University of Baltimore
Merrick School of Business

INSS737 - Management of Information Systems - Fall 2000

Effects of IT on Competition

Lecture notes

One of the manageable trends we saw last class meeting was the strategic impact of IST. Today we are taking a closer look at the effects of IT on competition.

1. Industry and Competitive analysis (ICA) framework.

You should have been introduced to this topic in either INSS610 or INSS640. Lets take a look at each of the competitive forces and how can IST contribute to gain competitive advantages:

• threat of new entrants: IST can provide barriers to entry by creating an unique service/product, by increasing sales force resources, and requiring sizable investments from competitors. When an industry becomes highly profitable it attracts new entrants, but if the initial capital investment is high, or the service/product is hard to duplicate, or yet the sales force training and tools are also difficult to replicate and expensive to develop, these factors become barriers to entry). IST can play a large role in this area.

• buyers' bargaining power: embedding IST in products can make the decision to switch to a new product very difficult (think about changing from a Windows-based system to an UNIX-based system, and vice-versa), decreasing the buyers' bargaining power. Also, providing an unique service to the buyers making them dependent of this service. The classical case example is American Hospital Supplies giving buyers'access to their inventory management system and gaining more than 60% market-share.

• suppliers' bargaining power: creating tightly integrated systems with suppliers, requiring them to invest in proprietary systems or special agreements (EDI) to become a supplier. Walmart is a classical example of using IST to gain competitive advantages this way. In addition to reduce suppliers's bargaining power this type of action also reduces the costs for the buyer company.

• threat of substitute products or services: think about butter and margarine to understand the concept of substitute products. IST can create a high degree of differentiation to a product/service, making it hard to substitute. Customization, innovation, customer service, etc, can provide an unique product/service that makes difficult substitution.

• intraindustry competition: the use of IST to decrease or increase prices, reduce costs, provide an unique product. Efficiency and innovation through IST are the most traditional effects of IST on the competition.

More details on the above forces can can be found in pages 61-76 of the textbook.
2. Competitive strategies

The classical Porter ICA framework discussed above also describes three generic strategies: (a) cost leadership (low cost producer), (b) differentiation (high quality) and (c) focus (niche). This is reflected in figure 1. Lets review this scenario taking into consideration process and product changes:

• Mass Production: in a stable process and product environment an organization can standardize products and services, benefit from economies of scale, and become a low cost producer. IST can play a crucial role in standardizing the processes and obtaining efficiency through automation.

• Innovation: in a dynamic process and product environment an organization can differentiate products and services, create unique products and services, and become a high quality producer. IST can play an important role in creating new products and services, and/or processes. See our prior discussions on buyer's bargaining power, threat of substitutes, etc.

• Focus is a strategy of low cost or high quality in a small market, or market segment (a niche). IST can play both efficiency and effectiveness roles here.

Boynton, A.C., Victor, B. and Pine, B.J (New Competitive Strategies: Challenges to Organization and Information Technology, IBM Systems Journal,(32)1,1993, 40-52) proposed a much broader framework for competitive strategies, as shown in figure 2.

This was a time when american businesses were being confronted with fierce competition of japanese and european firms, which were able to provide high quality and low cost products and services. Lets review what this new model added:

• Mass Customization: in a stable process, but dynamic product environment organizations can use low cost processes to obtain differentiation in new markets, becoming a mass customizing producer. Products are built to order (customer specifications), but using standardized processes. For example, Dell Computers can deliver a home computer, a business desktop PC, or a server, in three to four days, assembled to customer requirements. IST plays a vital role from order entry, to assembly, to delivery. See one of Dell pages for configuring a system and placing an order.

• Continous Improvement: in a dynamic process, but stable product environment organizations can use low cost processes to obtain differentiation in mature markets, becoming a continuous improver producer. Products are produced in mass but incorporating new, improved, processes or components. Please note that the organization needs to build upon an existing mass production strategy, modifying or adding processes or components. Also, notice that continuous improvement is a pre-requisite for mass customization.

  Organizations use a combination of these strategies. Innovation when creating a new product, mass production to standardize the products, continuous improvement to maintain competitiveness, and mass customization to reach new markets. IST is the basic ingredient in this process, which allows the evolution from one strategy state to the other.

Case instructions

We will use the framework to analyze the case introduced last week: (a) what is the problem, (b) what are the alternatives, and (c) what are the recommendations. We will discuss Canadia Airlines (A) using this framework.

When you analyze this case ask yourself how the ICA and Mass Customization frameworks affect the situation. What is the existing competitive situation? What significant issues are the airlines facing? Which, if any, is the role of the reservation systems? What are the strengths and weaknesses of each reservation system?

Think about the various strategies and competition forces. Then answer the questions:

1. What is the problem?

   Why is it a problem? Is there a decision involved? If it is a problem, what are the pros and cons that makes it a problem?

2. What are the alternatives?

   What can be done? There is always the do nothing alternative. If everything went well (rosy scenario) what we would like to do? If everything went wrong (doomsday scenario) what should we do? What can we do in between the rosy and the doomsday scenarios? What are pros and cons of each alternative?

3. What is you recommendation?

   What criteria should we use to select the most suitable alternative in the case? Why are you recommending one alternative versus the others? How this alternative satisfies your criteria? How to implement the alternative you selected?

As done last week, we will first discuss the case in the Forum, then in class, and then your group will post a report in the Forum.