Module 2: Fundamentals of Strategic Advantage 1

The Firm and Its Environment

The environment is of great importance to the firm. The environment is the very reason for the firm’s
existence. The firm’s owners see a need to provide products and services to meet specific environmental
needs, and they invest money so that the firm can perform this activity. The environment then provides the
resources that are required to produce the products and services.

THE EIGHT ENVIRONMENTAL ELEMENTS

The environment of one firm is not exactly the same as the environment of another. A bank has a different
environment than does a sporting goods store or a church, for example. However, we can lend some order
to this variability by identifying eight major types of elements that exist in the environments of all firms.
These environmental elements are organizations and individuals that exist outside the firm and have a direct
or indirect influence on the firm. These eight elements exist in a larger system called society.
1. Suppliers – or called vendors, supply the materials, machines, services and information that
are used by the firm to produce its products and services.
2. Customers – include both current and prospective users.
3. Labor unions – are the organizations of both skilled and unskilled workers.
4. Financial community – consists of institutions that influence the money resources that are
available to the firm. Example: banks
5. Stockholders (owners) – are the persons who invest money in the firm and represent the
highest level of management.
6. Competitors – include all of the organizations that compete with the firm in its marketplace.
7. Government – provides constraints in the form of laws and regulations, but it also provides
assistance in the form of information, purchases and funds.
8. Global community – is the geographic area where the firm performs its operations.

The firm is connected to these environmental elements by means of resource flows.

Fundamentals of Strategic Advantage

Information technology can change the way businesses compete. For this reason, you should view
information systems strategically, that is, as vital competitive networks, as a means of organizational
renewal, and as a necessary investment in technologies that help an enterprise achieve its strategic
objectives.

Competitive Strategy Concepts:

The strategic role of information systems involves using information technology to develop products,
services, and capabilities that give a company strategic advantages over the competitive forces it faces in
the global marketplace. This creates strategic information systems, information systems that support or
shape the competitive position and strategies of an enterprise. So a strategic information system can be any
kind of information system (TPS, MIS, DSS, etc.) that helps an organization:
1. Gain a competitive advantage
2. Reduce a competitive disadvantage
3. Meet other strategic enterprise objectives

Competitive Advantage
When a firm sustains profits that exceed the average for its industry, the firm is said to possess a
competitive advantage over its rivals. The goal of much of business strategy is to achieve a sustainable
competitive advantage.
Michael Porter identified two basic types of competitive advantage:
 cost advantage
 differentiation advantage

A competitive advantage exists when the firm is able to deliver the same benefits as competitors but at a
lower cost (cost advantage), or deliver benefits that exceed those of competing products (differentiation
advantage). Thus, a competitive advantage enables the firm to create superior value for its customers and
superior profits for itself.

MR. NIÑO MAR FEOLA; CCS FACULTY

neomarfeola2@[Link]/09759463110
ICCT COLLEGES FOUNDATION INC.
Module 2: Fundamentals of Strategic Advantage 2

Cost and differentiation advantages are known as positional advantages since they describe the firm's
position in the industry as a leader in either cost or differentiation.

A resource-based view emphasizes that a firm utilizes its resources and capabilities to create a competitive
advantage that ultimately results in superior value creation. The following diagram combines the resource-
based and positioning views to illustrate the concept of competitive advantage:

A Model of Competitive Advantage

Resources

Distinctive Cost Advantage

Value
Competencies or
Creation
Differentiation Advantage

Capabilities

Resources and Capabilities

According to the resource-based view, in order to develop a competitive advantage the firm must have
resources and capabilities that are superior to those of its competitors. Without this superiority, the
competitors simply could replicate what the firm was doing and any advantage quickly would disappear.

Resources are the firm-specific assets useful for creating a cost or differentiation advantage and that few
competitors can acquire easily. The following are some examples of such resources:
 Patents and trademarks
 Proprietary know-how
 Installed customer base
 Reputation of the firm
 Brand equity

Capabilities refer to the firm's ability to utilize its resources effectively. An example of a capability is the
ability to bring a product to market faster than competitors. Such capabilities are embedded in the routines of
the organization and are not easily documented as procedures and thus are difficult for competitors to
replicate.

