How is competitive advantage achieved

Most general managers know that the revolution is under way, and few dispute its importance. As more and more of their time and […]. As more and more of their time and investment capital is absorbed in information technology and its effects, executives have a growing awareness that the technology can no longer be the exclusive territory of EDP or IS departments.

As they see their rivals use information for competitive advantage, these executives recognize the need to become directly involved in the management of the new technology. This article aims to help general managers respond to the challenges of the information revolution. How will advances in information technology affect competition and the sources of competitive advantage? What strategies should a company pursue to exploit the technology? What are the implications of actions that competitors may already have taken?

Of the many opportunities for investment in information technology, which are the most urgent? To answer these questions, managers must first understand that information technology is more than just computers. Today, information technology must be conceived of broadly to encompass the information that businesses create and use as well as a wide spectrum of increasingly convergent and linked technologies that process the information.

In addition to computers, then, data recognition equipment, communications technologies, factory automation, and other hardware and services are involved. We discuss the reasons why information technology has acquired strategic significance and how it is affecting all businesses.

We then describe how the new technology changes the nature of competition and how astute companies have exploited this. Finally, we outline a procedure managers can use to assess the role of information technology in their business and to help define investment priorities to turn the technology to their competitive advantage. Information technology is changing the way companies operate. It is affecting the entire process by which companies create their products.

Furthermore, it is reshaping the product itself: the entire package of physical goods, services, and information companies provide to create value for their buyers. A business is profitable if the value it creates exceeds the cost of performing the value activities. To gain competitive advantage over its rivals, a company must either perform these activities at a lower cost or perform them in a way that leads to differentiation and a premium price more value.

Primary activities are those involved in the physical creation of the product, its marketing and delivery to buyers, and its support and servicing after sale. Support activities provide the inputs and infrastructure that allow the primary activities to take place.

Every activity employs purchased inputs, human resources, and a combination of technologies. Firm infrastructure, including such functions as general management, legal work, and accounting, supports the entire chain. Within each of these generic categories, a company will perform a number of discrete activities, depending on the particular business.

Service, for example, frequently includes activities such as installation, repair, adjustment, upgrading, and parts inventory management. Linkages exist when the way in which one activity is performed affects the cost or effectiveness of other activities.

Linkages often create trade-offs in performing different activities that should be optimized. This optimization may require trade-offs.

For example, a more costly product design and more expensive raw materials can reduce after-sale service costs. A company must resolve such trade-offs, in accordance with its strategy, to achieve competitive advantage. Linkages also require activities to be coordinated. On-time delivery requires that operations, outbound logistics, and service activities installation, for example should function smoothly together.

Good coordination allows on-time delivery without the need for costly inventory. Careful management of linkages is often a powerful source of competitive advantage because of the difficulty rivals have in perceiving them and in resolving trade-offs across organizational lines. Finally, the product becomes a purchased input to the value chains of its buyers, who use it to perform one or more buyer activities. Linkages not only connect value activities inside a company but also create interdependencies between its value chain and those of its suppliers and channels.

A company can create competitive advantage by optimizing or coordinating these links to the outside. For example, a candy manufacturer may save processing steps by persuading its suppliers to deliver chocolate in liquid form rather than in molded bars.

Just-in-time deliveries by the supplier may have the same effect. But the opportunities for savings through coordinating with suppliers and channels go far beyond logistics and order processing. The company, suppliers, and channels can all benefit through better recognition and exploitation of such linkages.

Each value activity has cost drivers that determine the potential sources of a cost advantage. In the search for competitive advantage, companies often differ in competitive scope—or the breadth of their activities.

Competitive scope has four key dimensions: segment scope, vertical scope degree of vertical integration , geographic scope, and industry scope or the range of related industries in which the company competes. Competitive scope is a powerful tool for creating competitive advantage. Broad scope can allow the company to exploit interrelationships between the value chains serving different industry segments, geographic areas, or related industries.

For example, two business units may share one sales force to sell their products, or the units may coordinate the procurement of common components. Competing nationally or globally with a coordinated strategy can yield a competitive advantage over local or domestic rivals.

By employing a broad vertical scope, a company can exploit the potential benefits of performing more activities internally rather than use outside suppliers. By selecting a narrow scope, on the other hand, a company may be able to tailor the value chain to a particular target segment to achieve lower cost or differentiation.

The competitive advantage of a narrow scope comes from customizing the value chain to best serve particular product varieties, buyers, or geographic regions. If the target segment has unusual needs, broad-scope competitors will not serve it well. Information technology is permeating the value chain at every point, transforming the way value activities are performed and the nature of the linkages among them.

It also is affecting competitive scope and reshaping the way products meet buyer needs. These basic effects explain why information technology has acquired strategic significance and is different from the many other technologies businesses use. Every value activity has both a physical and an information-processing component. The physical component includes all the physical tasks required to perform the activity. The information-processing component encompasses the steps required to capture, manipulate, and channel the data necessary to perform the activity.

