+ All Categories
Home > Documents > IT as Competitive Advantage-project

IT as Competitive Advantage-project

Date post: 10-Apr-2018
Category:
Upload: mzahidsadiq
View: 216 times
Download: 0 times
Share this document with a friend

of 32

Transcript
  • 8/8/2019 IT as Competitive Advantage-project

    1/31

    IT as Competitive Advantage

    Institute of Business Administration ii

    $%675$&7

    URPWKHYHU\EHJLQQLQJWKHFRQFHSWRI,7DVDSRZHUIXOFRPSHWLWLYHZHDSRQKDV

    EHHQVWURQJO\HPSKDVL]HGLQWKHOLWHUDWXUH\HWWKHVXVWDLQDELOLW\RIWKHFRPSHWLWLYHDGYDQWDJHSURYLGHGE\,7DSSOLFDWLRQVLVQRWZHOO H[SODLQHG7KHLPSRUWDQFHRI,7LQ

    YDULRXVEXVLQHVVVHFWLRQVLVYHU\PXFKSURQRXQFHG

    7KLVZRUNGLVFXVVHVWKHUHVRXUFHEDVHGWKHRU\DVDPHDQVRIDQDO\]LQJVXVWDLQDELOLW\

    DQGGHYHORSVDPRGHOIRXQGHGRQWKLVUHVRXUF HEDVHGYLHZRIWKHILUP7KLVPRGHOLV

    WKHQDSSOLHGWRIRXUDWWULEXWHVRI ,7FDSLWDOUHTXLUHPHQWVSURSULHWDU\WHFKQRORJ\

    WHFKQLFDO,7VNLOOVDQGPDQDJHULDO,7VNLOOVZKLFKPLJKWEHVRXUFHVRIVXVWDLQHG

    FRPSHWLWLYHDGYDQWDJH

    ,QIRUPDWLRQV\VWHPVDUHVWUDWHJLFEXVLQHVVWRROVIUHTXHQWO\HVVHQWLDOWRDILUPDQG

    FHQWUDOWRLWVFRPSHWLWLYHVWUDWHJ\,7HTXLSPHQWDQGVHUYLFHVDUHDYDLODEOHWRDOOILUPV

    DQGPRVWDSSOLFDWLRQVFDQEHGXSOLFDWHG7KHFRS\LQJILUPRIWHQHQMR\VWKHDGYDQWDJHV

    RIQHZHUDQGEHWWHUWHFKQRORJ\OHDUQVIURPWKHH[SHULHQFHRIWKHLQQRYDWRUDQGWKXV

    FDQRIIHUFRPSDUDEOHVHUYLFHVDWORZHUFRVWV

    )HZVWXGLHVKDYHDWWHPSWHGWRHPSLULFDOO\H[DPLQHWKHVHUHODWLRQVKLSV,QYHVWPHQWVLQ,7

    DUHDWOHDVWSDUWLDOO\UHVSRQVLEOHIRURQHLPSRUWDQWRUJDQL]DWLRQDOFKDQJHWKHVKLIWRI

    HFRQRPLFDFWLYLW\WRVPDOOHUILUPV:HH[DPLQHWKLVK\SRWKHVLVXVLQJLQGXVWU\ OHYHOGDWD

    RQ,7FDSLWDODQGPHDVXUHVRIILUPVL]HLQFOXGLQJHPSOR\HHVDQGVDOHVSHUILUP

    )

  • 8/8/2019 IT as Competitive Advantage-project

    2/31

    IT as Competitive Advantage

    Institute of Business Administration iii

    Executive Summary

    ince the invention of first computing device, there came a race in competition in

    business world. From history to present there came revolutionary changes in the

    Information technology field and its impacts on the different business sections. Now IT isrecognized as a major source of competitive advantage.

    The field of strategic management focuses on understanding sources of sustained

    competitive advantages for firms. A variety of factors have been discussed in this paper

    have an important impact on the ability of firms to obtain sustained competitive

    advantage, including the relative cost position of a firm, a firm's ability to differentiate its

    products and the ability of firms to cooperate in strategic alliances.

    Information technology (IT) has also been mentioned for its possible role in creating

    sustained competitive advantages for firms While the assertion that IT might be able tocreate sustained competitive advantage for firms is provocative, work in this area is

    relatively underdeveloped, both empirically and theoretically. Research on IT and

    competitive advantage has emphasized describing how, rather than systematically why IT

    can lead to such an advantage. It is possible to anticipate the conditions under which

    aspects of a firm's IT will be sources of competitive disadvantage, when they will be sources

    of competitive parity, and when they will be sources of either temporary or sustained

    competitive advantage.

    We have also discussed how IT has reduced the costs of coordination both within

    firms and between firms. The question of how IT affects firm size is subject to empirical

    investigation, the different theories make different predictions about what changes we

    should see.

    At last we have discussed the companies which took the initiative of IT systems

    strategically to reap significant competitive advantage. American Hospital Supply, being

    the first to install online order entry terminals in hospitals, now dominates the medical

    supply business. Merrill Lynch, with its Cash Management Account, dependent on

    database and laser printing technology, preempted the market with its innovative product.

    American and United Airlines, through their computerized reservation systems, Sabre andApollo established an edge that other air carriers have found impossible to overcome.

    The significance of these computer-based products and services lies neither in their

    technological sophistication nor in the format of the reports they produce. Rather, it is

    found by examining the role they play in their firm's quest for competitive advantage.

  • 8/8/2019 IT as Competitive Advantage-project

    3/31

    IT as Competitive Advantage

    Institute of Business Administration v

    Contents1. Information Technology................................ ................................ ................................ ................. 1

    1.1 Historical Background: ................................ ................................ ................................ .............1

    2. IT and Business World................................ ................................ ................................ ................. 2

    2.1. Introduction: ................................ ................................ ................................ ........................... 2

    2.2. Using Information Technology: (As Competitive Advantage) ................................ ................... 2

    2.2.1. Effects on Organization: ................................ ................................ ................................ ...3

    2.2.2. Effect on Management:................................ ................................ ................................ ....4

    2.2.3. Effects on Business Strategy: ................................ ................................ ............................ 4

    2.2.4. Effects on Accounting:................................ ................................ ................................ ......5

    2.2.5. Effects on International Business: ................................ ................................ ..................... 6

    2.2.6. Effects on Operation Management:................................ ................................ .................. 6

    2.2.7. Other Impacts on business: ................................ ................................ .............................. 6

    3. An Example................................ ................................ ................................ ................................ ....8

    4. IT as source of sustained competitive advantage................................ ................................ ............ 9

    4.1 Previous Literature The value of IT (and example)................................ ................................ ....9

    4.2 The create-capture-keep paradigm ................................ ................................ ........................ 10

    4.3 The resource-based perspective................................ ................................ ............................. 10

    5. The Resource-Based View of the Firm ................................ ................................ ......................... 10

    5.1 Resource heterogeneity................................ ................................ ................................ .........11

    5.2 Resource Immobility ................................ ................................ ................................ .............. 11

    5.3 Application of Resource based Assertions ................................ ................................ .............. 11