Cost Advantage and Differentiation Advantage

Competitive advantage is created by using resources and capabilities to achieve either a lower cost
structure or a differentiated product. A firm positions itself in its industry through its choice of low cost or
differentiation. This decision is a central component of the firm's competitive strategy.
Another important decision is how broad or narrow a market segment to target. Porter formed a matrix using
cost advantage, differentiation advantage, and a broad or narrow focus to identify a set of generic strategies
that the firm can pursue to create and sustain a competitive advantage.

Value Creation
The firm creates value by performing a series of activities that Porter identified as the value chain. In addition
to the firm's own value-creating activities, the firm operates in a value system of vertical activities including
those of upstream suppliers and downstream channel members.
To achieve a competitive advantage, the firm must perform one or more value creating activities in a way
that creates more overall value than do competitors. Superior value is created through lower costs or
superior benefits to the consumer (differentiation).

MR. NIÑO MAR FEOLA; CCS FACULTY

neomarfeola2@[Link]/09759463110
ICCT COLLEGES FOUNDATION INC.
Module 2: Fundamentals of Strategic Advantage 3

According to Michael Porter, a firm can survive and succeed in the long run if it successfully develops
strategies to confront five competitive forces that shape the structure of competition in its industry. These
include:
1. Rivalry of competitors within its industry
2. Threat of new entrants
3. Threat of substitutes
4. Bargaining power of customers
5. Bargaining power of suppliers
A variety of competitive strategies can be developed to help a firm confront these competitive forces.
These include:

Cost Leadership Strategy

1. Become a low cost producer of products and services
2. Find ways to help suppliers or customers reduce their costs
3. Increase the costs of competitors.

Differentiation Strategy
1. Develop ways to differentiate products and services from competitors.
2. Reduce the differentiation advantages of competitors.

Innovation Strategy - Find new ways of doing business

1. Develop new products & services
2. Enter new markets or marketing segments
3. Establish new business alliances
4. Find new ways of producing products/services
5. Find new ways of distributing products/services

Growth Strategies
1. Significantly expand the company’s capacity to produce goods and services
2. Expand into global markets
3. Diversify into new products and services
4. Integrate into related products and services.

Alliance Strategies
1. Establish new business linkages and alliances with customers, suppliers, competitors,
consultants and other companies (mergers, acquisitions, joint ventures, forming virtual
companies, etc.).

Strategic Roles for Information Systems

How can the preceding competitive strategy concepts be applied to the strategic role of information
systems? Information technology can be used to implement a variety of competitive strategies. These
include the five basic competitive strategies (differentiation, cost, innovation, growth, alliance), as well as
other ways that companies can use information systems strategically to gain a competitive edge. For
example:
1. Lower Costs
2. Differentiate
3. Innovate
4. Promote Growth
5. Develop Alliances
6. Improve quality and efficiency
7. Build an IT platform
8. Other strategies

 Use inter-organizational information systems to create switching costs that lock in customers and
suppliers.
 Use investments in IT to build barriers to entry against industry outsiders.
 Use IT components to make substitution of competing products unattractive.

MR. NIÑO MAR FEOLA; CCS FACULTY

neomarfeola2@[Link]/09759463110
ICCT COLLEGES FOUNDATION INC.
Module 2: Fundamentals of Strategic Advantage 4

Improving Business Processes:

Investments in information technology can help make a firm’s operational processes substantially more
efficient, and its managerial processes much more effective. By making such improvements to its business
processes a firm may be able to:
1. Dramatically cut costs
2. Improve the quality and customer service
3. Develop innovative products for new markets

Promoting Business Innovation

Investments in information systems technology can result in the development of new products, services, and
processes. This can:
1. Create new business opportunities
2. Enable a firm to enter new markets
3. Enable a firm to enter into new market segments of existing markets.

