CIO REPORTING STRUCTURE, STRATEGIC POSITIONING, AND FIRM PERFORMANCE
The ideal CIO reporting structure (whether the CIO should report to the CEO of the CFO) is yet to be identified.
Some say the CIO should always report to the CEO to promote the importance of IT and the CIO’s clout in the
firm, while others call for CIO-CFO reporting structure to keep a tab on IT spending. A firm’s strategic
positioning (differentiation or cost leadership) should be a primary determinant of its CIO reporting structure:
differentiators are more likely to have the CIO report to the CEO (in order to pursue IT initiatives that help the
differentiation), and cost leaders are more likely to have their CIO report to the CFO (facilitating the cost
leadership strategy). Firms should align their CIO reporting structure with their strategic positioning,
independent of whether IT plays a key strategic role in the firm.
Differentiation Cost leadership
Superior reporting structure CIO – CEO CIO-CFO
CIO’s may report to C-level executives (COO, for example) other than the CEO or the CFO, but this is not very
common.
To improve the CIO’s role, IS literature prescribed several means (middelen):
− Creating value;
− Having a solid business background and good communication skills;
− Rational persuasion;
− Personal appeal;
− Good working relationships with peers;
− Frequent communication with the CEO.
CIO is defined as the highest level IT executive or manager in a firm or business unit, even if the term CIO may
now always be used: director of IT, vice president of IT, or chief technology officer (CTO). The CIO’s clout has
increased in magnitude because the CIO manages a larger IT budget (1), and because the CIO shapes the firm’s
strategy (2).
The CIO reporting structure has a reciprocal relationship with the firm’s IT orientation, which can be:
1. Strategic IT orientation = the CIO is a member of the TMT and is involved in the firm’s strategic
planning;
2. Operational IT orientation = the CIO is only responsible for leading the IT function, offering IT support,
and managing less risky IT projects.
Firms whose CIO reports to C-level executives (CEO/CFO) tend to have a strategic IT orientation, whereas firms
whose CIO reports to 2 or more levels below the CEO often have an operational IT orientation. IT in firms with
an operational IT orientation is less likely to affect firm performance.
Porter’s typology of strategic positioning is widely accepted, arguing that there are 2 generic strategies:
1. Differentiation = offering products and services with unique features (superior designs, innovative
research and development, superior engineering, customer intimacy, or brand image) that customers
find valuable.
Differentiation is achieved by leading scientific research, advanced R&D and product development, and
superior customer service. This allows firms to command high margins by creating customer value.
2. Cost leadership = strive for the lowest average unit costs in the industry by achieving economies of
scale, cost efficiencies, and operational excellence.
,Cost leaders gain a strategic advantage by reducing costs and achieving ‘efficient scale facilities, cost
reductions through experience, tight cost and overhead control, and cost minimization in R&D, advertising,
sales’.
Firms that pursue one strategy do not totally ignore the other: differentiators focus on cost reduction and
cost leaders do differentiate their products. This makes it hard to distinguish between differentiators and cost
leaders, as well as the fact that some industries are more focussed on differentiation, while other industries are
more focussed on cost leadership. Both strategies do invest in IT initiatives to pursue their strategies. While
often equally innovative, the goal of IT initiatives is different for differentiators and cost leaders:
1. Differentiators have the goal to enhance new product development and customer intimacy, adjust to
changes in customer needs, personalize marketing efforts and identify products that meet seasonal
changes in customer needs. The CIO is in a better position to become aware of and contribute to
differentiating strategies by being closer to the CEO, who has a broader cross-functional view of the
firm and its needs for customer intimacy and original products;
2. Cost leaders have the goal to promote lean operations, tight cost management, close supervision of
labour, automated processes, cost-effective asset utilization, reduced cycle time, etc. IT initiatives
allow people to work remotely, reduce errors, automate, etc. Therefore, CIOs of cost leaders are
better positioned under the CFO, to work together to scrutinize the firm’s cost patterns to identify
inefficiencies and pursue IT initiatives for cost cutting.
A cost leadership strategy doesn’t necessarily imply reduced IT costs; both strategies invest in new IT
initiatives to pursue their strategies. However, since the objective of cost leaders is to reduce costs throughout
the firm, reducing IT costs is more likely to be a primary objective. Nonetheless, a cost leadership strategy
may still require increased IT investments if they offer more than commensurate reduction in other costs
throughout the firm.
Differentiators focus on more subjective and less quantifiable success measures (product innovation,
customer intimacy), while cost leaders focus on less subjective and more quantifiable targets (cost, time,
efficiency, and error reduction). This means that IT initiatives for differentiation are more difficult to quantify,
so the CIO would have a hard time with the CFO over this. For cost leaders, working with the CFO works to
promote the IT initiatives to meet the quantifiable cost targets imposed by the CFO.
Alignment between strategic positioning (differentiation and cost leadership) and CIO reporting structure
(CEO and CFO) is associated with a higher firm performance.
