The Impact of IT on Strategy

Five key questions can be used to guide an assessment of the impact of IT on strategy (Applegate et al., 1999). If the answer to one or more of these questions is yes, then IT could be a strategic resource that would require attention at the highest level.

Q1. Can IT Build Barriers to Entry? A successful entry barrier offers not only a new product or service that appeals to customers but it also offers features that keep the customer ‘hooked’. The harder the service is to emulate, the higher the barrier to entry.

A large financial service firm sought to build an effective barrier to entry when it launched a unique and highly attractive financial product dependent on sophisticated software that was both costly and difficult to implement. The complexity of the IT-enabled product caught competitors off guard; it took several years for them to develop a similar product, which gave the initiating firm valuable time to establish a significant market position. Meanwhile, the firm continued to innovate by enhancing the original product and adding value to its services. Competitors not only had to catch up, but also had to catch a moving target.

Q2. Can IT Build-in Switching Costs? Are there ways to encourage reliance on IT-enabled products and services? Can industry participants be encouraged to embed these products and services into their operations in such a manner that the notion of switching to a competitor is extremely unattractive? Ideally, an IT system should be simple for the customer to adopt, at the outset, but then, through a series of increasingly complex but very valuable enhancements, the IT system should become tightly intertwined with the customer’s daily routine. Proponents of electronic home banking hope to capitalise on the potential of increasing switching costs. Indeed, in France, a US$ 3 billion ‘virtual’

bank exists that has no branches; customers who have integrated their financial records into the bank’s IT systems conduct all their transactions electronically (Jelassi, 1994). In the United States, the joint marketing programme of MCI, Citibank and American Airlines, through which customers can earn American Airlines ‘frequent flyer miles’

whenever they use the telephone or their credit cards, is another example of how IT can support value-added services that not only enhance customer loyalty but also increase switching costs.

Q3. Can IT Change the Basis of Competition? In some industries, IT has enabled firms to alter the basis of competition fundamentally within their industry. This occurs when a firm uses IT to radically change either its cost structure (cost advantage) or its product/service offerings (differentiation advantage). For example, in the mid-1970s, a major distributor of magazines, a very cost-competitive industry segment, used IT to lower its cost structure significantly by developing cheaper methods of sorting and distributing magazines. By radically reducing both headcount and inventory, it was able to become the low-cost producer in the industry. Because buyers were extremely price sensitive, the distributor was able to quickly increase market share, but it did not stop there. Having attained significant cost advantage, the distributor then differentiated its products and services. Recognising that its customers were small, unsophisticated and unaware of their profit structures, the distributor used its internal records of weekly shipments and returns to create a new value-added product: a customised report that calculated profit per square foot for every magazine sold, data then compared with the aggregate information from comparable customers operating in similar neighbourhoods.

The distributor could thus tell each customer how it could improve its product mix. In addition to distributing magazines, the company used IT and the information it generated to offer a valuable inventory-management service. In this example, the distributor initially used IT to change its competitive position within an industry; it then used IT to change fundamentally the basis of the competition.

Q4. Can IT Change the Balance of Power in Supplier Relationships? The development of IT systems that link manufacturers and suppliers has been central within companies.

For example, just-in-time inventory systems have reduced inventory costs and warehouse expenses dramatically, while also improving order fulfilment times.

Traditionally, companies have used inventory to buffer uncertainty in their production processes. Large safety stocks, or raw materials and supplies, are kept on hand to allow operations to run smoothly. But inventory costs money: it ties up capital, it requires costly physical facilities for storage and it must be managed by people. Increasingly, companies are using IT to link suppliers and manufacturers; by improving information flow, they are able to decrease uncertainty and, in the process, reduce inventory, cut the number of warehouses and decrease headcount while also streamlining the production process. A large furniture retailer capitalised on these advantages by linking its materials-ordering system electronically to its suppliers’ order-fulfilment systems. Now, when 100 sofas are needed for a particular region, the retailer with the fastest availability and lowest costs gets the order. A major pressed-powder metal parts manufacturer proposed investment into computer-aided design (CAD) which was linked with US$ 100 million sales. Within 18 months, this system shortened the product design cycle from eight to three months (Applegate et al., 1999).

Q5. Can IT Generate New Products? IT can lead to products with higher quality, faster delivery or less cost. Similarly, at little extra expense, existing products can be tailored to meet a customer’s specific needs. Some companies may be able to combine one or more of these advantages. Indeed, mergers are often planned around these capabilities.

For example, a catalogue company and a credit card provider recently examined the possibility of combining their customer data files to facilitate cross-marketing and offer a new set of services. In another example, credit card companies have become voracious consumers of delinquent accounts by receiving data from other firms; there is a whole industry dedicated to the collection and organisation of these data. Similarly,

non-proprietary research data files can often have significant value to third parties (Applegate et al., 1999).