    5.4 Competitive Advantage as a result of Resource based assertions ................................ ...........11

    5.5 Causal ambiguity................................ ................................ ................................ .................... 12

    5.6 Social complexity ................................ ................................ ................................ ................... 12

    5.7 A resource-based model of competitive advantage................................ ................................ 12

    5.8 Applying the Resource- Based View to Attributes of IT ................................ ........................... 13

    5.8.1 Access to capital................................ ................................ ................................ .............. 13

    5.8.2 Proprietary technology................................ ................................ ................................ ....14

    5.8.3 Technical IT skills ................................ ................................ ................................ .............15

    5.8.4 Managerial IT skills ................................ ................................ ................................ ..........16

    6. Conclusions and Implications ................................ ................................ ................................ .......18

  • 8/8/2019 IT as Competitive Advantage-project

    4/31

    IT as Competitive Advantage

    Institute of Business Administration v

    7. IT and Firm Size................................ ................................ ................................ ............................ 19

    8. Relationship between IT and Firm Size................................ ................................ ......................... 19

    8.1 Firm Size: ................................ ................................ ................................ ............................... 19

    8.2 Information Technology:................................ ................................ ................................ ........19

    9. IT and Viability of Firms................................ ................................ ................................ ................ 20

    9.1 Labor Substitution................................ ................................ ................................ .................. 20

    9.2 Make versus Buy................................ ................................ ................................ .................... 20

    9.2.1 Reducing Internal Coordination Costs More than External................................ ............... 21

    9.2.2 Reducing External Coordination Costs More than Internal................................ ............... 21

    9.2.3 Reducing Coordination Costs More than Production Costs................................ .............. 22

    10. Summary ................................ ................................ ................................ ................................ ...22

    11. Gaining Competitive Advantage................................ ................................ ................................ .23

    11.1 A few examples ................................ ................................ ................................ .................... 23

    11.2 Using the Information technology: ................................ ................................ ....................... 24

    11.3 Strategic Information System as Competitive Advantage................................ ...................... 24

    11.4 Strategic thrusts as major competitive moves ................................ ................................ ......25

    11.4.1 Differentiation................................ ................................ ................................ ............... 25

    11.4.2 Cost................................ ................................ ................................ ............................... 25

    11.4.3 Innovation................................ ................................ ................................ ..................... 25

    11.4.4 Growth................................ ................................ ................................ .......................... 25

    11.4.5 Alliance ................................ ................................ ................................ ......................... 25

    12. References ................................ ................................ ................................ ................................ 26

  • 8/8/2019 IT as Competitive Advantage-project

    5/31

    IT as Competitive Advantage

    1 | P a g e

    Institute of Business Administration

    1. Information Technology

    nformation technology (IT), as defined by the Information Technology Association

    of America (ITAA), is the study, design, development,

    implementation, support or management of computer-based

    information systems, particularly software applications and computer

    hardware. IT deals with the use of electronic computers and

    computer software to convert, store, protect process, transmit, and

    securely retrieve information.

    We use the term information technology or IT to refer to an entire industry. In

    actuality, information technology is the use of computers and software to manage

    information. In some companies, this is referred to as Management Information Services (or

    MIS) or simply as Information Services (or IS). The information technology department of alarge company would be responsible for storing information, protecting information,

    processing the information, transmitting the information as necessary, and later retr ieving

    information as necessary.

    1.1 Historical Background:

    In relative terms, it wasn't long ago that the Information Technology department

    might have consisted of a single Computer Operator, who might be storing data on magnetic

    tape, and then putting i t in a box down in the basement somewhere. The history of

    information technology is fascinating.

    y Four basic periods Characterized by a principal technology used to solve the input, processing, output

    and communication problems of the time:

    1. Pre-mechanical (3000 B.C - 14000 A.D)

    2. Mechanical (1450 A.D - 1840 A.D)

    3. Electromechanical (1840 A.D 1940 A.D)

    4. Electronic (1940 Present)

    The developments made in these eras brought about many significant improvements

    in to the world globally. These improvements were very much pronounced in the business

    world and proved as a source of competitive advantage to firms.

    I

  • 8/8/2019 IT as Competitive Advantage-project

    6/31

    IT as Competitive Advantage

    2 | P a g e

    Institute of Business Administration

    2. IT and Business World

    2.1. Introduction:

    The technological advances achieved in the past few decades have brought about a

    revolution in the business world, affecting nearly all aspects of working life. People can reach

    others throughout the world in a matter of seconds, with cost being increasingly irrelevant.

    Employees no longer need to be physically with their clients and co -workers; instead

    they can communicate effectively at home, at a distant office, across the world, and even in

    their car or on an airplane. With technology's penetration into every business function

    executives have seen first -hand how it gives them access to well -organized, quality

    information they can use to make better decisions, and how it fundamentally supports the

    day-to-day running of their business.

    Getting a firm to accept the new world of information technology is only part of the

    equation. The invention of the teleph one, fax machine, and more recent developments in

    wireless communications and video -conferencing have offered businesses more flexibility

    and efficiency and competitive advantage over others, and those willing to embrace thesenew technologies found they were more likely to survive and prosper. The advent of the

    Information age has spawned new technologies capable of improving nearly every aspect of

    business.

    2.2. Using Information Technology: (As Competitive Advantage)

    The advent of the Information a ge has spawned new technologies capable of

    improving nearly every aspect of business. It is important for every business owner to

    understand that technology is not an obstacle, but a path to higher productivity, lo wer labor

    costs and eventually more profits. The productivity that each employee enjoys by utilizing

    computers on their job should make their hours more productive and more profitable for the

    employer.

    Every business owner has a different opinion on how much new technology their

    company needs. Technology has different effects on the business world, as described

    following:

    y Effect on Organization

    y Effect on Management

    y Effects on Business strategy

    y Effects on Accounting

    y Effects on International Business

    y

    Effects on Operation Managementy Other Impacts

  • 8/8/2019 IT as Competitive Advantage-project

    7/31

    IT as Competitive Advantage

    3 | P a g e

    Institute of Business Administration

    2.2.1. Effects on Organization:

    Organizations of the twenty first century are proving that in order to stay competitive

    they must reorganize the old hierarchical structure and transform into separate company

    hybrids. The old hierarchical control is somewhat stil l in tact but decision making and

    technology now influence the ways organizations are headed.

    The impact of information technology has significant effects on the structure,

    management and functioning of most organizations. It demands new patterns of work

    organization and effects individual jobs, the formation and structure of groups, the nature of

    supervision and managerial roles . In the case of new office technology it allows the potential

    for staff at clerical/operator level to carry out a wider range o f functions and to check their

    own work.The result is a change in the traditional supervisory function and a demand for

    fewer supervisors.

  • 8/8/2019 IT as Competitive Advantage-project

    8/31

    IT as Competitive Advantage

    4 | P a g e

    Institute of Business Administration

    IT has prompted a growing movement towards more automated procedures of work.

    It is important that IT be aligned wit h business strategy. Therefore, firms could adopt

    different types of technological deployment depending on their various business strategies.

