Sample solution for Test-2

Explain under which circumstances an information system can create competitive

advantage. Critically discuss with examples [2009, Q6]

Competitive advantages cannot be guaranteed simply by deploying the strategies laid out by
Michael Porter’s five forces, Hammer’s value chain analysis, or Warren McFarlen’s
strategic grid. Venkatraman cautioned on implementation with his proposal of Ladder of
business benefits with information systems. A good knowledge of the strategies relevant to
the firm, business or industry level can be useful but they are by no means effective if the
strategy does not fit the circumstances that the firm is facing.

“Circumstances” means “conditions” or “context”. Hence, it is important to understand the

conditions the firm is under so as to apply the appropriate strategy or strategies in order to
achieve competitive advantages. What then are the possible circumstances that a firm may
fall under?

Michael Porter explained the possible circumstances of external threats such as threat of
new entrants; pressure from substitute products and services; bargaining power of customers
and suppliers; and low cost rivalry. Hammer highlighted the circumstances of primary and
secondary responsibilities of different functions in a firm not adding values to one another.
Other circumstances lie with firm, poor exploit of firm’s core competence and special
knowledge, not maximising the value chain of the business processes linkages with suppliers
and distributors, and inadequate collaborations with industry partners and even,
competitors.

Given the threat of new entrants, Michael Porter suggested that competitive advantage
maybe gained by erecting “high technological barriers” with sophisticated network
economics and information systems.

In the 80’s, American Airlines was faced with the circumstances of stiff competitions with
new entrants eating away their market shares. American Airlines knew it has to come out
with suitable information systems strategy to differentiate their services and products rather
than compete on low-cost rivalry in the industry (which most airlines were competing on).
Double booking and under utilisation of passenger seats were the biggest problems most all
airlines were facing, especially when an aircraft has to pick up or disembarked passengers
along it overseas routes.

American Airlines took the next two years and tens of thousands of man-hours went into
building a global online real-time ticketing information system.

The information system with distributed networked regional databases was an innovative
computer system ensuring instant booking and allocation of passenger seats from any hotel,
car-rental firm, and travel agencies around the world. The new online information system, an
industry-level strategy, was so successful that it captured and increased its market share.
Many competitor airlines went bankrupted and new entrants were frightened off by the high
initial investment and information systems development cost.

In 2000, the average Toyota car buyer's average age was 45. Toyota aimed to attract
younger buyers who purchase cars based on the latest fashion trends. Under such
circumstances, a new strategy was needed to bring in new design and production support
systems – a firm level strategy that synergies internal processes - will help it quickly turn
marketing information about young consumers into cars that can take to the road within
months.

In March 2002, Toyota signed an agreement to purchase $1.2 billion in information systems,
hardware, and services from France's Dassault Systems and IBM to link Toyota's 56 plants
in 25 countries and its 1000-plus suppliers. The new information systems enabled Toyota to
model every aspect of car production, including the automobile's look, the parts that make it
run, the sequence in which components are assembled, and the design of the factory itself.

Toyota was able to transmit the specifications for the new car model to its production and
supply chain management systems. This business-level strategy of integration of digital
design, digital manufacturing, and digital design collaboration with suppliers enabled
Toyota to bring new models to market in 10 months instead of several years. Product-to-
market time has become more important as Toyota successfully increased its competitive
advantage by cultivating and capturing a younger market. Venkatraman aligned such
information system development to achieving “business network redesign” – a 4th level
transformation.

Based on these two scenarios, we see that an accurate interpretation of the circumstances
that the firm faced is hence crucial in determining the right strategy to gain competitive
advantages.

At the firm-level, two possible strategies to gain competitive advantages are creating
synergies between business units within firm and enhancing firm’s core competencies. At
business-level, leverage technology in the value chain to web value chain, products/services
differentiation, focus on market niche and supply chain management. While Information
Partnerships, Business Ecosystems with keystone firms, Network economics & externalities
are industry-level competitive advantage strategies.

NTUC is large local supermarket with many branches all over Singapore. Over the past 10
years, it has grown into a multi-business firm with many business interests. NTUC is now
into holiday chalets, resorts, holiday tours, insurance, and even embalming and undertaking.

With the wide spectrum of businesses, NTUC is faced with duplication in many areas of
business processes such as transportation, ICT services, accounting and inventory. Under
such circumstances, NTUC could synergies the operations of the various business units so
that their combined production is greater than the sum of their individual production, hence
critically examining its value chain and exploiting the frequency factor (volume
transactions) on transaction cost. NTUC can improve the firm’s overall business operations
with ERP and CRM information systems.

The value chain model provides a systematic way of examining all the internal processes a
firm performs and how they interact with each other. The model identifies specific, critical
leverage points where a firm can use information technology most effectively to enhance its
competitive position.

The value chain model views the firm as a series of basic activities that add a margin of
value to a firm’s products or services. The activities are categorized as either primary or
support activities. Primary activities are most directly related to production and distribution
of the firm’s products and services, which create value for the customer and vital to
competitive advantage depending on the industry. Support activities make the delivery of
primary activities possible and consist of firm infrastructure, procurement, technological
development, and human resource management.

A firm’s value chain can be linked to the value chains of its suppliers, distributors, and
customers – linking and improving coordination of business processes across the business
chain - known as a “business-level strategy”. One such firm exploiting such situation was
Flextronics.

Flextronics, a global contract manufacturing firm, was concerned with its business-level
processes of low price production, lock-in suppliers with efficient manufacturing and
distributions. It deployment of a unique supply chain management information system
provide them the competitive advantage that saw the company rose to the world second
largest contract manufacturer in just twelve short years.

The forming of “information partnership” is an industry-level strategy appropriate for

partners, who are faced with limited resources and expertises, to combine their resources to
compete and gain competitive advantages against their bigger competitors. We see such
information partnerships for several banks (Singapore OCBC, UOB, Maybank sharing their
banking ATMs) and the procurement partnership of several motorcycle manufacturers (as in
Aprila, Honda and Suzuki).

Bank consortium of OCBC, DBS and UOB establishing the Singapore NETS electronic
payment system for cash-less transaction set the stage for a new standard of information
processing and transaction exchange. Such network economics and externalities are
powerful industry-level strategy that could transform firm at the Venkatraman’s 4th and 5th
level of transformation with IT. Of course, Business ecosystems such as Microsoft operating
system, and Facebook are another form of industry-level strategy that could be appropriate
competitive strategies for given circumstances.

In conclusion, with the rapid advancement in technology, management must rethink

information systems strategy to maintain and gain competitive advantages. Firm must
capitalize on the new technology to break new grounds and improve the value chain of the
whole enterprise. While firm need to find ways to compete, alternative approach of
combining resources - of forming collaborative alliances with suppliers, business associates
and even competitors are also positive strategies toward gaining competitive advantages.
Having said, firm must always ensure that any information system strategy must fit the
overall business strategy and plans.