3.

Using Information System to Achieve Competitive Advantage

In almost every industry you examine, you will find some firms do better than most
others. There’s almost always a stand-out firm. Firms that “do better” than others are said
to have a competitive advantage over others: They either have access to special resources
that others do not, or they are able to use commonly available resources more efficiently
— usually because of superior knowledge and information assets. In any event, they do
better in terms of revenue growth, profitability, or productivity growth ( efficiency), all
of which ultimately in the long run translate into higher stock market valuations than
their competitors.
Porter’s Competitive Forces Model
 Traditional Competitors. All firms share market space with other
competitors who are continuously devising new, more efficient ways to
produce by introducing new products and services, and attempting to attract
customers by developing their brands and imposing switching costs on their
customers.
 New Market Entrants. New companies have several possible advantages:
They are not locked into old plants and equipment, they often hire younger
workers who are less expensive and perhaps more innovative, they are not
encumbered by old worn-out brand names, and they are “more hungry”
(more highly motivated) than traditional occupants of an industry. These
advantages are also their weakness: They depend on outside financing for
new plants and equipment, which can be expensive; they have a less-
experienced workforce; and they have little brand recognition
 Substitute Products and Services. New technologies create new substitutes
all the time. the Internet telephone service can substitute for traditional
telephone service, and fiber-optic telephone lines to the home can substitute
for cable TV lines. The more substitute products and services in your
industry, the less you can control pricing and the lower your profit margins.
 Customers. The power of customers grows if they can easily switch to a
competitor’s products and services, or if they can force a business and its
competitors to compete on price alone in a transparent marketplace where
there is little product differentiation, and all prices are known instantly
(such as on the Internet).
  Suppliers. The more different suppliers a firm has, the greater control it can
exercise over suppliers in terms of price, quality, and delivery schedules.
For instance, manufacturers of laptop PCs almost always have multiple
competing suppliers of key components, such as keyboards, hard drives,
and display screens.

Information System Strategies for Dealing With Competitive Forces

There are four generic strategies, each of which often is enabled by using
information technology and systems: low-cost leadership, product differentiation,
focus on market niche, and strengthening customer and supplier intimacy.

 Low-Cost Leadership
Use information systems to achieve the lowest operational costs and the
lowest prices. The classic example is Walmart. Walmart’s continuous
replenishment system sends orders for new merchandise directly to
suppliers as soon as consumers pay for their purchases at the cash register.
Because the system replenishes inventory with lightning speed, Walmart
does not need to spend much money on maintaining large inventories of
goods in its own warehouses. The system also enables Walmart to adjust
Purchases of store items to meet customer demands.
 Product Differentiation
Use information systems to enable new products and services, or greatly
change the customer convenience in using your existing products and
services. By purchasing PayPal, an electronic payment system, in 2003,
eBay made it much easier for customers to pay sellers and expanded use of
its auction marketplace. Manufacturers and retailers are using information
systems to create products and services that are customized and
personalized to fit the precise specifications of individual customers. For
example, Nike sells customized sneakers through its NIKEiD program on
its Web site.
 Focus on Market Niche
Use information systems to enable a specific market focus, and serve this
narrow target market better than competitors. Information systems support
 this strategy by producing and analyzing data for finely tuned sales and
marketing techniques. Information systems enable companies to analyze
customer buying patterns, tastes, and preferences closely so that they
efficiently pitch advertising and marketing campaigns to smaller and
smaller target markets. Credit card companies are able to use this strategy
to predict their most profitable cardholders. The companies gather vast
quantities of data about consumer purchases and other behaviors and mine
these data to construct detailed profiles that identify cardholders who might
be good or bad credit risks.
 Strengthen Customer and Supplier Intimacy
Use information systems to tighten linkages with suppliers and develop
intimacy with customers. Chrysler Corporation uses information systems to
facilitate direct access by suppliers to production schedules, and even
permits suppliers to decide how and when to ship supplies to Chrysler
factories. On the customer side, Amazon keeps track of user preferences for
book and CD purchases, and can recommend titles purchased by others to
its customers.