    The IT activities of organizations of the prospector type would be characterized by: a

    more intensive use of IT, b etter management of IT, a more important role of the IS

    department, more decentralized and flexible technological, organizational and administrativeinfrastructures, and more intensive technological scanning than the ones associated with the

    defender type. Research has been done supporting some of these perspectives.

    2.2.2. Effect on Management:

    Advances in technology made it possible to get to data faster and to access data in

    different ways. Each of these developments and others contributed to the rise of so-called

    management information system (MIS). Management information system became a serious

    field of study largely because of the development of computers and computer -related

    technologies. MIS, like many other computer terms, represents evolving concep t.

    Management Information System (MIS) is the system that provides people with eitherdata or information relating to an organizations operations. Management Information

    System(MIS) support the activities of employees, owners, customers and other key peop le

    to an organizations environment -either by efficiently processing data to assist with

    transaction work load or by effectively supplying information to authorized people in a timely

    manner

    2.2.3. Effects on Business Strategy:

    Firstly, let us see what is Business Strategy? Business strategy is the outcome of

    decisions made to guide an organization with respect to the environment, structure and

    processes that influence its organizational performance. Approaches to identifying business

    strategies are textual, multivariate or typological.

    Information

    technology plays a

    significant strategic role

    within organization. Strategic

    information systems (SIS)

    can support or even shape

    business strategy.

    Furthermore, some

    conventional information

    systems become strategicwhen used in innovative

    ways. Since the early 1990s,

    improving the information

    system planning process

    has been one of the top 10

    concerns of senior IS

    executives. In order to carry

  • 8/8/2019 IT as Competitive Advantage-project

    9/31

    IT as Competitive Advantage

    5 | P a g e

    Institute of Business Administration

    out this planning process successfully, it is important to align the IS plan with the

    organization's business.

    Some studies have successfully observed the effect of the alignment of information

    technology with organizational variables on organizational performance. The importance of

    strategic alignment of information techno logy is being acknowledged; however, some issues

    still need to be addressed.

    Technological deployment corresponds to the way companies plan and manage

    information technology to benefit from its potential and effectiveness. The concept of

    technological deployment arises from five recognized conceptual frameworks addressing the

    strategic aspect of IS.

    y The first conceptual framework, proposed by Mc Farlan i, stresses the importance of

    the strategic value of IS and the portfolio evaluation of current and future

    applications.

    y A second conceptual framework from Porter and Millerii highlights the contribution of

    IT in enhancing the competitive position of an organization.y A third conceptual framework suggested by Das et al iii proposes four principal

    dimensions related to the deployment of information technology: distinct

    competencies, the role of IT, design and development of IS, as well as technological,

    organizational and administrative infrastructures.

    y Henderson and Venkatraman iv indicated that to realize a successful strategic

    alignment of IT with the business strategy, companies should address components

    such as business strategy, IT strategy, organizational infrastructure and technological

    infrastructure.

    y Finally, the model of strategic management of IT related to t he management of IS:

    the positioning and role of IS, the strategic use of IS, new technological applications,

    the planning of architecture, and the security.

    2.2.4. Effects on Accounting:

    As we know, Accounting is an art of recording, classifying, summarizing and

    interpreting the financial statements.

    Technology has greatly impacted the accounting profession in the sense that a task

    that normally would take several entry level accounting clerks to perform can be

    accomplished by one accountant. The current technology has literally changed the way an

    accountant does their job. There is no longer a need for the old fashioned T accounts or

    hand written journal entries or even hand written ledgers.

    For example, in the past accountants used to do everythi ng written, then if they had a

    computer system the data was then entered into the system. The process was time

    consuming and lengthy. In many organizations, the advancement of technology has helped

    in all aspects of accounting, from A/R, A/P to payroll the roles have changed due to

    technology.

  • 8/8/2019 IT as Competitive Advantage-project

    10/31

    IT as Competitive Advantage

    6 | P a g e

    Institute of Business Administration

    2.2.5. Effects on International Business:

    Today's world of rapid increase in and expansion of technology is the reasons for

    recent International Business growth. The rapid growth in international business makes an

    understanding of organizational behavior all the more important for contemporary managers.

    Businesses have expanded internationally to increase their market share, as the domestic

    markets were too small to sustain growth. Business transactions are also becom ingincreasing blurred across national boundaries.

    The role of technology and its effects on international business management are

    even more apparent with respect to advances in communications systems. The changing

    technology environment (communication) is as important as transportation. The ability of a

    firm to communicate with entities (outside and inside market) can be estimated by using

    indicators of the communication infrastructure as telephones, computers, broadcast, and fax.

    2.2.6. Effects on Operation Management:

    Operation management focuses on carefully managing the processes to produce and

    distribute products and services. Overall activities of operational management include

    product creation, development, production and distribution. Related activities include

    managing purchases, inventory control, quality control, storage, logistics and evaluation.

    Operational management often includes substantial measurement and analysis of

    internal process. Ultimately, the nature of how operation management is carried out in an

    organization depends very much on the nature of the products or services in the

    organization. Technology impacts on it and now in this era, all activities of operation

    management e.g.; production creation inventory control, quality co ntrol and evaluation all is

    done through the computer systems and software.

    2.2.7. Other Impacts on business:

    Technological advancements over the past two decades have totally changed theway in which offices across the globe work. The evolution of the per sonal computer (PC) has

    provided the platform upon which major advances in word processing, filing, scheduling,

    communication and access to information have become possible.

    Advancement in technology also tends to improve Customer service. As market

    grow tighter and more competitive and as product life cycles has shortened, an increasing

    number of businesses are counting on superior customer service to help them compete. .

    First of all lets see what is customer service? Customer Service used to mean getti ng the

    customer the right product at the right time and giving refunds with a smile to disgruntled

    buyers.Now it means to pleasing buyers in many ways.

    Technology has effected on cost access and quality. Before launching any product,

    any organization ca n access its total cost quality within some minutes after calculation.

    In society today, technology plays an important role in people's lives and in

    businesses and organizations around the world. "Most technologies existing today were

    designed to expedite the way we manage, store, handle, analyze, and communicate

    information."

  • 8/8/2019 IT as Competitive Advantage-project

    11/31

    IT as Competitive Advantage

    7 | P a g e

    Institute of Business Administration

    Technology plays a significant role for enhancing internal and external

    communication. An effective communication is a key to success for every organization. In

    this day and age we as a global community are growing at a super fast rate. Communication

    is a vital tool which aids us in breaking the distance barrier.

    Similarly, it effects on inter-organizational network . Inter-organizational relationshave taken shape in different forms. Organizations, among themselves, have formed

    contractual relationships or joint ventures or informal associations. Inter Organizational

    Network as a successful measure of increasing competitiveness has been recognized in

    various studies.

    Technology also effects on logistical activities . Logistical activities defined as, the process

    of strategically managing the procurement, movement and storage of materials, parts and

    finished inventory (and related information flows) through the organization and its marketing

    channels in such a way that current and future profitability are maximized through the cost

    effectiveness of orders.

