EXECUTIVE SUMMARY
Since introduction of computer in 1950 to organizations, information technology has been deploying to gain competitive advantage for business organization. According to Ward and Griffiths, (1996), that information technology (IT) has gone through three evolutions. Today is third era of IT, organization view IT to support existing business strategy, create new opportunities for business, competitive advantage and new strategy opportunities leads to new markets and products and survival in this quick and challenge environment. The affects of IT
felt across entire organization such as accounting software for Accounting process, Customer Relationship Management (CRM) system to understand customers needs and wants, SAP solutions for supply chain model linking process of purchasing, manufacturing, logistics and order-fulfilment activities and deliveries. With the rapid change in the IT environment, planning is essential. Therefore, today organization leaders need to develop strong understanding of IT as transformation agent and value contributor. On the other hand, there is
another school of thought, for example, Nicolas G Carr commented in “IT Doesn’t Matters” that IT already vanishing it advantage because another company can easily copy any advantages obtained by one company and further, it is affordable. Hence, IT has becomes commodity based on internet standard whereby is easily available; it is no longer
differentiating factor in organization performance. He viewed that no companies could use IT to obtain the strategic advantage over its rivals any more than it could with electricity, telephone or any infrastructure. In conclusion of Carr “IT Doesn’t Matter” that company should reduce IT spending, be a follower to reduce risk of computer outages and privacy and security breaches and avoid deploying IT in new ways. This paper will divide into two portion of the impact of IT in
business organization. First section covers two topics that are gaining competitive advantage in IT and sustaining competitive advantage. In Gaining Competitive Advantage in IT, this topic will described Michael Porter five competitive forces strategic system and illustrated methodology of a company uses IT to thwart some of these forces, for example, cost leadership and differentiation in generic strategies. The other element by Porter cover here is business value chain model. Its will described five functions individually of value chain on how IT supports those function that create business value. Second topic of this section, describe how companies sustaining competitive advantage by applying strategic alliances concept. In second section, it covers topic of IT Don’t Last Long and IT Becomes Strategic Necessities. In IT Don’t Last Long topic, this paper will describe why IT have lost it competitive advantage and has becomes commodities using Nicholas G. Carr theories and its also explain why company finds keeping proprietary technologies a secret is very difficult with comments from Clemons & Knez, and Lieberman & Montgomery. As for second topic of this section, it explain why IT has becomes necessities and brief explanation on why companies still invest in IT even-thou its only give strategic necessities. TABLE OF CONTENTS Page No. EXECUTIVE SUMMARY 1-2
1.0 INTRODUCTION 4 SECTION I 2.0 GAINING COMPETITIVE ADVANTAGE ININFORMATION TECHNOLOGY
2.1 Porter’s Five Competitive Forces Model
Porter’s Generic Strategies a. Cost Leadership Strategy
b. Differentiation Strategy
2.2 Business Value Chain Model 2.2.1 Porter’s Value Chain Model 5-11
5-7
8-11
3.0 SUSTAINING COMPETITIVE ADVANTAGE 11-12 SECTION II 4.0 INFORMATION
TECHNOLOGY DON’T LAST LONG 13-14
5.0 INFORMATION TECHNOLOGY BECOMES STRATEGIC NECESSITIES 15-16
6.0 CONCLUSION 17 LIST OF REFERENCES 18-20 1.0 INTRODUCTION
Information technology (IT) is hardware and software applications that are interrelated components that collect or retrieve, store and accessing or distribute information to support business structure, decision-making and competitive advantage (Huff, 1994, Laudon & Laudon, 2006). Since introduction of computer in 1950 to organizations, information technology has been deploying to gain competitive advantage for business organization. According to Ward and Griffiths (1996), that IT has gone through three evolutions. First era, the computer is to automatic labour-intensive processes to reduce labour costs. In the second era, emphasize in development of management information system that provides information for decision-making. Today, in third era, organization view IT to support existing business strategy, create new opportunities for business, competitive advantage and new strategy opportunities leads to new markets and products and survival in this quick and challenge environment. A variety of factors have been shown to have an important impact on the ability of the firms to gain competitive strategy advantage and sustaining competitive advantage, including the relative of cost positioning (Porter, 1980), products differentiation (Caves & Williamson, 1985, Porter, 1980) and the ability of firm to cooperate in strategic alliance (Chen & Chen, 2003, Lee & Vonortas, 2002).
