Substitution
Two ways in which a firm can compete against substitute products are with relative price performance and product features. IT helps Wal-Mart skillfully manage large inventories. Buying in bulk and warehousing lets Wal-Mart demand discounts from suppliers. Savings incurred by use of this strategy are passed on to customers.
New Entrants & Rivals
Building entry barriers can provide one of the most powerful strategic uses of IT. To compete against existing industry rivals, firms can use IT to form a new basis for competition. New product and markets are a means of forming new bases of competition.
The generic strategic prescription provided by Porter are:
- Low cost
- Differentiation
- innovation
Porter has also talked of a Value Chain approach to competitive strategy. The value chain is an analytical framework to examine value-adding activities in the individual firm and between firms. The assumption of the value chain is that competitive advantage arises from the value created for the customer that exceeds the cost of creating the value. The more a firm understands its own value chain as well as the value chain of the customer, the greater the ability to create value for that customer. Value activities consist of primary and support activities.
We present excerpts from five articles garnered from the print media as well as the internet. Some of these article are path-breaking with respect to the horizon of their vision as well as the out-of-the-box thoughts that have gone into them.
IT DOESN’T MATTER -- Nicholas G Carr
This article in the Harvard Business Review in May 2003 created a sensation. The article postulates that IT is just one of the infrastructural necessities of a company. Carr says that it is one of the necessary costs of doing business that must be paid by all but provide distinction to none.
He says IT’s potency and ubiquity has transformed it from a strategic resource to a commodity factor of production. For a brief period, as they were being built into the infrastructure of commerce, all these technologies opened opportunities for forward-looking companies to gain real advantages.
He classifies IT as an infrastructural technology. Infrastructural technologies influence competition but their influence is felt at the macroeconomic level, not at the level of the individual company.
When a resource becomes essential for competition but inconsequential to strategy, the risks it creates become more important than the advantage it provides.
He views IT as a commodity, and its costs may fall rapidly enough to ensure that any new capabilities are quickly shared, but the very fact that it is entwined with so many business functions means that it will continue to consume a large portion of corporate spending. Studies of corporate IT spending consistently show that greater expenditures rarely translate into superior financial results.
The key to success, for the vast majority of companies, is no longer to seek advantage aggressively but to manage costs and risks meticulously. The challenge will be to maintain that discipline when the business cycle strengthens and the chorus of hype about IT’s strategic value rises anew.
The Path of Development of Strategic Information Systems Theory ---Roger Clarke
Clarke starts with an brief of the role of information system down the years. He then examines Porter’s strategic theory and the five key forces. The two basic strategies that enterprises can adopt are
- low cost
- product differentiation
He talks about the second mover advantage phenomenon, where the first user actually incurs a disadvantage. He also draws a distinction between sustainable and contestable competitive advantages.
An analysis of the prevalence of the use of the terms 'comparative advantage' and 'competitive advantage' as though they were equivalent and interchangeable.
He postulates that innovation in IT is of strategic advantage only if compatible with, and preferable leverages upon the company’s existing characteristic and advantage.
STRUCTURAL DIFFERENCES AMONG FIRMS: A POTENTIAL SOURCE OF COMPETITIVE ADVANTAGE IN THE APPLICATION OF INFORMATION TECHNOLOGY by Eric K. Clemons & Michael Row (1987)
In this article they see Information systems as strategic business tools, frequently essential to a firm and central to its competitive strategy. Their importance is now acknowledged. But information technology - equipment and services - is available to all firms, and most applications can be duplicated; often the copying firm enjoys the advantages of newer and better technology, learns from the experience of the innovator, and offers comparable services at reduced costs. When can an information system convey sustainable competitive advantage? We believe that the benefits resulting from an innovative application of information technology can be defended if:
- They are so closely tied to the strategy of the innovating firm that competitors do not wish to copy them
- They exploit unique structural characteristics of the innovating firm - aspects of vertical integration, degree of diversification, or unique skills and resources - so that competitors do not benefit from copying them.
Applications of IT may convey some advantage, assuming that they are good ideas and that the marketplace will demand them. They will convey sustainable advantage if any of the following conditions is met:
- Your competitors cannot duplicate your innovation or, through constant improvement, you can remain ahead of your competition
- You have preempted the marketplace; customers will accept only one system and will not switch, and the adoption of your system was so rapid that there is simply no market left to compete for by the time your competitors can act
- Competitors do not want to copy your innovation
- Competitors cannot benefit from copying your innovation
Clemons & Row say in very uncertain terms that there are very few instances of the first two types and none of the second type.
The views proposed by the authors are indeed very true. Furthermore, in today’s world there are legislations which have preempted any attempt to try the second method. A recent case is the monopoly charges against IT giants like Microsoft.
The Productivity Paradox by Thomas Haigh
(http://www.informatics.indiana.edu/thaigh/ i303)
Nobel Prize-winning economist Robert Solow has said that we see computers everywhere except in the productivity statistics. That productivity measures do not seem to show any impact from new computer and information technologies has been labeled the "productivity paradox." In this article, the author picks up the threads from Salow and questions the investments in IT. Essentially what he asks is “Have IT investments paid off ?”. He contends that by mid-90s computer spends in the US was :
- 3 % of GNP
- 50%+ of capital investment
He questions the justifiability of these high capital investments. He does so by exploring three different levels:
- US economy as a whole: He says that the correlation between rise in GNP and the computer spending doesn’t exist. He goes on to prove that there has been rise in productivity only due to agriculture and manufacturing. In fact white collar jobs have contributed nothing to the rise in GNP.
- Individual firms – Haigh is of the opinion that sustainable competitive advantage is the long term ability to outperform others. He says that IT can at best give you a short-term advantage till others catch up with you. There is the additional cost incurred by system failures and data inaccuracies. He says It is essential to competition but not to competitive strategy.
- Personal level – He builds on the concept of Total Cost of Ownership conceived by Gartner. The cost of the PC might be falling but with so many add-ons becoming de-facto essential the TCO is more northwards that the price tag suggests. And at the end of the day what is a PC most used for – playing games, watching movies and net surfing. It leads to wastage of time of self and others, the repeated headache of trying to make systems work.
Thomas Haigh is correct about many aspects. Essentially IT has become a general purpose technology much like electricity has become today and hence can not contribute to a significant and sustainable competitive advantage.
Issues in the Application of Information Technology for Strategic, Competitive Advantage by Virginia Franke Kleist
(/)
Kleist starts with the productivity paradox. He then talks of tangible vs. intangible benefits from IT. The benefits from It are more intangible than tangible. So how do we measure it effectively and truly?? Also IT doesn’t help an organization be unique rather what it helps is in staying even with competition. Thepercieved value additions that IT industry flouts were actually from simple automation projects. In contrast, value from highly risky, but strategic IT projects has yet to be realized effectively. Hence the risk vs. return analysis should not allow IT spends to so astronomical.
Conclusion
After review of the above articles our group is of the view that
- Strategic or competitive advantage can only be obtained by a company’s vision and process and IT can only be a facilitator.
- Greater spending on IT does not translate into superior financial results.
- The smartest users of technology – here again, Dell and Wal-Mart stand out – stay well back from the cutting edge, waiting to make purchases until standards and best practices solidify.