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Information technology and the new environment: developing and sustaining competitive advantage.

Competitive advantage accrues to the firm that is best able to deliver the right product or service to the marketplace at the right price and time. The question is, how can information technology (IT) contribute to the firm's timely development and delivery of new products and services? How can the firm maintain the resulting competitive advantage? This paper will address these issues by focusing on two elements:

(1) how successful firms incorporate IT into their corporate and business strategies to achieve competitive advantage; and

(2) the organizational structure that supports and flows from the strategy.

In the following section, competitive advantage is defined in general terms, and IT's contributions and pitfalls vis-a-vis the firm's competitive position are addressed. Then, the process of integrating competitive strength, the environment, and the firm's strategy is illustrated.

Information Technology and Competitive Advantage

Any time a product or service creates more value (both symbolic and in its attributes) for the consumer than a competing product or service, it has a competitive advantage. For example, when IBM introduced the Selectric typewriter it provided both types of value for buyers and users. There are two approaches (not necessarily mutually exclusive) to using IT to achieve competitive advantage:

(1) as a significant product or service sold or provided in the marketplace to outside customers; and

(2) as organizational support for a product or service which may not be visible to the consumer.

IT as a Product or Service

With technology-based products or services, it is often difficult to maintain a competitive advantage, because competitors copy successful entries. This may be particularly true of IT. For example, the product life expectancy in many high-tech industries, such as semiconductors or personal computers, is short, generally between three to five years. Firms in these industries expect to introduce an upgraded product or a significantly new product with very short development times, before the competition catches up or the next generation of products cannibalizes their profits. Firms using this "differentiation" strategy (Porter, 1980) expect to gain competitive advantage from the creativity, unique design, quality, customer support, and research associated with their products or services. Other firms within this industry might be "followers" with lower-cost alternatives (Porter, 1980).

A firm pursuing a cost minimization strategy might use state-of-the-art purchased parts or services to create and sell the firm's final product line. This strategy avoids the requirement for investment in R&D associated with new products and related processes. However, if a purchased part makes a significant contribution to the performance of a product or service, then the firm is vulnerable to variations in supply. This is an especially critical concern when the part is also an innovation.

For example, Compaq Computer's "clone" strategy is based on the firm using off-the-shelf parts to construct its PCs and independent dealers to provide sales and service. Compaq has been successful at using other firms' technology, its stock consistently performed better than the Dow Jones Computer Index until mid-1991. However, this strategy does make the firm vulnerable to parts shortages. For example, when Intel was unable (or unwilling) to supply its new 386 chips and flat-panel screens for Compaq's new laptop, early 1991 shipments were delayed. Even when Compaq owns stock in a supplier, it does not guarantee parts delivery. Compaq owns 21% of Conner Peripherals and was wait-listed for some super-small hard disks (Bartimo, 1991). Clearly, although the firm is pursuing a "cost minimization" strategy with some success, it is risky.

In today's intensely competitive marketplace, firms in the IT industry must compete on both differentiation and cost for long-term survival and competitiveness. Firms that compete solely on either differentiation or cost alone may be at a disadvantage in the long-run. Intel, for example, is a well-known innovator in the semiconductor industry. However, the rise of firms like Advanced Micro Devices, which rapidly developed the Am386SX chip that mimics Intel's 386SX chip, put tremendous pressure on Intel's rapid product development strategy. The AMD chip is faster, uses less power and sells for a lower price, thus competing on both fronts -- cost and product differentiation. Intel's response is its 486SX, a lower-priced version of the 486, while it develops its next generation product (Yoder, 1991).

The personal computer software industry may be experiencing a similar change in its environment. Early in the industry's development, producers of truly original products found that price was not a significant force in buyers' decision making (e.g., Lotus Development). Users were interested in product usefulness, customer support, and compatibility with hardware. However, the founders of the industry now find that the numerous upstart competitors drawn to the high margins are bringing competing products on line at lower prices. Since 1989, the large producers have engaged in price wars that will very likely change the competitive nature of the software industry. Customers may no longer be willing to pay list price for well-known branded software when a "look-alike plain wrap" is available for half the cost (Bulkeley, 1991).

Thus, firms producing goods and services in the information technology industry appear to be experiencing a significant environmental change. For example, customers' rising expectations vis-a-vis quality and a shortened new product time to market exert additional environmental pressures.

IT as Organizational Support for Products or Services

A second way to achieve competitive advantage is to use IT as organizational support for a firm's products or services (whether technology-based or not). As in the case of firms producing IT products or services, a short development cycle also frequently applies to firms using IT as a supporting function to gain competitive advantage (Vesey, 1991). The "strategic necessity" hypothesis (Clemons, 1988) was developed as a result of recent findings that most information systems' applications, regardless of the developer's original intent, have not proven to be sources of long lasting competitive advantage. This is only to be expected. A company earning supernormal profits attracts competitors, and unless the firm creates new competitive advantage it will eventually lose its market edge. Furthermore, when information systems are integral to the product or service they become necessities for the long-term survival of every competitor. This means that the company which chooses not to use these systems is going to be at a disadvantage and would suffer eventual failure.

