Strategic information systems is a computer system that implement business strategies. They are those systems where information services resources are applied to strategic business opportunities in such a way that the computer systems have an impact on the organization’s products and business operations.
Most information systems are looked on as support activities to the business. They mechanize operations for better efficiency, control, and effectiveness, but they do not, in themselves, increase profitability.
They are simply used to provide management with sufficient dependable information to keep the business running smoothly, and they are used for analysis to plan new directions.
Strategic information systems, on the other hand, become an integral and necessary part of the business, and they affect the profitability and growth of a company. They open up new markets and new businesses. They directly affect the competitive stance of the organization, giving it an advantage against the competitors.
The threat of new entrants;
The threat of substitute products or services;
The bargaining power of suppliers;
The bargaining power of buyers and;
The intensity of the rivalry among existing competitors.
Inbound logistics, which includes the receipt and storage of material, and the general management of supplies;
Operations, which are the manufacturing steps or the service steps;
Outbound logistics, which are associated with collecting, storing, and physically distributing the product to buyers. In some companies this is a significant cost, and buyer’s value speed and consistency;
Marketing and sales includes customer relations, order entry, and price management;
After-sales services cover the support of the product in the field, installation, customer training, and so on.
This is an attractive way of thinking for most information services people, as it is, fundamentally, the systems analysis approach. Computer people are trained to reduce systems to their components, look for the best application for each component, and then put together an interrelated system.
Information technology is also pervasive throughout all parts of the value chain. Every activity that the firm performs has the potential to embed information technology because it involves information processing.
As information technology moves away from repetitive transaction processing and permeates all activities in the value chain, it will be in a better position to be useful in gaining competitive advantage.
It is obvious that information processing plays an important role in all these key activities. Porter emphasizes what he calls the linkages between the activities that the firm performs. No activities in a firm are independent, yet each department is managed separately. It is most important to understand the cost linkages that are involved so that the firm may get an overall optimization of the production rather than departmental optimizations.
A typical linkage might be that if more is spent in procurement, less is spent in operations. If more testing is done in operations, after-sales service costs will be lower.
Multifunctional coordination is crucial to competitive advantage, but it is often difficult to see. Insights into linkages give the ability to have overall optimization. Any strategic information system must be analyzed across all departments in the organization.
Cost and Competitive Advantage
Cost leadership is one of Porter’s two types of competitive advantage. The cost leader delivers a product of acceptable quality at the lowest possible cost. It attempts to open up a significant and sustainable cost gap over all other competitors. The cost advantage is achieved through superior position in relation to the key cost drivers.
Cost leadership translates into above-average profits if the cost leader can command the average prices in the industry. On the other hand, cost leaders must maintain quality that is close to, or equal to, that of the competition.
Achieving cost leadership usually requires trade-offs with differentiation. The two are usually incompatible. Note that a firm’s relative cost position cannot be understood by viewing the firm as a whole. Overall cost grows out of the cost performing discrete activities.
Cost position is determined by the cumulative cost of performing all value activities. To sustain cost advantage, Porter gives a number of cost drivers which must be understood in detail because the sustainability of cost advantage in an activity depends on the cost drivers of that activity. Again, this type of detail is best obtained by classical systems analysis methods.
Some of the cost drivers which must be analyzed, understood, and controlled are:
Differentiation advantage
Focus Strategies for Advantage
Porter’s writings also discuss focus strategies. He emphasizes that a company that attempts to completely satisfy every buyer does not have a strategy. Focusing means selecting targets and optimizing the strategies for them.
Focus strategies further segment the industry. They may be imitated, but can provide strategic openings. Clearly, multiple generic strategies may be implemented, but internal inconsistencies can then arise, and the distinctions between the focused entities may become blurred. Porter’s work is directed towards competitive advantage in general, and is not specific to strategic information systems.
They are simply used to provide management with sufficient dependable information to keep the business running smoothly, and they are used for analysis to plan new directions.
Strategic information systems, on the other hand, become an integral and necessary part of the business, and they affect the profitability and growth of a company. They open up new markets and new businesses. They directly affect the competitive stance of the organization, giving it an advantage against the competitors.
Most literature on strategic
information systems emphasizes the dramatic breakthroughs in computer systems,
such as American Airlines' Sabre System and American Hospital Supply’s
terminals in customer offices.
These, and many other highly successful approaches are most attractive to think about, and it is always possible that an equivalent success may be attained in your organization.