The complexity of IT is transforming Porter’s value chain theory and is affecting the competition. It changes the industry structure and rules of competition (Porter & Millar, 1985). IT no longer a competitive advantage (Carr, 2003, Clemons & Knez, 1987 & Lieberman & Montgomery 1988) it had become strategic advantage (Carr, 2003 & Loudon & Loudon, 2007) The purpose of this paper is to explain further whether information technology can or cannot really give a company a strategic advantage, because most competitive advantages do not last long. In additional, it is also explain whether information technology becomes strategic necessities.
SECTION I
2.0 GAINING COMPETITIVE STRATEGY ADVANTAGE IN INFORMATION TECHNOLOGY
Business competitive strategy advantage in information technology is vital for successes of both large corporation and small businesses. According to Barney (1996) that companies uses IT resources to help implement a wide range of strategies, including cost leadership, product differentiation, strategic alliance strategies, diversification strategies and vertical integration strategies to gain competitive advantage. Furthermore, new technologies will continue to give
companies the chance to focus on improving cost saving and efficiencies, incremental improving of organisation structure, products and services, creation of strategic advantage through expanding competitive scope, Partnerships (customers and other parties) and provision of new IT-based services to extend the customer value proposition (Brown & Hagel, 2003).
This paper used two business models from Michael Porter: (3.1) Porter’s five competitive forces model and (3.2) Business value chain model to analyze a business and identify strategic advantage and how companies gain competitive advantage in information technology.
2.1 Porter’s Five Competitive Force Model Michael Porter (1980) provide framework for understand the relationship between a firm’s uses of IT and the nature of that firm output. He
proposes a five-force model for business competition strategies: (1)bargaining power of buyers, (2) bargaining power of suppliers, (3), threat of new entrants (4) threat of substitute products or services and (5) rivalry among existing competitors. The following is a brief description of these five forces and their connections with the possibility of new entry.
(1) “Bargaining Power of Buyers” refer to ability for customer to demand lower price, reduce product delivery cycle time, expectation for higher quality and efficient and effective services. Porter identified 7 factors, which suggested that buyers are powerful whenever there are
many alternative available and low entries for new products. On the contrary, buyers are weak when higher entry barrier, which may result in higher concentration of market
(Porter, 1980).
(2) “Bargaining Power of Supplier” refer to ability for suppliers to increase raw materials price, increase product delivery cycle time and reduce quality of product supplied which have significant impact on firm profits especially when the firm cannot rise price as fast as supplier (Porter, 1980).
(3) “Threat of New Entrants” is in a free economy, there are number and quality of potential competitors may enter the industry. In theory, with high number of new entry would reduce and hence the bargaining power of customer and supplier (Porter, 1980).
(4) “Threat of Substitute Products or Services” refers to switching of products or services from customer. The more substitute products or services in the market, the organization will have less control of the pricing and thus lower profit margin. Therefore, the threat of substitute products or services and threat of new entrants should be treat equally the same (Porter, 1980). (5) “Rivalry among Existing Competitors” is a competition among the same industry players. Here are some of example that companies applied to compete in the market i.e. price-cutting, and new product development (Porter, 1980).
Thus, firms must adopt some forms of IT to survive in a quickly changing environment to confront five competitive forces. If successfully, IT will change industry structure, creates competitive advantage, spawns completely new business and literally transforms industries by actuating new approaches to competitive behaviours (Porter, 1980).
Manufacturer and service providers need to capitalize on their strength to sustain and secure position of market leadership for years to come.
Porter’s (1980) viewed that company strength comes from cost advantage and differentiation. By applying these strengths, Porter has identified three generic strategies (see Figure 1.0).
Porter’s Generic Strategies
Target Scope Advantage
Lost Cost Product Uniqueness
Broad
(Industry Wide) Cost Leadership
Strategy Differentiation
Strategy
Narrow
(Market Segment) Focus
Strategy
(low cost) Focus Strategy
(differentiation)
Figure 1.0
Source: Porter (1980)
(a) Cost Leadership Strategy
Cost leadership strategy calls for lowest operational costs and the lowest price to gain market share uses IT to achieve the objective. The low-cost leadership strategy will allows companies to make profit for long time and will not effected any of these conditions such as price war, industry mature or price decline (Porter, 1980).