Firms choosing to use IT as a competitive advantage in this way are seeking to develop less costly products or services. That is, they are pursuing cost leadership strategies (Porter, 1980) and typically are concerned with market size and share, tight controls, process investment, ease of manufacture, width of product line, and are willing to accept potential early losses. The firm expects the IT investment to create a competitive advantage for the firm as it works to become a more efficient and effective organization.

Other firms recognize that the need to minimize the time required to design and produce a new product is creating new organizational challenges. These firms envision speed as a source of competitive advantage. For example, Benetton's electronic communication system which links its field agents to its headquarters allows the company to make changes in inventory in ten days that take most retailers months. Similarly, Benetton's American counterpart, The Limited, boasts of the world's largest and most automated distribution center and instantaneous data linkages among the company's retail outlets, distribution centers, and far-flung factories (Peters, 1987).

It has been shown that firms that are able to get products to market first may reap one-third more profit over the product's life than a later arrival (Vesey, 1991). Firms using this strategy emphasize product innovation or differentiation (Porter, 1980), where niche markets, shortened lead times, and product life cycles that look like spikes are the rule rather than the exception.

The strategic emphasis selected for a particular firm would depend upon its own strengths and position within the marketplace as well as management's view of its competitive environment. Furthermore, in order for an information system to work to a firm's advantage, a market-oriented company should focus on providing services that will enhance its relationship with its customers and suppliers.

A recent study reported that customer service applications account for 70% of the information systems in 51 firms (Huff, 1988). There are two instances in which a firm can achieve competitive advantage through IT using a customer focus: 1) providing customers with terminals to enter orders directly; and 2) using information technology to target potential customers for other products. For example, a hospital can place supply orders directly with American Hospital Supply, and a person buying a new personal computer from Sears receives unsolicited brochures for computer enhancement products (Thompson, 1987). These foci increase the odds that the firm will increase its market share or simply increase the size of the market for all. The consumer is the ultimate beneficiary of the lower cost and more responsive service derived from the introduction of customer-focused information technology.

Regardless of the product or service produced, competitive advantage can be achieved through a well-developed and integrated IT system. Several companies have documented the success of their strategically placed information systems. However, the price as well as the risks may be enormous. The strategic necessity hypothesis offers a word of advice to decision makers that expectations should be realistic and that competitive advantage could very well be limited given the environment businesses operate in today.

IT Systems and Market Environment

Most documented uses of strategic information systems are directed towards oligopolies which have significant financial resources available for investment in IT. For example, the SABRE system, an on-line reservations system developed by American Airlines, has given the company a competitive advantage in gaining market share (Wiseman and MacMillan, 1984). The use of IT has been shown to be very effective in locking out the competition in oligopolistic markets. In this case, the added convenience to the travel agent plus the high switching cost locks the user to the system, thereby reducing the flying customer's access to competing airlines. SABRE has provided American Airlines a competitive advantage for nearly 20 years (McFarlan, 1990).

However, investing in IT by itself will not automatically reap benefits. It is the creative, ingenious, and often intuitive use of new technology and the willingness to make a long-term commitment and investment that generates the competitive advantage for the oligopolist.

A local monopoly is another market type that can benefit from IT. Unlike the case of the oligopolist, however, the role of IT in gaining competitive advantage for the local monopolist does not necessarily involve trying to gain market share; rather, the role of IT may be to strengthen the relationship between the organization and its customers and suppliers to maintain the foundation on which the monopoly is built.

For instance, the basis for a local hospital's monopoly is its relationship with doctors in the area. Doctors use hospital facilities to treat their patients, i.e., they supply services to their patients through the hospital's investment in equipment, supplies, staff, and rooms. Thus, if the doctors (suppliers) are provided with computer terminals or centralized answering services or some other form of information service, the hospital facilitates doctors' efforts to achieve a better "competitive" position. That is, if doctors can lower their own and their patients' cost in time commitment or provide their patients improved services, then there is no incentive for the doctor to shift hospitals. This type of support helps maintain the relationship between the supplier and the monopoly which is essential to the business's survival.

Aside from market share, environmental pressures derived from the globalization of products and markets create increasingly demanding challenges. In this global environment, the need for and uses of IT systems are quite widespread. For example, advances in telecommunications have spurred stiffer competition in most industries all over the world and the expansion of IT over the last 20 years has changed the way business is done. As a result of these changes, timely information management has become the key to business survival. The automobile, freight, airline, telecommunication, and financial services industries are a few which have been affected by the information revolution. While firms once competed primarily within a single economy, today's firms' competitive boundaries are no longer coterminous with their national boundaries. This blurring of economic and national boundaries is expected to accelerate over the next decade (Business Week May 1990).