There are many possibilities for strategic information systems, however, which may not be dramatic breakthroughs, but which will certainly become a part of decision making and will, increase profitability. The development of any strategic information systems always enhances the image of information services in the organization, and leads to information management having a more participatory role in the operation of the organization.
Three general types of information systems
These, and many other highly successful approaches are most attractive to think about, and it is always possible that an equivalent success may be attained in your organization.
There are many possibilities for strategic information systems, however, which may not be dramatic breakthroughs, but which will certainly become a part of decision making and will, increase profitability. The development of any strategic information systems always enhances the image of information services in the organization, and leads to information management having a more participatory role in the operation of the organization.
Three general types of information systems
The three general types of information
systems that are developed and in general use are financial systems,
operational systems, and strategic systems. These categories are not mutually
exclusive and, in fact, they always overlap to some. Well-directed financial systems
and operational systems may well become the strategic systems for a particular
organization.
Financial systems are the basic computerization of
the accounting, budgeting, and finance operations of an organization.
These are similar and ubiquitous in all organizations because the computer
has proven to be ideal for the mechanization and control or financial
systems; these include the personnel systems because the headcount control
and payroll of a company is of prime financial concern. Financial systems
should be one of the bases of all other systems because they give a
common, controlled measurement of all operations and projects, and can
supply trusted numbers for indicating departmental or project success.
Organizational planning must be tied to financial analysis. There is
always a greater opportunity to develop strategic systems when the
financial systems are in place, and required figures can be readily
retrieved from them.
Operational systems, or services systems, help
control the details of the business. Such systems will vary with each type
of enterprise. They are the computer systems that operational managers
need to help run the business on a routing basis. They may be useful but
mundane systems that simply keep track of inventory, for example, and
print out reorder points and cost allocations. On the other hand, they may
have a strategic perspective built into them, and may handle inventory in
a way that dramatically impacts profitability. A prime example of this is
the American Hospital Supply inventory control system installed on
customer premises. Where the great majority of inventory control systems
simply smooth the operations and give adequate cost control, this
well-known hospital system broke through with a new version of the use of
an operational system for competitive advantage. The great majority of
operational systems for which many large and small computer systems have
been purchased, however, simply help to manage and automate the business.
They are important and necessary, but can only be put into the
"strategic" category it they have a pronounced impact on the
profitability of the business.
All businesses should have both
long-range and short-range planning of operational systems to ensure that the
possibilities of computer usefulness will be seized in a reasonable time. Such
planning will project analysis and costing, system development life cycle
considerations, and specific technology planning, such as for computers,
databases, and communications. There must be computer capacity planning,
technology forecasting, and personnel performance planning. It is more likely
that those in the organization with entrepreneurial vision will conceive of
strategic plans when such basic operational capabilities are in place and are
well managed.
Operational systems, then, are those that keep the organization operating under control and most cost effectively. Any of them may be changed to strategic systems if they are viewed with strategic vision. They are fertile grounds for new business opportunities.
Operational systems, then, are those that keep the organization operating under control and most cost effectively. Any of them may be changed to strategic systems if they are viewed with strategic vision. They are fertile grounds for new business opportunities.
Strategic systems are those that link business and
computer strategies. They are the systems where new business strategies
have been developed and they can be realized using information technology.
They may be systems where new computer technology has been made available
on the market, and planners with an entrepreneurial spirit perceive how
the new capabilities can quickly gain competitive advantage. They may be
systems where operational management people and information services
people have brainstormed together over business problems, and have
realized that a new competitive thrust is possible when computer methods
are applied in a new way.
There is a tendency to think that
strategic systems are only those that have been conceived at what popular, scientific
writing sometimes calls the "achtpunckt." This is simply synthetic
German for "the point where you say ‘acht!’ or ‘that’s it!’"
The classical story of Archimedes discovering the principle of the density of matter by getting into a full bathtub, seeing it overflow, then shouting "Eureka!" or "I have found it!" is a perfect example of an achtpuncht. It is most pleasant and profitable if someone is brilliant enough, or lucky enough, to have such an experience.
The great majority of people must be content, however, to work step-by-step at the process of trying to get strategic vision, trying to integrate information services thinking with operational thinking, and trying to conceive of new directions to take in systems development.
This is not an impossible task, but it is a slow task that requires a great deal of communication and cooperation. If the possibilities of strategic systems are clearly understood by all managers in an enterprise, and they approach the development of ideas and the planning systematically, the chances are good that strategic systems will be result. These may not be as dramatic as American Airline’s Sabre, but they can certainly be highly profitable.