(b) Differentiation Strategy
Differentiation strategy calls for new products and services that offer uniqueness feature that valued by customers or perceived the products or services is better than similar product or services in competition (Caves & Williamson, 1985, Porter, 1980). Here is one of example demonstrate an American airline company leveraging on IT in applying cost leadership strategy and differentiation strategy. Southwest Airlines has re-invested it profit in its operation infrastructure (i.e. supply chain) and its business model perceive as automobile instead of normal airlines targeting market for infrequent airline travellers. The company only purchased Boeing 737’s inline with the concept of using one standard price of equipment allows maintenance, labour / repairing, training, technology and fuel costs easy to managed. Targeting at lowering operating costs and an internal ticketing system that developed efficient and customer-friendly, Southwest Airlines is effectively targeting and sustaining it niche market for budgeted travellers where other airlines initiative had failed (Guzak & Hill, 1998).
2.2. Business Value Chain Model
Michael Porter’s (1980) described the fundamental of Value Chain Model is interdependent activities in the business that add margin of value to products and services to customers. The value chain framework helps to analyze specific activities within the organization to create value
and competitive advantage. IT can profoundly affect the effectiveness and efficiency of this value-added processing and thus enhance it competitive advantage. According to Charles Wiseman’s Strategic Thrusts model (Wiseman, 1988), implementing IT in business value helps focusing on processes that directly contribute value across organizational functions. This model
identifies that individual or groups within the organization often have opportunities to contribute competitive value to business. Business value can be gained through operational changes, for example lowering the cost or improve product quality to convince and change customers or suppliers buying behaviour, which had impact on competitive environment. The “Thrusts” model as follows: differentiation, cost, innovation, growth and alliance.
Both Porter and Wiseman approaches to planning methodologies are well known and to be found effective (Bergeron, 1991). However, based on study conducted to comparing both methodologies by Bergeron, Porter’s value chain approach was found to generate more opportunities for innovation, but fewer opportunities for growth. 2.2.1 Porter’s Value Chain Model The value chain model and industry value chain (see figure 2.0) focuses on identifying activities within the organization and its value partners where IT can be activated to contribute value. Figure
2.0 � The Value Chain Model and Industry Chain Model Sources: Porter (1985) and Louden & Louden (2006) The five functions to create business value are:
2.2.1.1. Inbound Logistics encompasses the sourcing and procurement that capture input of resources for distribution to production. This concept includes much more than raw materials for manufacturing environment. The Automatic Warehouse System enable procurement efficiencies such as suppliers are aware of the schedule of the manufacturing, electronic data interchange, e-Procurement and Supply Chain Management. It also contributes to cost reduction value whereby the firm able to source for competitive pricing in internet (Louden & Louden, 2006). 2.2.1.2. Operations focus on organization processes, its transforms raw materials into products. Redesign the processes from manual to automatic computer controlled machining can significantly improve quality, reduce cost for example, wastage or labour costs and can speed up the process i.e. conveyer belt. These contributed directly increase value (Louden & Louden, 2006).
2.2.1.3. Outbound Logistic refers to ways of delivery of finished goods to customer. With IT innovation, its changes in outbound logistics enable firm to automatic shipment scheduling through internet technologies. The flexibility and easy to adapt to changes in supply and demands, provide companies likes Amazon.com and Dell, an upper hand to response to market conditions and make quick decision to provide the best price and efficient and effectively next day delivery for their customers (Louden & Louden, 2006).
2.2.1.4. Marketing and Sales functions include promoting and selling the firm’s products and services. IT has contributed business value to reduce sales and marketing cost and conduct business via internet. In additional, the firm gain global economies of scale (Levitt, 1983). For
example, Dell provides products directly to the end user with better level of service and supports, reviewing feedback and dealing with customer effectively and efficiently through its direct distribution system to distinguish themselves from its competitors. Maintaining customer direct support gives Dell another avenue of selling opportunities to existing customer. Dell will be able to introduce new product/services offering exactly at the right time (Magretta, 1998).
2.2.1.5. Customer Service is today business focus. IT enables customer relationship management systems add value through increased knowledge of who are their customers’, anticipate the needs of current and potential customers and another avenue for customer to reach the
company (Bateman & Snell, 2007). For example, Maybank put themselves in MSN and Windows
Live to provide convenient and easy avenue for its customers to get in touch with Maybank (, June 2008).
3.0 SUSTAINING COMPETITIVE ADVANTAGE
Sustainable competitive advantage is difficult to achieve through IT because its can be copied and it do not necessarily last long enough to ensure long term profitability, it is important for the firms to obtain sustained competitive advantage in cost positioning (Porter, 1980), products differentiation (Caves & Williamson, 1985, Porter, 1980) and to cooperate in strategic alliance (Chen & Chen, 2003 & Lee & Vonortas, 2002).
