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The value of differentiation

The value of differentiation

Outperforming enterprises in the future will be those that learn to embrace and harness proliferative innovation – learning from the modus operandi of next-generation companies like Amazon and Salesforce.

Organisations continue to be plagued by the tension that US academics Paul Lawrence and Jay Lorsch defined forty-three years ago - the need to balance “differentiation and integration”. On the one hand the business units of complex organisations need to differentiate to meet the needs of their different markets and customers. On the other hand the organisation as a whole needs to create more value via integration, than if the business units acted independently. Discussion of how this tension is balanced is as relevant in 2010 as it was in the late 1960s, with the holy grail of competitive advantage being to optimise for both. All too often, however, achieving a sustainable balance is a triumph of hope over experience, and we see the pendulum swinging back and forth between the apogees of decentralisation (differentiation) and centralisation (integration) each time there is a change of organisational leadership.

ICT has often been heralded as the solution – lubricating processes and the flow of information so that integrated global platforms can support differentiated customer or citizen centric products and services. This is the essence of the consolidation, rationalisation and shared services discussions currently under way in many organisations and the driver for eGovernment strategies in the public sector.

The national e-health record policy debate illustrates this tension at an industry level, where the hope is that e-health systems will provide the glue to integrate otherwise disparate healthcare providers at the point of a patient interaction.

Technology in this context, however, often seems to exacerbate, rather than ease the tensions. Centralised one-size-fits-all solutions such as an ERP system or a shared corporate service appear to solve the integration problem, but frequently create equal or greater tensions by constraining the ability to differentiate at the local level.

The new wave of decentralising, fleet-of-foot, web 2.0, enterprise 2.0, government 2.0 and cloud computing technologies appears to offer new hope for empowering local differentiation, but (surprise!) is already causing tensions due to its lack of integration.

Admire the future ICT-enabled market leaders

The rise of the ‘Web 2.0’ platforms is often referred to as the ‘consumerisation’ of IT – with innovations being incubated in the consumer realm and the internet before they become relevant to the enterprise sector. These innovations arise from thousands of start-ups and new products fighting it out in the decentralised internet jungle. The winners, however, are those that couple new service innovations with the ability to scale and to integrate. Amazon, Blogger, eBay, Facebook, Flickr, Google, Linkedin, Netsuite, Salesforce, Twitter, YouTube, Wikipedia, Workday and so on.

These businesses demonstrate that it is not sufficient to create a differentiated new service offering. The service must also have the global back-end needed to scale, to evolve faster than competitors and to integrate efficiently with other services. Amazon and Salesforce exemplify this perfectly – their integrated IT platforms enable these businesses to launch a stream of new services with global reach ... and indeed to make this proliferative innovation capability available to their customers as a service in its own right.

Proliferative innovation

If we think about the relevance of this for enterprise IT, the future will be about enabling and fuelling proliferative innovation so that more new ideas, products and services are generated and bought to market. Success, however, requires more than just the ability to spawn innovative point solutions. It also requires that innovations that meet with customer approval can both scale rapidly and integrate with other processes and systems in the enterprise. So, on the one hand proliferative innovation appears to be about ‘1000 flowers blooming’, but in practice it is actually about the globally scalable and flexible back-end infrastructure and the integrated processes and systems needed to cope simultaneously with constant innovation and rapid growth of transaction volumes.

Proliferative innovation is all about developing new ways to use technology to integrate so that you can differentiate.

The key question is how can an organisation innovate more quickly with customer/citizen-centric new product and service features, without the whole thing turning into an unmanageable, confusing, dysfunctional and uneconomic mess (again)?

This is the real challenge facing the Web 2.0 technologies in an enterprise context. A laissez-faire approach to wikis, blogs, SaaS applications and on-demand cloud computing services will create proliferation (for sure) ... but will not necessarily lead to scalable, sustained innovation. Neither, however, will the instinctive corporate IT response of controlling for integration and efficiency via ‘fewer-moving-parts’ policies, standardisation, locked-down desktops and bans on the use of social media. Fresh IT strategy thinking is required here.

Outperforming enterprises in the future will be those that learn to embrace and harness proliferative innovation – learning from the modus operandi of next-generation companies like Amazon and Salesforce.

The followers will be those that prefer to restrain the proliferation of innovations, and innovators, to stay within their integration comfort zone.

Dr Steve Hodgkinson (steve.hodgkinson@ovum.com) leads Ovum’s public sector advisory services.

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Tags innovationSaaSovumTech trendsCIO roleWeb 2.0social networkinganalystcloudshodgkinson

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