There is general agreement that strategic systems are those information systems that may be used gaining competitive advantage. How is competitive advantage gained? At this point, different writers list different possibilities, but none of them claim that there may not be other openings to move through.
Gaining competitive advantage
The classical story of Archimedes discovering the principle of the density of matter by getting into a full bathtub, seeing it overflow, then shouting "Eureka!" or "I have found it!" is a perfect example of an achtpuncht. It is most pleasant and profitable if someone is brilliant enough, or lucky enough, to have such an experience.
The great majority of people must be content, however, to work step-by-step at the process of trying to get strategic vision, trying to integrate information services thinking with operational thinking, and trying to conceive of new directions to take in systems development.
This is not an impossible task, but it is a slow task that requires a great deal of communication and cooperation. If the possibilities of strategic systems are clearly understood by all managers in an enterprise, and they approach the development of ideas and the planning systematically, the chances are good that strategic systems will be result. These may not be as dramatic as American Airline’s Sabre, but they can certainly be highly profitable.
There is general agreement that strategic systems are those information systems that may be used gaining competitive advantage. How is competitive advantage gained? At this point, different writers list different possibilities, but none of them claim that there may not be other openings to move through.
Gaining competitive advantage
Some of the more common ways of
thinking about gaining competitive advantage are:
Deliver a product or a service at a lower cost. This does not necessarily mean the lowest cost, but simply a cost related to the quality of the product or service that will be both attractive in the marketplace and will yield sufficient return on investment. The cost considered is not simply the data processing cost, but is the overall cost of all activities for the delivery of that product or service. There are many operational computer systems that have given internal cost saving and other internal advantages, but they cannot be thought of as strategic until those savings can be translated to a better competitive position in the market.
Deliver a product or service that is differentiated. Differentiation means the addition of unique features to a product or service that are competitively attractive in the market. Generally such features will cost something to produce, and so they will be the setting point, rather than the cost itself. Seldom does a lowest cost product also have the best differentiation. A strategic system helps customers to perceive that they are getting some extras for which they will willingly pay.
Focus on a specific market segment. The idea is to identify and create market niches that have not been adequately filled. Information technology is frequently able to provide the capabilities of defining, expanding, and filling a particular niche or segment. The application would be quite specific to the industry.
Innovation. Develop products or services through the use of computers that are new and appreciably different from other available offerings. Examples of this are automatic credit card handing at service stations, and automatic teller machines at banks. Such innovative approaches not only give new opportunities to attract customers, but also open up entirely new fields of business so that their use has very elastic demand.
Deliver a product or a service at a lower cost. This does not necessarily mean the lowest cost, but simply a cost related to the quality of the product or service that will be both attractive in the marketplace and will yield sufficient return on investment. The cost considered is not simply the data processing cost, but is the overall cost of all activities for the delivery of that product or service. There are many operational computer systems that have given internal cost saving and other internal advantages, but they cannot be thought of as strategic until those savings can be translated to a better competitive position in the market.
Deliver a product or service that is differentiated. Differentiation means the addition of unique features to a product or service that are competitively attractive in the market. Generally such features will cost something to produce, and so they will be the setting point, rather than the cost itself. Seldom does a lowest cost product also have the best differentiation. A strategic system helps customers to perceive that they are getting some extras for which they will willingly pay.
Focus on a specific market segment. The idea is to identify and create market niches that have not been adequately filled. Information technology is frequently able to provide the capabilities of defining, expanding, and filling a particular niche or segment. The application would be quite specific to the industry.
Innovation. Develop products or services through the use of computers that are new and appreciably different from other available offerings. Examples of this are automatic credit card handing at service stations, and automatic teller machines at banks. Such innovative approaches not only give new opportunities to attract customers, but also open up entirely new fields of business so that their use has very elastic demand.
Almost any data processing system may
be called "strategic" if it aligns the computer strategies with the
business strategies of the organization, and there is close cooperation in its
development between the information services people and operational business
managers. There should be an explicit connection between the organization’s
business plan and its systems plan to provide better support of the
organization’s goals and objectives, and closer management control of the
critical information systems.
