Competing with Information Technology

Fundamentals of Strategic Advantage

Strategic IT:

• Information technology (IT) can significantly alter the competitive landscape for businesses.
• Viewing information systems strategically means recognizing them as essential competitive networks, tools for organizational renewal, and necessary investments in technology.
• Technologies allow companies to adopt strategies and business processes that enable reengineering or reinvention, which is crucial for survival and success in a dynamic business environment.

Competitive Strategy Concepts:

• The strategic role of information systems involves leveraging IT to develop products, services, and capabilities that provide a competitive edge in the global marketplace.
• This is achieved through a strategic information architecture, which consists of strategic information systems that support or shape the competitive position and strategies of a business.
• A strategic information system can be any system (e.g., Transaction Processing Systems (TPS), Management Information Systems (MIS), Decision Support Systems (DSS)) that uses IT to help an organization gain a competitive advantage, reduce a competitive disadvantage, or meet other strategic objectives.

Competitive Forces and Strategies

The following figure illustrates various competitive forces a business might encounter and the strategies to counteract them. Each strategy can be useful against different competitive forces, though it’s uncommon for a single firm to use all strategies simultaneously.

Competitive Forces:

1. Threat of new entrants: New competitors entering the market can pose a threat.
2. Bargaining power of buyers: The ability of customers to influence prices and terms.
3. Bargaining power of suppliers: The power suppliers have over businesses.
4. Threat of substitute products or services: Alternatives that customers might switch to.
5. Rivalry among existing competitors: The intensity of competition among existing firms.

Competitive Strategies:

1. Cost Leadership: Becoming the lowest-cost producer in the industry to attract price-sensitive customers.
2. Differentiation: Offering unique products or services that are valued by customers.
3. Focus: Targeting a specific market niche with tailored products or services.
4. Innovation: Developing new products, services, or processes that significantly alter the market.
5. Growth: Expanding operations, products, or markets to increase market share.
6. Alliances: Forming partnerships or alliances with other companies to leverage strengths and mitigate weaknesses.

Competitive Forces

Rivalry Among Competitors:

• Positive Aspect of Competition: Competition is often positive, fostering a natural and healthy rivalry among businesses.
• Continuous Effort for Advantage: This rivalry drives firms to continually seek competitive advantages in the marketplace.
• Resource Allocation: Significant resources are needed to maintain and enhance competitive positions.

Threat of New Entrants:

• Barrier Creation: Firms must allocate substantial resources to create barriers that deter new competitors from entering the market.
• Internet Impact: The Internet has lowered the barriers to entry, enabling new competitors to enter markets quickly and at a lower cost.
• Vigilance Required: Companies must remain vigilant as potential competitors could emerge rapidly and unexpectedly.

Threat of Substitutes:

• Alternative Options: Consumers often have alternative products or services available, posing a constant threat to businesses.
• Impact of Costs: The threat of substitutes becomes more pronounced during periods of rising costs or inflation.
  • Examples:
    • High airline prices may lead consumers to choose car travel.
    • Rising steak prices might lead consumers to opt for hamburger or fish.
• Consumer Choice: The availability of substitutes means that businesses must continuously monitor and adapt to changes in consumer preferences and costs.

Bargaining Power of Customers and Suppliers

Finally, a business must guard against the often opposing forces of customer and supplier bargaining powers. If customers’ bargaining power gets too strong, they can drive prices to unmanageably low levels or just refuse to buy the product or service. If a key supplier’s bargaining power gets too strong, it can force the price of goods and services to unmanageably high levels or just starve a business by controlling the flow of parts or raw materials essential to the manufacture of a product. Above figure also illustrates that businesses can counter the threats of competitive forces that they face by implementing one or more of the five basic competitive strategies.

Competitive Strategies

Cost Leadership Strategy:

• Objective: Become the lowest-cost producer in the industry.
• Methods:
  • Streamline operations to reduce costs.
  • Use economies of scale to lower production costs.
  • Negotiate lower prices with suppliers.
  • Help suppliers or customers reduce their costs or increase competitors’ costs.

Differentiation Strategy:

• Objective: Develop unique products or services that stand out from competitors.
• Methods:
  • Innovate product features or functionalities.
  • Enhance customer service or support.
  • Establish a strong brand identity.
  • Focus on specific market segments or niches where differentiation can provide a competitive edge.

Innovation Strategy:

• Objective: Find new ways of doing business, creating unique products or services, or entering unique markets.
• Methods:
  • Develop groundbreaking products or services.
  • Enter untapped markets or niches.
  • Radically change business processes to alter the industry’s structure.
  • Utilize disruptive technologies.

