Playing To Win

Information Technology & Strategy

The Rules of Alignment

Source: Roger L. Martin, 2022

In my recent Getting to Know Me series, I invited readers to request topics for me to tackle in this Playing to Win/Practitioner Insights (PTW/PI) series. One (thanks Alan) echoed many questions I have previously been asked variations on: how to ensure information technology (IT) really does align with business strategies? I promised to respond to this good question and am doing so with my 29th PTW/PI, which is Information Technology & Strategy: The Rules of Alignment. You can find the previous 81 PTW/PI here.

Flattening Technologies

I think that the interest in the impact of information technology on business strategy stems from the recency of two major IT-based flattening technologies: digital computing and the Internet.

What is a flattening technology? It is a technology that sits so dominantly on top of the existing competitive structure that it wipes out any aspect of the competitive structure that doesn’t embrace the flattening technology. A non-IT example is the internal combustion engine (ICE). Prior to its arrival as a commercial technology, there was a huge industry in personal transportation, with plenty of variety produced by many competitors serving a great variety of customer preferences, the biggest of which was the Durant-Dort Carriage Company.

Then the flattening technology hit and the entire carriage industry and its related and supporting industries were largely wiped out — unless they embraced the new technology. That is what Durant-Dort’s Billy Durant, founder of General Motors, did. If you didn’t embrace the flattening technology, you were at best marginalized.

The flattening technology created gigantic opportunities in the core industry itself (e.g., the Big Three, the auto parts giants) and also created gigantic industries built upon the flattening technology — like gas stations, auto insurance, auto repair, etc. And those industries grew and prospered for a century.

Flattening technologies come in all sizes. Some flatten a small domain — like Lipitor in cholesterol treatment. They are valuable but less so than a technology that flattens a huge domain — such as most of transportation. It is a flattening technology if those in the domain in cannot survive without embracing it. It is an interesting but not flattening technology if some embrace it and others do not but still compete successfully.

Flattening Information Technologies

Digital computing was the first great flattening IT. Prior to that flattening technology, lots of activities were performed manually and were done slowly with endemic errors. The companies and job classifications that performed those slow and inefficient processes were wiped out unless they embraced the flattening technology. Whether it happened quickly or slowly, it was all downhill. Meanwhile a new industry was built featuring digital computers, with IBM emerging first as the industry’s global giant. And in addition, giant industries were built on top of the flattening technology, the biggest by far of which is software. The digital computing flattening technology is well on the way to dominating for a century.

The next one was the Internet. Prior to the Internet, information existed in distinct pockets all over. Communication was fragmented. With the coming of the Internet, many things that depended on fragmented/compartmentalized information were wiped out, from Yellow Pages to classified newspaper advertising to yard sales. A new industry of Internet commerce was built and then industries that have been built on top of that industry — like Internet gaming, and Internet entertainment distribution. As with all flattening technologies, if you don’t incorporate the flattening technology into your strategy, you will not be able to survive. Good luck trying to be bricks without clicks. It isn’t doable anymore. And this flattening technology will have a century to run.

More/Less Valuable

Each flattening makes some assets and capabilities less valuable and some more. The ICE flattening made wood working and horse training less valuable while it made metal bending and large-scale production more valuable. The digital computing flattening made organizing large workforces and paper management less valuable while it made algorithmizing, coding, and understanding horizontal use cases more valuable. The Internet flattening has made physical locations less valuable while making data collection, data analytics, and graphical user interface design more valuable.

The Three Rules of Flattening Technologies

Rule #1

You don’t have a useful strategy if it isn’t built on the flattening technology impacting your industry. If you were a manufacturing or transportation company that thought steam engines weren’t important, you were dead. Later, if you were a transportation company that thought ICEs weren’t important, you were dead. If you built a strategy assuming that digital computing wasn’t important, you were dead. And if you built a strategy assuming that your business would not be impacted by the Internet, you might not know it yet, but you are on the road to extinction. There may be time for you to adjust once it becomes apparent that it is a flattening technology but unless you embrace it, it will flatten you.

Rule #2

In the early days of a flattening technology, the folks who have deep technical knowledge of the flattening technology have a big advantage. It is not utterly determinative, but it sure helps. From Thomas Edison to Henry Ford to Bill Gates to Sergey Brin and Larry Page, being the geek of the flattening technology is a great position in which to be. The most powerful combination is geeky technical understanding plus customer insight. Brin and Page are rich beyond imagination because they conceived of the PageRank algorithm and they figured out that they could make money selling words.

Rule #3

Over time in the life of a flattening technology, customer insight ascends to the catbird seat. As the knowledge surrounding a flattening technology becomes diffuse (and/or loses its patent protection), combining the flattening technology with customer insight is the key to competitiveness. It may seem trite to use Steve Jobs again as an exemplar, but he is the epitome of winning by using already tried and true aspects of the flattening technologies and to win the biggest of all by combining them (repeatedly!) with better customer insights than anybody in his industry.

