4.2 The Competitive Advantage and Strategic Information Systems

Organizations compete based on their value chains, the series of processes that create
products and services that external customers pay for. Competitive advantage occurs
when a firm’s value chain generate superior product and service features, quality,
availability, low cost or other things customers care about. Competitive advantage comes
from many sources. Some companies have a natural competitive advantage. Others
must create competitive advantage through superior product design, marketing,
customer service or distribution channel. A major role of information systems
applications in business was to provide effective support of a company’s strategies for
gaining competitive advantage. This strategic role of information systems, which creates
strategic information system, involves using information technology to develop products,
services and capabilities that give company major advantages to compete in the global
market.

4.2.1 Competitive Forces and Strategies

A company can survive and succeed in the long run only if it successfully develops
strategies to gain advantage in the global market over the competitive forces that
shape the structure of competition in its industry and market. Any business that wants to
survive and succeed must develop and implement strategies to effectively counter the
following five completive forces.

1. The challenge of competitors within its industry.
2. The threat of new entrants into an industry and its market.
3. The threat posed by substitute products, which might capture market share.
4. The bargaining power of customers.
5. The bargaining power of suppliers.

Whether and how a firm can use information systems competitively depends on the
firm’s strategy. Although competitive situations vary widely, most companies adopt some
combination of the following five strategies to cope with the above threats of competitive
forces.

1. Cost leadership strategy: Produce products and/or services at the lowest cost in
the industry. A firm achieves cost leadership in its industry by thrifty buying practices,
efficient business processes, forcing up the prices paid by competitors, and helping
customers or suppliers reduce their costs.

2. Product differentiation strategy provides more value to its products and services
than competitors’ or eliminates or reduces the competitor’s differentiation
advantages.

3. Innovation strategy: Introduce new products and services, put new features in
existing products and services, or develop new ways to produce them. Innovation is
similar to differentiation except that the impact is much more dramatic. Differentiation
“tweaks” existing products and services to offer the customer something special and
different. Innovation implies something so new and different that it changes the
nature of the industry.

4. Growth strategy: Increase market share, acquire more customers, or sell more
products. Such a strategy strengthens a company and increases profitability in the
long run. Web-based selling can facilitate growth by creating new marketing
channels, such as electronic auctions.

5. Alliance strategy: Work with business partners in partnerships, alliances, joint
ventures, or virtual companies. This strategy creates synergy, allows companies to
concentrate on their core business, and provides opportunities for growth. Alliances
are particularly popular in electronic commerce ventures.

4.2.2 Use of IT to Support Competitive Strategies

A company’s business strategy has crucial implications for its operations, profitability,
and capacity to meet the needs of its customers. Information technology can facilitate
strategy implementation and can become a source of competitive advantage. The source
of competitive advantage in business is what you do with the information that technology
gives you access to. Therefore, planning and applying information systems in a way that
complements the overall strategies and tactics of the organization is important.

How information technology can be used to implement the five basic competitive
strategies is briefed in Table 4.1.




4.2.3 The Value Chain and Strategic IS

A strategic information system is designed to play a major role in an organization’s
competitive strategy and involves using various strategic uses of information technology
for gaining a competitive advantage or reducing a competitive disadvantage or meeting
other strategic enterprise objectives. In this framework of developing information system,
organizations would devise business strategies that would use information technology to
develop products, services and capabilities that would give the organization major
advantages in the markets in which it competes.

The value chain concept was briefly introduced in section 4.1. It views the organization
as a chain of value-added processors or activities. In this view, the organization should
focus developing of a variety of strategic uses of information technology on those
processors that add the most value to an organization’s products or services, and thus to
the overall business value.

As such, the value chain concept is useful in analyzing where and how the strategic
capabilities of information technology can be applied. It also shows how various types of
information technologies might be applied to specific business processes to help an
organization gain competitive advantages in the market place.

Some examples of strategic applications of information systems technology to primary
and support business processes is presented in table 4.2.



4.2.4 Other Strategic Uses of IT

There are many other strategic uses of information technology in addition to one
described in the previous section. Let’s look at several of those.

4.2.4.1 Building a Customer Focused Business

The value of this type of business lies in its ability to help organizations keep customers
loyal, anticipate their future needs, respond to customer concerns and provide top-quality
customer service. This strategic focus on customer value considers quality of products
and services, rather than prices, as the primary determinant in a customer’s perception
of the value. The organization that consistently offer the best value to customers from
their point of view, are mainly able to keep track of their customers’ individual
preferences and provide customer services tailored to individual needs.

