Negotiating change to make intelligent investments

"You can't make intelligent investments within your organization unless you understand how your whole industry is changing," writes Anita McGahan in October's Harvard Business Review. McGahan, author of How Industries Evolve: Principles for Achieving and Sustaining Superior Performance (Harvard Business School Press, 2004), bases her theories on more than a decade of research on four trajectories of industry change. She told Kathleen Melymuka how CIOs can align IT investments with those changes.

How do I recognize that my industry is undergoing radical change?

Radical change occurs when everything you do is eventually going to become irrelevant because of some new technology or way of doing business. Take overnight letter delivery. When I ask students, they all agree that it will be gone in 100 years. What they differ on is how soon. Another example is land-line telephone. We probably could agree that in 100 years, telephone communication will not occur over copper wire. The question is how long that infrastructure will stay around.

You say progressive change is the most common type. What does that look like?

Progressive change is occurring in many transportation and retail industries. The challenge during progressive change is understanding that the way to make money is to improve incrementally through careful analysis and reacting to feedback. Unless your strategy is deeply flawed, the Hail Mary attempt to achieve breakthroughs will not work.

You say creative change is more nuanced. Tell me about that.

Creative change occurs when the underlying resources or architecture or assets in a business are becoming obsolete: legacy systems, old database architectures that don't allow you to connect with customers as you'd like to. Many organizations, such as pharmaceutical and film production companies, are also challenged with threats to their resources. Blockbuster drugs go off patents, and revenue is fundamentally challenged as a result. Or you need a new hit film regularly. You need to constantly renew.

So some industries by their nature are constantly in creative change?

Yes. The idea is that the assets that lie underneath the revenue structure of the business are constantly being challenged.

How does that differ from radical change?

Under creative change, the customer is satisfied with how you're dealing with that. The difference between the movie industry and the overnight letter industry is that the movie industry is dealing effectively with renewal of underlying resources, so the customer is not looking for better alternatives.

That brings us to intermediating change. What's that all about?

Under intermediating change, your customer relationships are threatened but your assets retain value. It's harder to deal with than radical change because you've got to figure out a new way to make money out of assets. If you're running a telephone service provider, you know that the challenge is managing down the land-line infrastructure. But if you're running an organization going through intermediating change -- like an auto dealership -- you've got a fundamental strategic problem: How do you redeploy assets into new ways of doing business for which you can get paid while ramping down your commitment to an old way of doing business? It's very challenging, because often you're making more money under the old way, and that may continue for many years. That creates civil wars within organizations.

What does all this mean to me as a CIO?

The IT world is so incredibly complex. There are many, many different trajectories of change within the IT sector. And for CIOs in non-IT companies -- the CIO of a bookseller is facing a fundamentally different challenge then the CIO of a telephone company. If you're a CIO, the right way to use this is as part of a broader strategic process in which you envision how your company is going to compete in five years. The right way to manage IT depends on how your organization intends to navigate this change.

As a CIO whose industry is in radical change, what sorts of IT investments should I consider?

If you're running an overnight letter delivery company confronting radical change, you might want to augment your systems to support account managers in evaluating which customers are willing to work with you in new ways -- say, in document management or expanded logistics services -- so you can diversify from overnight letter services into related businesses.

What if I'm a CIO in progressive change?

If you're running a business undergoing progressive change, like Home Depot or Wal-Mart, you should be vigilantly focused on incrementally expanding IT services for efficiency, and strategic IT would deal with managing links to suppliers and customers.

And if I'm in intermediating change?

The challenge is in finding new ways of transacting business. Developing a system for capturing information about the costs associated with offering products in new ways is going to be central to the future of an organization. If you're an auction house, for example, how do you deal with the stress of online auctions? Well, you have appraisal capability; how will you sell that in a new way? Understanding how much it costs to offer appraisal services to sellers on eBay is an example of how IT could be used to help you deal with intermediating change.

How does IT play in creative change?

The goal under creative change is to keep these Hail Mary projects isolated. A pharmaceutical company developing a new drug doesn't want to bring down the whole company if the drug fails. The same goes for a movie studio or a company in oil and gas exploration. They need to keep projects isolated. But most leading companies are trying to manage risks across a portfolio of projects. IT is effective if it provides management with information about programmatic success without overcontrolling the individual programs.

What's the hardest thing about getting all this right?

Each of these trajectories plays out over decades. And even when change carries the potential to blow away old systems and make them obsolete, often in the short run, staying the course generates a higher return on investment. So the hardest part is figuring out how to take these insights about the trajectory of your industry and integrate them into your daily decisions about how to run the business.

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