Every value activity creates and uses information of some kind. A logistics activity, for example, uses information like scheduling promises, transportation rates, and production plans to ensure timely and cost-effective delivery. A service activity uses information about service requests to schedule calls and order parts, and generates information on product failures that a company can use to revise product designs and manufacturing methods.

Different activities require a different mix of the two components. For instance, metal stamping uses more physical processing than information processing; processing of insurance claims requires just the opposite balance.

For most of industrial history, technological progress principally affected the physical component of what businesses do. During the Industrial Revolution, companies achieved competitive advantage by substituting machines for human labor. Information processing at that time was mostly the result of human effort.

Now the pace of technological change is reversed. Information technology is advancing faster than technologies for physical processing. The costs of information storage, manipulation, and transmittal are falling rapidly and the boundaries of what is feasible in information processing are at the same time expanding.

During the Industrial Revolution, the railroad cut the travel time from Boston, Massachusetts, to Concord, New Hampshire, from five days to four hours, a factor of The cost of computer power relative to the cost of manual information processing is at least 8, times less expensive than the cost 30 years ago. Between and the time for one electronic operation fell by a factor of 80 million. Department of Defense studies show that the error rate in recording data through bar coding is 1 in 3,,, compared to 1 error in manual data entries.

This technological transformation is expanding the limits of what companies can do faster than managers can explore the opportunities. The information revolution affects all nine categories of value activity, from allowing computer-aided design in technology development to incorporating automation in warehouses see Exhibit III. The new technology substitutes machines for human effort in information processing.

Paper ledgers and rules of thumb have given way to computers. Initially, companies used information technology mainly for accounting and record-keeping functions. In these applications, the computers automated repetitive clerical functions such as order processing. Today information technology is spreading throughout the value chain and is performing optimization and control functions as well as more judgmental executive functions.

General Electric, for instance, uses a data base that includes the accumulated experience and often intuitive knowledge of its appliance service engineers to provide support to customers by phone. A cost leader must spend as little as possible producing a product or providing a service so that it will still be profitable when selling that product or service at the lowest price.

Walmart is the master of cost leadership, offering a wide variety of products at lower prices than competitors because it does not spend money on fancy stores, it extracts low prices from its suppliers, and its pays its employees relatively low wages. Not all products or services in the marketplace are offered at low prices, of course. A differentiation strategy is exactly the opposite of a cost-leadership strategy. While firms do not look to spend as much as possible to produce their output, firms that differentiate try to add value to their products and services so they can attract customers who are willing to pay a higher price.

At each step in the value chain, the differentiator increases the quality, features, and overall attractiveness of its products or services.

Research and development efforts focus on innovation, customer service is excellent, and marketing bolsters the value of the firm brand. Starbucks is a good example of a differentiator: it makes coffee, but its customers are willing to pay premium prices for a cup of Starbucks coffee because they value the restaurant atmosphere, customer service, product quality, and brand.

Trying to combine these two, Porter suggests, can lead to a firm being stuck in the middle. A firm that focuses still must choose one of the other strategies to organize its activities. It will still strive to lower costs or add value. The difference here is that a firm choosing to implement a focused strategy will concentrate its marketing and selling efforts on a smaller market than a broad cost leader or differentiator. A firm following a focus-differentiation strategy, for example, will add value to its product or service that a few customers will value highly, either because the product is specifically suited to a particular use or because it is a luxury product that few can afford.

For example, Flux is a company that offers custom-made bindings for your snowboard. Innovative products, processes or new business models provide strong competitive edge due to the first mover advantage. Porter has identified 2 basic types of competitive advantage: cost and differentiation advantage.

Cost advantage. Porter argued that a company could achieve superior performance by producing similar quality products or services but at lower costs. In this case, company sells products at the same price as competitors but reaps higher profit margins because of lower production costs. The company that tries to achieve cost advantage like Amazon.

Higher profit margins lead to further price reductions, more investments in process innovation and ultimately greater value for customers. Differentiation advantage.

Differentiation advantage is achieved by offering unique products and services and charging premium price for that. Differentiation strategy is used in this situation and company positions itself more on branding, advertising, design, quality and new product development like Apple Inc.

Customers are willing to pay higher price only for unique features and the best quality. They know that when workers are supported, the quality of care is better and products have fewer issues. Customers want to buy from companies that take care of their people because this means that they take care of their customers.

This provides you with a competitive edge. Define Niches that are Under-serviced In fishing, there are two types of fish. Those you find in oceans and those you find in lakes or rivers. For obvious reasons, fish that grow in oceans are bigger, but they take much more effort to catch. Fish that grow in lakes and rivers are easy to catch but tend to be smaller compared to their ocean counter-parts.

When looking to gain a competitive advantage, it can be easy to go after known niches where customers are easy to find. However, looking for niches where customers are under-serviced can provide you with a market advantage. There are often few competitors, plus you can tap a market an establish brand recognition early.