Information systems (ISs) have been basically considered in terms of the way they affect individual organizations. Scholars have put their focus on defining the nature of information system function. However, at recent times, the external information systems utilization as sources of competitive advantage has come under consideration (Pant and Hsu, 1995). This consideration can be attributed to a number of issues and these include the economic structural changes arising from global competition, cost reductions of the supporting ITs and deregulation of a large number of industries, especially the financial services and transportation. Business organizations that were at some point under the constraint of regulatory practices have taken rapid moves in the wake of deregulation in order to substitute limited, familiar, and well-regulated product lines, with diverse, continuously changing selections of new products as well as services (Ledrer and Sethi, 1988).
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The researches that were conducted the recent times indicate that information systems provide a “unique opportunity for competitive advantages in the new business climate” (Ives and Learmonth, 1984, p.1193). Such researches offer descriptive models for the classification of successful “strategic applications” for carrying out the evaluation of the prospect of the applications that are proposed. However, such models are not, in general terms, helpful for the identification of these applications. There is a need to have a model that is much more detailed, a model that can assist in finding fresh opportunities for the successful application of the IST (“information system technologies”) (Bulfa, 1984). An application like this one is strategic in case it changes a company’s product or the way it engages in the competition within the industry in which it belongs. This paper aims to discuss the use of Michael Porter’s five competitive forces model in analyzing how the strategic use of information systems can be used or has been used to gain competitive advantage for organizations (Battaglia, 1991). The relevant literature is going to be looked at and this will be followed by consideration of some specific organizations and how they have been using information systems as sources of competitive advantage in their operations. The paper will end with a conclusion in which a summary of the discussion will be given.
Strategic information systems
According to Ives and Learmonth (1984), the competitive application of information system technologies was initiated at the Harvard Business School. These studies were based on the work of Michael Porter in which he identified five competitive forces. These forces include; the threat of new entrants in the industry, competitive rivalry, threat of substitute products, buyer bargaining power, and supplier bargaining power (Porter and Millar, 1985). According to Michael Porter, the organization that had a wish to gain a competitive advantage over its competitors has to consider setting up defenses against these five forces and come up with specific courses of action which can have a direct influence over these forces. There are three generic strategies that an organization can opt to take up to determine its course of competitive action. These strategies include; cost leadership, differentiation and focus (Hsu and Rattner, 1993).
According to Ives and Learmonth (1984), “Porter analysis of competitive forces does not specifically address IST, but it does provide a framework for investigating the role that IST can play in a firm’s competitive strategy (Ives and Learmonth, 1984, p.1194). Among those who initially identified the new role that information system technology was starting to play in firms was McFarlan and McKennedy (1983). They present the strategic grid in which they classify organizations based on how critical the existing applications are and based on applications’ criticality which is under development.
The changes that recently took place in the banking sector give an illustration of the utilization of the strategic grid. Just before deregulation, banks generally fell under the “factory quadrant” in regard to their utilization of information system technologies; the information system support was quite vital for the daily processing of transactions but the applications that were under development were less likely to assist an organization to acquire a significant competitive edge. After deregulation took place, the banks that were prosperous developed through the “turnaround quadrant” to the strategic quadrant, engaging in aggressive action in order to get new products that were information-based to the buyers. This move marked an apparent shift of information system technologies from “a back-office support role to an important instrument of competitive strategy” (Ives and Learmonth, 1984, p.1194).
Ives and Learmonth (1984) point out that in such industries as publishing, ISTs have not been critical in the times that have passed but it will not take long before moving from the “support quadrant” to “turnaround quadrant” while fresh information systems start to provide significant competitive advantages. In the end, organizations in these industries may get themselves in the “strategic quadrant” while information system technologies turn out to be a crucial competition element.
The strategic grid is used by McFarlan and McKennedy (1983) in the prescription of a suitable kind of management control system. For instance, these scholars present an argument that it is more sensible “to charge for computer resources in the factory quadrant than it does in the turnaround quadrant” (McFarlan and McKennedy, (1983, p.84). The strategic grid is also of help for carrying out the evaluation of the alternative IS investments. However, it provides little help to the organization that has an intention to identify fresh competitive applications of ISs.
At some point in time, McFarlan (1983) engaged in the mapping of the IST competitive application onto the five forces model presented by Porter. He came up with five questions in this regard that could help in carrying out the assessment of the strategic impact of information system technologies on an organization. In case there was answering to any of these questions in the positive, this implies that there is the existence of an opportunity that is supposed to be seriously considered. The five questions that were presented include; can IST be utilized to set up barriers against new firms entering the industry? Can information system technology shift that base on which the competition lies? Can information system technologies be utilized to create new products? Can information system technologies be utilized to set up switching costs? Can information system technologies be used to change the balance of power in supplier relationships? The questions assist an organization in determining when there are opportunities for “strategic applications”. But on the other hand, the questions offer relatively little help in the identification of what particular applications to set up.
