Special Topics in Information Systems: Readings in Human-Centered Computing

By Emanuel Baisire

Information Systems and Competitive Strategy

Abstract

The paper examines the impact of information systems technology in achieving competitive

edge. The paper reviews several firms’ attempt to out-compete rivals through the use of

information systems and streamlining production cost by adopting new business processes that

are influenced by information systems. Many organizations have embraced the use of

information systems to gain market share, increase customer loyalty and introduce new products

to consumers The existence of transaction processing systems and decision support systems have

eased the process in which important business decision are reached. The paper also links the

impact and value of information systems in determining an ideal competitive strategy for a firm

within an industry. It also examines how firms apply information systems technology to execute

business processes.

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Information Systems and Competitive Strategy

Introduction

The focus of this paper is to understand the influence played by information systems in shaping

new industry structures and increasing the rate of first-mover advantage .Organizations have

realized that the only way to compete more effectively is to make significant investments in

information technology infrastructures. It is also important to note that firms investing in

advanced information technology but avoid other complementary assets tend to fail in their

attempt to become profitable or improving their business process. Information systems are

catalyst for rolling out new strategies and helping towards cost reduction initiatives. Information

systems have a tremendous impact in increasing organizational efficiency and effectiveness1. The

paper also explores the extent to which information systems can be applied to Porter’s (1998)

five competitive forces of threat of new entrants, rivalry among existing firms, the threat of

substitutes, bargaining power of buyers and suppliers.

Information Systems Success

Information system is a set of interrelated components that gather and distribute information to

support tasks and other decision-making processes2. Competitive strategy is a firm’s ability to

position itself in a more advantageous sphere than other firms within the industry3. The logic of

1 Bakos, Y.J. and M.E. Treacy, “Information Technology and Corporate Strategy: A Research Perspective”, MIS Quarterly, vol.10, no.2, pp. 107-119, 1986.

2 Laudon, K.C. and Laudon, P.L.(2007). Managing Information Systems: Managing the Digital Firm, Upper Saddle River Pearson

Prentice Hall..3 Porter, M.E (1998). Competitive Advantage: Creating and Sustaining Superior Performance: With A New Introduction. New York: Free Press.

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adopting a competitive strategy is to map out a profitable and sustainable path that is superior in

relation to industry competition. Information systems process data into information resources

that are used by senior executives, middle managers, line workers and external partner

organizations. Information systems can be designed for operational purposes within an

organization and in some instances it can be an inter-organizational information system

overlapping organizational boundaries4. Although information needs differ within organizations,

each employee is tasked with achieving certain goals and objectives set by the organization.

The value –added chain analysis and Porter’s framework for competitive analysis are the two

recognized approaches on how firms use information systems to gain competitive advantage5.

Information system is a core component in value chain process because every step during the

value chain process disseminates and uses information (Porter, 1998).

Information systems can create competitive opportunities in areas of operational efficiency,

inter-organizational synergies, product innovation, customer and suppliers loyalty6. Firms are

advised not to consider investments in information systems for costs reduction purposes only but

should also focus on systems that add value to the product or service7. Firms that are well

positioned and having the needed resources to add value to their product but lacking a

comprehensive information system will lag behind their competitors.

In order to gain a competitive edge, organizations may launch an information system aimed at

improving the way products and services are delivered to its customer or by simply streamlining

4 Bakos, Y.J., “ A Strategic Analysis of Electronic Market Places”, MIS Quarterly, vol.15, no.3, pp. 295-310, 1991.

5 Ibid.6 Ibid.7 Blake, I., G.P. Learmonth, “The Information System as a Competitive Weapon”, Communications of the ACM, vol.27, no.12, Pp.1193-1201, 1984.

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a distribution channel to meet current demand8. In some cases, the need may be to directly

benefit a company’s internal operations. For instance a company may launch an automation

system to process sales order and invoices for the sales and marketing team. The customer

centered information system may be an order-entry system that enables potential clients to punch

in their orders without interacting with any company employee. This initiative may save a

company from incurring extra costs related to wages and other office supplies.