Many organizations that have done substantial work with computers since the 1950s have long used the term "strategic planning" for any computer developments that are going to directly affect the conduct of their business. Not included are budget, or annual planning and the planning of developing information services facilities and the many "housekeeping" tasks that are required in any business. Definitely included in strategic planning are any information systems that will be used by operational management to conduct the business more profitably.
A simple test would be to ask whether senior management would be interested in the immediate outcome of the systems development because they felt it would affect their profitability. If the answer is affirmative, then the system is strategic.
Strategic systems, thus, attempt to match information services resources to strategic business opportunities where the computer systems will have an impact on the products and the business operations. Planning for strategic systems is not defined by calendar cycles or routine reporting. It is defined by the effort required to impact the competitive environment and the strategy of a firm at the point in time that management wants to move on the idea.
Effective strategic systems can only be accomplished, of course, if the capabilities are in place for the routine basic work of gathering data, evaluating possible equipment and software, and managing the routine reporting of project status.
The calendarized planning and operational work is absolutely necessary as a base from which a strategic system can be planned and developed when a priority situation arises. When a new strategic need becomes apparent, information services should have laid the groundwork to be able to accept the task of meeting that need.
Porter’s competitive advantage
Many organizations that have done substantial work with computers since the 1950s have long used the term "strategic planning" for any computer developments that are going to directly affect the conduct of their business. Not included are budget, or annual planning and the planning of developing information services facilities and the many "housekeeping" tasks that are required in any business. Definitely included in strategic planning are any information systems that will be used by operational management to conduct the business more profitably.
A simple test would be to ask whether senior management would be interested in the immediate outcome of the systems development because they felt it would affect their profitability. If the answer is affirmative, then the system is strategic.
Strategic systems, thus, attempt to match information services resources to strategic business opportunities where the computer systems will have an impact on the products and the business operations. Planning for strategic systems is not defined by calendar cycles or routine reporting. It is defined by the effort required to impact the competitive environment and the strategy of a firm at the point in time that management wants to move on the idea.
Effective strategic systems can only be accomplished, of course, if the capabilities are in place for the routine basic work of gathering data, evaluating possible equipment and software, and managing the routine reporting of project status.
The calendarized planning and operational work is absolutely necessary as a base from which a strategic system can be planned and developed when a priority situation arises. When a new strategic need becomes apparent, information services should have laid the groundwork to be able to accept the task of meeting that need.
Porter’s competitive advantage
Michael E. Porter, Professor of
Business Administration, Harvard Business School, has addressed his ideas in
two keystone books. Competitive Strategy: Techniques for Analyzing Industries
and Competitors, and his newer book, Competitive Advantage, present a framework
for helping firms actually create and sustain a competitive advantage in their
industry in either cost or differentiation.
Dr. Porter’s theories on competitive advantage are not tied to information systems, but are used by others to involve information services technologies. In his book, Dr. Porter says that there are two central questions in competitive strategy:
How structurally attractive is the industry?
What is the firm’s relative position in the industry?
Both of these questions are dynamic, and neither is sufficient alone to guide strategic choices. Both can be influenced by competitor behavior, and both can be shaped by a firm’s actions. It is imperative that these questions be answered by analysis, which will be the starting point for good strategic thinking, and will open up possibilities for the role of information systems.
Industry profitability is a function of five basic competitive forces:
Dr. Porter’s theories on competitive advantage are not tied to information systems, but are used by others to involve information services technologies. In his book, Dr. Porter says that there are two central questions in competitive strategy:
How structurally attractive is the industry?
What is the firm’s relative position in the industry?
Both of these questions are dynamic, and neither is sufficient alone to guide strategic choices. Both can be influenced by competitor behavior, and both can be shaped by a firm’s actions. It is imperative that these questions be answered by analysis, which will be the starting point for good strategic thinking, and will open up possibilities for the role of information systems.
Industry profitability is a function of five basic competitive forces:
The threat of new entrants;
The threat of substitute products or services;
The bargaining power of suppliers;
The bargaining power of buyers and;
The intensity of the rivalry among existing competitors.
Porter’s books give techniques for
getting a handle on the possible average profitability of an industry over
time. The analysis of these forces is the base for estimating a firm’s relative
position and competitive advantage.
In any industry, the sustained average profitability of competitors vary widely. The problem is to determine how a business can outperform the industry average and attain a sustainable competitive advantage. It is possible that the answer lies in information technology together with good management.
Porter claims that the principal types of competitive advantage are low cost producer, differentiation, and focus. A firm has a competitive advantage if it is able to deliver its product or service at a lower cost than its competitors.
