Competitive Advantage through Information Technology - Literature review Example

Executive Summary Rosenbluth international (rosenbluth.com) is a world’s third largest travel agency company. It offers exclusive vacation, corporate and travel services. This international travel agency whose headquarters are in Philadelphia operates in more than 30 countries, with over 1000 locations. The travel agency had experienced threats such as increased popularity of online travel agents, commission caps and cuts, as well as the emergence of automated travel management systems. This made many travel companies to either surrender to low profitability or exit the market. This report examines how Rosenbluth responded to such threats to gain competitive advantage by use of information systems. The analysis focus on how Porter’s competitive forces model shape the structure of an organization in the industry’s competitive environment. These competitive forces include rivalry, threat of new entrants, threat of substitutes, bargaining powers of the target customers and finally the bargaining powers of the suppliers (Porter, 2008). The report shows how the information systems, especially the use of the internet, affect these competitive forces. It is realized that the internet increases the competition in the market. A company that would succeed must employ strategies that will enable it compete favorably where the use of information systems is one of them. Rosenbluth used travel management applications as well a web-based travel management which made it succeed under the stiff competition. Since the competitive forces continuously change over time, it is necessary for Rosenbluth to view the use of information systems as a competitive weapon in which it gains competitive advantage. Therefore, it should use innovative IT applications and the internet to link business partners and changing business process hence reducing the operating costs. Introduction: Organizations within the same market segment constantly compete with one another. Any organization that needs to succeed must seek for ways which enables it survive this competition, and gain a competitive advantage over the others. The set formula that determines its goals, operations, plans and policies that it uses in the competition is referred to as a competitive strategy (Porter, 1996). An organization is able to gain a competitive advantage in measures such as quality, cost, or speed through the competitive strategy that it uses. A firm’s success is thus determined by its competitive advantage. The advantages gained enable an organization to earn above average returns, and in most cases, be a market leader. One of the competitive strategies that a firm uses to gain competitive advantage is the use of information systems, which contributes to the realization of the strategic goals of an organization as well as increasing the performance and productive abilities. Information systems can be defined as the applications used in a business firm to shape or support its competitive strategy in order to gain a competitive advantage over other firms (Porter, 1985). Thus, it is the role of the managers to seek for a competitive strategy of engaging the use information technology to expand the company’s products, services, as well as its overall capabilities so as to gain major advantages over the competitive forces that it faces in the market. This research paper uses Michael Porter’s competitive forces model in analyzing how the strategic information system has been used by Rosenbluth International (rosenbluth.com), a major world player in the competitive travel agent industry, to achieve competitive advantage. It is important to understand the basic concepts which define the role of the information systems. For an organization to survive and ultimately succeed, it must successfully develop strategies that confront Michael Porter’s five competitive forces (Porter, 2008). The paper will therefore, first, examine the forces that shape the positioning of an organization in the competitive environment of an industry. Porter’s competitive forces include rivalry, threat of new entrants, threat of substitutes, bargaining powers of the target customers and finally the bargaining powers of the suppliers (Porter, 2008). Different ways of successfully countering these competitive forces will then be discussed. The strategies to be implemented include cost leadership, differentiation, innovation, growth, and the formation of alliances. The analysis of the use of strategic information systems by Rosenbluth International will then follow, but before that, a brief overview of this organization will be highlighted. It will illustrate on the use of information systems in the implementation of the above basic competitive strategies and more especially the use of internet. Literature Search: Porter (1985) has formulated a framework that analyzes the competitiveness of an organization. This framework has been used in developing competitive strategies that companies use in increasing their competitive edge. In addition, the framework demonstrates the use of information technology by corporations in enhancing their competitiveness. Porter (2008) highlights the necessity of being aware of the five competitive forces which enable a corporation to understand its structure within the industry as well as being in a position that is more profitable with less vulnerability to attack. It is however, according to Callon (1996), mistaken by many managers that it is only rivalry which influences competition. Porter (2008) disagrees with this misguided understanding of market competition and goes further to illustrate all the five forces that determine the completion for profits among different organizations. These competitive forces include: a) The rivalry among the existing competitors b) The threat of new entrants c) Bargaining power of buyers d) Bargaining power of suppliers e) The threat of substitute products or services. All these five forces not only determine the structure of a given industry, but also shape the nature of competition in the industry. Porter’s model of the five competitive forces is shown below. Figure 1. Porter’s competitive forces model Adopted from: Michael Porter. 