  • 8/8/2019 IT as Competitive Advantage-project

    12/31

    IT as Competitive Advantage

    8 | P a g e

    Institute of Business Administration

    3. An Example

    Dells Approach to Selling PCs vs. Traditional Manufacturers

    Traditional Manufacturer (like HP or IBM)Forecasts Demand

    Obtained Sub-Components from Suppliers

    Makes Basic Components

    Assembles Complete PC

    Stores in Warehouse

    Ships to Retailer

    Sits on Retailers Shelf until Sold

    In Hands of Consumer

    DELL

    Customer Places Order Via Phone or Internet

    Contract Manufacturers Instantly View Order Information and Ship Component Parts

    Dell Assembles Computer from Components Parts As They Arrive and Maintains Customer

    Relationship

    Computer is Shipped Direct to Customer via UPS

    In Hands of Consumer

  • 8/8/2019 IT as Competitive Advantage-project

    13/31

    IT as Competitive Advantage

    9 | P a g e

    Institute of Business Administration

    4. IT as source of sustained competitive advantageThe field of strategic management

    focuses on understanding sources of sustained

    competitive advantages for firms. A variety offactors have been shown to have an important

    impact on the ability of firms to obtain sustained

    competitive advantage, including the relative

    cost position of a firm, a firm's ability to

    differentiate its products and the ability of firms

    to cooperate in s trategic alliances. Information

    technology (IT) has also been mentioned for its

    possible role in creating sustained competitive

    advantages for firms While the assertion that IT

    might be able to create sustained competitive

    advantage for firms is provocativ e, work in thisarea is relatively underdeveloped, both

    empirically and theoretically Research on IT and

    competitive advantage has emphasized describing how, rather than systematically why IT

    can lead to such an advantage. It is possible to anticipate th e conditions under which

    aspects of a firm's IT will be sources of competitive disadvantage, when they will be sources

    of competitive parity, and when they will be sources of either temporary or sustained

    competitive advantage.

    4.1 Previous Literature The value of IT (and example)

    Traditionally, most research in strategic IT has focused on the ability of IT to add

    economic value to a firm by either reducing a firm's costs or differentiating its products orservices. For example, when WalMartadopted its purchase/inventory/distribution system, it

    was able to reduce its inventory costs On the other hand, General Electrichas been able to

    differentiate its service support from its competitors by means of its answer center

    technology and Otis Elevatorsimilarly has differentiated its service operations thanks to its

    Otis line system. In all these cases, the judicious use of IT either reduced these firms' costs

    of operations or increased their revenues by differentiating their products or services, and

    therefore was valuable.

    There is little doubt that, in a wide variety of circumstances, IT can add value to a

    firm. However, IT adding value to a firm by

    reducing costs and/or increasing

    revenues is not the same as IT being a

    source of sustained competitive

    advantage for a firm. For example, when WalMartadopted its

    purchase/inventory/distribution system, it gained a competitive advantage over its closest

    rival, K-Mart. However, K-Marthas not remained idle and is in the process of developing its

    own similar system. To the extent that K-Martis able to implement its system and apply it

    like WalMarthas, WalMart's system will have been only a source of temporary, but not

    sustained competitive advantage.

  • 8/8/2019 IT as Competitive Advantage-project

    14/31

    IT as Competitive Advantage

    10 | P a g e

    Institute of Business Administration

    Put another way, WalMart's purchase/inventory/d istribution system would have been

    valuable, but value, per se, is a necessary but not sufficient condition for a sustained

    competitive advantage. More generally, a firm is said to have a sustained competitive

    advantage when it is implementing a strategy n ot simultaneously implemented by many

    competing firms and where these other firms face significant disadvantages in acquiring the

    resources necessary to implement this strategy. A firm has a temporary competitive

    advantage when it is implementing a valuab le strategy currently pursued by few competing

    firms, but where these competing firms do not face significant disadvantages in acquiring the

    resources necessary to implement this strategy.

    A firm experiences competitive paritywhen it is implementing a valuable strategy

    being simultaneously implemented by several competing firms. A firm is at a competitive

    disadvantage when it is implementing a strategy that is not valuable, i.e., a strategy that

    does not reduce its costs or in crease its revenues.

    4.2 The create-capture-keep paradigm

    Several authors have gone beyond examining the value of IT in reducing a firm's

    costs and/or increasing its revenues to suggest ways that IT can be a source of sustainedcompetitive advantage. Perhaps the most important of these efforts began with Clemons

    (1986) and focuses on the role of IT -based customer switching costs as a source of

    sustained competitive advantage for firms selling IT applications. This set of ideas has come

    to be known as the " create-capture-keep" paradigm.

    4.3 The resource-based perspective

    Another approach to understanding the relationship between IT and sustained

    competitive advantage has recently emerged. In this approach, the ability to use IT to

    leverage the fundamental r esource advantages of firms enables IT to be a potential source

    of sustained competitive advantage. Fundamental to this paradigm is the resource-based

    view of the firm, which is used throughout this paper to explain ITs link to sustained

    competitive advantage.

    5. The Resource-Based View of the Firmhe resource based view of the firm is based on two underlying assertions, as

    developed in strategic management theory:

    1) That the resources and capabilities possessed by competing firms may differ

    (resource heterogeneity); and

    2) That these differences may be long lasting (resource immobility).

    In this context, the concepts of a firm's resources and capabilities are defined very broadly,and could certainly include the ability of a firm to conceive, implement, and exploit valuable

    IT applications. The conditions of resource heterogeneity and resource immobility are

    connected to sustained competitive advantage in the following way.

    T

  • 8/8/2019 IT as Competitive Advantage-project

    15/31

    IT as Competitive Advantage

    11 | P a g e

    Institute of Business Administration

    5.1 Resource heterogeneity

    If a firm possesses a resource or capability that is possessed by numerous other

    competing firms, that resource or capability cannot be a source of competitive advantage. In

    the context of IT, if several competing firms in an industry all operate the same automated

    inventory management system, for example, and then possessing such a system, by itself,

    cannot be a source of competitive advantage for any of these firms. Common resources do

    not meet the resource heterogeneity requirement, and thus are, at best, sources of

    competitive parity.

    On the other hand, if a firm possesses a resource or capability that is not currently

    possessed by competing firms, the condition of resource heterogeneity is met, and a firm

    may obtain at least a temporary competitive advantage. This was the situation described

    earlier forWalMart's purchase/inventory/distribution system. As long as WalMartwas the

    only discount retailer with this system in operation, that system was a source of at least a

    temporary competitive advantage for WalMart.

    5.2 Resource Immobility

    The second resource-based condition, the condition of resource immobility, becomesimportant in understanding when a firm's resources and capabilities will be sources of

    sustained competitive advantage. A resource is mobile if firms without a resource (or

    capability) face no cost disadvantage in developing, acquiring, and using that resource

    compared to firms that already possess and use it. In this case, that resource (i.e., mobile

    resource) can only be a source of temporary competitive advantage at best.

    5.3 Application of Resource based Assertions

    On the other hand, if a firm without a resource or capability does face a cost

    disadvantage in obtaining, developing, and using it compared to a firm that already

    possesses that resource (i.e., resource immobility), then the firm that already possesses tha t

    resource can have a sustained competitive advantage .Thus, if K -Mart was unable to imitateWalMart's purchase/inventory/distribution system, then WalMart's system would be a source

    of sustained competitive advantage. Also, if K -Mart could imitate WalMart 's system (i.e., the

    hardware and software), but not use it as effectively as WalMart, WalMarts system could still

    be a source of sustained competitive advantage.