The Internet’s Impact on Competitive Advantage

Internet technology is based on universal standards that any company can use,
making it easy for rivals to compete on price alone and for new competitors to
enter the market. Because information is available to everyone, the Internet raises
the bargaining power of customers, who can quickly find the lowest-cost provider
on web.

The Internet has nearly destroyed some industries and has severely threatened
more. For instance, the printed encyclopedia industry and the travel agency
industry have been nearly decimated by the availability of substitutes over the
Internet. Likewise, the Internet has had a significant impact on the retail, music,
book, retail brokerage, software, telecommunications, and newspaper. Newspapers
and magazines have been hit even harder, as their readerships diminish, their
advertisers shrink, and more people get their news for free online. However, the
Internet has also created entirely new markets, formed the basis for thousands of
new products, services, and business models, and provided new opportunities for
building brands with very large and loyal customer bases. Amazon, eBay, iTunes,
YouTube, Facebook, Travelocity, and Google are the example.

The Business Value Chain Model

Value chain model identifies specific, critical leverage points where a firm can
use information technology most effectively to enhance its competitive position.
The value chain model views the firm as a series or chain of basic activities that
add a margin of value to a firm’s products or services. These activities can be
categorized as either primary activities or support activities.

Primary activities are most directly related to the production and distribution
of the firm’s products and services, which create value for the customer. Primary
activities include inbound logistics (receiving and storing materials), operations
(transforms inputs into finished products), outbound logistics (entails storing and
distributing finished products), sales and marketing (promoting and selling the
firm’s products), and service (maintenance and repair of the firm’s goods and
services). Support activities make the delivery of the primary activities possible
and consist of organization infrastructure (administration and management), human
resources (employee recruiting, hiring, and training), technology (improving
products and the production process), and procurement (purchasing input).

How can we use information systems to improve operational efficiency, and

improve customer and supplier intimacy? Supply chain management systems that
coordinate the flow of resources into your firm, and customer relationship
management systems that coordinate your sales and support employees with
customers, are two of the most common system applications that result from a
business value chain analysis. Using the business value chain model will also cause
you to consider benchmarking (comparing the efficiency and effectiveness of your
business processes against strict standards and then measuring performance
against those standards) your business processes against your competitors or others
in related industries, and identifying industry best practices.

Once you have analyzed the various stages in the value chain at your business,
you can come up with candidate applications of information systems. Then, once
you have a list of candidate applications, you can decide which to develop first. By
making improvements in your own business value chain that your competitors
might miss, you can achieve competitive advantage by attaining operational
excellence, lowering costs, improving profit margins, and forging a closer
relationship with customers and suppliers.

 Extending the Value Chain: The Value Web

The performance of most firms depends not only on what goes on
inside a firm but also on how well the firm coordinates with direct and
indirect suppliers, delivery firms (logistics partners, such as FedEx or UPS),
and, of course, customers. By working with other firms, industry
participants can use information technology to develop industry-wide
standards for exchanging information or business transactions
electronically, which force all market participants to subscribe to similar
standards.
Internet technology has made it possible to create highly synchronized
industry value chains called value webs. A value web is a collection of
independent firms that use information technology to coordinate their value
chains to produce a product or service for a market collectively. Value web
synchronizes the business processes of customers, suppliers, and trading
partners among different companies in an industry or in related industries.

Synergies, Core Competencies, and Network Based Strategies

Information systems can improve the overall performance of the business units by
promoting synergies and core competencies.