If the quality of its product is satisfactory, this will translate into higher margins and higher returns. Another advantage is gained if the firm is able to differentiate itself in some way. Differentiation leads to offering something that is both unique and is desired, and translates into a premium price.
Again, this will lead to higher margins and superior performance. It seems that two types of competitive advantage, lower cost and differentiation, are mutually exclusive. To get lower cost, you sacrifice uniqueness. To get a premium price, there must be extra cost involved in the process. To be a superior performer, however, you must go for competitive advantage in either cost or differentiation.
Another point of Porter’s is that competitive advantage is gained through a strategy based on scope. It is necessary to look at the breadth of a firm’s activities, and narrow the competitive scope to gain focus in either an industry segment, a geographic area, a customer type, and so on.
Competitive advantage is most readily gained by defining the competitive scope in which the firm is operating, and concentrating on it. Based on these ideas of type and scope, Porter gives a useful tool for analysis which he calls The Value Chain.
This value chain gives a framework on which a useful analysis can be hung. The basic notion is that to understand competitive advantage in any firm, one cannot look at the firm as a whole. It is necessary to identify the specific activities which the firm performs to do business.
Each firm is a collection of the things that it does that all add up to the product being delivered to the customer. These activities are numerous and are unique to every industry, but it is only in these activities where cost advantage or differentiation can be gained.
The basic idea is that the firm’s activities can be divided into nine generic types. Five are the primary activities, which are the activities that create the product, market it and deliver it; four are the support activities that cross between the primary activities.
The primary activities are:
In any industry, the sustained average profitability of competitors vary widely. The problem is to determine how a business can outperform the industry average and attain a sustainable competitive advantage. It is possible that the answer lies in information technology together with good management.
Porter claims that the principal types of competitive advantage are low cost producer, differentiation, and focus. A firm has a competitive advantage if it is able to deliver its product or service at a lower cost than its competitors.
If the quality of its product is satisfactory, this will translate into higher margins and higher returns. Another advantage is gained if the firm is able to differentiate itself in some way. Differentiation leads to offering something that is both unique and is desired, and translates into a premium price.
Again, this will lead to higher margins and superior performance. It seems that two types of competitive advantage, lower cost and differentiation, are mutually exclusive. To get lower cost, you sacrifice uniqueness. To get a premium price, there must be extra cost involved in the process. To be a superior performer, however, you must go for competitive advantage in either cost or differentiation.
Another point of Porter’s is that competitive advantage is gained through a strategy based on scope. It is necessary to look at the breadth of a firm’s activities, and narrow the competitive scope to gain focus in either an industry segment, a geographic area, a customer type, and so on.
Competitive advantage is most readily gained by defining the competitive scope in which the firm is operating, and concentrating on it. Based on these ideas of type and scope, Porter gives a useful tool for analysis which he calls The Value Chain.
This value chain gives a framework on which a useful analysis can be hung. The basic notion is that to understand competitive advantage in any firm, one cannot look at the firm as a whole. It is necessary to identify the specific activities which the firm performs to do business.
Each firm is a collection of the things that it does that all add up to the product being delivered to the customer. These activities are numerous and are unique to every industry, but it is only in these activities where cost advantage or differentiation can be gained.
The basic idea is that the firm’s activities can be divided into nine generic types. Five are the primary activities, which are the activities that create the product, market it and deliver it; four are the support activities that cross between the primary activities.
The primary activities are:
Inbound logistics, which includes the receipt and storage of material, and the general management of supplies;
Operations, which are the manufacturing steps or the service steps;
Outbound logistics, which are associated with collecting, storing, and physically distributing the product to buyers. In some companies this is a significant cost, and buyer’s value speed and consistency;
Marketing and sales includes customer relations, order entry, and price management;
After-sales services cover the support of the product in the field, installation, customer training, and so on.
The support activities are not directed
to the customer, but they allow the firm to perform its primary activities.
The four generic types of support activities are:
Procurement, which includes the contracting for and purchase of raw materials, or any items used by the enterprise. Part of procurement is in the purchasing department, but it is also spread throughout the organization;
Technology development may simply cover operational procedures, or many be involved with the use of complex technology. Today, sophisticated technology is pervasive, and cuts across all activities; it is not just an R&D function;
Human resource management is the recruiting, training, and development of people. Obviously, this cuts across every other activity;
Firm infrastructure is a considerable part of the firm, including the accounting department, the legal department, the planning department, government relations, and so on.