    5.4 Competitive Advantage as a result of Resource based assertions

    The requirement that firm s must face a cost disadvantage in developing, acquiring,

    and using a resource in order for that resource to be a source of sustained competitive

    advantage does not imply that the only way to gain such advantages is through cost

    leadership strategies. Comp etitive advantage can be gain through differentiation of products .

    More generally, a firm may use its IT resources to help implement a wide range of strategies,

    including cost leadership,product differentiation, strategic alliance strategies , diversification

    strategies, and vertical integration strategies . If those resources are heterogeneously

    distributed across competing firms, and if firms without these resources find it more costly to

    develop, acquire, and use them to implement a strategy t han firms that have already used

    them to implement that strategy, these resources can be a source of sustained competitive

    advantage. The importance of resource immobility in creating sustained competitive

    advantage has led strategic management researchers to ask another question.

  • 8/8/2019 IT as Competitive Advantage-project

    16/31

    IT as Competitive Advantage

    12 | P a g e

    Institute of Business Administration

    5.5 Causal ambiguity

    A firm can imitate another firm's resources and capabilities at a low cost only if the

    imitating firm knows what it is about the successful firm that should be imitated. When there

    is causal ambiguity for about the source of competitive advantage, imitation becomes more

    costly. There are at least two reasons why causal ambiguity about the sources of a firm's

    sustained competitive advantage might exist.

    First, these sources of advantage may be taken for granted and are unspoken, tacit

    attributes of a firm .Such organizational attributes have been described as "invisible

    assets" and can include an organization's culture, its standard operating procedures,

    and its operational routines .Invisible assets may be valuable for a firm, enabling

    managers to communicate more effectively, providing guidance to managers in

    uncertain and complex situations, and in other ways making business decision

    making more efficient.

    Second, a firm's competitive advantage may depend on a large number of smalldecisions and actions in a firm, rather than on a few large decisions.

    5.6 Social complexityFinally, resources and capabilities that are socially complex may also be costly to

    imitate. Firm attributes such as an organiz ation's culture, its reputation among customers

    and suppliers, its trustworthiness, and so forth are generally beyond management's ability to

    change rapidly. Rather, these socially complex attributes evolve and change over time. The

    delays associated with changing these complex social relationships suggest that firms with

    competitive advantages based on these types of resources and capabilities may be immune

    from low cost imitation in the short run.

    5.7 A resource-based model of competitive advantage

    The impact of resource heterogeneity and immobility on competitive advantage can

    be organized into the model presented in figure below.

  • 8/8/2019 IT as Competitive Advantage-project

    17/31

    IT as Competitive Advantage

    13 | P a g e

    Institute of Business Administration

    As suggested previously, resource value is a necessary but not sufficient condition

    for competitive advantage. Firms that possess resources or capabilities that are not

    valuablewill gain a competitive disadvantage from exploiting these resources. On theother hand, firms with valuable resources and capabilities may gain at least

    competitive parity from exploiting these resources. Resources and capabilities possessed by many competing firms cannot be a source

    of competitive advantage for any of them, although they will be a source of at least

    competitive parity. On the other hand, if a resource or capability is valuable a nd

    heterogeneously distributed across competing firms, then that resource or capability

    will be a source of at least a temporary competitive advantage for firms that possess

    that resource.

    If firms without a valuable resource are at no disadvantage in acqu iring, developing,

    and using it compared to firms that already possess this resource, then it will only be

    a source of temporary competitive advantage for the firms that originally controlled it.

    On the other hand, when a resource or capability is immobile , then firms without this

    resource face significant challenges in acquiring, developing, and using it. Thisresource or capability may then be a source of sustained competitive advantage for

    firms that control it. A resource or capability may be immobile f or any of the reasons

    mentioned previously, i.e., the role of history, causal ambiguity, and/or social

    complexity

    5.8 Applying the Resource- Based View to Attributes of IT

    Armed with the model presented in figure above, it is now possible to examine the

    ability of IT to generate sustained competitive advantages for firms. A review of the IT

    literature indicates that four specific attributes of IT have been suggested, which are

    described below:

    y Access to capital

    y Proprietary Technology

    y Technical IT skills

    y Managerial skills

    5.8.1 Access to capital

    The capital needed to develop and apply IT -whether in the form of debt, equity, or

    from retained earnings -has been suggested as a source of sustainable competitive

    advantage for at least some firms. The logic unde rlying this assertion is straight forward.

    y First, IT investments can be very risky, and thus the capital needed to make these

    investments can be very costly.y Second, IT investments can require huge amounts of this risky capital. It may often

    be the case that only a few firms competing in a particular product market will have

    the financial capability needed to acquire the necessary capital to make certain IT

    investments.

    Thus, the few firms that are able to acquire the needed capital to make these

    investments can gain a sustained competitive advantage from them. Two kinds of

    uncertainty can be considered as the major sources of risk in IT investments, and are,

  • 8/8/2019 IT as Competitive Advantage-project

    18/31

    IT as Competitive Advantage

    14 | P a g e

    Institute of Business Administration

    therefore, determinants of the cost of capital required to make those investments :

    technological u ncertaintyand market uncertainty.

    5.8.1.1 Technological Uncertainty

    Technological uncertainty reflects the risk that of sustained competitive advantage for

    firms. The first of an IT investment may not meet its expected performance targets in a

    timely way. Specific sources of technological uncertainty in IT investments include:

    1) Failure to obtain the anticipated IT results because of implementation difficulties,

    2) Higher than anticipated implementation costs,

    3) Longer than anticipated implementation time,

    4) Technical performance below what was anticipated at the outset of the investment,

    and

    Incompatibility of the developed IT with selected hardware and software when they

    were first developed airline reservation systems were characterized by high levels of

    technological uncertainty. Their development required the solution of a number of

    unforeseen problems, which reflected the technological limitations and scarce experience

    available at the time.

    5.8.1.2 Market Uncertainty

    Market uncertainty, on the other h and, reflects risks related to the customer's

    acceptance of new IT products or services. Market uncertainty was a major cause of failure

    for the Pronto and Zap Mail systems. Even though these systems met their technical

    objectives, they were not adopted by customers.

    The Pronto system, Chemical Bank and AT&T's joint venture in electronic banking,

    did not attract enough customers in six years to break even and had to be abandoned

    similarly, insufficient demand was one of the reasons for the failure of Feder al Express's Zap

    Mail, a system designed to transmit facsimile documents through a nationwide network.

    Of course, not all IT investments are large, nor are they all risky. If IT investments

    are not large and risky, then it is likely that several firms wil l have access to the capital

    necessary to make them. In this context, access to capital is not likely to be a source of

    sustainable competitive advantage.

    On the other hand, some IT investments may be both large and very risky. However,

    even in this context, access to capital for IT investments, per se, is not likely to be a source

    of sustained competitive advantage for firms.