The success of American Airline's SABRE system, for instance, has caused some of its European counterparts to develop their own on-line reservation system. The system, Amadeus, is a joint venture between SAS, British Airways, Air France, and Lufthansa. The consortium has invested $6 billion in the design, development, and implementation of its own reservation system (Wiseman and McMillan, 1984). The goal is to achieve the market share advantage that American Airlines has achieved with SABRE using a European customer base. With the integration of the European market, more and more European firms will follow this strategy, i.e., forming consortia to gain competitive advantage.

IT products are also experiencing significant competitive pressure. At one time, the U.S. chip industry was a world leader. That leadership has eroded and Japanese-based firms are now market leaders. While IBM has maintained its European market leadership in large mainframe computers, it will face added competition as European as well as Japanese firms move to take advantage of the opportunities provided by the economic consolidation of common market countries.

The significant changes in the marketplace for IT products as well as the shifts in focus the firms find necessary lead to considerable industry discontinuities. As a result, existing competitive advantages are under considerable pressure. This pressure compels organizations to seek organization structures that adapt well to the environmental discontinuities.

Information Technology and Organization Structure

As we move into the information age, the critical questions facing today's managers are:

(1) how to design strategy-based, interacting subsystems; and

(2) how to combine the subsystems into a structure that is effective in a very rapidly evolving environment?

Empirically-based studies that examined an organization's design in relation to its strategy and environment have identified numerous variables related to organizational effectiveness (see, for example, Galbraith and Kazanjian, 1986). For the purpose of our study, however, we will focus on three that are critical to success in the information age, namely, task design, work flow (including work segmentation and information-decision making processes), and people. As these variables are interrelated, it is critical that they fit or align in a way that supports the firm's strategy and defends its competitive advantage.

Matching People, Workflow, and Tasks

Within the traditional production-oriented firm generating a large volume of standardized products, both sophisticated and simple technologies are used. In this environment, tasks are generally highly specialized single operations, most semiskilled workers are employed, and production flows in a straight line (Woodward, 1965). With the advent of IT, such tasks are no longer necessary; indeed, IT is used to shorten the time-to-market for a wide range of products and services from airplanes to retail sales. For example, rather than designing, building, and testing a new airplane wing in a wind tunnel, engineers design and test the wing's aerodynamics using computer-aided design software. This reduces not only the design/development time but also the cost. Through the creative use of IT, retailers Wal-Mart and Dillard have significantly reduced the time a product remains in their inventory pipelines.

Because of the shortened time from market knowledge to design table to buyer, IT permits the firm to operate closer to the customer, improve product and service quality, achieve more rapid product development or redesign and development, reduce production cycle times, etc. These attributes provide firms the opportunity to focus on creating customer and supplier value and gain a competitive advantage. To actually achieve these benefits from IT, the firm requires a highly skilled, professional work force that is grounded in team work and able to act or react quickly. Thus rather than individuals prepared to perform a single activity within a functional area, firms need workers who are comfortable dealing with tasks and issues that cross organizational boundaries. Further, rather than individual performance, the team's performance is critical. And continuous improvement is the watchword. Table 1 compares the attributes associated with people, tasks, and work flow under the industrial age with those required under the information age.

Strategy and Structure

Alfred Chandler's seminal work (1962) shows that organization structure supports the firm's strategy and provides the connections between workers and their tasks. In the information age, the organization must provide products and services designed to meet individual customer needs, quickly and for a low price. Furthermore, rather than specifying a specific level of quality as "acceptable," the organization must continually strive to improve quality. Time is clearly the critical element. What is the appropriate subsystem structure that will accommodate this time-focused era?


A hierarchy has provided the most workable structure during the industrial era. In the classical hierarchical organization, the functional areas form the basic subsystems, bureaucratic procedures are used to provide the necessary subsystem interaction, and formalization serves as the organization's control. The information age organization's equivalent "functional area" will be more akin to a small, self-contained subunit within the larger firm where the professional work team deals more holistically with products or services.

Rather than sticking to hierarchical approaches to organization decision making and communication, the information age firm should use "adhocracy" within a holistic unit. The professional nature of the work force will enable the organization to use professional norms as control mechanisms. While the chain of command is used in the traditional hierarchy to direct the flow of information and decisions, the necessary chain for the large organization in the information age will be a network. The overriding organization goal is to reduce the time-to-market while simultaneously improving quality. Table 2 compares the management tasks of planning, organizing, directing and controlling under both types of organizations.
 Bureaucracy Adhocracy
Planning top down sub-unit based
Organizing hierarchy of separate system of interacting
 functions subunits
Directing chain of command networked subunits
Controlling formalized procedures professional norms

This shift in the location and direction of the management functions from a top-down approach to a center-out one is designed to create an organization whose response time is shortened while customer service is enhanced. This is accomplished through the use of IT's now ubiquitous personal computers or work stations. These desktop tools put the professional in touch with others within the same unit as well as providing access to professionals in other subunits. In addition, they make decentralized decision making possible without sacrificing the power of a central computer. Figure 1 illustrates the difference between the traditional hierarchy and the contemporary network.