Growth Strategies:

• Objective: Expand the company’s capacity to produce goods and services and enter new markets.
• Methods:
  • Increase production capabilities.
  • Expand into global markets.
  • Diversify into new products and services.
  • Integrate related products and services (vertical or horizontal integration).

Alliance Strategies:

• Objective: Establish business linkages and alliances with other entities to enhance competitive position.
• Methods:
  • Form mergers or acquisitions.
  • Create joint ventures.
  • Establish virtual companies.
  • Develop marketing, manufacturing, or distribution agreements.
  • Collaborate with customers, suppliers, competitors, consultants, and other companies.

Implementing Competitive Strategies

• Flexibility: Competitive strategies are not mutually exclusive. Organizations can employ one, some, or all strategies to various extents to manage competitive forces.
• Integration: A single activity can fall into multiple strategy categories, enabling businesses to leverage different strategies concurrently.
• Strategic Use of Information Systems: Information systems play a crucial role in implementing these strategies by providing data insights, enhancing operational efficiency, and facilitating communication and collaboration.

For example, implementing a system that allows customers to track their orders or shipments online could be considered a form of differentiation if the other competitors in the marketplace do not offer this service. If they do offer the service, however, online order tracking would not serve to differentiate one organization from another.
– If an organization offers its online package tracking system in a manner that allows its customers to access shipment information via not only a computer but a mobile phone as well, then such an action could fall into both the differentiation and innovation strategy categories.
– Not everything innovative will serve to differentiate one organization from another. Likewise, not everything that serves to differentiate organizations is necessarily viewed as innovative. These types of observations are true for any combination of the competitive strategies, thus making them complementary to each other rather than mutually exclusive.

Strategic Uses of Information Technology

Information technology (IT) plays a crucial role in implementing various competitive strategies. Here are key strategies that can be enhanced through the strategic use of IT:

a. Locking in Customers or Suppliers:

• Objective: Ensure customer and supplier loyalty by making it difficult or undesirable for them to switch to competitors.
• Methods:
  • Customer Relationship Management (CRM) Systems: Implement CRM systems to provide personalized service, track customer preferences, and enhance customer satisfaction.
  • Supply Chain Management (SCM) Systems: Utilize SCM systems to integrate and optimize the supply chain, improving supplier relationships and coordination.
  • Loyalty Programs: Use IT to develop and manage customer loyalty programs that reward repeat business.

b. Building Switching Costs:

• Objective: Increase the costs (financial, time, effort) for customers or suppliers to switch to a competitor.
• Methods:
  • Proprietary Platforms: Develop and maintain proprietary software or platforms that are integral to customers’ or suppliers’ operations.
  • Data Integration: Offer systems that integrate deeply with customers’ or suppliers’ existing workflows and data, making it costly to switch.
  • Service Contracts: Use IT to manage long-term service contracts that provide value-added services and support.

c. Raising Barriers to Entry:

• Objective: Create obstacles that make it difficult for new competitors to enter the market.
• Methods:
  • Advanced Technology Investments: Invest in cutting-edge technologies that new entrants cannot easily replicate.
  • Patents and Intellectual Property: Use IT to develop unique, patentable technologies.
  • Regulatory Compliance: Implement comprehensive IT systems that ensure compliance with complex regulations, making it harder for new entrants to match.

d. Leveraging Investment in Information Technology:

• Objective: Maximize the return on IT investments to gain a competitive advantage.
• Methods:
  • Scalable IT Infrastructure: Develop scalable IT infrastructure that supports growth and adapts to changing business needs.
  • Data Analytics: Use data analytics to gain insights into market trends, customer behavior, and operational efficiencies.
  • Cloud Computing: Leverage cloud computing to reduce costs, improve flexibility, and enhance collaboration.
  • Automation: Implement automation technologies to streamline operations, reduce errors, and increase efficiency.

Implementing IT Strategies for Competitive Advantage

1. Locking in Customers or Suppliers:
   • Example: A retail company uses a CRM system to track customer purchase history and preferences, offering personalized recommendations and promotions that enhance customer loyalty.
   • Example: A manufacturing company employs an SCM system to coordinate with suppliers, ensuring timely deliveries and optimizing inventory management.
2. Building Switching Costs:
   • Example: A software company develops proprietary platforms that integrate with customers’ existing systems, making it challenging for them to switch to another provider without significant disruptions.
   • Example: A telecommunications company offers long-term contracts with bundled services, creating a financial disincentive for customers to switch providers.
3. Raising Barriers to Entry:
   • Example: A pharmaceutical company invests in advanced research and development (R&D) technologies that are protected by patents, preventing new competitors from easily entering the market.
   • Example: A financial services firm implements comprehensive compliance systems that meet stringent regulatory requirements, deterring new entrants who may struggle to match these standards.
4. Leveraging Investment in Information Technology:
   • Example: An e-commerce company uses data analytics to analyze customer behavior and market trends, optimizing its marketing strategies and inventory management.
   • Example: A logistics company adopts cloud computing solutions to enhance collaboration across its global operations, improving efficiency and reducing operational costs.

