Information Technology as an Element of Competitive Advantage - Term Paper Example

Information Technology as an Element of Competitive Advantage Introduction In order to achieve competitive advantage, companies should develop the capacity to continuously enhance vital domains such as human resources and organizational structure. Such capabilities are critical to achieving competitive advantage, but possibly even more significantly, guaranteeing that the competitive advantage is consistently via value-added products/services. Competitive advantage is usually transitory. Sooner or later, competitors copy the leading firm, and the advantage weakens. Thus, the pursuit for a cutting-edge approach should be forceful. Companies should constantly think of new ways to exploit information technology (IT). This essay tries to demonstrate or prove that information technology is an element of competitive advantage. More than five decades have gone by ever since computers were introduced to businesses, but there are still so many things people do not know about their impact on corporate performance and on businesses, generally. As a whole, it remains difficult to conclude exactly why the computer revolution had modest impact on industrial efficiency for forty years and afterward, in the latter part of 1990s, all of a sudden became the powerhouse behind a drastic improvement in industrial efficiency. Companies nowadays are witnessing the same form—and scale—of transformation (Moginn, Kudyba, & Diwan, 2002). The information revolution today implies that companies can examine any area of their business and look at all the pieces of information that compose it: they can assess the profit from a complex array of marketing operations; they can observe consumer behavior. Competitors are looking for new ways of exploiting IT. It is not enough anymore to be the leader, to have the most powerful marketing strategies or the highest quality products. It not enough anymore to develop the strongest brand, a premium customer service, or cheapest costs. Every company is at risk of competitors that exploit information to knock over the status quo in the market. The world has witnessed companies that were once market leaders eradicated, at times instantly, by a competitor who successfully exploited information as a competitive advantage. Information technology can help an organization maintain competitive advantage if it continually changes and improves the system, building a dynamic and inimitable target for competitors (Oz, 2008). A perfect illustration is an online airline reservation site—American Airlines’ Sabre. In the 1950s, the system was created. But in the latter part of the 1970s, the system was re-created to provide a more convenient service for travel agents, online reservation. However, the company developed the Agency Data Systems-- an office computerization system for travel agents (Oz, 2008, 236). The reservation site currently includes limousine rentals, train tickets, car rentals, hotel reservations, and theater schedules. When the Internet eventually became widely accessible, the reservation site was redeveloped to give travelers the option to log in to Sabre from the comfort of their own homes or workstation. The site has been very profitable that in several years Sabre generated more profit from IT than from its airline services. Another example of a company that uses IT as an element of competitive advantage is Amazon. Management thinks that it should insert new services to its Web site to draw the interest of customers habitually. Amazon constantly enhances the appearance of its Web pages and the range of products/services it offers. It advances from being a simple book seller to a sophisticated provider of “best-seller lists, readers’ reviews, and authors’ interviews” (Oz, 2008, 57); offering a remarkably wide array of consumer products/services. The continuous developments help Amazon sustain its leading position and competitive advantage in Internet retailing. Yet, every one of these features has been copied by competitors. Amazon then decided to add Web hosting services into their list of offerings. There are two ways of exploiting information technology to attain competitive advantage: first, as an important product/service offered to customers; and, second, as an organizational backup for product/service which is imperceptible to the customers. With highly technological products/services, it is usually very tricky to sustain a competitive advantage, because, as repeatedly mentioned above, competitors are good imitators. This may be specifically factual in the field of IT (Zoephel, 2011). For instance, the life expectancy of products/services in numerous technology-based companies, like laptops or semiconductors, is brief. High-tech companies aim to develop a new product or a modified one within the shortest time possible, before competitors draw near or the latest batch of products eat up their profits. Companies employing Porter’s ‘differentiation’ approach attempt to acquire competitive advantage from the research, customer assistance, quality, inimitable design, and ingenuity related to their products/services (Zoephel, 2011, 17). Other high-tech companies may be ‘followers’ with cheaper options. A company using a cost-minimization approach could utilize high-tech bought units to develop and sell the company’s final set of products. This approach dodges the needed R&D costs related to new products and associated procedures. Nevertheless, if an acquired unit considerably contributes to the profitability of a product/service, then the company is exposed to fluctuations in supply (Czernlawska & Potter, 1998). This is a specifically crucial matter when