    According to above mentioned figure, firm attributes that are not heterogeneously

    distributed across firms will only be a source o f competitive parity. While the capital used by

    these firms to make these IT investments will be risky and large, it will not be any more so to

    any one of these firms than it is to the others.

    5.8.2 Proprietary technology

    Technology that can be kept proprietary has also been suggested as a source of

    sustained competitive advantage. Although proprietary technology can be protected through

    patents or secrecy, IT applications are difficult to patent Moreover, even if they coul d be

  • 8/8/2019 IT as Competitive Advantage-project

    19/31

  • 8/8/2019 IT as Competitive Advantage-project

    20/31

    IT as Competitive Advantage

    16 | P a g e

    Institute of Business Administration

    valuable, but they are usually not heterogeneously distributed across firms. Moreover, even

    when they are heterogeneously distributed across firms, they are typically highly mobile.

    For instance, firms without the required analysis, design, and progr amming skills

    required to make an IT investment can hire technical consultants and contractors.

    Specifically, airlines acquired technical expertise for developing their complex airline

    reservation systems by hiring programmers from other airlines and by ma king alliances withother carriers and hardware vendors.

    5.8.4 Managerial IT skills

    Technical skills are not the only skills required to build and use IT applications. A

    second broad set of skills are managerial skills. In the case of IT, managerial skil ls include

    management's ability to conceive of, develop, and exploit IT applications to support and

    enhance other business functions. Examples of important IT management skills include:

    1) The ability of IT managers to understand and appreciate the business needs of other

    functional managers, suppliers, and customers;

    2) The ability to work with these functional managers, suppliers, and customers to

    develop appropriate IT applications;

    3) The ability to coordinate IT activities in ways that support other functiona l managers,

    suppliers, and customers; and

    4) The ability to anticipate the future IT needs of functional managers, suppliers, and

    customers.

    Managerial IT skills enable firms to manage the market risks associated with

    investing in IT. Firms can acquire technical IT skills by hiring programmers and analysts.

    They then use their managerial IT skills to help programmers and analysts fit into an

    organizations culture, understand its policies and procedures, and learn to work with other

    business functional a reas on IT-related projects.

  • 8/8/2019 IT as Competitive Advantage-project

    21/31

    IT as Competitive Advantage

    17 | P a g e

    Institute of Business Administration

    Managerial skills in many cases are tacit, and may involve hundreds to thousands of

    small decisions that cannot be precisely imitated. As long as these skills are part of the

    "taken for granted" part of a firm's skill base, th ey may remain causally ambiguous.

    The development and use of many of these managerial skills depends on close

    interpersonal relationships between IT managers and those working in the IT function,

    between IT managers and managers in other business function s, and between IT managersand customers. Thus, the development of these skills is often a socially complex process.

    Therefore, if managerial IT skills are valuable and heterogeneously distributed across firms,

    then they usually will be a source of sustain ed competitive advantage, since these relation -

    ships are developed over time; and they are socially complex and thus not subject to low -

    cost imitation.

    Of course, while many managerial IT skills are developed over long periods of time and

    are causally ambiguous and socially complex, not all such skills have the attributes needed

    to be sources of sustained competitive advantage.

    WalMart's purchase/inventory/distribution system, which has allowed a reduction in its

    cost of sales 2-3 percent below the industr y average, is another example of the importanceof managerial IT skills in creating sustained competitive advantage. A competitively

    interesting note about this just -in-time system is that it applies very little proprietary

    technology and uses very few ini mitable IT technical skills. Instead, IT is used to support

    constant and direct communication among WalMart's stores, distribution centers, and

    suppliers. It is this constant communication and the relationship it builds that has enabled

    WalMart to retain i ts competitive advantage despite the successful efforts of many of

    WalMart's competitors to imitate WalMart's hardware and software.

    Put differently, while WalMart's technical IT skills have been imitated, its IT management

    skills have been shown to be a s ource of sustained competitive advantage. Part of

    WalMart's advantage results from its ability to link its IT function with its stores, itsdistribution centers, and even with its suppliers.

    This suggests that managerial IT skills are relevant not only in linking different functions

    within the same firm, but may also be important in linking different firms in ways that

    generate IT-based competitive advantages through strategic alliances. It may also be the

    case that managerial IT skills can be used to link a firm with its customers .In all these

    cases, if the linkages are valuable, if they are possessed by relatively few competing firms,

    and if they are socially complex (and thus imperfectly mobile), they may be sources of

    sustained competitive advantage.

  • 8/8/2019 IT as Competitive Advantage-project

    22/31

    IT as Competitive Advantage

    18 | P a g e

    Institute of Business Administration

    6. Conclusions and ImplicationsOf the four attributes of IT explained, application of the resource -based logic

    summarized in figure above suggests that only IT managerial skills are likely to be a source

    of sustained competitive advantage. IT management skills are often heterogeneously

    distributed across firms.

    Access to capital is also not likely to be a source of sustained competitive advantage,especially for ITs that are neither large nor particularly risky. Even when these investments

    are large and risky, differential access to capital, per se, is not a source of sustained

    competitive advantage. Rather, differential access to capital reflects a firm's different ial

    technical and managerial IT skills.

    Also, it is becoming increasingly difficult to keep information technology proprietary,

    and thus, proprietary IT is not likely to be a source of sustained competitive advantage.

    Finally, while technical IT skills a re absolutely essential for a firm to gain even

    competitive parity in IT, they are, by themselves, not likely to be a source of sustained

    competitive advantage.

    This analysis has important implications for both researchers and managers. For

    researchers, the resource-based view of the firm suggests that the search for IT -based

    sources of sustained competitive advantage must focus less on IT, per se, and more on the

    process of organizing and managing IT within a firm. It is the ability of IT managers to work

    with each other, with managers in other functional areas in a firm, and with managers in

    other firms that is most likely to separate those firms that are able to gain sustained

    competitive advantages from their IT and those that are only able to gain comp etitive parity

    from their IT.

    These skills, and the relationships upon which they are built, have been called

    managerial IT skills. Future research will need to explore, in much more detail, the exactnature of these managerial IT skills, how they develop and evolve in a firm, and how they

    can be used to leverage a firm's technical IT skills to create sustained competitive

    advantage.

    Moreover, empirical tests of the arguments presented here and other resource -based

    arguments about IT attributes will also need to be conducted. This analysis also has

    important implications for IT managers.

    This analysis suggests that using IT to gain sustained competitive advantage is not

    likely to be easy. Indeed, if it was relatively simple for firms to use IT in this way , then IT

    would not be imperfectly mobile and therefore not a source of sustained competitive

    advantage. The fact that it is often difficult to develop IT managerial skills, that relationshipsbetween the IT function and other business functions are often slow to evolve, and that the

    technical orientation of many of those in the IT function can clash with the business

    orientation of others in a firm is good for those firms who have been able to develop these IT

    managerial skills. This implies that other fir ms will have a difficult time imitating these skills,

    and therefore they can be a source of sustained competitive advantage.

