Posted by: Monideepa Tarafdar | August 10, 2009

IT and Competitive Advantage

Porter, M. E., and Millar, V. E., How Information Gives you Competitive Advantage, Harvard Business Review, July-August 1985. 149-160.

I had occasion to recently re-visit this article, a must include in almost all introductory graduate MIS courses. The article was one of the first to explain how information technology (IT) can provide competitive advantage to firms. It analyzes five ways in which this can happen – (1) by supporting or transforming activities in the value chain and the linkages between, (2) by changing the nature of the product, (3) by changing industry structure by changing one or more of the five forces, (4) by supporting the particular competitive strategy (e.g. cost, differentiation) of the firm, and (5) by spawning new businesses.

Although written almost 25 years ago, many of the ideas put forward by the authors have begun to see compelling examples illustrating them only recently, more specifically with the maturing of those systems and applications that aid in inter- and intra- enterprise integration. As examples of value chain transformations, we see firms like Amazon and Dell, which have “mirrored” physical processes associated with product search, configuration and order taking and customer interaction on the internet, thus making them faster and more efficient. Dell in particular has exploited value chain linkages using real time B2B links with its suppliers – its close relationships with suppliers like Sony ensures up-front quality, eliminates the need for incoming goods’ inspection and delivery at Dell’s factories and thus allows these suppliers to ship directly to customers (see Magretta 1998). iTunes and Netflix are examples of changing the product through IT – the first by delivering mp3 files instead of physical CD’s and the second by streaming movies online instead of shipping DVD’s. Wal Mart is a good example of using IT to support a low cost strategy. Through extranets with suppliers and near real time inventory tracking and management across all of its stores, the firm is able to address its critical success factors, i.e.,  maximize its inventory turnover and minimize inventory, thus leading to low costs.

Most interesting however is to try to understand how IT spawns new businesses and revenue streams. Recent moves by firms like Google, Apple and Amazon provide examples. Google has used its search capabilities to become a leader in online advertising, which is essentially a “search” processes matching the advertiser with the consumer. Apple has used its digital platform for iTunes to expand into applications for the iPhone, through the Appstore. Amazon has used its order taking platform to host the B2C interfaces for a host of “affiliate” companies, opening up a new revenue stream. However, the question that arises is – do business models spawned by IT lead to sustained competitive advantage? Based on technology, are they not replicable? Even worse, technology being an ever-moving frontier, aren’t they prone to obsolescence when technology advances? Current research ideas provide examples and reasons why this may not be so. Piccoli and Ives (2005) offer what they call the “barriers” view, stating that IT creates “lag drivers”, that is, it makes it difficult for imitators to copy a particular strategy such that by the time a competitor duplicates it, the original firm has already changed or expanded its strategy, again aided by its IT leverage. Sambamuthy et al (2003) term this phenomenon as agility and entrepreneurial alertness facilitated by IT. How does this happen? Take the example of Amazon. It was one of the first online retailers and now the online retail space is crowded by many other firms such as www.buy.com. However, Amazon continues to “move” the target and spawn new revenue streams by – (1) offering an increasing number of products through affiliations with other merchants, (2) excelling in customer service, delivery and logistics –facilitated by IT and (3) by using its platform to provide selling and hosting functions for other retailers. So any company that wants to “copy” Amazon successfully will have to look at the above three aspects, plus any new ones that the company comes up with. Also to be kept in mind is the fact that these aspects are not just about IT, they are about embedding IT in organizational processes, inter-organizational relationships, and cultural routines – thus they are not as imitable as the technology itself. Further, leveraging existing IT to enter new businesses would require deep understanding about markets and customers proximal to current ones, again something that is not easily copied.

This article therefore provides a useful and technology-independent framework and starting point from which to analyze how IT creates strategic advantage, and forms a good basis for explaining current strategic actions by Internet based firms.

References:

Magretta, J., Power of Virtual Integration, Harvard Business Review, March April 1998. 73-84.

Piccoli, G., Ives, B., 2005. Review: IT-dependent strategic initiatives and sustained competitive advantage: A review and synthesis of the literature. MIS Quarterly. 29 (4) 747 – 776.

Sambamurthy, V., A. Bharadwaj, V. Grover. 2003. Shaping agility through digital options: Reconceptualizing the role of information technology in contemporary firms. MIS Quarterly. 27(2) 237–263.

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