the unit is an innovation as well. The ‘clone’ approach of Compaq Computer, for instance, is derived from the company making use purchased pieces to create its personal computers and independent providers to carry out service and sales (Hill & Jones, 2012, 107). Compaq thrives from other companies’ technology. Yet, this approach does make the company exposed to supply fluctuations. For instance, when Intel was not able, or perhaps hesitant, to sell its latest flat-panel monitors for the latest notebook of Compaq, the deliveries were late (Hill & Jones, 2012). Obviously, even though the company is using a ‘cost-minimization’ approach with a certain extent of success, it is precarious. In the extremely competitive business world of today, IT-based companies should vie on cost and differentiation for sustainable competitive advantage. Companies that vie only on either cost or differentiation on its own could be at a difficult situation sooner or later. For instance, Intel is a globally recognized leader in the semiconductor manufacturing. Unfortunately, the growth of companies which quickly produced the Am386 SX chip that copies the 386SX chip of Intel placed enormous stress on the quick product development tactic of Intel. The Am386 SX chip is quicker, consumes less energy and is more affordable, hence vying on both differentiation and cost (Chan & Heide, 1992, 5). The reaction of Intel is a cheaper adaptation of the 486—the 486SX—at the same time as designing its next batch of products. PC software companies may be undergoing the same transformation in its setting. These companies discovered that price was not an important factor in consumers’ purchasing decisions. Consumers were keen on customer support, product value, and hardware compatibility. Nevertheless, the pioneers of the PC software industry discover that a large number of small competitors focused on high margins are introducing cheaper products (Chan & Heide, 1992, 5).The leading manufacturers have participated in price competitions that will quite probably transform the software industry’s competitive aspect. Consumers may not be eager anymore to buy high-priced branded software when a cheaper alternative is offered. Therefore, companies manufacturing products/services in the IT industry seem to be undergoing major environmental transformation. For instance, consumers’ increasing demands in relation to quality and innovation generate further environmental stresses. Another way to attain competitive advantage is to take advantage of information technology as organizational backup for a company’s products/services. A brief development phase is often true of companies exploiting IT as a backup component to achieve competitive advantage. The theory of ‘strategic necessity’ was created due to current discoveries that almost all of the applications of information systems, irrespective of the initial plan of the developer, have not been verified to be a component of sustainable competitive advantage (Papp, 2001, 173). This is no surprise. A firm generating stable stream of profits draws competitors, and if the company fails to develop another source of competitive advantage its leading position will vanish in the long run. Moreover, once information systems become vital to the product/service they become requirements for the sustainable existence of all competitors. This suggests that the firm which decides not to apply these systems will eventually experience difficulties and would eventually collapse. Companies trying to exploit IT as a component of competitive advantage are aiming to create more cost-effective products/services. Specifically, they are moving toward cost management techniques and normally are interested in breadth of product line, productivity, process venture, rigid controls, market share, size of the market, and are prepared to incur possible losses. The company believes that investment in information technology will build a competitive advantage while it operates to become a more productive and successful firm. Other companies know that the necessity to reduce the time needed to develop and manufacture a new product is generating new organizational demands. These companies believe that ‘speed’ is one of the major components of competitive advantage. The strategic focus chosen for a specific company would rely on its own market share or position and capabilities as well as how the management analyzes its competitive context (Rao, 2005). Moreover, to make an information system a source of competitive advantage, a market-based firm must concentrate on offering services that will strengthen its ties with its suppliers and customers. A current research discovered that customer service applications comprise seventy percent of the information systems in fifty-one companies. At present, there are two occasions wherein a company can attain competitive advantage via customer-oriented information technology: first, developing online sites or other convenient terminals for customers; and, second, taking advantage of IT to attract prospective customers for other products/services (Chan & Heide, 1992, 6). These strategies boost the chances that the company will enlarge its market share or merely enlarge market size for everyone. Customers are the final recipient of the more efficient services and improved cost-effectiveness or more competitive pricing from the development of customer-based IT. Irrespective of the product/service developed, competitive advantage can be attained via a strong and consolidated information system. A number of firms have confirmed the effectiveness of their strategically developed IT systems (Bloomfield et al., 2000). Nevertheless, the risks and the costs could