Earlier in this paper, cost positioning and products differentiation of Porter’s Generic Strategy, had already been discussed and shown example of Southwest Airlines adopting these concept to gain competitive advantage using IT. The other attribution of sustaining competitive advantage is companies have the abilities to corporate in strategic alliance.
Strategic alliances create synergies among companies to complement and share resource and capabilities and also reshape and/or enhance competition in the market (Chen & Chen, 2003). Lee & Vonortas (2002) supported this theory that alliance strategy with vague goals to define the collaboration structure for present or future needs, market position and technologies capabilities whether it is for short or long-term contract. This paper will highlight two successful story of corporation adopting alliance strategy to gain experience, increase market share and profitability.
Cisco Systems Inc and BearingPoint alliance for streamlined business consulting and network solutions that help improve productivity, reduce costs, secure assets and promote better connectivity to their customers and partners and exploit new technologies to enable business faster return on investment. In this collaboration, Cisco Systems Inc invested a $1 billion (19.9%) ownership of BearingPoint. In return, BearingPoint will increase skilled IT human resources to deliver Cisco solutions to clients, to develop new solutions, customizing and demonstration of solution to clients and provide customer service support for Cisco’s
growing Service Provider market (, viewed June 2008).
Ericsson and Sony Corporation alliance with mission to established
Sony Ericsson as the most striking and pioneering global brand in the
mobile handset industry. Sony Ericsson Mobile Communication is owned
equally by Sony Corporation and Ericsson. Hence, the company supplies
globally mobile multimedia devices. The company endeavours to be a
cutting edge provider of application for example, bringing the best and
latest in entertainment contents to its users by partnering with Sony
BMG (, June 2008)
Information technologies such as intranets, extranet connection with
customers and suppliers and the World Wide Web, the world becoming
globally linked in terms of migration of production, technology,
capital, human resources and information and business makes strategic
alliances synergy possible (Kotler, Brown, Adam, Burton &
Armstrong, 2007).
SECTION II
4.0 INFORMATION TECHNOLOGY DON’T LAST LONG
Information technology don’t last long because the increase of
technically literate population, and the rising integration of computer
into everything, which means window to gain competitive advantage is
only for short time (Carr, 2003). According to Carr’s (2003) in “IT
Doesn’t Matters” that no companies could use IT to obtain the strategic
advantage over its rivals any more than it could with electricity,
telephone or any infrastructure and he suggested that company should
reduce IT spending, be a follower instead of leader and avoid deploying
IT in new ways. Carr’s (2003) commented that IT already vanishing it
advantage because another company can easily copy any advantages
obtained by one company. Several researchers indicates that it is
relatively difficult to keep a firm’s proprietary technology secret due
to workforce mobility, reverse engineering, and formal and informal
technical communication all act to reduce the secrecy of proprietary
technologies (Clemons
& Knez, 1987, Lieberman & Montgomery, 1988). Thus, if one firm
find itself at the competitive disadvantage due to IT proprietary
application, the company can employed one or more individuals who
developed the proprietary application, it can purchase the application
and discover its character through reverse engineering or it could read
published report about the nature of the proprietary application and
duplicate it in the way. Therefore, an Innovator may only gain
temporary competitive advantage from its proprietary IT application
(Mata, Fuerst, Barney, 1995).
Now, IT becomes commodity in particular internet. Internet technologies
based on open system, thus intensifying the rivalry among competitors
and it is no longer differentiating factor in organization performance.
In additional internet technologies tend to reduce variable costs and
tilt the cost structures toward fixed cost, creating significantly
effect on price competitive. With easily accessible of information
about products and suppliers, thus increase bargaining power of
consumers (Carr, 2003 & Porter, 2001). Michael Porter (2001)
provides a framework of how internet influences industry structure is
determined by fiver underlying forces of competition: the intensity of
rivalry among existing competitor, the barriers to entry entrants,
threat of substitute products or services, and bargaining power of
suppliers and buyers. Internet technology provides buyers with easily
available information about the products or services, which increase
bargaining power of buyers, that effect company bottom line. Because of
it open system, companies find it harder to maintain it proprietary
products, thus intensity of rivalry among existing competitor. Anything
internet technology eliminates reduced barriers to entry such as the
need of sales force, access to channels and physical assets. Beside,
the internet technology makes the market open 24 hours and globally
accessible, thus increasing number of competitors and lower variable
cost relative to fixed cost, hence the pressures of price discounting
(Porter, 2001). For example, Amazon.com being the e-commerce leader but
now faces competition from eBay, Yahoo!, and Google, therefore by
depending solely on IT will not provide an enduring business advantage
(Louden & Louden, 2006).
