1

Lesson 06: Competitive Advantage

A competitive advantage is a significant and (ideally) long-term benefit to a company over its
competition, and can result in higher-quality products, better customer service, and lower
costs. According to the chief information officer of a large consulting company, “An efficiently
run IT organization can be a significant source of competitive advantage.” An organization
often uses its information system to help achieve a competitive advantage. A large Canadian
furniture manufacturing company, for example, achieved a competitive advantage by
reducing total operating costs by more than 20 percent using its information system to
streamline its supply chain and reduce the cost of wood and other raw materials. In his book
Good to Great, Jim Collins outlines how technology can be used to accelerate companies to
greatness. Table 1 shows how a few companies accomplished this move. Ultimately, it is not
how much a company spends on information systems but how it makes and manages
investments in technology. Companies can spend less and get more value.

Table 1: How some Companies used Technologies to m

ove from Good to Great

Taking advantage of the existing situation, including an economic downturn, can also help a
firm achieve a competitive advantage. In 2009 and 2010, while some companies struggled
with the economy and slumping sales, other companies were investing in information
systems to give them a long-term advantage.

Factors That Lead Firms to Seek Competitive Advantage

A number of factors can lead to attaining a competitive advantage. Michael Porter, a
prominent management theorist, suggested a now widely accepted competitive forces model,
also called the five-force model. The five forces include
1. Rivalry among existing competitors
2. Threat of new entrants
3. Threat of substitute products and services
4. Bargaining power of buyers
5. Bargaining power of suppliers
The more these forces combine in any instance, the more likely firms will seek competitive
advantage and the more dramatic the results of such an advantage will be.

Strategic Planning for Competitive Advantage

To be competitive, a company must be fast, nimble, flexible, innovative, productive,
economical, and customer oriented. It must also align its IS strategy with general business
strategies and objectives. Given the five market forces previously mentioned, Porter and
others have proposed a number of strategies to attain competitive advantage, including
1. Cost leadership
2. Differentiation
3. Niche strategy
4. Altering the industry structure
5. Creating new products and services

11.06.2019 IS11201 Fundamentals of Information Systems

 2

6. Improving existing product lines and services

In some cases, one of these strategies becomes dominant. For example, with a cost
leadership strategy, cost can be the key consideration, at the expense of other factors if need
be.

1. Cost leadership
Deliver the lowest possible cost for products and services. Walmart and other discount
retailers have used this strategy for years. Cost leadership is often achieved by reducing the
costs of raw materials through aggressive negotiations with suppliers, becoming more
efficient with production and manufacturing processes, and reducing warehousing and
shipping costs. Some companies use outsourcing to cut costs when making products or
completing services.

2. Differentiation
Deliver different products and services. This strategy can involve producing a variety of
products, giving customers more choices, or delivering higher quality products and services.
Many car companies make different models that use the same basic parts and components,
giving customers more options. Other car companies attempt to increase perceived quality
and safety to differentiate their products and appeal to consumers who are willing to pay
higher prices for these features. Companies that try to differentiate their products often strive
to uncover and eliminate counterfeit products produced and delivered by others.

3. Niche strategy
Deliver to only a small, niche market. Porsche, for example, doesn’t produce inexpensive
economy cars. It makes high-performance sports cars and SUVs. Rolex only makes high-
quality, expensive watches. It doesn’t make inexpensive, plastic watches that can be
purchased for $20 or less.

4. Altering the industry structure

Change the industry to become more favorable to the company or organization. The
introduction of low-fare airline carriers, such as Southwest Airlines, has forever changed the
airline industry, making it difficult for traditional airlines to make high profit margins. Creating
strategic alliances can also alter the industry structure. A strategic alliance, also called a
strategic partnership, is an agreement between two or more companies that involves the joint
production and distribution of goods and services. The investment firm American Diversified
Holdings, for example, developed a strategic alliance with Invent Pharmaceuticals to help the
pharmaceutical company with investments, regulatory issues, and business operations.
According to the chairman of American Diversified Holdings, “This alliance with Invent
Pharma will enhance our investment focus in the biotech industry.”

5. Creating new products and services

Introduce new products and services periodically or frequently. This strategy always helps a
firm gain a competitive advantage, especially for the computer industry and other high-tech
businesses. If an organization does not introduce new products and services every few
months, the company can quickly stagnate, lose market share, and decline. Companies that
stay on top are constantly developing new products and services. Apple Computer, for
example, introduced the iPod, iPhone, and iPad as new products.

6. Improving existing product lines and services

Make real or perceived improvements to existing product lines and services. Manufacturers
of household products are always advertising new and improved products. In some cases,

11.06.2019 IS11201 Fundamentals of Information Systems

 3

the improvements are more perceived than actual refinements; usually, only minor changes
are made to the existing product, such as to reduce the amount of sugar in breakfast cereal.

7. Other strategies
Some companies seek strong growth in sales, hoping that it can increase profits in the long
run due to increased sales. Being the first to market is another competitive strategy. Apple
Computer was one of the first companies to offer complete and ready-to-use personal
computers. Some companies offer customized products and services to achieve a
competitive advantage. Dell, for example, builds custom PCs for consumers. Hire the best
people is another example of a competitive strategy. The assumption is that the best people
will determine the best products and services to deliver to the market and the best approach
to deliver these products and services. Having agile information systems that can rapidly
change with changing conditions and environments can be a key to information systems
success and a competitive advantage. Achieving a high level of efficiency and effectiveness
is an important challenge of developing an agile information system. Other challenges
included satisfying various governmental regulations, meeting customer requirements, and
maintaining a good growth level. Innovation is another competitive strategy. Vodafone relied
on outside help to provide innovative solutions in its wireless business. According its chief
executive, “The only way to create a fertile environment for innovation is to have open
platforms and leverage them.” Natural Selection, a San Diego company, originally developed
a computer program that attempted to analyze past inventions and suggest future ones.
Although the original program was not an immediate success, the approach has been used
by General Electric, the U.S. Air Force, and others to cut costs and streamline delivery routes
of products. According to one expert, “Successful innovations are often built on the back of
failed ones.” A lack of innovation can lead to a loss in competitiveness and long-term
profitability. Some believe that less innovation has led to lower productivity, lower profits, and
lower wages and salaries for managers and workers. Companies can also combine one or
more of these strategies. In addition to customization, Dell attempts to offer low-cost
computers (cost leadership) and top-notch service (differentiation).

Reference:
R.M. Stair and G.W. Reynolds. “An Introduction to Information Systems in Organizations” in
Fundamentals of Information Systems, 6th ed., 2012, pp. 33-37.

11.06.2019 IS11201 Fundamentals of Information Systems