Making sense of the current stock market fluctuations may be like trying to read tea leaves to some, but according to Geoffrey Moore, founder of the San Francisco-based Chasm Group, there is a logic to that madness.

Moore, who gave the opening keynote address during the Connect IT conference on information technology in the apparel industry, said that investors judge companies on how well they are managing the core of their business—and that includes the kinds of decisions they make regarding investments in information technology infrastructure.

To the surprise of most attendees, Moore said that, generally speaking, information technology solutions merely sustain a company’s current earnings potential. “It’s your context, but it has no upside potential,” he said.

Context, he explained, is everything a company does that spells trouble if it goes wrong, but that is and should be taken for granted, and certainly provides no competitive advantage.

On the other hand, he implored executives to invest in what he defined as “core”--technology solutions that can generate a long-term competitive advantage.

Indeed, he argued that “apparel retail is going to get turned on its ear” by companies who understand that the bulk of their investment should be on “anything that increases competitive advantage, differentiation and sustainability.”

Because investors are interested in the “future unrealized potential” of a company, said Moore, “executives must look to increase” that potential in their own companies.

This logic in the madness of the markets, which explains why some companies with no profits have a higher market capitalization than well-established competitors with stable earnings, should guide executives in making better decisions--and requires examining the factors that affect the shareholder value of a company.

Unfortunately, he said, “talking about stock price to executives is like talking to third graders about sex. They’re sure it’s important but they aren’t sure exactly what it is.”

But in fact it’s simple. “Managing for shareholder value is the same thing as managing for competitive advantage,” said Moore.

Moore described four different disciplines on which companies could focus:

1. discontinuous innovation—in which a company leverages someone else’s disruptive technology to gain a business process advantage. He cited Amazon’s use of the Internet and American Airlines’ Sabre as examples of these.
2. product leadership—in which a company uses technology to optimize cycle times and gains a time-to-market advantage. He cited Benetton as an example of this.
3. customer intimacy—in which a company creates a differentiated customer experience to gain an advantage through customer loyalty. “Any technology that involves customer relationship management is a possible candidate,” said Moore.
4. Operational excellence—in which a company uses technology to optimize production and delivery systems to gain an advantage through economies of scale. Moore noted that Wal-Mart has excelled at this.

“Each requires a different sort of IT investment to be successful,” noted Moore.

Those four disciplines constitute a company’s potential core, and should be the locus of the bulk of a company’s investment.

Moore noted wryly that “the only known mode of failure” is to try and invest in all four aspects. “At most, a company should focus on two or three areas,” he said.

On the other hand, companies should invest as few of their scarce resources as possible in functions that are merely context--those other essential functions that companies need to carry out, but which have no upside.

Indeed, Moore suggested that companies should outsource as many non-core functions as possible—including mission-critical systems.

Most companies refuse to do this, said Moore, because they are risk-averse. But a conservative corporate culture “wastes scarce resources and alienates investors.”

Moore did acknowledge that outsourcing mission-critical functions requires careful planning, and outlined a strategy for doing so:

1. build a relationship of trust slowly
2. use a service level agreement as a dashboard—not to beat up on your partner, and finally;
3. incorporate the new partner into management decisions.

“Outsourcing will increase costs at first, but will free up the time, talent and management attention on core issues that need to be addressed,” said Moore.

The ongoing challenge for even those companies that do focus on their core is that their competitors will be working continuously to catch up with them, turning core into mere context.

This, said Moore, is why investors will always be more inclined to invest in companies “where 90 cents of each invested dollar goes to core—versus 90 cents going to context that cannot improve my stock price.”