Applied Strategy-Academic Article- CIO Reporting Structure, Strategic Positioning and Firm Performance
Authors: Ranjiv D. Banker, Nan Hu, Paul A. Pavlou, Jerry Luftman
Since the early 1980’s more and more organizations are incorporating CIO’s (Chief Information Officers) into their executive level structure. The CIO is the highest level of management in the IT department. The role of the CIO is to manage the IT department’s strategy building, applying the company vision in their decisions for the department and staying inline with the financial goals for the organization. There are other titles that this particular person can carry, but CIO is used for the purpose of this article. (www.cio.com/article/147950/)The use of IT in organizations has increased tremendously with things like medical records, pay systems, time clocks, etc. going electronic. How these systems are used have to be overseen to ensure that they are being used efficiently and the information that is stored is protected.
This article discusses how the CIO’s (Chief Information Officer) role and whether he reports to the organization’s CEO or CFO affects the company’s performance. The article also discusses how the reporting structure of the IT component in a firm can make a difference in the success of the company. There has not been reported evidence at this point that either structure is better than the other. The verdict is still out on which is better or more efficient.
The hypothesis in the article is:
1. How does a firm’s strategic positioning (differentiation or cost leadership) influence its CIO reporting structure (CIO reporting to the CEO versus to the CFO)?
2. Is there an alignment or “fit” between the CIO reporting structure and the firm’s strategic positioning that is associated with higher firm performance? (Banker, Hu, Pavlou, and Luftman, June 2011)
There are two strategies researched and they are the differentiation strategy (http://www.businessdictionary.com/definition/differentiation-strategy.html) which is usually followed by the CEO and the cost leadership strategy (http://www.businessdictionary.com/definition/cost-leadership.html)which is usually followed by the CFO. The periods that the data in this research is obtained from comes from the years 1990-1993 and 2006. In other studies there is evidence that CIO's that report directly to the CEO have a better understanding of the organizations vision and strategy and are better able to facilitate better outcomes. No matter which person the CIO is reporting to there is still a specific structure they will need to follow and that’s either strategic (used when reporting to the CEO) or operational structures (when reporting to managers below the C-level in the organization). Under the strategic structure the CIO only deals with aligning goals with the strategic plan of the company and with operational they would only deal with the IT functions, support and specific projects in the company. Whether the differentiation or the cost leadership approach is used it should lead the way to the vision of what the company wishes to accomplish. When using the differentiation approach the company focuses on innovation, design, engineering, a good rapport with the customers. The cost leadership approach wants the company to be cost effective, basically wants to get the job done most effectively and efficiently, but at the lowest possible cost. When competing with rival companies differentiators target marketing to their customers their quality product, whereas the cost leadership competes with have the lowest price for a product, lower than their competitor.
The findings according to these hypotheses were that: the strategic positioning within a company does affect who the CIO reports to and that union does affect the company’s performance overall. Under differentiation, higher operating income over sales the CIO-CEO group came out higher and under cost leadership lower sales over assets, CIO-CEO came out higher as well.
The implications are that there is still not significant enough evidence to prove which strategy overall would be most beneficial to result in optimal performance for any company. That either CIO-CEO or CIO-CFO matches can produce a well run strategy. It should not be looked at as a weakness when the CIO is matched with the CFO in a company. Practicing managers or executive should look at the strategy they wish to executive and see which fit would better align their company with their goals.