The network structure makes communications interactive and non-constrained with respect to unit boundaries. The removal of boundaries provide the impetus to open communications, thus increasing the speed of communicating. This openness stimulates cooperative decision-making which, in turn, improves the caliber of decisions made. That is, the network structure creates the opportunity for the organization to improve the flow of communications and, simultaneously, to take advantage of the expertise of professionals within and outside the individual subunit.


Successful business organizations today are facing an increasingly uncertain environment, one that is fraught with the potential for missteps. For example, the following environmental factors are significantly affecting business organizations.

* Competitive Environment: increased environmental uncertainty due to the evolving global nature of competition and significant technological shifts

* Customer Environment: changed customer expectations with respect to product and service timeliness, availability and quality

* Supplier Environment: altered relationship with suppliers that reflects a more cooperative style.

Furthermore, as the world's businesses move from a nationalistic perspective to one that is transnational, organizations must accommodate internally the resulting external changes. That is, the economic dislocations fostered by the shift from a nationalistic to a global focus are compounded as businesses are forced to change internally from a predominately stable industrial model to one based on the ability to respond rapidly to market changes -- the information model.

Within their increasingly dynamic environment, the firms best able to handle shortened time horizons will create their own competitive advantages. IT, as tools or as products or services, provides the most accessible method for meeting this challenge. Thus, the information age organization will use emerging, cutting-edge technology to improve internal operations and provide greater value for an increasingly discriminating customer. A customer who expects rapid response to changing needs.

Simply creating better value for customers, however, will not guarantee survival. In order to cope effectively with these new environmental uncertainties, organizations must organize differently. IT can provide a foundation methodology and the necessary human and process linkages needed for survival. For example, a centralized network connecting all facets of the larger organization, while simultaneously nurturing small, customer-focused subunits, can serve as both a foundation and as structural support. The resulting web of interconnected small groups enables the firm to supply quickly what the customer wants. Thus, as business organizations aim for competitive advantage in the twenty-first century, they must organize to deliver value in order to reap profits from their enterprise.


Bartimo, J., "Compaq Plots Strategy to Widen Its Horizons Beyond a Niche in PCs," Wall Street Journal, April 10, 1991, A1.

Brandt, R., "Microsoft May Have Macro Worries," Business Week, March 25, 1991, 30.

Bulkeley, W., "Software Industry Discovers It Has Lost Its Immunity From Battles Over Pricing," Wail Street Journal, May 6, 1991, B1.

Business Week, "The Stateless Corporation," May 14, 1990, 98-106.

Chandler, A., Strategy and Structure, Cambridge, MA: MIT Press, 1962.

Clemons, E., "Strategic Necessities," Computerworld, 22, 8, February 22, 1988.

Galbraith, J. R., and R. Kazanjian, Strategy Implementation: Structure, Systems, and Process, St. Paul, MN.: West, 1986.

Huff, S., "Supporting competitive strategy with information technology," Business Quarterly, 53, 2, 1988, 37-39.

McFarlan, F., "Letter to Editor," Harvard Business Review, July-August, 1990, 176.

Peters, T., Thriving on Chaos, New York: Harper & Row, 1987.

Porter, M., Competitive Strategy, New York: The Free Press, 1980.

Thompson, J., "Competing through information technology: locking up customers," Information Strategy: The Executive's Journal, 4, 1, Fall 1987, 34-37.

Vesey, J., "The new competitors: they think in terms of 'speed-to-market'" Academy of Management Executive, May 1991, 23-33.

Wiseman, C., and I. MacMillan, "Creating competitive weapons from information systems," Journal of Business Strategy, 5, Fall 1984, 42-49.

Woodward, Joan, Industrial Organization: Theory and Practice, Oxford: Oxford University Press, 1965.

Yoder, S., "AMD to Unveil Clone of Popular Intel 386SX Chip," Wall Street Journal, April 29, 1991, B4.

Dr. Chan, an active business consultant for U.S. and Asian companies, has published articles in numerous journals in the general areas of strategic and global management; Dr. Heide, a member of the SAM Editorial Board, has published in the areas of technology management and strategy.
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Author:Chan, Peng S.; Heide, Dorothy
Publication:SAM Advanced Management Journal
Date:Sep 22, 1992
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