The basic idea is that competitive advantage grows out of the firm’s ability to perform these activities either less expensively than its competitors, or in a unique way. Competitive advantage should be linked precisely to these specific activities, and not thought of broadly at a firm-wide level.
The four generic types of support activities are:
Procurement, which includes the contracting for and purchase of raw materials, or any items used by the enterprise. Part of procurement is in the purchasing department, but it is also spread throughout the organization;
Technology development may simply cover operational procedures, or many be involved with the use of complex technology. Today, sophisticated technology is pervasive, and cuts across all activities; it is not just an R&D function;
Human resource management is the recruiting, training, and development of people. Obviously, this cuts across every other activity;
Firm infrastructure is a considerable part of the firm, including the accounting department, the legal department, the planning department, government relations, and so on.
The basic idea is that competitive advantage grows out of the firm’s ability to perform these activities either less expensively than its competitors, or in a unique way. Competitive advantage should be linked precisely to these specific activities, and not thought of broadly at a firm-wide level.
This is an attractive way of thinking for most information services people, as it is, fundamentally, the systems analysis approach. Computer people are trained to reduce systems to their components, look for the best application for each component, and then put together an interrelated system.
Information technology is also pervasive throughout all parts of the value chain. Every activity that the firm performs has the potential to embed information technology because it involves information processing.
As information technology moves away from repetitive transaction processing and permeates all activities in the value chain, it will be in a better position to be useful in gaining competitive advantage.
It is obvious that information processing plays an important role in all these key activities. Porter emphasizes what he calls the linkages between the activities that the firm performs. No activities in a firm are independent, yet each department is managed separately. It is most important to understand the cost linkages that are involved so that the firm may get an overall optimization of the production rather than departmental optimizations.
A typical linkage might be that if more is spent in procurement, less is spent in operations. If more testing is done in operations, after-sales service costs will be lower.
Multifunctional coordination is crucial to competitive advantage, but it is often difficult to see. Insights into linkages give the ability to have overall optimization. Any strategic information system must be analyzed across all departments in the organization.
Cost and Competitive Advantage
Cost leadership is one of Porter’s two types of competitive advantage. The cost leader delivers a product of acceptable quality at the lowest possible cost. It attempts to open up a significant and sustainable cost gap over all other competitors. The cost advantage is achieved through superior position in relation to the key cost drivers.
Cost leadership translates into above-average profits if the cost leader can command the average prices in the industry. On the other hand, cost leaders must maintain quality that is close to, or equal to, that of the competition.
Achieving cost leadership usually requires trade-offs with differentiation. The two are usually incompatible. Note that a firm’s relative cost position cannot be understood by viewing the firm as a whole. Overall cost grows out of the cost performing discrete activities.
Cost position is determined by the cumulative cost of performing all value activities. To sustain cost advantage, Porter gives a number of cost drivers which must be understood in detail because the sustainability of cost advantage in an activity depends on the cost drivers of that activity. Again, this type of detail is best obtained by classical systems analysis methods.
Some of the cost drivers which must be analyzed, understood, and controlled are:
- Scale. The appropriate type of
scale must be found. Policies must be set to reinforce economies of scale
in scale-sensitive activities.
- Learning. The learning curve must
be understood and managed. As the organization tries to learn from
competitors, it must strive to keep its own learning proprietary.
- Capacity Utilization. Cost can be
controlled by the leveling of throughput.
- Linkages. Linkages should be
exploited within the value chain. Work with suppliers and channels can
reduce costs.
- Interrelationships. Shared
activities can reduce costs.
- Integration. The possibilities for
integration or de-integration should be examined systematically.
- Timing. If the advantages of being
the firs mover or a late mover are understood, they can be exploited.
- Policies. Policies that enhance
the low-cost position or differentiation should be emphasized.
- Location. When viewed as a whole,
the location of individual activities can be optimized.
- Institutional Factors. Institutional factors should be examined to see whether their change may be helpful.
Care must be taken in the evaluation
and perception of cost drivers because there are pitfalls if the thinking is
incremental and indirect activities are ignored. Even though the manufacturing
activities, for example, are obvious candidates for analyses, they should not
have exclusive focus. Linkages must be exploited and cross-subsidies avoided.
Porter gives five steps to achieving cost leadership:
Porter gives five steps to achieving cost leadership:
- Identify the appropriate value
chain and assign costs and assets to it.
