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Leveraging Information Systems for Competitive Advantage
Business Essentials · Chapter 17: Information Systems and Digital BusinessSection 17.1 · lesson 77 of 10513 min · free with a free account
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In this lesson
When a system sets a business apart, and when it only keeps up.
- Explain how a system can create competitive advantage
- Describe the categories of business information system
- Compare building, buying, and subscribing
- Assess a system for advantage or only parity
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Information Systems and Digital Business
Leveraging Information Systems for Competitive Advantage
Almost every business now runs on information systems. So why don't they all gain an edge from them? This section asks when a system creates real competitive advantage, and when it only keeps a business level with rivals. We'll separate systems you need just to compete from systems that set you apart. We'll walk through five ways a system can create advantage, and how fast each one fades. Then the debate over whether technology matters at all, once everyone can buy it. We'll cover the categories of system, and the choice between building, buying, and subscribing. Then implementation, alignment, governance, and security, treated as strategic questions. And we'll end with a dental clinic chain that bought exactly what everyone else bought.
The Central Question
Advantage, or Just Another Expense?
Start with a definition. An information system is an organized combination of hardware, software, data, and people. It collects, processes, stores, and delivers information to support a business. Earlier, in chapter eight, we looked at these systems in their operational role, running the daily transactions. This section asks a harder question. When does a system create a competitive advantage, a basis on which one business outperforms its rivals? And when is it simply an expense that every competitor has to bear as well? Here's the problem. Technology is available to competitors on broadly similar terms. Same vendors, often similar prices. So the mere presence of a system explains very little. That's the imitability test from chapter twelve. A system any competitor can adopt at a comparable cost is not, by itself, a source of advantage. That holds however much it does for the business that has it.
Parity vs. Advantage
Necessary to Compete, or Differentiating?
This leads to a key distinction. Some systems are necessary to compete. A business without one is at a disadvantage, but a business with one merely matches its rivals. A payment system that accepts cards is the classic case. In most retail settings you need one, and it creates no advantage, because every competitor has one too. Other systems differentiate. They let a business do something its rivals can't easily match. Only that second kind creates advantage. So the question to ask is not whether the system helps. It's whether it helps you more than it helps everyone else who could buy the same thing.
Table 17.1.1
5 Ways a System Can Create Advantage
There are five mechanisms by which a system can create advantage, and they erode at different speeds. The first is lowering cost, by removing labor, error, or delay at a scale rivals can't easily match. Think of a distributor whose system routes deliveries automatically, cutting fuel and driver time. Rivals can buy similar software. But years of accumulated route data are much harder to copy. The second is enabling differentiation, like a furniture retailer's tool for previewing a sofa in your own room. That erodes fast if the feature is easy to build, and slowly if it rests on a large library of content. The third is creating switching costs, a real cost in money, time, or risk to move to a rival. A payroll system holding years of a client's records and custom rules is a good example. That advantage erodes slowly. The fourth is changing the basis of competition, like a repair service competing on real-time appointment tracking. Rivals adapt once customers start to expect it. The fifth is enabling a new business model, like renting tools by the hour, tracked automatically. That's slow to erode at first, until competitors see it succeed and copy the concept. The pattern is the point. Durability depends less on the technology than on what's hard to copy around it.
The Commoditization Debate
How Much Does the Technology Matter?
That leads to the commoditization argument, a genuinely contested question. One position holds that as a technology becomes widely available, competitors adopt it, and its price falls. Its advantage erodes until it's simply a cost of doing business. On that view, durable advantage lies not in the system, but in what an organization does with it. That means the processes, the people, and the data that surround it. The competing position says this understates the advantage of being early. An early adopter can accumulate data, refine its processes, and build customer relationships before rivals catch up. And those accumulated assets may outlast the technology that started them. The empirical question is how long such a head start typically survives in a given industry. Whether businesses ought to compete mainly on head starts is a separate, normative question.
System Categories
6 Kinds of Business Information System
Business information systems are usually grouped by what they do. Transaction processing systems capture the basic transactions, like sales, payments, and inventory movements. Enterprise systems integrate data and processes across functions, on one shared set of records. Customer relationship management systems organize what's known about each customer, so anyone can see the whole relationship. Supply chain systems coordinate materials and information among suppliers, the business, and its customers. Decision support and analytics systems help managers interpret data, and collaboration systems support shared work. Enterprise systems deserve particular attention, because of the trade-off they impose. Integration means a sale recorded in one place is immediately visible in inventory and finance, with no separate entry. The cost is process standardization. The system embeds one particular way of doing a process. Departments that worked differently must adapt, or the system gets customized. And customization grows costlier and more complex with each departure from the standard. So a business choosing one is choosing not just software, but a degree of uniformity across its own operations.