Information systems ease the way in which consumers acquire products and services. For

instance major chain hotels have put in place check-ins and check-out electronic kiosks linked to

airline sites and other attractions. Customers that value convenience are more likely stay in

hotels that provide such services thus creating brand loyalty.

It should be noted that information systems should not only store data and information but rather

the same information has to be manipulated in order to create value to the organization. For

instance, an inventory information system that only stores and retrieve information may not be as

effective as another system that uses the stored information to solve different business problems.

A valued inventory information system should have the capability of automatically triggering

supply orders from suppliers and analyze data to initiate promotional sales and product pricing.

Firms that adopt new technological innovations and information systems much earlier than their

counterparts tend to gain a first mover advantage within the industry. Information systems can

affect positioning to new market entrant due to extensive and expensive barriers. Organization’s

choice for a specific information system can be influenced by individuals but the entire

organization needs to rally behind a chosen strategy if it is to be effective.

8 Notowidigdo, M.H., “ Information Systems: Weapons to Gain the Competitive Edge”, Finance, Executive, vol.52, no.2 pp.20-25, 1984.

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In case of Wal-Mart, it positioned itself as a retail industry leader by making significant

investments in inventory replenishment systems. It uses the system to monitor store sales and

share instant information with suppliers globally to ensure timely delivery of demanded

products. Early adoption of this technology enabled Wal-Mart to surpass all its major

competitors and became an industry leader by integrating information systems as a core element

of its business strategy (Porter, 1998).

A decision to purchase information technologies such as electronic data interchange (EDI) and

point-of-sale scanners can leverage a firm’s competitiveness through costs reduction and low

prices to customers (Boulton et al, 1992). Sears Corp. launched an information system that

automatically generates postcard alerts to remind customers to renew their service contracts. By

using the system, Sears has been able to attract a group of strong and loyal customers thus

boosting service revenues and customer intimacy.9

Competitive forces and information systems

Information systems are important for firms that need to remain competitive in such a dynamic

business environment. Information systems play a significant role in reshaping market shares,

strengthening relationships between businesses and customers or businesses and suppliers10.

According to Porter (1998), firms develop their business strategies in order to obtain competitive

advantage over their competitors. It is argued that firms will only succeed if they are able to

choose and develop competitive forces that are in line with the overall business strategy. The five

competitive force models advocated by Porter include new market entrants, substitute product

and services, intensity of rivalry, bargaining power of buyers and suppliers.

9 Ibid.10 Avison & Fitzgerald 1995, Information Systems Development: Methodologies, Techniques and Tools 2nd ed. McGraw Hill, Maidenhead.

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Figure 1: The Five Competitive Forces Driving Industry Profitability

Adapted from M.E. Porter, Competitive Advantage, Free Press, 1998

Information systems and entry barriers

A firm’s investment in information systems can act as an entry barrier to the industry. For

instance, a decision by FedEx and UPS to invest in logistical integrated system in order to ship

and track customer’ packages worldwide enables them to limit new entrants in the market and at

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the same time differentiating themselves from other carriers. Similarly ownership of computer

reservation systems by many service industries that requires large capital expenditure limits

would be competitors from joining the industry. The innovative idea of using portable computer

terminals by sales representatives allows them to analyze customer needs and prepare sales

proposal onsite without concurring with senior managers11. The threat of market entry depends

on entry barriers or the ability of new firms entering the industry. In case of low entry barriers,

firms will attempt to join the industry thus increasing competition and eroding potential profits

(Grim et al 2006). The threat of entry is widely experienced in situations where economies of

scale and capital requirements to enter the industry are low.

Information Systems and buyer power

Information technology in form of extensive databases and other data mining techniques used by

companies like Expedia allow consumers to compare prices offered by different hotels and

airlines thus increasing buyer power. The internet has also increased buyers power by providing

consumers with needed information to compare prices to reach a purchase decision. However,

firms can maintain an edge on its customers by devising a strategy that makes it harder or

expensive for consumers to switch to other products. Information systems technology can tilt the

balance of power between an industry and its consumers.