Lock In Customers & Suppliers

Investments in information technology can also allow a business to lock in customers and suppliers (and
lock out competitors) by building valuable new relationships with them. This can be accomplished by:
1. Deters both customers and suppliers from abandoning a firm for its competitors or intimidating a firm
into accepting less profitable relationships.
2. Offer better-quality service to customers allows a company to differentiate themselves from their
competitors.
3. Create inter-organizational information systems in which telecommunications networks electronically
link the terminals and computers of businesses with their customers and suppliers, resulting in new
business alliances and partnerships.

Creating Switching Costs

A major emphasis in strategic information systems is to build switching costs into the relationships between
a firm and its customers or suppliers. That is, investments in information systems technology can make
customers or suppliers dependent on the continued use of innovative, mutually beneficial inter-
organizational information systems. Then, they become reluctant to pay the cost in time, money, effort, and
inconvenience that it would take to change to a firm’s competitors. Example: APOLLO (USA) airline
reservation system, and GEMNI (CAN) airline reservation system

Raising Barriers to Entry

Investment in information technologies that increase operational efficiency can erect barriers to entry for
new players in the industry, and can discourage firms already in the market. This can be accomplished by:
1. Increasing the amount of investment or the complexity of the technology required to compete in a
market segment.
2. Discourage firms already in the industry and deter external firms from entering the industry.

Leveraging a Strategic IT Platform

Information technology enables a firm to build a strategic IT platform that allows it to take advantage of
strategic opportunities. Typically, this means acquiring hardware and software, developing
telecommunications networks, hiring information system specialists, and training end users. A firm can then
leverage investment in information technology by developing new products and services.

Developing a Strategic Information Base

Information systems allow a firm to develop a strategic information base that can provide information to
support the firm's competitive strategies. A firm’s database is considered a strategic resource that is used to
support strategic planning, marketing, and other strategic initiatives. These resources are being used by
firms in such areas as:
1. Strategic planning
2. Marketing campaigns
3. Erecting barriers to entry for competitors
4. Finding better ways to lock in customers and suppliers

MR. NIÑO MAR FEOLA; CCS FACULTY

neomarfeola2@[Link]/09759463110
ICCT COLLEGES FOUNDATION INC.
Module 2: Fundamentals of Strategic Advantage 5

Breaking Business Barriers

Several vital capabilities of information technology that break traditional barriers to strategic business
success include:
1. Break time barriers.
2. Break geographic barriers.
3. Break cost barriers.
4. Break structural barriers.

Breaking Time Barriers

Information technology is used to shorten the intervals between the various critical steps in a business
process. Telecommunications is a lot faster than most other forms of communications, thus, it provides
information to remote locations immediately after it is requested.

Breaking Geographic Barriers

Telecommunications networks enable you to communicate with people almost anywhere in the world.
Telecommunications and computing technologies make it possible to distribute key business activities to
where they are needed, where they are best performed, or where they best support the competitive
advantage of a business.

Breaking Cost Barriers

Computers and telecommunications can often significantly reduce the cost of business operations when
compared with other means of information processing and communications. For example, they can reduce
costs in such areas as production, inventory, distribution, or communications. Information technologies have
also helped companies cut labor costs, minimize inventory levels, reduce the number of distribution centers,
and lower communications costs.

Breaking Structural Barriers

Computers and telecommunications networks can help a business develop strategic relationships by
establishing new electronic linkages with customers, suppliers, and other business entities. For example,
telecommunications networks can support innovations in the delivery of services, increase the scope and
penetration of markets, and create strategic alliances with customers, suppliers, and even a firm’s
competitors.

The Value Chain and Strategic IS

An important concept that can help a manager identify opportunities for strategic information systems is the
value chain concept as developed by Michael Porter. This concept:
1. Views a firm as a series or "chain," of basic activities that add value to its products and services and
thus, add a margin of value to the firm.
2. Some business activities are viewed as primary activities, and others are support activities. This
framework can highlight where competitive strategies can best be applied in a business.
3. Managerial end users should try to develop strategic information systems for those activities that add
the most value to a company’s product or services, and thus to the overall business value of the
firm.

MR. NIÑO MAR FEOLA; CCS FACULTY

neomarfeola2@[Link]/09759463110
ICCT COLLEGES FOUNDATION INC.