Another researcher, Parsons (1983), builds on the work of Michael Porter, taking a wider view of the information system technologies at three levels. The three levels are the industry, firm, and strategic levels. Parsons gives out a suggestion that a clear “understanding of when, where, and how IST will impact a firm can lead to the recognition of both opportunities and threats” (Parsons, 1983, p.184).
Considering the industry level, at this level, Parsons puts focus on the way information system technologies change the industry’s basic nature. This examination considers the real changes as well as the potential ones in the industry’s nature of products or services, the markets served by the industry and the production economics within the industry. Considering the firms, Parsons makes use of the Porter’s five forces in order to determine where there are opportunities for information system technologies to have a direct influence over a competitive position of a firm. Parson presents an argument that “the traditional criteria for information technology investments are not always the correct criteria to apply when considering the strategic impact of these investments” (Parson, 1984, p.190). For instance, it may be very hard to give a good reason for putting terminals within the offices of large clients basing on cost reductions in the order processing. Installations like these may not offer a significant competitive advantage.
Porter’s five competitive forces and the Strategic Use of Information Systems in Organizations
Organizations have been using information systems as a source of competitive advantage. For instance, Metpath, which is a big clinical laboratory, engages in the competition in a “tough commodity business” in which low service differentiation has contributed to the lack of customer loyalty as well as recurrent price discounting. The physicians take specimens to the laboratories for processing, and having results in good time is very crucial for diagnosis as well as treatment. Metpath has engaged in the enhancement of the customer service by ensuring there is installation of computer terminals and connecting them to the lab computers in order for the physicians to retrieve test results the moment they are known (Wiseman and MacMillan, n.d).
Looking at this from a technical perspective, this is an online “database application” (Wiseman and MacMillan, n.d). However, from a strategic perspective, this organization is making use of information system as a competitive tool in two main ways; one of them is that the organization is using IS to set up barriers against new entrants and also against the existing competitor by bringing up the IS ante. The other one is that the organization is gaining an advantage over other laboratories by engaging in the differentiation of an otherwise commodity service by keeping patient data records on file and by providing “financial processing services through billing and accounts payable applications” (Wiseman and MacMillan, n.d, p.42). The intention of such differentiation is to have the loyalty of physicians who usually tend to switch from one laboratory to the other looking for low favorable costs.
The information system put in place by Metpath offers a reflection of an important departure from the usual function of information systems which is, to automate a company’s fundamental business processes such as accounts receivable, payroll and order entry among others or to fulfill the information needs of the company’s management personnel in order for them to improve the process of decision making.
Also, away from the usual use of information systems is the extended utilization of these systems carried out by the American Airlines (Sabre) as well as United Airlines (Apollo). These companies use computerized reservation systems. Set up in the course of the mid-1970s costing about three hundred million dollars, the information systems in these companies have ceased to be just used as “neutral scheduling mechanisms to automate the seat reservation process” (Wiseman and MacMillan, n.d, p.46). Instead, the systems are being utilized as weapons in the fight to win a competitive advantage.
These companies have prioritized listing to the United flights as well as American flights at a time the travel agents ask for information on their computer terminals. That agent who utilizes the Sabre system and makes a request for a listing of flights to Los angels from New York with some stops between the two cities is aware that the initial few screens may neither depict the very direct way nor the very less costly way (Wiseman and MacMillan, n.d).
There is domination of the United and the American in the “computerized travel agency market” with the American having a 40% share and the United having 39% (Wiseman and MacMillan, n.d). In the areas where the airline with reservation system has a large number of flights, “the prioritization procedure can lead to as much as 20 percent additional business”(Wiseman and MacMillan, n.d, p.46).