But the same holds for Jeff Bezos and Mark Zuckerberg. Like Jobs, both were aficionados of the flattening technologies of their time, but hardly leaders in them. Bezos was a banker and hedge fund manager before founding Amazon. But both had incredibly valuable customer insights into how they could use the flattening technology of their time, the Internet, to create massive customer value.

Three Ways to align IT with Strategy

1) Invest in Creating a Flattening Technology

This is a proverbial Hail Mary that is not going to happen often. This approach requires you make a huge capital bet, be right, and have staying power. An example would be the invention/commercialization of the transistor at AT&T’s Bell Labs. At the time, AT&T was an incredibly rich regulated monopoly with the largest commercial research operation in the world in Bell Labs. It could easily fund the development of an important flattening technology. Later, Texas Instruments and Fairchild Semiconductor created the next important generation with the integrated circuit, though the strain of the huge investment required took a toll on both companies. Each was instrumental in the beginning of a great flattening, but both were outpaced by other players as the flattening technology evolved.

2) Be the Early Leader in the New Flattening Technology

This is the approach of IBM, Microsoft, Intel, and Google. In the early days of a flattening technology, be super aggressive at carving out a position that depends on the flattening technology but doesn’t require that you invent it. IBM didn’t invent the digital computer, Microsoft didn’t invent the computer operating system, Intel didn’t invent logic chips, and Google didn’t create the Internet. But each one took advantage of the flattening technology to dominate a market that was created by and dependent on a flattening technology. And it is synergistic — they helped the technology flatten a landscape and benefited from its flattening.

The strategy approach is to go and go fast. There is one opportunity to take leadership in the flattening landscape and if you don’t take it, someone else will and it will be hard if not impossible to win it back. It is no surprise at IBM, Microsoft, Intel and Google all developed reputations for being aggressive to the point of anti-competitive. In fact, in various ways, they have been abusive to customers, who put up with the abuse because it got (or in the case of Google — still gets) customers the benefits of the flattening technology.

The key competition plays out before knowledge about the flattening technology is widely dispersed, so it is important to have talent that knows more about the flattening technology than does talent at the competitive firms — and then ride the experience curve and/or exploit the network effects to stay ahead of competition in knowledge about the commercial application of the technology.

The most modern example of this approach is Tesla. It most certainly didn’t invent the electric vehicle. But as electric becomes the flattening technology for automotive propulsion, Tesla is investing as aggressively as any company ever has to be the undisputed leader in that flattening process.

3) Combine the Flattening Technology with Customer Insights

This is the approach of Apple and Salesforce. Apple, especially in its huge growth phase after the return of Steve Jobs, is often chided or derided for utilizing old, well-established technology in its products. But like Salesforce, it outpaced the technology leaders by removing aspects of the flattening technology that annoyed customers and provided an experience that customers embraced. Of note, neither of their charismatic founders was a trained technologist.

Non-technology companies also use the ubiquity of flattening technologies to enhance their strategies, including Progressive with usage-based insurance, Starbucks with AI-based rewards, Domino’s with digital self-serve, and IKEA with virtual reality interior design.

For this strategy to be fruitful, a company needs to understand its customers better than its competitors, serve them with affection rather than abuse, and leverage the ubiquity of the flattening technology to set a superior standard for serving the needs of their customers.

Practitioner Insights

The key IT strategy alignment question concerns flattening technologies. When a flattening IT technology has become fully dispersed, it is no different than any other piece of infrastructure that a company is able to utilize — like the electrical grid or the highway system. It is not a separate strategic question just because it happens to be infrastructure involving IT.

But with flattening IT technologies, you have to have a clear view of which of the following three things you are attempting to accomplish.

Are you attempting to create a flattening IT technology? If so, be prepared to show staying power in investing highly risky capital into a potentially flattening technology. Frankly, I wouldn’t recommend it. The creation of the last two major IT flattening technologies, digital computing and the Internet, were not financed commercially, but rather by the US military (ENIAC by the US Army and ARPANET by DARPA).

Are you attempting to lead in a flattening IT technology? If so, invest aggressively in the early stages of a flattening technology to be leader. Don’t let anyone, including customers, stop you from running fast. It is a race, and you will have one chance to win it.

Are you attempting to build your strategy upon a flattening IT technology? While a flattening technology is still on the way to becoming fully dispersed infrastructure, become the best at understanding the customer’s pain points with respect to that flattening technology and find a way to utilize it to produce a superior customer experience.

My bet is that for every one success in the first category, there will be ten in the second, and one hundred in the third. Invest accordingly.

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Roger Martin

Professor Roger Martin is a writer, strategy advisor and in 2017 was named the #1 management thinker in world. He is also former Dean of the Rotman School.