 Synergies
The idea of synergies is that when the output of some units can be used as
inputs to other units, or two organizations pool markets and expertise, these
relationships lower costs and generate profits. For example, acquiring
Countrywide Financial enabled Bank of America to extend its mortgage
lending business and to tap into a large pool of new customers who might
be interested in its credit card, consumer banking, and other financial
products.
 Enhancing Core Competencies
 The performance of all business units will increase insofar as these
business units develop, or create, a central core of competencies. A core
competency relies on knowledge that is gained over many years of practical
field experience with a technology. For example, Procter & Gamble, a
world leader in brand management and consumer product innovation, uses
a series of systems to enhance its core competencies. An intranet called
InnovationNet helps people working on similar problems share ideas and
expertise.
 Network-Based Strategies
Network-based strategies include the use of network economics, a virtual
company model, and business ecosystems.
o Network Economics. Business models based on a network may help
firms strategically by taking advantage of network economics. In a
network, the marginal costs of adding another participant are about
zero, whereas the marginal gain is much larger. The larger the
number of subscribers in a telephone system or the Internet, the
greater the value to all participants because each user can interact
with more people. From this network economics perspective,
information technology can be strategically useful. Internet sites can
be used by firms to build communities of users—like-minded
customers who want to share their experiences. This builds
customer loyalty and enjoyment, and builds unique ties to
customers.
o Virtual company known as a virtual organization, uses networks to
link people, assets, and ideas, enabling it to ally with other
companies to create and distribute products and services without
being limited by traditional organizational boundaries or physical
locations. The virtual company model is useful when a company
finds it cheaper to acquire products, services, or capabilities from an
external vendor or when it needs to move quickly to exploit new
market opportunities and lacks the time and resources to respond on
its own.
 o Business Ecosystems. The concept of a business ecosystem builds
on the idea of the value web described earlier, the main difference
being that cooperation takes place across many industries rather
than many firms. For instance, both Microsoft and Walmart provide
platforms composed of information systems, technologies, and
services that thousands of other firms in different industries use to
enhance their own capabilities. Microsoft has estimated that more
than 40,000 firms use its Windows platform to deliver their own
products, support Microsoft products, and extend the value of
Microsoft’s own firm. Walmart’s order entry and inventory
management system is a platform used by thousands of suppliers to
obtain real-time access to customer demand, track shipments, and
control inventories.

4. Using System for Competitive Advantage: Management Issues

Successfully using information systems to achieve a competitive advantage is
challenging and requires precise coordination of technology, organizations and
management.
Sustaining Competitive Advantage
The competitive advantages that strategic systems confer do not necessarily
last long enough to ensure long-term profitability. Because competitors can
retaliate and copy strategic systems, competitive advantage is not always
sustainable. Markets, customer expectations, and technology change; globalization
has made these changes even more rapid and unpredictable. The Internet can make
competitive advantage disappear very quickly because virtually all companies can
use this technology. Amazon was an e-commerce leader but now faces competition
from eBay, Yahoo and Google.

Aligning it With Business Objective

Information technology takes on a life of its own and does not serve
management and shareholder interests very well. Instead of business people taking
an active role in shaping IT to the enterprise, they ignore it, claim not to
understand IT, and tolerate failure in the IT area as just a nuisance to work around.
Such firms pay a hefty price in poor performance. Successful firms and managers
understand what IT can do and how it works, take an active role in shaping its use,
and measure its impact on revenues and profits.

To align IT with the business and use information systems effectively for
competitive advantage, managers need to perform a strategic systems analysis. To
identify the types of systems that provide a strategic advantage to their firms,
managers should ask the following questions:

1. What is the structure of the industry in which the firm is located?

2. What are the business, firm, and industry value chains for this particular
firm?
3. Have we aligned IT with our business strategy and goals?

Managing Strategic Transitions

The sociotechnical changes (business goals, relationships with customers and

suppliers, and business processes), affecting both social and technical elements of
the organization, can be considered strategic transitions—a movement between
levels of sociotechnical systems. Such changes often entail blurring of
organizational boundaries, both external and internal. Suppliers and customers
must become intimately linked and may share each other’s responsibilities.
Managers will need to devise new business processes for coordinating their firms’
activities with those of customers, suppliers, and other organizations. The
organizational change requirements surrounding new information systems are so
important that they merit attention throughout this text.