As infrastructure technologies are losing it competitive potential
because it accessible and affordable, companies is taking “defense”
action instead of “offense” action. IT risk facing most companies is
more prosaic than a catastrophe. IT may be a commodity, and its cost
may fall rapidly to ensure new capabilities are quickly shared, but the
fact is entwined with the entire organizational functions that will
continue to consume a large portion of corporate spending. Therefore,
the opportunities for gaining strategic advantage from information
technology rapidly disappearing, company should reduce its spending in
IT investment, be a follower instead of leader, and focus on
vulnerabilities, not opportunities (Carr, 2003). 5.0 INFORMATION
TECHNOLOGY BECOMES STRATEGIC NECESSITIES
Strategic necessities are a system that must be installed to remain
competitive and, survival in today’s business world (Louden &
Louden, 2006). Sometimes these necessities are driven by industry-level
changes. For example, the automatic teller machine (ATM) which was
introduced by Citibank 1977 to attract customers. Today, nearly all
banks had this feature, which become a bank’s necessity to stay in
business. Therefore, IT has become essential tool for business
organization to compete and operate in a global economy (Louden &
Louden, 2006).
As IT’s core functions interpreted in value chain model, have become
cheaper, more standardized and easily to replicable, its ability to
provide competitive advantage has steadily eroded. Hence, IT
capabilities will not add value to competitive advantage but
competitive necessity (Carr, 2003). IT in business has been a history
of increased interconnectivity and interoperability. In spite of all
the hype, wireless systems
and new advance technologies implement will not create lasting
strategic advantage and its will become strategic necessities (Carr,
2003, Skaistis, 2003).
Nevertheless, in today business world, IT has becomes essential tools
to support business organization to conduct business in this dynamic
global market. Business organization are capitalizing the power of IT
in order to be more competitive and efficient where nearly all core
business processes and relationship with customers and suppliers, and
employees are digitally enable (Loudon & Loudon, 2006).
The complexity of information technologies is transforming Porter’s
value chain theory. IT is advancing faster than technologies for manual
processing whereby the companies can expand faster within it limitation
than manager can explore the opportunities, generating in-depth data
analysis of company activities and products and/or services and
enhances the ability exploit linkages between internal and external
activities and allows companies to coordinate activities without
geographical boundaries. In additional, IT manages the flow of
information, storage and data analysis for company to survive (Porter
& Millar, 1985).
However, the turbulent market conditions and competitive environment,
IT investment either because of they hoped to capture a first mover
advantage or because feared being left behind (Carr, 2003). 6.0
CONCLUSION
This paper had demonstrated that gaining competitive advantage through
IT is easy but to sustain competitive advantage is difficult to
achieve, even-thou, IT provides information for the company to
understand their customer better, applying the understanding into the
products and/or services and processes, and integrating all these
processes to deliver greater value to customers. Therefore, it is
important for business organization finds its methodology for
developing new or innovative ideas that create business value to
sustain competitive advantage.
Secondly, internet technologies could not give competitive advantage
for long because internet technologies based on universal standards
that any company can use, creates new entrances and competing in price.
Despite of this, internet continues to create brand building and
building very large and loyal customer based for the products and/or
services. The advantage of internet technologies is flexibility and
easy to adapt to changes in supply and demands, provide companies likes
Amazon.com an upper hand to response to market conditions and make
quick decision to provide the best price and efficient and effectively
next day delivery for their customers.
Thirdly, the growing interdependence between firms’ abilities to use IT
internally and externally is essential when conducting business in this
twenty first century. Despite of challenges face by companies deploying
IT, which does not give competitive advantage, it is essential for
companies to install a system to remain competitive and survive in
today’s business world. Lastly, heavy capital investment of IT at the
initial stage does not rise with increased of sales. It means, in
accounting any investment of IT will depreciated throughout the year
and eventually asymptotically toward zero. Therefore, deployment of IT
can make information technology investments enormously profitable and
can generate a rising strategic value. Thus, IT has become VALUE still
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