Building a Customer-Focused Business

A customer-focused business prioritizes the needs and satisfaction of its customers, ensuring loyalty and long-term relationships. Here are key aspects of building a customer-focused business, enhanced through the use of information technology:

1. Keeping Customers Loyal:

• Personalized Service: Track individual customer preferences using CRM systems to offer personalized services and recommendations.
• Loyalty Programs: Implement loyalty programs that reward repeat business and encourage customer retention.
• Consistent Communication: Maintain regular and meaningful communication with customers through various channels like email, social media, and mobile apps.

2. Anticipating Future Needs:

• Market Trends Analysis: Use data analytics to keep up with market trends and predict future customer needs.
• Customer Feedback: Collect and analyze customer feedback to identify emerging preferences and demands.
• Innovative Products and Services: Develop and offer new products and services based on insights gained from market and customer data.

3. Responding to Customer Concerns:

• Responsive Support: Provide quick and effective customer support through various channels like live chat, email, and phone support.
• Proactive Problem Solving: Use CRM systems to track and resolve customer issues promptly, ensuring customer satisfaction and loyalty.
• Feedback Loops: Establish feedback loops to continuously improve products and services based on customer concerns and suggestions.

4. Providing Top-Quality Customer Service:

• Training and Empowerment: Train employees to deliver high-quality customer service and empower them to make decisions that benefit the customer.
• Consistent Quality: Ensure consistency in service quality across all customer touchpoints.
• Customer-Centric Culture: Foster a company culture that prioritizes customer satisfaction and values customer feedback.

Leveraging Internet Technologies for a Customer-Focused Business

1. Strategic Use of Internet Technologies:

• 24/7 Availability: Offer products, services, and information anytime and anywhere through online platforms.
• Tailored Services: Use internet technologies to tailor services to individual customer preferences, enhancing the customer experience.
• Fast and Responsive: Utilize online tools to provide fast and responsive customer service.

2. Customer Relationship Management (CRM):

• Centralized Data: Use CRM systems to centralize customer data, enabling a comprehensive view of each customer’s interactions and preferences.
• Interactive Communication Channels: Create new channels for interactive communication with customers using web technologies (Internet, intranet, extranet).
• Cross-Functional Collaboration: Encourage cross-functional collaboration within the company to improve customer engagement and service.

3. Enhanced Customer Interaction:

• Online Customer Service: Provide platforms for customers to ask questions, lodge complaints, evaluate products, request support, and track purchases online.
• Cross-Functional Teams: Form cross-functional teams to address customer needs, involving specialists from various business functions.
• Continuous Interaction: Facilitate continuous interaction with customers through various business functions, ensuring ongoing engagement and support.

Implementing Customer-Focused Strategies

1. Using CRM Systems and Internet Technologies:

• Example: A retail company uses a CRM system integrated with its e-commerce platform to offer personalized shopping experiences and recommendations based on customer purchase history.
• Example: A software company uses online forums and support portals to engage with customers, address their concerns, and gather feedback for product improvements.

2. Encouraging Cross-Functional Collaboration:

• Example: A manufacturing firm forms cross-functional teams to work on customer feedback, involving departments like product development, marketing, and customer service to create a holistic approach to customer satisfaction.
• Example: A financial services company uses intranet platforms to facilitate internal communication and collaboration, ensuring that customer queries and issues are resolved efficiently by the relevant specialists.

The Value Chain and Strategic Information Systems

The value chain concept, developed by Michael Porter, provides a framework for analyzing a firm’s activities and identifying areas where information systems can add value. Understanding this concept is crucial for developing strategic uses of IT to enhance a company’s competitive advantage.

The Value Chain Framework

The value chain views a firm as a series or network of activities that add value to its products and services, ultimately benefiting both the firm and its customers. These activities are categorized into primary processes and support processes.