be substantial. The theory of ‘strategic necessity’ suggests that expectations or goals must be reasonable and that competitive advantage may be highly imperfect or restricted due to the organizational or business environment nowadays. Economic Assessment of Information Technology Economic evaluations of ITs demand that the costs be associated somehow to the advantages or value acquired in return. Two generic, but completely unique models of determining the advantage of information are: (1) Information Theory—“the content of a message is a function of the set of alternative states that are possible, thus value depends on context, not message.” (2) Decision Theory—“a Bayesian analysis of the expected value of perfect information to decide on value of the information provided based upon forecasting success” (Khosrowpour, 1998, 484). Information reduces risks, hence, has greater value in cases of major uncertainty. Porter’s models of competitive advantage are not associated exactly with IT systems, but are applied by some scholars to include ITs. Porter argues that there are two main issues in acquiring competitive advantage: first is the structural appeal of the industry; and, second is the company’s comparative position in the industry. These two issues create opportunities for information technologies. Porter uses the success of an industry as a role of five core competitive factors (Hill & Jones, 2012, 45): (1) the threat of new entrants; (2) the threat of substitute products or services; (3) the bargaining power of suppliers; (4) the bargaining power of buyers; and (5) the intensity of the rivalry among existing competitors The examination of these factors is the basis for determining a company’s competitive advantage and comparative position in the industry. It is likely that the solution to this problem of how to acquire a long-term competitive advantage rests in IT alongside strong management. Parker and Benson (1989 as cited in Khosrowpour, 1998, 484)) apply Porter’s models to demonstrate that in order for companies to have an opportunity to acquire competitive advantage, the manner IT is monetarily rationalized should also transform. Enterprise-wide information economics (EWIE) offers a classification and guidelines for monetary rationalization of IT. Through employing EWIE, the issue of how to determine and rationalize the needed investments in IT is tackled (Khosrowpour, 1998, 484). As regards monetary rationalization, there are three kinds of IT functions: (1) innovative, (2) complementary, and (3) substitutive (Khosrowpour, 1998, 484). Cost-benefit study is not sufficient for assessment of IT functions, except when focusing merely on cost-prevention concerns. Information economics—evaluates and rationalizes the technology on account of organizational outcomes, is a stronger process. Methods employed in information economics involve innovation and investment assessment— determines the cost of acquiring competitive advantage; value streamlining—supposes that if an application is already established in a company, it has a certain extent of value; and, connecting of value and value hastening—evaluate advantages attained in other departments (Bloomfield et al., 2000). *image acquired from Papp (2001, 2) The units in the organizational infrastructure area are skills, processes, and administrative structure. Business processes are operations that move the company forward. They identify the level to which work flows can be consolidated as regards IT. Enhancements to business processes can be the outcome of IT, or a modified system may be developed to integrate new technologies. Thus, the information technology strategy is the IT equivalent of business strategy. The information technology strategy, as shown in the upper right-hand section of the figure above, is composed of IT governance, systemic competencies, and technology scope. IT governance puts emphasis on the decision to create or purchase, the likelihood of technological affiliations, and the focus on applications (Papp, 2001, 2-3). Systemic competencies, on the other hand, require details or information about the customers of the company. Lastly, technological scope specifically addresses the main functions and technologies the business must use. It tries to determine the particular IT required to attain the crucial success variables (Papp, 2001, 3). The information technology infrastructure, located at the lower-right hand corner of the figure above, is composed of IT skills, processes, and architecture. IT skills focus on the advantages, ability, and experience of IT staffs. It involves the IT culture and its related rules, hiring guidelines, training processes, and compensation system. IT processes address the growth of certain IT practices and the strategies to enhance them. Lastly, IT architecture involves the communication processes, applications, information, software, and hardware that the company utilizes to realize its business approaches and IT (Golden, 1994). The connections between the areas of the strategic alignment framework illustrate the interdependence of the four areas. Although each of the four areas is essential in its particular setting, they simply acquire value when used as a unified whole. In order to realize this objective, different connections are employed as shown in the previous diagram. The first connection is the strategic fit, which is vertical in form. It focuses on the importance of making business choices that establish the position of the company in the industry as well as the skills, processes, and infrastructure that establish the internal center that needed to realize the intended competitive advantage. The implementation of strategy to establish