2008, p.64 Porter (2008) postulates that the strength of each of the five forces is influenced the factors that relate to the industry’s structure. He says that the internet has changed both the nature of business operations and the nature of market competition. He argues that the internet does not change the five forces model but rather seeks for competitive advantage. He views the internet as a “compliment to traditional ways of competing” (Porter, 2001, p.64). Porter (2001) suggests various ways that the Internet influences competition in the five factors. a. The rivalry among the existing competitors: - The internet applications of an organization that are visible on the web can be accessed by other competitors revealing their secrets. This reduces the differences that exist among the competitors. The internet has the tendency of lowering the variable costs in relation to the fixed costs in most industries and thus making competition to migrate to prices as well as encouraging price discounting. b. The threat of new entrants: - The threat of new entrants can be raised by the internet by sharply reducing those barriers to the new entrants, such as a physical store for the sale of products or the need for a sales force. Industries whose products or services are digital or those that perform an intermediation role are faced with this acute threat. Secondly, the reach of the internet to various geographical areas bring indirect or even distant competitors into the local market with an existing firm. c. The bargaining power of buyers: - The internet serves as an information center for the potential customers on the different products provided by the suppliers. Besides, the information technologies reduce the customer switching costs making them to buy products easily from downstream suppliers. Therefore, the internet increases the bargaining power of the customers. d. The bargaining power of suppliers: - The influence of the internet in this force can take two dimensions. First, it can enhance an easy comparison of prices among suppliers by buyer. This reduces the bargaining power of the suppliers. On the other hand, the suppliers can increase their bargaining powers when they use the internet to join digital exchanges as well as integrating their supply chain so that they prosper by increasing their switching costs. e. The threat of substitute products or services: - The internet causes a great danger for information based industries since with the internet, the information is digitalized. From this analysis, it is evident that the overall impact of the internet is to increase competition which in turn negatively impacts on the profitability of the organization. However, the internet makes information to be available hence reducing the difficulty of marketing, distributing and purchasing of the organization’s products. Thus, the sellers and buyers transact with one another more easily despite of the difficulties that the companies get in capturing these benefits as profits (Porter, 2001, p. 66). Of great interest is the development of a strategy that establishes a sustainable and profitable position against these competitive forces by the business managers. A company therefore needs to establish a strategy in which it performs its activities differently from its competitors. Porter (1985) proposed differentiation, cost leadership and niche strategies. Porter’s five forces model assesses the position of a company within its industry. Different organizations use this model for competitive analysis in suggesting specific actions to be taken. The actions that follow involve the use of information technology. This section analyses Rosenbluth International travel agency which is among the organizations that have strategically used information systems to gain competitive advantage. It develops and distributes global travel services and information (Clemons, 1999). It had experienced various business pressures and threats from other agencies during the digital revolution in the industry. Its rivalry includes the competition from other airlines, hotels and service providers who have moved aggressively to the electronic distribution systems. According to Rosenbluth International Inc. (1996), they sell packages and issue electronic tickets directly. Some of these travel service providers had cut the commission percentage for the travel agents and reduced the commission caps. Besides, there are new entrants such as expedia.com (an online travel company) who attract individual travelers by diversifying their travel services as well as bargaining their prices. Such services have been a threat to the corporate travel business in which the travel agency had enjoyed. Customers are offered part of the commission that the travel agencies receive from the travel service providers. Besides, there have been innovative business models which they have put in place through e-commerce by the travel service providers such as auctions and reverse auctions (Clemons and Hann, 1999). This has continuously added competitive pressure on the Rosenbluth International travel agent. The diagram below summarizes the pressures that Rosenbluth had experienced and how the strategic Information systems helped it defend the pressures. Figure2. Strategic information system at Rosenbluth- defending against business pressures and competition. Adopted from Hemmatfar, Salehi& Bayat 2010. All the above discussed business pressures constitute to the five forces of competition and have greatly threatened the welfare of Rosenbluth. It was necessary for Rosenbluth to establish profitability and attain a sustainable position against Porter’s five competitive forces. They had to develop strategies which involved different ways of doing activities from its competitors in order to gain competitive advantage. The company responded to these using two strategies. First, it got rid of the leisure travel business and decided to become a purely corporate travel agency. In this manner, they offered different and services and better services and products through the use of differentiation strategy. The second strategy, which we are more interested with, used was billing the airlines for the services they provided instead of rebating them with entire commissions they received. It was necessary for the travel agency to use various innovative information systems in implementing the second strategy (Clemons and Hann, 1999). Firstly, it decided to use a comprehensive web-based travel management solution which incorporates the policy and profile management tools, web- based travel planning technology, seamless frontline support/ service, and proprietary travel management applications. This allowed travelers to book their reservations in time, anywhere, at any time within the corporate travel policy. This enhanced the provision of special and different products and thus changing their nature in the industry. The strategic use of the information systems was considered as being focused outwardly, i.e. it increased direct competition of Rosenbluth in the industry and was visible to all other organizations. The strategic information systems, financial systems and operational systems used provided new services to suppliers and consumers. This attracted and retained its suppliers and customers. The strategic information systems also locked in the suppliers and increased customer switching costs. The suppliers and customers were made to stay with the organization and not to go to the competitors since they were locked in and their bargaining power was reduced due to economic reasons. All these were aimed at achieving better results than its competitors. According to (Salehi & Bayat 2010), it later changed its strategic system and was now viewed inwardly, i.e. Rosenbluth started to enhance its competitive position by streamlining business processes, increasing employees’ productivity as well as making better decisions through the use of operational effectiveness strategy. However, this system has been compromised by the following customer-facing tools. i. Discount Analysis Containing Optimal Decision Algorithms (DACODA): -This is a management system which enables travel managers to identify the favorable airline contracts and translate the airline pricing. ii. iVision: - This is an application that offers customers with consolidated information that enables the customers to negotiate for better prices in the airlines and hotels. iii. Global Distribution Network:- this is a network that electronically links the locations of the business organization and enables travelers to access corporate travel policies, traveler’s itinerary and/or personal travel preferences. Clemons and Hann (1999) highlights that the use of IT innovations by Rosenbluth made it to grow by its sales of $40 million in 1979 to over $5 billion in 2002. The company thus survived the threats of competition hence becoming a market leader in travel technology, integrated information management as well as in customer service. We realize that the internet has a potential of becoming a threat to an organization and yet it can be an important tool of gaining competitive advantage. Indeed, the information systems provide competitive opportunities than renders an organization to achieve competitive advantage. According to (Callon, 1996, and Neumann, 1994), the information systems used support the Rosenbluth’s competitive strategy in responding to the business pressures of this company. Rosenbluth management should therefore seek ways in which it should map its strategy in its future operations so that it can be able to gain and maintain its competitive advantage. It should continue using Information Technology as a contributor to the strategic management in the following various ways (Kemerer 1997; Callon 1996). a. Rosenbluth international should use innovative IT applications so that they gain strategic advantage over the other competing organizations as well as the new entrants. It should offer electronic tickets and online services. They should also make their database accessible to the customers over the internet. Besides, it should track its operations with the use of IT. By so doing this, it will offer e-fulfillment solutions based on information technology (Bhise et al. 2000). b. Rosenbluth should view the use of information system as a competitive weapon which should either be picked by them or their competitors (Dell 1999). They had rather pick it and use it to offer a one-click shopping system which is significant for the overall reputation of the organization as well as serving the customers who are patent to the system. c. Thirdly, they should use Information technology as a tool that changes business processes in order to gain competitive advantage (Davenport 1993). They need to use a resource planning system implementation strategy that unifies all the branches into a single set for cost saving purposes. Other ways of changing business processes by use of IT include the controlling its remote stores through the provision of speedy communication tools, provision of timely information reports to the managers in enhancing better decision making, and offering a streamlined product design using computer technologies. d. Fourthly, they should use information technology in linking with other business partners. They should efficiently and effectively use a network that allows them connect with agents, customers, and other service providers in order to broaden their marketing range (Clemons and Hann, 1999). e. Through the use of Information Technology, Rosenbluth is able to reduce its operating costs. It cheaper to run some of the activities of the organization online that it could rather be if they were not run online. A good example is offering customer service using live chats than calling. Besides, online bank transactions are cheaper when compared to the traditional banking system. f. IT can be used to lock in the customers and suppliers and thus, maintaining their relationships. This builds up the switching costs by making it difficult for the customers and suppliers switching the organization’s competitors. Rosenbluth should use a monitoring system that automatically notifies their suppliers when their inventories goes down hence assuring the customers with reduced inventory management time, less capital tie in inventory and a continued supply of the products. Rosenbluth then gains a competitive advantage since their competitors will have difficulties in convincing customers to switch to them (Vandenbosch and Dawar, 2002 g. Rosenbluth can lever its investment in information technology so that it creates new products that are needed in the market. Through the use of technology, the organization is able to diversify its products, services as well as operations. h. Information technology offers competitive intelligence to businesses by not only collecting information regarding the markets, products, competitors, and environmental changes, but also analyzing and interpreting the information (Guimaraes and Armstrong, 1997). Rosenbluth international