- Identify the cost drivers of each
value activity and see how they interact.
- Determine the relative costs of
competitors and the sources of cost differences.
- Develop a strategy to lower
relative cost position through controlling cost drivers or reconfiguring
the value chain.
- Assess the cost reduction strategy for sustainability.
Differentiation advantage
Differentiation is the second of
Porter’s two types of competitive advantage. In the differentiation strategy,
one or more characteristics that are widely value by buyers are selected. The
purpose is to achieve and sustain performance that is superior to any
competitor in satisfying those buyer needs. A differentiator selectively adds
costs in areas that are important to the buyer.
Thus, successful differentiation leads to premium prices, and these lead to above-average profitably if there is approximate cost parity. To achieve this, efficient forms of differentiation must be picked, and costs must be reduced in areas that are irrelevant to the buyer needs. Buyers are like sellers in that they have their own value chains.
The product being sold will represent one purchased input, but the seller may affect the buyer’s activities in other ways. Differentiation can lower the buyer’s cost and improve the buyer’s performance, and thus create value, or competitive advantage, for the buyer. The buyer may not be able to assess all the value that a firm provides, but it looks for signals of value, or perceived value.
A few typical factors which may lower the buyer’s costs are:
Thus, successful differentiation leads to premium prices, and these lead to above-average profitably if there is approximate cost parity. To achieve this, efficient forms of differentiation must be picked, and costs must be reduced in areas that are irrelevant to the buyer needs. Buyers are like sellers in that they have their own value chains.
The product being sold will represent one purchased input, but the seller may affect the buyer’s activities in other ways. Differentiation can lower the buyer’s cost and improve the buyer’s performance, and thus create value, or competitive advantage, for the buyer. The buyer may not be able to assess all the value that a firm provides, but it looks for signals of value, or perceived value.
A few typical factors which may lower the buyer’s costs are:
- Less idle time
- Lower risk of failure
- Lower installation costs
- Faster processing time
- Lower labor costs
- Longer useful life and so on.
A firm must find forms of
differentiation where it has a cost advantage in differentiating.
Differentiation is achieved by enhancing the sources of uniqueness. These may
be found throughout the value chain, and should be signaled to the buyer.
The cost of differentiation can be turned to advantage if the less costly sources are exploited and the cost drivers are controlled. The emphasis must be on getting a sustainable cost advantage in differentiating. Efforts must be made to change the buyer’s criteria by reconfiguring the value chain to be unique in new ways, and by preemptively responding to changing buyer or channel circumstances.
Differentiation will not work if there is too much uniqueness, or uniqueness that the buyers do not value. The buyer’s ability to pay a premium price, the signaling criteria, and the segments important to the buyer must all be understood. Also, there cannot be over reliance on sources of differentiation that competitors can emulate cheaply or quickly.
Porter lists seven steps to achieving differentiation:
The cost of differentiation can be turned to advantage if the less costly sources are exploited and the cost drivers are controlled. The emphasis must be on getting a sustainable cost advantage in differentiating. Efforts must be made to change the buyer’s criteria by reconfiguring the value chain to be unique in new ways, and by preemptively responding to changing buyer or channel circumstances.
Differentiation will not work if there is too much uniqueness, or uniqueness that the buyers do not value. The buyer’s ability to pay a premium price, the signaling criteria, and the segments important to the buyer must all be understood. Also, there cannot be over reliance on sources of differentiation that competitors can emulate cheaply or quickly.
Porter lists seven steps to achieving differentiation:
- Determine the identity of the real
buyer.
- Understand the buyer’s value
chain, and the impact of the seller’s product on it.
- Determine the purchasing criteria
of the buyer.
- Assess possible sources of
uniqueness in the firm’s value chain.
- Identify the cost of these sources
of uniqueness.
- Choose the value activities that
create the most valuable differentiation for the buyer relative to the
costs incurred.
- Test the chosen differentiation strategy for sustainability.
Focus Strategies for Advantage
Porter’s writings also discuss focus strategies. He emphasizes that a company that attempts to completely satisfy every buyer does not have a strategy. Focusing means selecting targets and optimizing the strategies for them.
Focus strategies further segment the industry. They may be imitated, but can provide strategic openings. Clearly, multiple generic strategies may be implemented, but internal inconsistencies can then arise, and the distinctions between the focused entities may become blurred. Porter’s work is directed towards competitive advantage in general, and is not specific to strategic information systems.