1. Primary Processes: Primary processes are business activities directly related to the production and delivery of a company’s products or services. They include:

• Inbound Logistics: Activities related to receiving, storing, and disseminating inputs to the production process.
• Operations: Activities involved in transforming inputs into finished products or services.
• Outbound Logistics: Activities related to collecting, storing, and distributing the finished products to customers.
• Marketing and Sales: Activities involved in informing potential customers about products and services and facilitating their purchase.
• Service: Activities related to maintaining and enhancing the value of products or services after they have been sold to customers.

2. Support Processes: Support processes are business activities that support the day-to-day operations of the business and indirectly contribute to the production and delivery of products or services. They include:

• Firm Infrastructure: Activities related to general management, planning, finance, accounting, legal, and government affairs.
• Human Resource Management: Activities related to recruiting, hiring, training, development, and compensation of employees.
• Technology Development: Activities related to the development and improvement of products, services, and processes.
• Procurement: Activities related to purchasing the raw materials, supplies, and other inputs needed for production.

Strategic Uses of Information Technology in the Value Chain

1. Enhancing Primary Processes:

• Inbound Logistics:
  • Example: Use of automated inventory management systems to streamline the receiving and storage of materials.
  • Example: Implementation of supplier portals to facilitate real-time communication and collaboration with suppliers.
• Operations:
  • Example: Adoption of manufacturing execution systems (MES) to monitor and control production processes, improving efficiency and reducing waste.
  • Example: Use of computer-aided design (CAD) and computer-aided manufacturing (CAM) systems to enhance product development and manufacturing.
• Outbound Logistics:
  • Example: Deployment of warehouse management systems (WMS) to optimize storage and distribution of finished products.
  • Example: Use of transportation management systems (TMS) to improve delivery scheduling and reduce shipping costs.
• Marketing and Sales:
  • Example: Implementation of customer relationship management (CRM) systems to manage customer interactions, track sales, and analyze customer data.
  • Example: Use of e-commerce platforms to reach a broader audience and facilitate online sales.
• Service:
  • Example: Adoption of online support portals and chatbots to provide 24/7 customer service and technical support.
  • Example: Use of predictive maintenance systems to proactively address product issues before they impact customers.

2. Enhancing Support Processes:

• Firm Infrastructure:
  • Example: Implementation of enterprise resource planning (ERP) systems to integrate and manage core business processes.
  • Example: Use of financial management software to streamline accounting and financial reporting.
• Human Resource Management:
  • Example: Adoption of human capital management (HCM) systems to manage employee data, track performance, and facilitate training and development.
  • Example: Use of recruitment management systems to streamline the hiring process and improve candidate experience.
• Technology Development:
  • Example: Investment in research and development (R&D) tools to foster innovation and improve product development.
  • Example: Use of project management software to enhance collaboration and track progress on technology projects.
• Procurement:
  • Example: Implementation of e-procurement systems to automate purchasing processes and improve supplier management.
  • Example: Use of procurement analytics to identify cost-saving opportunities and optimize sourcing strategies.

Developing Strategic Uses of Internet and Other Technologies

Managers and business professionals should focus on developing strategic uses of the Internet and other technologies for processes that add the most value to the company’s products or services. This involves:

• Identifying Value-Adding Activities: Analyzing the value chain to pinpoint activities where technology can enhance efficiency, quality, or customer satisfaction.
• Leveraging Internet Technologies: Utilizing Internet, intranet, and extranet technologies to streamline operations, improve communication, and enhance customer interaction.
• Fostering Innovation: Encouraging innovation in both primary and support processes to create new value propositions and competitive advantages.

Value Chain Examples
– Figure above provides examples of how and where information technologies can be applied to basic business processes using the value chain framework. For example, the figure illustrates that collaborative workflow intranets can increase the communications and collaboration required to improve administrative coordination and support services dramatically.
– An employee benefits intranet can help the human resources management function provide employees with easy, self-service access to their benefits information.
– Extranets enable a company and its global business partners to use the Web to design products and processes jointly.
– Finally, e-commerce Web portals can dramatically improve procurement of resources by providing online marketplaces for a firm’s suppliers.
– The value chain model in Figure above also identifies examples of strategic applications of information systems technology to primary business processes.
– These include automated just-in-time warehousing systems to support inbound logistic processes that involve inventory storage, computer-aided flexible manufacturing systems, as well as online point-of-sale and order processing systems to improve the outbound logistics processes that handle customer orders.
– Information systems can also support marketing and sales processes by developing an interactive targeted marketing capability on the Internet and the Web.
– Finally, a coordinated and integrated customer relationship management system can dramatically improve customer service.
– Thus, the value chain concept can help you identify where and how to apply the strategic capabilities of information technology.
– It shows how various types of information technologies might be applied to specific business processes to help a firm gain competitive advantages in the marketplace.