should use competitive intelligence so that it is the first to discover ideas before its competitors, making faster interpretations so that it gains competitive advantage by offering products or services of higher value to the customers. It should continuously monitor its competitor’s information in order to increase their market knowledge and improve their management hence raising their strategic management. The diagram below summarizes the strategic decision made by managers in establishing a system information system that can be used to gain strategic competitiveness in an organization. Figure 3.strategic information systems and strategic points. Adopted from Hemmatfar, Salehi& Bayat 2010. Due to the fact that the average profitability of industries are under pressure as influenced by the internet, it is necessary for the individual organizations to set themselves from the rest and move to become more profitable than those who perform averagely. Porter (2001, p. 69) says that “the only way to do so is by achieving a sustainable competitive advantage-by operating at a lower cost, by commanding a premium price, or by doing both.” There are two ways in which the price and cost can be achieved. One is through operational effectiveness where the organization does what its competitors do but by doing them in a better manner. The organization can achieve this by the use better technologies. Another way is through strategic positioning where an organization operates differently from its competitors so that it delivers a unique value to its customers. This includes using a different array of services and applying different logistical arrangements. According to Porter (2001), the internet opens up new opportunities for strengthening or achieving a distinctive strategic positioning. However, it hinders companies in maintaining their operational advantages. The internet enhances operational effectiveness by enhancing improvements in the entire value chain by speeding and easing the exchange of information (Davenport, 1993). However, companies cannot gain competitive advantage by simply improving the operational effectiveness but rather through the achieving and sustaining higher levels of operational effectiveness as compared to its competitors. Usually, when an organization establishes new practices that are beneficial, its competitors tend to copy them and at the long run such competition leads to competitive convergence where many companies operate in similar ways (Porter 2001). What now matters is the price in which the customers compare among the organizations. Sustaining of the operational advantages therefore seems to be more difficult. On the other hand, the strategic positioning becomes crucial since it is hard to sustain the operational effectiveness. The organization should therefore generate high economic value levels by gaining a cost advantage through a unique way of competing distinctively. Conclusions: Most organizations have used the information systems and especially the internet in trying to gain competitive advantage over one another (Neumann, 1994). This has created internet competition regardless of whether the industries exist differently. The examination of the competitive forces illustrates that the use of internet technology puts pressure on the existing profitability of many organizations. Intensified competition indicates consolidation of business organizations hence a reduction in the rivalry among the competitors (Porter 2001). However, many established organizations are deploying internet technologies and therefore, there is an overall increase in the number of competitors as compared to the time of advent of the internet. There is an increase in the power of customers as they become more familiar with technology. This declines their loyalty to their initial suppliers by realizing a low cost of switching. Some technological advances enhance profitability by providing opportunities such as making video calls to consumers using computers. On contrary, the switching costs are increased when organizations use automatic bill paying by the bank. Nevertheless we realize that “information technology erodes the profitability of an organization by shifting power to its customers” (Porter 2001, p. 69). There is an increased rise of digital companies that connect and link suppliers and customers electronically. This benefits the customers by offering them with easier ways in which they access product and price information. Besides, they also experience lower transaction costs. On the other hand, the benefits enjoyed by the suppliers include lower transaction costs, lower selling costs, access to a wider market as well as avoiding powerful channels. The internet determines the structure of the industry by the influence it has on the existing forces of competition (Porter, 2001). It determines how organizations use it to influence the intrinsic power of buyers and sellers, as well as the threat of substitution. Competition among the digital market places is continuously increasing. The suppliers and customers will therefore tend to deal directly without intermediaries in a new value supply chain. With this new technology, it will undoubtedly be easier for these parties to search and exchange goods as well as information with one another. Depending on the product area, some organizations will enjoy the ongoing attractive profitability and competitive advantage while others will be superseded by cost centers in which they will offer valuable public goods to customers without reaping any enduring benefit. References: Bithos, P 2001, “Back to B2B basics,” Business Online Journal, pp. 66–69. Callon, JD 1996, Competitive advantage through information technology, McGraw Hill, New York. Clemons, EK, & Hann IH 1999, “Rosenbluth International: Strategic Transformation,” Journal of MIS, pp. 67-78. Davenport, TH 1993. Process innovation: reengineering work through information technology, Harvard Business School Press, Boston. Dell, M 1999, Keynote Address at the Direct Connect Conference, Austin, Texas. Guimaraes, T, & Armstrong C 1997, “Exploring the Relationships Between Competitive Intelligence, IS Support, and Business Change,” Competitive Intelligence Review Journal, 9 (3). 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Vandenbosch, M & Dawar N 2002 “Beyond Better Products: Capturing Value in Customer Interactions,” Sloan Management Review Journal, pp. 35-42. Read More