In circumstances where a buyer holds more power, buyers will possess tremendous power to

determine price structures of a product and its quality (Grim et al 2006). The situation arises

mostly with products that are not differentiated. A firm’s ability to influence prices is mostly

curtailed when a buyer is a large volume buyer or has full information about a product’s market

trend.

11 Ibid.

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Information systems and suppliers power

Information systems technology has a dominant power in shifting the balance of power between

industry players and its suppliers (Porter, 1998). When a firm’s existence depends on one or few

suppliers, the supplier will more likely yield strong power and able to charge higher prices for

poor quality goods (Grim et al 2006). The emergence of web technology has diminished the

power of suppliers by allowing companies to source product in-puts and materials from suppliers

worldwide. Web technology reduces the reliance on a single and powerful supplier that may

dictate product prices and supply quality which might undermine a firm’s profit margin.

Companies like Honeywell and Dell have implemented web technologies enabling them to

contract with several suppliers all over the world.

Web technologies, centralized computer systems and distributed database systems have

decreased supplier’s power. Such a readily available resource provides firms with the

opportunity to contract with several suppliers globally and also communicate instantly with

suppliers thus reducing the dominance of supplier’s power on firms.

Information systems and threat of substitutes

Information systems and the use of internet have enabled Apple computers to sell downloadable

music to the public thus acting as a substitute for compact disc music. Information technology

through the use of teleconferencing is also becoming a substitute for business travel and office

works. Such kind of technology allows individuals to virtually work anywhere while stationed in

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one location. Information systems technologies have revolutionized production process leading

to new innovations and new products (Porter, 1998).

Conclusion

Information systems technology have become a core component in the business process of many

firms trying to maximizing their revenue and at the same time the satisfying the changing needs

of consumers. It is also important because it enable organizations to identify and deploy new

strategies and cost reduction techniques in a timely manner than their competitors. Firms need to

integrate their business processes in order to gain a competitive advantage. However, firms

should make a clear choice as to which competitive strategy is feasible within a specific industry.

It is also worth noting that competitive strategy may works well in one industry and may not be

appropriate in another. A firm’s competitive strategy should be one that position it reduce cost

and set itself in a unique position that can not be easily imitated by competitors in the industry.

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Reference:

Avison & Fitzgerald 1995, Information Systems Development: Methodologies, Techniques and Tools 2nd ed. McGraw Hill, Maidenhead.

Bakos, Y.J. and M.E. Treacy, “Information Technology and Corporate Strategy: A Research Perspective”, MIS Quarterly, vol.10, no.2, pp. 107-119, 1986.

Bakos, Y.J., “ A Strategic Analysis of Electronic Market Places”, MIS Quarterly, vol.15, no.3, pp. 295-310, 1991.

Blake, I., G.P. Learmonth, “The Information System as a Competitive Weapon”, Communications of the ACM, vol.27, no.12, pp.1193-1201, 1984.

Boulton W.C. and Davidson N.W. (1992). Developing Information Technology Strategy: Major Issues and Methods, Idea Group Publishing IRMA.

Grim et al (2006). Strategy as Action: Competitive Dynamics and Competitive Advantage, New York: Oxford University Press.

Laudon, K.C. and Laudon, P.L.(2007). Managing Information Systems: Managing the Digital Firm, Upper Saddle River Pearson Prentice Hall.

Notowidigdo, M.H., “Information Systems: Weapons to Gain the Competitive Edge”, Finance, Executive, vol.52, no.2 pp.20-25, 1984.

Porter, M.E (1998). Competitive Advantage: Creating and Sustaining Superior Performance: With A New Introduction. New York: Free Press.

Rackoff, N., C. Wiseman, and W. Ullrich, “Information Systems for Competitive Advantage: Implementation of Planning Process”, MIS Quarterly, vol.9, no.4, pp.285- 294, 1985.

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