  • 8/8/2019 IT as Competitive Advantage-project

    23/31

    IT as Competitive Advantage

    19 | P a g e

    Institute of Business Administration

    7. IT and Firm Sizeany changes in the organization of work in the United States since 1975 have

    been attributed to the increased capabilities and use of information technology

    (IT) in business. However, few studies have attempted to empirical ly examine these

    relationships. Investments in information technology are at least partially responsible for one

    important organizational chan ge, the shift of economic activity to smaller firms. We examine

    this hypothesis using industry-level data on IT capital and measures of firm size, including

    employees and sales per firm. We find broad evidence that investment in IT is significantly

    associated with subsequent decreases in the average size of firms. We also find that these

    decreases in firm size are most pronounced two to three years after the IT investment is

    made.

    8. Relationship between IT and Firm SizeTo our knowledge, this is the only p ublic domain data on IT investments in the U.S.

    economy. It includes fairly accurate hedonic price deflators which take into account quality

    improvements of over 20% per year in computing power. In order to understand the changes

    more fully, we examined fo ur different measures of firm size: (1) the number of employees

    per establishment, (2) the number of employees per firm, (3) the sales per firm, and(4) the

    value-added per firm.

    Our results show clearly that the deployment of IT is correlated with a decr ease in the

    number of employees per establishment and per firm in all sectors that we analyzed, and is

    associated with a decrease in sales and value added per firm in the manufacturing sector

    (the only sector for which data on these measures are avail -able). Taken as a whole, our

    results demonstrate empirically the inverse relationship between IT and firm size.

    We summarize existing evidence of two significant trends in the last 15 years: (1)

    The number of employees in the average business establishment has decreased

    substantially, and (2) the real stock of IT has grown enormously.

    8.1 Firm Size:

    According to several sources, firm size, as measured by the number of employees ,

    has declined. In addition, we examined two other measures of firm size, sales per firm and

    value-added per firm, for manufacturing industries. We did not find any overall declines in

    these measures of firm size.

    8.2 Information Technology:

    Data from the Bureau of Economic Analysis (BEA) confirm the self -evident increasein the ubiquity of IT. We find that investment in computers has increased steadily and

    dramatically since at least 1971. After taking into account the quality improvements reflected

    in the BEA price deflator (which allow each dollar to buy more IT), there has been over a

    tenfold increase in IT investments between 1971 and 1990. Each of the major business

    sectors shows the same accelerating trend toward increased use of IT .

    M

  • 8/8/2019 IT as Competitive Advantage-project

    24/31

    IT as Competitive Advantage

    20 | P a g e

    Institute of Business Administration

    9. IT and Viability of FirmsA central theoretical question, then, is why the inc reasing use of IT might change the

    relative viability of small and large firms.

    We summarize the arguments that have been proposed to answer this question in two basic

    categories: (a) labor substitution , and (b) make versus buy.

    9.1 Labor Substitution

    Perhaps the simples t explanation that has been pro posed for why firm size might be

    related to IT is that firms can sometimes use IT to produce the same output with fewer

    people. By substituting automated processing for human labor, the argument goes; these

    firms can increase p roductivity and reduce costs. Somewhat surprisingly, however, previous

    studies have not provided broad support for the hypothesis that IT substituted for labor or

    even increased the productivity of labor, at least in the 1975 -1985 time period. Furthermore,

    in direct studies of the relationship be tween IT and employment, there is some evidence that

    IT may actually increase employment. IT investment resulted in a complementary increase

    in the number of clerks and managers employed a fter a lag of several years. Recently,

    Berndt and Morrison (1991), using essentially the same IT data set we are using, found thatIT was on balance a complement, not a substitute for labor, especially white collar labor.

    Specifically, it is concluded, rather than being aggregate l abor-saving, increases in (IT) tend

    to be labor-using.

    While the previous work casts some doubt upon the labor substitution hypo thesis as

    an explanation for de creasing firm size, our study will allow us to examine the hypothesis

    from another perspective. I f labor substitution due to IT is the primary explanation for

    decreasing firm sizes, then we should expect to see a decrease in the number of employees

    per firm associated with IT use, but no decrease in the sales per firm. In fact, if this

    hypothesis is correct, we might even see an increase in the sales per firm associated with IT

    use.

    9.2 Make versus Buy

    Another possible explanation for why IT might be re lated to firm size is that IT might

    affect the firms' "make" versus "buy" decisions for the components and services needed to

    make their primary products.

    For instance, when a firm like Ford needs tires for the cars it produces, it has two

    choices about how to obtain these tires: It can make them internally, or it can buy them from

    an outside tire supplier. Which of these choices is preferable in a given situation depends, in

    part, on their respective costs.

    We can divide these costs into two categories-production costs and coordination costs.Production costs refer to the costs of the physical p roduction process itself-tasks like

    molding and cutting the rubber for tires.

    Coordination costs, on the other hand, refer to the costs of managi ng the dependencies

    between production tasks. For example, coordination tasks include making sure that the

    rights things and the right people are in the right places at the right times.

  • 8/8/2019 IT as Competitive Advantage-project

    25/31

    IT as Competitive Advantage

    21 | P a g e

    Institute of Business Administration

    We can further divide coordination costs into two subcategories -internal coordination

    costs and external coordination costs.

    When Fordproduces its own tires, for instance, the inte rnal coordination costs

    include the costs of managers and others who decide when, where, and how to produce the

    tires. When Fordbuys tires from an outside supplier, the external coordination costs include

    (a) the supplier's costs for marketing, sales, and billing and (b ) Ford's costs for findingsuppliers, negotiating contracts, and paying bills. In both cases, coordin ation costs include

    information intensive activities such as gathering information, com municating, and making

    decisions. Since IT is particu larly useful in these kinds of information intensive activities,

    several previous theories suggest how IT might affect firm size by reducing these

    coordination costs.

    9.2.1 Reducing Internal Coordination Costs More than External

    If IT reduces the costs of internal co ordination more than external coordination, then

    we would expect firms to do more things internally. This means we w ould expect firms to

    grow in size. For ex ample, if IT greatly reduced the costs for managers to monitor and

    control what their subordinates were doing throughout a large organization, then this mightlead firms to do more things internally. One kind of int ernal coordination cost simply involves

    moving information to the places where decisions are made and then informing others about

    the decisions. Another important kind of internal coordination cost arises because the

    interests of individual employees are o ften not the same as those of the firm as a whole.

    Research in agency theory has studied extensively how these conflicts of interest

    can be managed by approaches such as monitoring employees or providing them with

    performance-based pay.

    Since these approaches involve information-intensive activities, it seems plausible

    that IT might affect their costs . More generally, since many early ap plications of computers

    have focused on internal sys tems rather than inter-organizational systems, we might expectthat these systems would affect internal coor dination costs more than external ones.

    9.2.2 Reducing External Coordination Costs More than Internal

    If IT reduces the costs of external coordination more than internal coordination, then

    we would expect to see firms buy more things externally. In this case, the average size of

    firms should decrease. For example, if it is easier and cheaper for a firm to find an external

    supplier for new parts than to make them internally, then the firm is more likely to buy the

    parts outside and less likely to need as much internal man ufacturing capacity.

