiation have a competitive advantage in a broad range of industry segments. On the other hand, companies looking for focused differentiation attempt to create a competitive advantage in fewer industries. In either case, the company is better than other competitors in terms of scale, quality, features, support, distribution, or delivery.  Indicators of a successful differentiation strategy is premium pricing or ownership of unique intellectual property.

Cost Leadership Strategy

Industry-wide competitors look for competitive advantage by offering lower prices than anybody else on products or services in a broad range of segments, whereas focused cost leadership limits the strategy to a smaller set of industries. Because the company is trying to outdo its competitors on price alone, the principle problem the company faces is infrastructure: automation and efficiency is necessary to keep downward pressure on costs.

Where Tech is Applied

Under both strategies, technology is applied to both products and processes. Technology can be used to enhance products and give them more features than similar products from competitors; that differentiates the product. Technology can be applied to business processes to create more reliable scheduling, less defects, faster order processing, and better economy of scale. And generally speaking, the first is a problem of revenue (how many units of X-product can I sell? How many hours for X-service can I bill for?) versus a problem of expense (how can I control the erosion of my margin? How can I continuously improve to lower waste and scrap costs?).

Managing the Technology Portfolio

In thinking about these ideas, business managers have to look at their business strategy and think how their tech portfolio – the hardware, software, database, and telecom assets they’ve invested in – complements their objective. Unfortunately, what we usually see is a mis-match between the portfolio and business opportunity.

Differentiation Example:

1. The industry-wide differentiators maybe blows a bulk of its IT spend on sales, production control, and accounting software instead of R&D. It never introduces new features or takes pole-position in the market with new products. It follows industry leaders. It fails to innovate on its own. It never gets closer to its customers.

2. The focused differentiators maybe blows its IT spend on a broad online marketing campaign rather than honing-in on search attributes that bring it closer to its own geographic region; or, it doesn’t spend money on creating value-added self-service apps that bring them more “organically” closer to the consumer.

Cost Leadership Examples:

1. The industry-wide competitor maybe wants more market share and places strategic emphasis on broad marketing and advertising. This improves sales and increases volume. However, without an investment in infrastructure, their costs increase exponentially: their economy of scale isn’t refined. So, as more orders come in, the less efficient they get, missing deadlines, harming their brand, and pulling in more over-time, eroding margins.

2. The focused competitor may have invested significantly in cost controls and internal process automation. However, intake may still be manually compiled or hand-entered. They made a huge back-end investment to improve process automation, but a similar investment on in-taking the order into the process wasn’t made, so you get a bad GIGO effect (garbage in, garbage out), which diminishes the initial tech return.

Align the Tech Portfolio with the Business Plan

If you’re looking at your business plan, consciously think about where tech dollars are being spent. Is it being spent in a way that complements the business plan? Is IT spending helping you innovate and differentiate your products to a bunch of customers, or, is it helping to bring your niche customers closer to you, or, provide extra value in the transaction?

Instead of saying, “We need PC’s so we can use email and make spreadsheets”, how about, “We need a tablet PC so we can automate order inflow and ensure accuracy, meeting our focused cost leadership strategy”.

Instead of saying, “We need to sell more – online, onground, anywhere!”, how about, “We need to balance our ad-spend with IT-spend so we can create an efficient economy of scale first, and then push broad advertising”.

Instead of saying, “We need a website”, how about, “Most of our customers call from the field. We need a search strategy so when customers in our geographic region and industry want our products, and they’re on their mobile phone, we’re the first name that pops up, and the first number they’ll dial.”

Instead of saying, “We need a good order management system,” how about, “How, specifically, can this system automate my business process and reduce my labor costs? Where can I reduce headcount or touch points… friction?”

So, think of this as a simple quadrant/magic box diagram (x: broad, narrow | y: differentiation, cost). Where is your IT spending generally hitting? Thinking in these terms will help create a lens by which to view your tech spending, balance where your tech portfolio is leaning, and see where the spend complements your business plan.

R

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