To illustrate one of the five Porter’s competitive forces in relation to information systems, supplier power, the Equitable Life Assurance Company is considered. This company is the America’s third largest insurance company. The company set up an online system in order to tie the organization’s field offices with its seven regional offices, four stores, and the company’s headquarters located in the New York City. The stores stock the entire inventory items that are required by the company for its operations. In the former times, the store purchasing agents in most cases did not have information that could enable them to analyze the vendor bits and in order to carry out the determination of ‘best buy’. Having the new inventory control in place, this company buys a large number of the inventory supplies for a distributor located in the New York City and in turn provides them at a “marked-up” price to the stores or warehouses. The warehouses have the freedom to purchase supplies from corporate or move to the outside in case they find a deal which is better. The IS gives the company the power in the course of vendor negotiations, for the reason that they have an online access to the inventory database and are able to engage in checking the terms of all deals that were made recently for the commodities they may wish to have. This gives an example of a strategic IS aimed at a group of suppliers which has made it possible for this company to bring down the level of the supplier bargaining power. Estimations are made by the company that information system has enabled it to save more than two million U.S dollars annually and has also brought up the level of quality as well as reliability of the deals it cuts with the suppliers (Wiseman and MacMillan, n.d).
Among the companies that have used information system as a competitive tool to deal with new entrants and threat of substitutes in the market is Toys “R” Us. This company is the leading toy chain in the United States of America. It has captured about 11% of the toy market share. Having more than 165 stores, the company depends on an IS that is advanced in order to keep track of what is selling so that it can take the appropriate measures to get rid of slow movers in the industry. The IS is not just the sole reason for the company’s quick rise to the top of the competition in an industry which is very much competitive. What also count are such factors as good management, the parking lots that are very much spacious and also, the stores that are very much well-organized. However, information system is a very vital component.
The Toys “R” Us Company engaged in the selection of the “innovative thrust” by making use of the IS’s expertise as well as resources the company had set up within the toy market in order to support “its diversification in to the children’s apparel market” (Wiseman and MacMillan, n.d, p.45). At a time another company, Kids “R” Us, was set up, there was instant response to the competition. Wiseman and MacMillan (n.d) states that it was pointed out by a spokesman who came from a group of two hundred and eighty five “specialty and department stores nationwide’ that “the new chain has upset everyone in the market” (Wiseman and MacMillan, n.d, p.45). It is clear that the Toys “R” Us Company has been making use of its strategy based on information systems it successfully utilized within the toy market “to enter the children’s apparel market” (Wiseman and MacMillan, n.d, p.45).
Dell Computer Corporation is another company that has been strategically using information systems in order to deal with the competition in relation to the Porter’s five competitive forces. It is reported that this company “formally stopped selling personal computers in retail stores because reaching customers in this way was expensive, time consuming, and did not fit with Michael Dell’s vision of the direct business model” (Anon, Strategic use of information resources, n.d, p.38). This vision was enabled by IT. The combination of the internet and this company’s information system that was well-set up enabled the clients to contact the company electronically, who would in turn design a personal computer basing on the specific needs of the client. There is integration of this company’s “ordering system” with the production system and there is automatic information sharing with every personal computer component supplier. This information system makes it possible for the assembly of a large number of current computers with no storage cost of large inventories. “Cost savings are passed on to the customer, and this business model allows Dell to focus its production capacity on building only the most current products” (Anon, n.d, p.38).
Having small profit margins as well as new products coming to the market at a high speed to substitute the products that are already there, the strategic utilization of information system is crucial to this company’s strategic leadership. Utilizing information systems strategically ultimately brings about cost savings which is reflected in the systems prices. Moreover, Dell’s management team attain a competitive advantage in decreasing response time as well as designing custom computers “for one of the industry’s lowest costs, and eliminating inventories that could become obsolete before they are sold” (Anon, n.d, p.38).
The Dell Company made use of the information resources that it had in order to attain high volumes with no high costs of the usual distribution channels of the industry. This move brought about continual profitability as well as the achievement of a competitive advantage. Just like in many cases of strategic advantages, the rest of the companies within the industry followed suit and took up Dell’s “direct-to-the-customer” model, but antiquated IS make this task difficult, if not an impossibility” (Anon, n.d ,p.38).
While the competitive landscape of the personal computer market undergoes change, the Dell Company goes on engaging in innovation by making use of information systems and currently offers “customized order configuring, sales inventory management, kiosks in shopping malls, and technical support directly from the internet” (Anon, n.d, p.38).
A large number of business organizations are currently using information systems as a source of competitive advantage. The information systems have ceased to be mere tools that are used by organizations to carry out their day-to-day operations. There has been recognition that IS can serve a great purpose in enabling any organization using it to actually go ahead of its competitors. Information systems can enable, as it has been looked at, an organization to deal with the Porter’s five competitive forces which include, threat of new entrants, competitive rivalry, threat for substitutes, buyer bargaining power and supplier bargaining power. Use of IS enables firms to either differentiate, aim at cost leadership or focus their operations in order to win the competition through enabling them to deal with these five forces.
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