Why IT Matters: 6 Insights for Demonstrating the Strategic Role of IT in Business

Information technology (IT) is not just a tool for supporting business processes, but a strategic driver of business value. IT can enable organizations to run more efficiently, innovate faster, and deliver better outcomes for their customers and stakeholders. However, demonstrating the business value of IT is not always easy, as it requires a clear alignment between IT and business goals, a focus on outcomes rather than outputs, and a compelling narrative that resonates with key decision-makers.

In this article, we will explore some of the challenges and best practices for communicating the business value of IT.

IT investments cannot stand alone in businesses, thus there exist several factors that complicate the investments made in IT and their potential value creation which we will take a deep dive into:

1. Strategic investment in IT

The first insight for demonstrating the strategic role of IT is to ensure that your IT investments are aligned with your business strategy and your resource base. Not all IT investments are equally valuable or relevant for achieving competitive advantage. Some may be essential for running your business, but not for growing or transforming it. Some may be common among your competitors, but not unique or distinctive for your firm. Some may be easy to copy or substitute, but not difficult or costly to imitate or acquire.

To assess whether an IT investment is strategic, you can use the VRIN framework, which stands for value, rarity, inimitability, and non-substitutability. These are the four criteria that determine whether an IT investment can create and sustain competitive advantage for your firm.

By applying the VRIN framework, you can identify and prioritize those IT investments that can help you exploit opportunities or neutralize threats in the environment, leverage or enhance your existing resources and capabilities, and differentiate yourself from your competitors.

2. IT does not create value in isolation

The second insight for demonstrating the strategic role of IT is to ensure that your IT investments are integrated with your resource base. Your resource base is the set of all the assets, capabilities, processes, information, and knowledge that you control and can use to improve your performance. Your IT investments should not be seen as standalone projects but as part of a larger system that supports and enhances your resource base.

According to the resource-based view, IT creates value when it meets two conditions: (a) it is consistent with your resource base, meaning that it fits well with your existing resources and capabilities and does not create conflicts or redundancies and (b) it matches your resources, meaning that it complements or supplements your existing resources and capabilities and does not create gaps or weaknesses.

If these two conditions are not met, your IT investments may fail to deliver value or even destroy value for your firm. Therefore, you should always evaluate how well your IT investments align with your resource base and address any misalignments or mismatches. You should also consider how to leverage or improve your existing and previously failed IT investments, rather than discarding them or ignoring them.

3. IT-based value manifests itself in several ways

IT can create value in various ways that go beyond monetary returns. Managers should not have unrealistic expectations when investing in IT but rather consider the different types of value that IT can offer to the organization and its stakeholders.

For example, IT can help improve (1) internal value: such as enhancing process efficiency, reducing errors, and increasing product quality and innovation, and (2) external value: such as strengthening supply chain collaboration, improving customer satisfaction and loyalty, and creating competitive advantage.

4. IT-based value manifests itself across multiple levels

IT can create value at different levels of the organization, depending on how it is used and integrated. IT may not benefit every unit equally, but only some departments that use it more effectively. For example, IT can help improve the efficiency and quality of operations, such as production, logistics, and accounting. IT can also help enhance the innovation and creativity of functions, such as marketing, research, and development. IT can also help support the coordination and communication of activities, such as planning, decision-making, and problem-solving.

Specific investments made in IT in your organization might thus benefit only a few units that get direct value made from the investment. This could e.g. include a sales department that uses AI technology to find leads, which mainly creates value for that department.

5. Technology is not a competitive advantage in its own right

Technology alone does not give you a competitive edge. Technology does not guarantee value creation, it depends on how you use it. Technology is a tool that can enable or enhance your capabilities, but it is not a substitute for your strategy, skills, or resources. Technology can help you achieve your goals, but it cannot define them for you.

Technology is non-deterministic implying that it does not guarantee (determine) how valuable the investment will be for the firm.

6. IT based value can be latent

IT-based value can take time to emerge. Sometimes, the value of IT is not immediately visible or measurable, but it becomes apparent later on. For example, IT can help you build capabilities, relationships, or reputation that will pay off in the future.

Another example of latent business value derived from IT relates to how using AI technology in a firm might not create value immediately, but rather over time. AI technology needs to learn from data before it can create immense value in your business, thus making the value creation latent.

There’s no doubt about how IT can help any organization grow and make them more profitable. But it is, however, crucial for managers to invest in the right, meaning strategic, technology that aligns with their existing resource base, and be aware of some of the confounding factors that might complicate the business value creation the investment potentially will have.