    The factors that lead to high "transaction costs" for external coordination have been

    analyzed extensively by research in transaction cost theory. In general, the "opportunistic"behavior of firms negotiating contracts with each other often leads to costs (such as legal

    and accounting expenses) that would not be necessary if the same transactions were

    coordinated internally. More generally, by reducing the costs of many of the info rmationsearching and accounting activities that are needed for coordination with external suppliers,

    IT can make buying things externally more attractive to firms. A related effect of IT is that it

    might reduce market coordination costs by changing the "s pecificity" of assets themselves.

  • 8/8/2019 IT as Competitive Advantage-project

    26/31

    IT as Competitive Advantage

    22 | P a g e

    Institute of Business Administration

    9.2.3 Reducing Coordination Costs More than Production Costs

    The theories reviewed so far allow us to predict either kin d of change: if internal

    coordination costs decrease most, firms should grow; if external coordination costs decrease

    most, firms should shrink. It is argue that, in general, we should expect both kinds ofcoordination costs to decrease relative to production costs. They further argue that this

    would still favor buying rather than making. T he costs of finding suppliers, negotiatingcontracts, and paying bills often make external coordination more expensive than

    coordinating the same activities internally would be. However, when external suppliers pool

    the demands of multiple customers, they can often realiz e economies of scale or other

    production cost advantages that internal production could not achieve. Thus, in general,

    buying rather than making leads to higher coordination costs but lower production costs.

    Now, how will IT affect these costs? In the case s where IT can directly improve the

    production process (e.g., via computerized typesetting or factory robots), we should expect

    IT to reduce production costs. However, these effects will be very specific to particular

    production processes and, thus, to particular industries.

    In almost all industries, however, IT should be able to reduce the costs of theinformation intensive activities involved in coordination. In general, if IT reduces both internal

    and external coordination costs more than it reduces p roduction costs, then it will decrease

    the importance of the dime nsion on which buying has a disadvantage? Thus, it should

    increase the number of situations in which buying is more attractive than making.

    10. SummaryThe theoretical literature suggests that IT will reduce the costs of coordination both within

    firms and between firms. We cannot know, a priori, however, which effect predominates and

    whether a resulting shift is of an economically significant magnitude. Furthermore, these

    theoretical arguments do not allow us to determine whether the decrease in average f irmsize noted above is related either positively or negatively to the in creasing use of IT.

    Fortunately, the question of how IT affects firm size is subject to empirical investigation, and

    as noted above, the different theories make different predictions about what changes we

    should see. In the remainder of this paper, we use econometric techniques to analyze the

    relationship in the U.S. economy as a whole between IT investments and firm siz e. We also

    interpret these results in light of the theories just de scribed.

  • 8/8/2019 IT as Competitive Advantage-project

    27/31

    IT as Competitive Advantage

    23 | P a g e

    Institute of Business Administration

    11. Gaining Competitive Advantagehe principal role that information systems have performed in the past has been

    one of operational and management support. But recently companies have

    begun using information systems strategically to reap significant competitive advantage.

    11.1 A few examples

    American Hospital Supply, being the first to install online order entry terminals in

    hospitals, now dominates the medical supply business.

    Merrill Lynch, with its Cash Management Account, dependent on database and laser

    printing technology, preempted the market with its innovative product.

    American and United Airlines, through their computerized reservation systems, Sabre

    and Apollo established an edge that other air carriers have found impossible to overcome.

    The significance of these computer -based products and services lies neither in their

    technological sophistication nor in the format of the reports they produce. Rather, it is found

    by examining the role they play in their firm's quest for competitive advantage.

    The cases just mentioned are instances of strategic information systems (SIS) -

    information systems used to support or shape an organization's competitive strategy, its plan

    for gaining and/or maintaining advantage.

    T

  • 8/8/2019 IT as Competitive Advantage-project

    28/31

  • 8/8/2019 IT as Competitive Advantage-project

    29/31

    IT as Competitive Advantage

    25 | P a g e

    Institute of Business Administration

    11.4 Strategic thrusts as major competitive moves

    Strategic thrusts are major competitive moves (offensive or defensive) made

    by the firm. It is our contention that the multitude of such moves reduce to five basic

    thrusts:

    11.4.1 Differentiation - Achieve advantage by distinguishing your company's

    products and services from competitors, or by reducing the differentiation advantage

    of rivals.

    11.4.2 Cost- Achieve advantage by reducing your firm's costs, supplier's costs, or

    customer's costs, or by raising the costs of your competitors.

    11.4.3 Innovation - Achieve advantage by introducing a product or process change

    that results in a fundamental transformation in the way business is conducted in the

    industry.

    11.4.4 Growth - Achieve advantage by volume or geographical expansion, backward

    or forward integration, product-line or entry diversification.

    11.4.5 Alliance - Achieve advantage by forging marketing agreements, forming joint

    ventures, or making acquisitions related to the thrusts of differentiation, cost,

    innovation, or growth.

    Information technology can be used to support or shape the firm's competitive

    strategy by supporting or shaping strategic thrusts. Strategic thrusts, therefore,

    constitute the mechanisms for connecting business strategy and in formation

    technology. These thrusts strike at three classes of strategic targets:

    1) Supplier targets - Organizations providing what the firm needs to make itsproduct, for example, those providing materials, capital, labor, services, and

    the like.

    2) Customer targets - End users as well as organizations (e.g., middlemen,

    physical distributors, financial institutions, etc.) purchasing the firm's product

    for its own use or for sale to end users.

    3) Competitor targets - Organizations selling (or potentially selling) products

    judged by customers to be the same as, similar to, or substitutable for the

    firm's products.

  • 8/8/2019 IT as Competitive Advantage-project

    30/31

    IT as Competitive Advantage

    26 | P a g e

    Institute of Business Administration

    12. References

    y www.pulibrary.edu.pk

    y www.jstor.org/stable/3088167

    y www.jstor.org/stable/249630

    y www.jstor.org/stable/2632942

    y www.jstor.org

    y www.jstor.org/stable/249229

    y www.dogpile.com

    y www.answer.com

    y http://scholar.google.com

    y www.cashflows.com

    y www.directscience.com

    y http://en.wikipedia.org/wiki/

    y www.oppapers.com/topics/effect/technology/organization

    y http://images.google.com.pk

    End Notes

    i^ Kohn, Alfie (1986). No Contest The Case Against Competition. Boston NewYork London: Houghton Mifflin Co.. ISBN 0-395-63125-4.

    iMc Farlan et al(1983)i Porter and Millar (1985)

    i Das et al. (1991)

    i Henderson and Venkatramen (1999)

    i see Articles 81 and 82 of the EC Treaty

    i see What is the Internet (and What Makes it Work) , by Robert E. Kahnand Vint Cerf, InternetPolicy Institute, December 1999.

    iSee, e.g., Defining and measuring Electronic Commerce, a background paper , OECD,Paris, April 2000.

    iMc Farlan et al(1983)ii Porter and Millar (1985)

    iii Das et al. (1991)

    iv Henderson and Venkatramen (1999)

  • 8/8/2019 IT as Competitive Advantage-project

    31/31

    IT as Competitive Advantage


Recommended