infrastructure normally gives way to these vertical connections (Golden, 1994). The second key connection is functional integration, which is in horizontal form. This expands the rule of strategic fit to the functional areas of IT and business. The IT strategies should transform while business strategies adjust and likewise, processes and infrastructure should cope while either IT or business goes through changes (O’Brien, 2003). The capacity to effectively position the company in the technology industry is important in the controlling of IT; functional integration generates competitive leverage and capitalizes on the benefits of IT. The ‘competitive potential’ paradigm places emphasis on how developing ITs can shape and facilitate new business approaches. Competitive advantage emanates from new business approaches. Business strategy is the focal unit of this paradigm, IT strategy is the foundation unit, and organizational infrastructure is influenced. The function of senior management is similar to that of a business innovator through which the capacity of developing IT is achieved and its strategic value is evaluated in relation to business (O’Brien, 2003). Senior management should also be knowledgeable of how to control IT to make the business firmly in line with their objectives. The responsibility of the IT manager is similar to that of a business planner whose responsibility is to guarantee knowledge of IT and its applications. The IT manager is a key member of management, and capacity to disseminate the importance of IT is important, together with precise business understanding. The IT orientation is to add value to the business strategy and create new prospects for the company. The use of IT to build competitive advantage and shape business strategy is important (Reddy, 2006). The value of IT is evaluated as regards how the use of IT affects customers. The Service level paradigm, with IT infrastructure as the focal point, IT strategy as the foundation, and organizational infrastructure as the affected area, puts emphasis on how IT can enhance the product/service delivery. It evaluates as well how IT can enhance its specific business processes. The obligation of senior managers is to identify key concerns for IT programs (Papp, 2001, 8). The function of IT and its directors is to reinforce major business parts and harmonize long-term investment in IT and short-term goals. Steering groups often determine and establish key areas for IT programs and, in fact, operate as a “business within the business” (Papp, 2001, 8). The primary task of the IT manager is to work as a service manager and meet the demands of IT users. Value is often assessed by the level of customer satisfaction and the resulting competitive advantage. The organization IT infrastructure paradigm leads to process developments from IT. The organization infrastructure builds the path for IT, working as the foundation. Information technology infrastructure is the focal point and adjustments initiated at this point influence information technology strategy. The process of strategic planning employed is business process reengineering (BPR). The function of senior managers, for instance, is similar to that of a leader and the task of the IT manager is similar to that of business process designer to facilitate BPR (Papp, 2001, 8-9). On the other hand, the IT infrastructure strategy paradigm puts emphasis on the enhancement of IT strategy derived from the use of developing and current IT infrastructures. The foundation is information technology infrastructure, which facilitates information technology strategy. For instance, e-commerce is an instrument often applied to allow modifications in application delivery in the company (Moginn et al., 2002). Therefore, IT gives satisfaction to customers or end users via system support. Alignment is a complicated, forceful mechanism that requires a long development phase and a lot of effort to sustain. Organizations that have accomplished alignment can make a strategic competitive advantage possible which will provide them with better profitability, productivity, and position to contend in the fast-evolving markets of today. The significance of collaboration between information technology and business to capitalize on investment in IT is still obvious. The thorough evaluation of a company’s alignment is vital to make sure IT is being applied to correctly facilitate or push the business strategy (Hill & Jones, 2012). The paradigm of strategic alignment is an aggressive and complex concept and cannot be understood with a detached analysis of the company’s standpoints. The paradigm is developed to push and enable response to evolving business circumstances; a company might be at ease in a particular standpoint at the moment, but might want or be pushed to modify its standpoint at some point depending on its competitors and setting. Almost all known functions of strategic ITs are oriented toward consortiums which have substantial assets on hand for investment in information technology. American Airlines’ online reservation system, for instance, has built a competitive advantage for the firm by acquiring greater market share. The application of information technology has been proven to be quite useful in keeping off the competition in markets dominated by few companies. Thus, the greater convenience to the travel staff in addition to the substantial switching expenses secures the customer to the system, hence limiting the access of the traveling customer to other airlines (Chan & Heide, 1992). This online reservation system has created a competitive advantage for the American Airlines for two decades. Nevertheless, investment in information technology alone will