Differentiators are likely to be high profit margin firms that command higher margins as returns for their
superior product/service quality or greater customer intimacy. Operating income over sales (OPIS) measures
the profit margin and is used to capture a firm’s differentiation strategy. On the other hand, to be the lowest
cost producer, firms must achieve operational efficiency and high asset turnover. Utilizing assets efficiently
asks for lean operations, and ‘sales over assets’ is used as a proxy for such firms.
,Alignment Between Business and IS Strategies: A Study of Prospectors, Analyzers, and Defenders
The impact of information systems and technology on business performance increases noticeably. CIO’s are
concerned with IS strategic alignment (aligning IS with the rest of the business). Despite the argument for
aligning IS strategy with business strategy, there is not much known about the performance implications of
this alignment.
The distinction between content and process is made in prior literature on business strategy and IS strategy:
1. Content, concerning the question ‘What strategy is the organization pursuing?’. This can be divided in
3 strategies: IS strategy, IT strategy, and information management (IM) strategy:
- IS strategy = focuses on systems or business applications of IT, being concerned primarily with aligning them
with business needs and using them to derive strategic benefits.
- IT strategy = concerned mainly with technology policies, including such aspects as architecture, technical
standards, security levels, and risk attitudes.
- IM strategy = concerned with the structures and roles for the management of IS and IT, focusing on issues
such as the relationship between the specialists and users, management responsibilities, performance
measurement processes, and management controls.
In short: the IS strategy is about “what” and the IT strategy about “how,” the IM strategy is about the
“wherefores”— which way? who does it? where is it located?, etc. This paper focuses further on IS strategy. IS
strategy is directly concerned with business applications and suggestions are made that it should be aligned
with (or even derived from) the business strategy. One of the reasons for aligning business and IS strategies is
the increased likelihood of the developed systems being more critical to the organization and the increased
likelihood of top-management support for IS projects. Alignment between business and IS strategies enhance
business success.
2. Process, concerning the question ‘How does the organization develop (and implement, etc.) its
strategy?’. There has been a lot of research on this IS strategy process.
Figure 1 summarizes the
overall model underlying
this paper. Emphasis is on
strategy content – on
realized rather than
intended strategies – and
on IS strategy rather than
IT and IM strategies.
Business strategy types
are viewed in terms of
Miles and Snow’s
typology of Defenders,
Analyzers, and
Prospectors. This typology
captures strategic
differences in industry-independent terms. The Defender, Analyzer, and Prospector business strategy types are
examined using 6 business strategy attributes: defensiveness, risk aversion, aggressiveness, proactiveness,
analysis, and futurity.
, Organizations with greater alignment between business strategy and IS strategy are also more likely to utilize IS
for a competitive advantage. Or: Hypothesis 1. The alignment between business strategy and IS strategy is
positively associated with perceived business performance.
So Miles and Snow identified 3 viable business strategies:
1. Defenders = seals off a stable and predictable but narrow niche in its industry by offering high-quality
(but standard) products or services at low prices. It stresses operational efficiency and economies of
scale, employing a mechanistic organization structure. Investments are made in highly cost efficient
but few core technologies. Defenders don’t tend to search outside its domain for new opportunities,
and rarely makes major adjustments in its structure or technology.
2. Prospectors = continuously seeks new product/market opportunities, and is the creator of change in
its market. Invests heavily in product R&D and environmental scanning. Prospectors seek flexibility in
technology and uses an organic organization structure. However, flexibility and innovativeness often
leads to a lack of controls and low operational efficiency.
3. Analyzers = shares characteristics with both strategies. Analyzers seek to simultaneously minimize risk
while maximizing opportunities for growth. It maintains a stable domain of core products, while
seeking new product/market opportunities. Doesn’t often initiate new products, but often follows the
Prospector by very quickly introducing competitive, and occasionally better, products. To address the
conflicting demands of efficiency and innovation, Analyzers use a matrix organization structure, and a
dual technological core. Organizations may fail to address one or both of these. The dual focus may
also imply a larger organization size.
They also described a fourth type of organization (Reactors) but considered it to be an organization that either
lacks a viable strategy or is in transition from one of the three ideal strategies to another.
The business strategy profiles for the three strategic types are (see appendix B as well):
- Defensiveness and proactiveness represent
Defenders and Prospectors and therefore rank
high on their domain. Analyzers rank Medium
on both.
- Risk aversion: the Defender plays it safe ,
whereas the Prospector frequently takes risks.
The analyser is also highly risk averse, and only
adds new products/services another organization already shown to work successfully.
- Analysis (the organization’s overall problem-solving behaviour), dividable in internal and external analysis.
Only the Analyzer is high in both internal and external analysis, and the other 2 only on either internal or
external analysis.
- Futurity (the relative emphasis of effectiveness (long-term) considerations versus efficiency (shorter-term)
considerations). This reflects the inherent nature of these organisations.
- Aggressiveness (improving market rates at a relatively faster rate than the competitors in its chosen market).
Miles and Snow view Defenders as being aggressive: a Defender’s success in the industry hinges on its ability to
maintain aggressively its prominence within the chosen market segment.
