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— Blog

Does Cloud Computing Matter?

Joe Weinman
January 23, 2013

Cloud computing is top of mind for computer geeks, information technology (IT) providers, web and mobile start-ups, and most CIOs (chief information officers), but should other senior executives care? After all, can CxOs afford to take time out from global growth concerns, foreign corrupt practice allegations, dysfunction in D.C., and other business exigencies merely to immerse themselves in abstruse technology plumbing? To be a leadership priority, “computing” in general and the “cloud” in particular—a network-centric, pay-per-use, on-demand service model for IT—would have to be strategic.

It’s been argued that “IT Doesn’t Matter,” since IT is available to anyone, and thus is a commodity like electricity. Therefore, this argument concludes, IT can’t be a source of strategic competitive advantage. This line of reasoning seems plausible at first glance, but conflates IT’s infinite malleability and algorithmic possibilities, often limited only by imagination, with its more mundane physical incarnation—computers, storage, and network gear—and therefore fails to explain how a Google or Facebook—started from scratch with no brand, no assets, no preferential access to resources, no marketing, no sales force, no regulatory protection, in fact, with nothing more than ideas and business concepts encapsulated as IT—could rocket from dorm room project to multi-billion dollar annual revenues in short order.

It had also been argued that there was a “Productivity Paradox:” IT was ubiquitous, except in the productivity statistics. Over the past decade, however, studies from the Federal Reserve and leading universities have shown productivity growth from the use of IT, positive returns to IT investment, and a correlation betweenproductivity and profitability and the use of big data and analytics. A recent study showed that a net dollar of IT investment resulted in a greater than twelve-dollar increase in sales per employee, generating a compelling return on investment.

So IT appears to be beneficial, but is cloud computing strategic? After all, it’s hard to believe that a firm can develop competitive advantage through the use of, say, cloud-based conference-room-scheduling software or expense-reporting tools. While there are such utilitarian applications, at the other extreme, the cloud can be strategic, and potentially existential; consider firms such as Borders Books that have failed to formulate effective responses to cloud-based competitors. Stories abound of companies in other verticals—publishing, recording, retail, cinema—that have been derailed, disrupted or destroyed by emerging cloud-centric firms.

In most markets, winning typically requires better products, better processes, or better customer relationships, or, as Michael Treacy and Fred Wiersema would put it, “value disciplines” of either product leadership,operational excellence, or customer intimacy. How does the cloud enable or accentuate these generic strategies?

As our world becomes increasingly connected, mobilized, and digitalized, cloud-based capabilities increasingly contribute to product leadership. The iPad itself is surely a wondrous device, but a majority of its value and infinite extensibility is unlocked by apps from the Apple App Store and the access to content and services that many of those apps in turn offer. Beyond high-tech Internet-centric products, however, cloud-enabled IT is permeating every facet of society, from running shoes and accessories that record routes taken and connect to social network communities, to smart grid electric utilities, to automobiles that allow access to apps. As the late strategy icon C. K. Prahalad has argued, a product is no longer just a product, but the “nexus of a network,” and thus just one element of “network-based co-created value.” The cloud is the embodiment of this network, made tangible by a product-service system endpoint, whether smartphone or sedan.

Operational excellence can be enhanced via the cloud in a variety of ways. Within the firm, time can be compressed through cloud-enabled agility, and operations can be optimized through big data analytics. Field delivery routes can be tuned thanks to real-time traffic data collection, and fast fashion is in style thanks to accelerated feedback loops tying fashion trends and sales results directly to production. Beyond the firm boundaries, networked enterprises—whether static supply chains or dynamic, virtual, “Hollywood organizations”—require an IT architecture and flexibility that recapitulates that of the business and organizational network.

Customer intimacy is not only enabled by the cloud, but can become frictionless as customer preferences are passively tabulated and diligently analyzed. Netflix or Amazon can make recommendations based not just on one customer’s past behaviors, but informed by subtle patterns and preferences identified through complex algorithms applied to tens or hundreds of millions of customers, transactions, and moments of truth. The cloud is thus inextricably interwoven with personalization and contextualization, not to mention convenience and quality of user experience.

Although not a “value discipline” per se, we might add innovation to this model. Ability to innovate may well be a fourth strategy, especially in today’s flat world and resulting turbulent hyper-competition. Here, too, the cloud can be critical. Social networking permits companies to tap into shifting consumer preferences and supports dialogue and thus engagement and co-creation. The cloud can support big data collection and thereby increase operational excellence; it can enable open contests such as the Netflix Prize, thereby boosting customer intimacy; or further develop product/service leadership, as in the case of a thorny molecular biochemistry problem solved via cloud-based gaming, which could in turn form the basis of new pharmaceuticals. These are not one-off examples; consider the hundreds of challenges at InnoCentive.com and similar firms that tap into a global talent pool and accelerate the pace of innovation.

Sure, the cloud can be mundane and tactical, easing the mechanics of running data centers or reducing costs. But more importantly, the cloud can be a source of competitive advantage through operational excellence, customer intimacy, product/service leadership, and accelerated innovation. Ultimately, the cloud is the latest example of Schumpeterian creative destruction: creating wealth for those who exploit it; and leading to the demise of those that don’t.

Strategic differentiation, innovation, and growth. What could be a higher priority for senior executives?

Joe Weinman can be reached at JWeinman@telx.com or on Twitter at @joeweinman

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