Too Much Of A Good Thing Can Kill An IT Department

by drjim on August 19, 2008

Being the 900 lb gorilla can be a bad thing for an IT department

Being the 900 lb gorilla can be a bad thing for an IT department

If revenue is what feeds a company, then it must also be what keeps an IT department alive. Growing companies need more and more revenue to stay alive – if growth stalls, then there’s a good chance that the party may be over for everyone involved (including the IT department).

But what if everything is going great? What if your firm owns the market – you are the 900 lb gorilla? Do you really have anything to worry about? Well, the answer is yes and in fact history tells us that you are probably in a sinking boat even if you don’t realize it right now.

The fancy term that is used to describe 900 lb market gorillas is “premium-position captivity”. If you think about it, it makes sense. When you are making money hand over fist, you really don’t want to do anything to rock the boat. This means that if a new, low-cost competitor shows up or if your customer suddenly changes how they value your product, you’re not going to be able to react quickly enough to defend the firm. CIOs have a major role to play in this.

This situation is best described in the fantastic book “The Innovator’s Dilemma” that if you haven’t read, you really should. In the book, the hard drive business is examined and one of the points made is that 3.5″ small hard drives originally had less capacity of larger hard drives so who would ever want them? Well, it turns out that small hard drives work perfectly for laptops and when that market exploded, the companies that made only the larger drives got left in the dust.

What’s a CIO to do? If the senior management of a firm are unable to see impending doom, then how can a CIO possibly provide any value? The answer is simple: the CIO has access to tools and data that are not available to the rest of the firm. Awareness of the potential for a revenue stall and the will to keep a vigilant eye out for the signs can make the CIO an invaluable bellwether for the firm.

How can a CIO who works at a firm that has a dominate market position detect when a revenue stall is on the horizon? The key is for the IT department to collect and analyze market data. The data never lies. Rather, senior management who have grown accustom to seeing what they want to see discount the changes that will ultimately result in their downfall. Here is what the IT department needs to sift through the data to find:

  1. Market Share Loss: The first warning signs will be pockets of rapid market share loss. These will generally be found in specific, narrow, customer segments. It will be followed by the emergence of resistance from well-established existing customers to paying premium prices for incremental enhancements to existing products.
  2. Tracking The Wrong Metrics: More often than not, dominate firms like to track profit per customer. However, if they don’t notice that customer acquisition costs have shot up, then they will end up being blindsided. Adjusting the metrics that are being tracked is key to uncovering new trends.
  3. Internal Attitude: how is the company viewing start-up competition? Is it assumed that these new players will never be able to compete with the firm for it’s customers? Are lower end parts of the market being turned over to them so that we can focus on the upper ends of the market with the assumption that they’ll never challenge us for our part of the market?

The companies to watch today are SAP and Oracle. They are the 900 lb gorilla. Other firms such as Salesforce.com and SugarCRM have entered the market and may not be seen as a threat to the established players right now; however, time has shown that they may very well turn into tomorrow’s gorillas. Let’s hope that the CIOs at SAP and Oracle are already taking the correct next steps…

What do you think – once a gorilla, always a gorilla? Do you think that looking for economic stalls is part of the CIO’s job? If not, then who should be doing it? Have you ever worked at a company that went from being dominate in its market to struggling? Leave a comment and let me know what you think.

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