not mechanically bring in competitive advantage. It is the innovative, resourceful, and usually perceptive application of new technologies and the eagerness to enter into a continuing investment and dedication that brings in the competitive advantage for the company. A monopoly market can also build competitive advantage through investment in information technology. Yet, not like in oligopolistic markets, the function of information technology in building competitive advantage for the monopolistic market does not automatically imply attempting to acquire market share; instead, the function of IT may be to boost or support the relationships between the company and its providers/suppliers and customers to strengthen the groundwork on which the monopoly is developed (Rao, 2005). Except for market share, external forces or environmental demands rooted in market and product/service globalization generate more and more difficult demands. Within this global setting, the importance and applications of IT are fairly pervasive. For instances, developments in information technologies have stimulated more rigid competition in almost all industries across the global and the growth of telecommunications over the recent decades has transformed the manner business is carried out (Rao, 2005). As a consequence of such developments appropriate and prompt IT management has become the means toward survival. The financial, telecommunications, and airline industries are some which have been impacted by the IT breakthrough. Although companies competed mostly in a single economy before, the competitive limitations of companies today are not connected anymore to their national borders. The gradual disappearance of national borders and economic frontiers is predicted to speed up in the future. For example, the triumph of the online reservation system of the American Airline has forced several of its European competitors to create and enhance their own online reservation system. Lufthansa, Air France, British Airways, and SAS, in a joint enterprise, developed the Amadeus system. The conglomerate has shelled out $6 billion for the planning, formation, and execution of its own online reservation system (Chan & Heide, 1992, 6). The objective is to acquire the competitive advantage that American Airlines has gained with its online reservation system. Due to the European market integration, a lot more European companies will adopt this approach, such as entering into a joint venture to acquire competitive advantage. IT applications are also confronting major competitive demands. U.S. chip companies have dominated the global scene in the past. That leading position has weakened and Japanese businesses are the market leaders of today. Although IBM has sustained its leading position in the European market, it will confront further competition as Japanese and European companies advance to exploit the prospects created by the economic integration of developing economies (Chan & Heide, 1992, 6-7). The major developments in the marketplace for the products of information technology the companies believe are needed result in major industry disruptions. Consequently, current competitive advantages face substantial demands. This demands force companies to look for an organizational structure that adjust perfectly to the environmental disruptions. Therefore, as the business world becomes more deeply engaged in the information era, the crucial issues confronting management nowadays are: (1) developing strategy-oriented, interrelating subsystems; and (2) matching the subsystems into a system that is efficient in a quite fast-changing environment (O’Brien, 2003). Studies that looked at organization design as regards its environment and approach have found out several factors associated with organizational success. Within the usual production-based company producing massive quantities of regular products, both simple and advanced technologies are utilized. Within this setting, production runs in directly, almost all semi-skilled employees are hired, and tasks are normally highly focused single tasks. Because of the IT revolution, these operations are not needed anymore; rather, information technology is applied to reduce the time-to-market for a broad array of services and/or products. For instance, instead of planning, constructing, and checking a new airplane arm, builders develop and check the arm’s aerodynamic employing automated design program. This lessens not just the development phase but also expenses. By means of the innovative application of information technology, Wal-Mart has substantially shortened inventory durations (Chan & Heide, 1992). Due to the reduced time from business ideas to development to customer, information technology allows the company to shorten production phases, attain faster product design and development, and enhance the quality of products/services, and so on. These qualities give companies the chance to concentrate on building value and acquire a competitive advantage. In order to realize these gains from information technology, the company needs specialized and experienced workers that are based on co-operation and capable of responding or taking action promptly. Hence, instead of people equipped to carry out a single tasks in a functional unit, companies require employees who can easily and effectively deal with tasks and problems that go beyond organizational limits (Bloomfield et al., 2000). Moreover, instead of individual outcome, group outcome is crucial. And uninterrupted upgrading is the motto. The influential study of Alfred Chandler in 1962 demonstrates that organizational structure reinforces the company’s approach or strategy and creates the linkages