Let’s look at how IT can be used to build a customer based business.

• The Internet provides a strategic opportunity. It offers a fast, responsive, high
quality products and services tailored to individual customer preferences.

• Customer Relationship Management (CRM) systems and Internet, intranet and
extranet web sites create new channels for interactive communications within a
company with customers and suppliers, business partners and others in the
external environment.

• Internet and extranet links to suppliers and business partners can be used to
ensure prompt delivery of quality components/services.

4.2.4.2 Reengineering Business Processes

Reengineering business processes, often called reengineering, is the fundamental
rethinking and radical redesign of business processes to achieve dramatic improvements
in critical measures of performance, such as cost, quality, service and speed. Obviously,
its payback is very high. However, making radical changes to the business processes to
dramatically improve efficiency and effectiveness is not an easy task. Because of the
radical restructuring it calls for, most firms attempting major reengineering projects have
found them difficult and risky. Common outcomes of reengineering include combining
several jobs into one, permitting workers to make more decisions themselves, and
reorganizing jobs to give individuals more understanding and more responsibility. Many
reengineering efforts also result in significant staff reductions.

Information technology plays a major role in reengineering most business processes.
The speed, information processing capabilities and connectivity of computers, Internet
technologies can substantially increase the efficiency of business processes, as well as
communication and collaboration among the people responsible for their operation and
management.

4.2.4.3 Improve Agility

Agility in business performance is the ability of a company to remain competitive in
rapidly changing, continually fragmenting global markets for high-quality, high
performance products and services. Thus, an agile company can compete in markets
with broad product ranges and short reproduction lifetimes. It also can fill large orders
individually. It offers customized products while maintaining high volumes of production.
Agile companies depend heavily on internet technologies to integrate and manage
business processes.

Four basic strategies must be implemented to be an agile company.

1. Customers view products or services as solution to their individual problems. Thus,
the price of a product is only based on the value of it to customers, and not based on
the cost to produce.

2. Company cooperates with customers, suppliers, and other companies, and even with
competitors to bring products to the market as rapidly and cost effectively as
possible.

3. Company succeeds on change and uncertainty. It uses flexible organizational
structures keyed to the requirements of different and constantly changing customer
opportunities.

4. Company leverages the impact of its people and the knowledge they possess.

4.2.4.4 Develop Virtual Organizations

A virtual organization can be one of the most important strategic uses of information
technology. A virtual organization uses information technology to link people,
organizations, assets and ideas. The major aspects of core processes such as design,
production, and delivery are outsourced to other organizations that specialize in these
areas. Virtual organizations exist by agreement of their members and sometimes need
immediate access to shared information in order to operate efficiently. Virtual
organizations typically form flexible and adaptable virtual workgroups and alliances with
business partners that are interlinked by the Internet, Intranet and extranets to exploit
fast changing business opportunities. People and organizations are forming virtual
companies as the best way to implement key business strategies and alliances that
promise to ensure success in today’s chaotic business climate.

4.2.4.5 Improve Knowledge Creation

In a company where the only certainty is uncertainty, the one sure source of lasting
competitive advantage is knowledge. When markets shift, technologies proliferate,
competitors multiply, and products become obsolete almost overnight. Successful
companies are those that consistently create new knowledge, disseminate it widely
throughout the organization, and quickly embody it in new technologies and products.
These activities define the "knowledge-creating" company, whose sole business is
continuous innovation. These companies are famous for their ability to respond quickly to
customers, create new markets, rapidly develop new products, and dominate emergent
technologies. The secret of their success is their unique approach to managing the
creation of new knowledge. Successful knowledge management creates techniques,
technologies, systems, and rewards for getting employees to share what they know and
to make better use of accumulated workplace and enterprise knowledge as they do their
job.

Knowledge management has thus become one of the major strategic uses of information
technology. Knowledge management system manages organizational learning and
business know-how. The goal of such systems is to help knowledge workers create,
organize and make available important business knowledge, wherever and whenever it’s
needed in an organization. As the organizational learning process continues and its
knowledge base expands, the knowledge creating company works to integrate its
business processes, products and services. This helps the company become more
innovative and agile provider of high quality products and customer services.