Toolkit: McFarlan’s strategic grid
January 14, 2009
I evaluate McFarlan’s strategic grid model.
This post is the fourth post in a series in which I discuss various frameworks and models that I might be able to use to answer questions on my CGU IST screening exam of Jan 23.
The strategic grid model is an IT specific model that can be used to assess the nature of the projects that the IT organization has in its portfolio with the aim of seeing how well that portfolio supports the operational and strategic interests of the firm.
The CIO plots projects and systems from the IT organization’s portfolio on a two dimensional graph. The X axis represents impact of the project on IT strategy. One way of expressing what we mean by this is: what options does this project offer the firm by way of affecting one of Porter’s five forces in our favor? Does it change the nature of competition in our market, affect the bargaining power of buyers or suppliers, raise or lower the barriers to entry into our market, or change switching costs for our products and services? Does it enable us to offer completely new products and services, or enable us to substitute one of ours for one of someone else’s in the eyes of their customers?
The Y axis represents the impact of the project on IT operations. One way of expressing this is to say that projects that are high on this axis improve the efficiency or quality of our existing systems and business processes, or lower their costs.
The graph is usually drawn like so:
Another way to think about the two axes is in relation to Argyris’ organizational learning styles: single loop and double loop learning. Impact on operational ability is like single loop learning: incremental process improvements on what we already do. Impact on strategy is like double loop learning: look for a completely new process.
McFarlan divides the grid made by these axes into four quadrants:
- Support: low operational impact, low strategic impact. This quadrant is about local process improvements for individual users.
- Factory: high operational impact, low strategic impact. This quadrant is about operational improvements that affect large portions of the firm, and are aimed at improving performance or decreasing cost.
- Turnaround: low operational impact, high strategic impact. This quadrant is about exploiting new technologies to provide strategic opportunities.
- Strategic: high operational impact, high strategic impact. IT organizations that have most projects in this quadrant understand that IT can both improve core operations of the firm while simultaneously generating strategic options.
Evaluation for use by CIO
The CIO can use the strategic grid to assess business/IT alignment, to assign appropriate governance and oversight to individual projects, and to select projects and systems for outsourcing.
After plotting all projects in the portfolio on the grid, the CIO assesses where the bulk of them lay: that is how IT is being used in the organization. This will indicate how well aligned IT strategy is to business strategy, and can be used as either a confirmation that the IT org is doing what is expected of it by the business organization, or as a wake up call. If the projects that the IT organization is working on are not where the CIO expects the them to be, then they can see what kind of changes need to be made.
Secondly, different quadrants demand different kinds of project governance: support quadrant projects can be handled by IT specialists and individual end users; factory quadrant projects should be handled by a business executives and IT executives working together; turnaround quadrant projects should be handled by business executives, IT executives and emerging technologies development groups; and strategic quadrant projects should be initiated, defined and managed at the top levels of the firm. The failure of many projects may come about because the quadrant they lay in was misidentified and inappropriate governance was applied to them.
Thirdly, the CIO can use the position of a project in the grid to assess how good a candidate it is for outsourcing. Support and factory projects are good candidates for outsourcing largely due to economies of scale that outsourcing vendors might be able to offer, access to skills and best practices that the IT org may not possess, and increased time to market/implementation. Turnaround and strategic quadrant projects should be outsourced with caution; the firm may choose to outsource such project to access rare skills, resources or applications or to work around an out-of-control IT organization.