between tasks and employees. In IT world, the company should develop products and/or services aimed at satisfying customer demands and needs, promptly and for an affordable price. Moreover, instead of classifying a certain extent of quality as ‘acceptable’, the company should persistently exert an effort to enhance quality (Chan & Heide, 1992, 6). Time is obviously one of the most important components. A hierarchical structure has been the most practical during the period of industrialization. In the traditional hierarchical structure, the core subsystems were composed of the functional units, bureaucratic processes are employed to create the needed subsystem connection, and standardization functions as the company’s control (Oz, 2008). The matching functional unit of an IT-based company will be more similar to a small autonomous subunit inside the bigger company where the specialized team handles products/services in an integrated manner. Instead of relying on hierarchical strategies for corporate communication and decision making, the IT-based company should implement ‘adhocracy’—a form of organization that functions differently from a bureaucracy—within an integrated part. The specialized characteristic of the employees will allow the company to implement formalized guidelines as a control strategy. Although the chain of command is exercised in the classic hierarchical structure to organize the course of communication and decision making, the required chain for the big company in the IT world will be a ‘system’ (Chan & Heide, 1992). The prevailing objective of a company is to cut down the time-to-market while at the same time enhancing quality. The change in the course and position of the management tasks from a top-down framework to a center-out model is aimed at building a company whose response point is reduced while at the same time customer satisfaction is increased. This is attained through the application of work stations. Personal computers allow employees to communicate with others in the same division and create access pathway to employees in other divisions. Furthermore, they facilitate decision making without giving up the potential of a central computer. The network mechanism promotes interactive communication (O’Brien, 2003). The collapsing of boundaries paves the way for clear and open communications, hence boosting the efficiency of communication. This efficiency brings about teamwork or collaborative decision making which, consequently, enhances the quality of decisions (Oz, 2008). Specifically, the network mechanism opens the chance for the company to enhance its communications system and, at the same time, to capitalize on the skills, knowledge, and experience of professions outside and inside the division. Discussion and Conclusions The strategic value of information technology depends on its capacity to build a ‘value chain’ by forming mutually dependent basic value operations consisting of components like production, customers, suppliers, and so on. Information technology builds a connection between these operations via a value chain. It revolutionizes the value chain operations and the physical processes and characteristics of a product either through differentiation of product or reducing cost of value operations (Reddy, 2006). In addition, a company applying IT can also acquire differentiation benefits, consortium, cost-effectiveness, progress, and innovation produced by information technology. Likewise, IT improves business relationships, communication, and flow of information. These attributes could boost the competitive qualities of small-and-medium enterprises in global economies or markets and enable alliances with other companies inside a particular value chain. It may be assumed, as stated by Porter (2001 as cited in Hill & Jones, 2012), that information technology does not satisfy the fundamental conditions to create a strategic asset because they are commonly applied and available to all organizations. For that reason, information technology alone does not embody a competitive advantage unless it supports other strategic assets. Hence, small enterprises are investing in IT to boost IT applications to reinforce their business strategy and in so doing build a competitive advantage rooted in the inimitable capacity generated in their markets. As a result, alignment between information systems strategy and business strategy favorably influences organizational outcomes. Leading companies nowadays are confronting an ever more unpredictable and risky environment. For instance, these environmental forces are considerably influencing companies: supplier, customer, and competitive environment. Moreover, as businesses across the globe advance from a localized point of view to an outlook that is global, companies should deal on the inside with the consequent external forces. Specifically, the economic disruptions created by the transition from a localized to a transnational outlook are complicated as companies are pushed to transform on the inside from a firmly established industrial perspective to an outlook derived from the capacity to react quickly to changes in a particular market—the IT perspective. References Bloomfield, B. et al. (2000). Information Technology and Organizations: Strategies, Networks, and Integration. Oxford: Oxford University Press. Chan, P. & Heide, D. (1992). Information Technology and the New Environment: Developing and Sustaining Competitive Advantage. SAM Advanced Management Journal, 57(4), 4+ Czernlawska, F. & Potter, G. (1998). Business in a Virtual World-Exploiting Information for Competitive Advantage. England: Macmillan. Golden, J. (1994). 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