Acquiring a System
Build, Buy, or Subscribe
A business acquiring a system has three routes. It can build the system, itself or through a contractor. That gives the closest fit to its own processes, at the cost of time, risk, and ongoing maintenance. It can buy a system outright, and install it on its own infrastructure. That's a proven product, but with less flexibility, and periodic upgrade cycles. Or it can subscribe to a system the vendor hosts and maintains, paying for access over time. That lowers the upfront cost and shifts maintenance to the vendor. The price is dependence on the vendor's continuity, its pricing, and its roadmap. The choice turns on how distinctive the business's needs are, compared with the standard offering. It also turns on capital, technical staff, and comfort with relying on an outsider for a core function.
Implementation and Alignment
Process First, Strategy Always
Chapter eight taught a lesson worth restating here, without repeating the detail. Install a system onto a process that hasn't been redesigned, and you get the old process at greater cost. A new ordering system layered over an unchanged approval chain still takes as many steps, and as many days. The only difference is a screen instead of paper. You've paid for software without removing the delay. So process design must come before system selection. A project that starts by choosing software, before examining the process, is at risk from day one. A system also has to support the strategy the business has chosen, where to compete, and how. A retailer competing on the lowest possible price needs systems that minimize cost. A retailer competing on a highly personalized experience needs systems that capture and use customer detail. Each would be poorly served by the other's system. Adopt systems admired in general, and you risk paying for capability you don't need, while lacking what you do.
Governance
Who Decides What Gets Built
Information technology governance is about who decides. It's the set of decision rights and accountabilities that determine what gets built, and how requests are prioritized. It also settles who answers for the result. Why does a business need it? Every function wants systems that serve its own needs. And demand for technical work routinely exceeds the capacity to deliver it. So there has to be a method for choosing. That might be a committee, a designated executive, or a process tied to the business's strategic objectives. Governance also covers data ownership. That means which part of the business is responsible, for the accuracy and appropriate use of each category of data. Data recorded by one department is often relied on by others. When ownership is unclear, errors go uncorrected, because nobody believes it's their job.
Security and Continuity
Dependence Creates Exposure
Information security is the set of obligations to protect the confidentiality, integrity, and availability of information. Business continuity is the obligation to plan for operating, or recovering quickly, when a system fails or is disrupted. Both are strategic, and here's why. Depend heavily on a system for your advantage, and you're also exposed if that system goes down. Or if its data is compromised. The dependence built for competitive reasons is the very same dependence that creates the exposure. This course treats security and continuity only as governance obligations, not as technical methods. A governance framework usually assigns clear responsibility for them, and requires regular review. It states what must be reported to leadership, and, where the law requires it, to regulators or affected individuals. State and federal laws increasingly impose specific notification duties after a breach of personal information. Legal counsel should be consulted on what applies to a particular business.
Figure 17.1.1
A Booking System Through the 4 Conditions
So how do you test whether a system creates advantage? Use four conditions from chapter twelve's resource-based reasoning. Is it valuable? Does it lower cost, help customers, or enable something otherwise impossible? Is it rare? Do only a few competitors have it? Is it costly to imitate? Would a rival find it hard, or slow, to copy? And is the business organized to exploit it, actually using it in a way that captures its value? The figure runs an online booking system for a chain of dental clinics through those tests. It's clearly valuable. It cuts missed appointments and frees staff time. But it fails rare, and it fails costly to imitate, because comparable booking software is available to any competitor. A system that's valuable but not rare, or valuable but easy to imitate, produces parity. Everyone benefits from having it, and nobody gains ground on anyone else. That's why value alone is never the test.
Case Vignette
The System Everyone Bought
Here's the full case, a composite built for instruction. Priya is operations director of a regional chain of dental clinics. She leads the adoption of an online booking system, to reduce missed appointments and free front-desk staff. It delivers exactly what was promised. But within eighteen months, every clinic chain in the region has a similar system, from one of a handful of vendors. Priya's clinics aren't worse off, and patients now simply expect online booking. But the chain has gained no ground. Its position still rests on its locations, its staff, and its reputation. Now she faces a trade-off. Treat the system as a settled cost, or invest to make it distinctive. That could mean building a library of patient history a new entrant couldn't quickly copy. Or using appointment data to schedule staff more efficiently than rivals do. Either way, the return is uncertain. Her reasoning is sound. The booking system itself won't be the source of any future advantage. Any distinct advantage must come from elsewhere: from what the clinics do with the data the system now provides.
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