Porter and Competitive Advantage

The information revolution and the tales of competitive advantage have certainly altered how managers throughout business see the role of Information Systems. Where it was once perceived to be only part of the operating of a business, there is now an increasing recognition of the value of information. Furthermore, it is recognized that information is a depreciating asset and must be treated as a resource that the organization could / should use in its business. ( Robson, 1997, p. 188)

The concept of competitive advantage lies at the heart of understanding a firm's performance in competitive markets; above average performance in the long-run can only be generated by creating a sustainable competitive advantage. Porter's ideas about competitive advantage can be used to examine how Information Systems affect the performance of a business organization by changing the relationships within the five forces that shape its competitive environment.

The Concept of Value and Competitive Advantage

Porter's analysis of the competitive advantage stems from two fundamental questions. These are firstly, how attractive, from the viewpoint of long-term profitability, are different types of industry, and secondly what is an enterprises relative position in that industry? He bases his analysis on the twin concepts of value and competitive advantage. He argues that:

"Competitive advantage grows fundamentally from the value a firm is able to create ... Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset higher prices." ( Porter, 1985, p 3)

He continues:

"A firm is profitable if the value it commands exceeds the costs involved in creating the product. Creating value for buyers that exceeds the cost of doing so is the goal of any generic strategy. Value, instead of cost, must be used in analyzing competitive position ..." ( Porter, 1985, p 38)

Three generic competitive strategies

Porter argues that the fundamental basis for above average performance in the long run is a sustainable competitive advantage; without a sustainable competitive advantage, all a company can do is "harvest" the windfall i.e. skim off the largest profits it can for as long as it is able to do so. Porter postulates two basic types of competitive advantage: cost leadership and product differentiation. These two basic types of competitive advantage, combined with the scope of the activities open to a particular firm, lead to three basic strategies for pursuing competitive advantage: cost leadership, differentiation and focus.

Cost leadership

Cost leadership is intuitively the easiest strategy to understand. The firm sets out to become the lowest cost producer in its particular industry rather than one of several firms vying for that position. To be a cost leader the company must do more than simply move down the learning curve. It must seek out and exploit every source of potential cost advantage. Typically, cost leaders sell a basic product or commodity and are concerned with pursing economies of scale and absolute cost advantages. While the product may be relatively unsophisticated, the company must comply with the industry norms i.e. the product and/or service must be perceived as acceptable and comparable to its competitor's. A cost leader must therefore maintain some degree of parity with its competitor's performance in other areas while out performing them based on price.

Differentiation

The second generic strategy is differentiation. Here a firm seeks to be the best performer in its industry grouping along some dimension or dimensions of the product or service other than cost. This attribute of its product / service must be something that a majority of its customers perceive as important, and the company must position its self uniquely to meet those needs. Its singular position will then be rewarded by a premium for its distinctive product or service. The premium is paid for the company's uniqueness, although the company must also maintain some degree of parity with its competitors cost levels in order that the cost of "uniqueness" does not begin to exceed the premium that the customer is prepared to pay. Unlike cost leadership, several different firms can simultaneously pursue successful differentiation strategies in the same industrial sector - if sufficient scope exists.

Focus

This strategy is not based on the selection of desirable attributes for a product or service across the whole of an industry grouping but upon the selection of a particular segment or group, within the industry as a whole, which is to be targeted, i.e. the company looks to exploit a niche market. A company whose strategic advantage lies in focus will select its niche and, having found it, will tailor its strategy specifically to serve the needs of that particular client group. The focuser seeks competitive advantage in its own segment, although it need not possess an overall competitive advantage. To be successful the focuser must exploit the under-performance of its more broadly based competitors in that niche based either on cost or of differentiation.

Which Strategy?

Each strategy is a fundamentally different approach to creating and sustaining a competitive advantage. Usually a firm will need to make a choice about which it will pursue. Implementing differentiation and cost leadership strategies simultaneously is usually impossible for a company. For example, it is difficult to be a cost leader while pursuing a differentiation strategy because differentiation costs money. Although simply reducing costs may not adversely effect differentiation, a cost leader will eventually reach the point where pursuing a cost advantage will inevitably mean a sacrifice of scope.

Conditions under which a firm may be able to pursue cost leadership and differentiation simultaneously

Normally each of these approaches are mutually exclusive and a firm needs to choose which it will pursue, however Porter does concede that under certain circumstances it may be possible. He outlines only three conditions under which a firm may be able to achieve cost leadership and differentiation simultaneously.

1. In a situation where the competition is inefficient e.g., where a particular firm is so far in advance of its competitors, or its competitors are so ineffective, that it has not yet had to make a choice between cost leadership or differentiation. An example of this might be where the advantages gained by the first entrant to a new market mean that its potential competitors need to follow a steep learning curve to catch up.
    
2. In a situation where a firm pioneers a successful major technological innovation. A significant technological innovation can open such a gap between a firm's performance and that of its competitors, that both cost leadership and differentiation can be pursued concurrently. An example of this might be where are firm is able to achieve some form of technological breakthrough that enables it to redefine the way the current market operates.
    
3. In a situation where cost is strongly affected by structural interrelationships or the possibility of sharing between industries exists. If correctly positioned a company can reduce the cost of differentiation through a sharing of the cost or by exploiting important interrelationships. An example of this might be when a number of firms with an interest is a particular product or service cooperate and form an interrelated network of companies that share the costs and/or activities associated with its development.

Competitive Advantage and Technology

Porter acknowledges technology's role as one of the principal drivers of competition claiming that it plays a major role in both the structural changes in existing industries as well as in the creation of new industries. Technological change is such an important influence on competitive advantage both because it creates new opportunities for competition and because it plays a central part in the existing competitive strategy through its ubiquitous presence in the value chain.

He states that "Information Technology" and "Information Systems" are particularly important as every activity creates and uses information. He points out that modern information system technology plays a particularly crucial role in scheduling, controlling, optimizing, measuring and otherwise co-ordinating all manner of activities. Similarly, he notes that office or administrative technologies, although often neglected or subsumed beneath the umbrella term of information systems, also have an important role to play as:

"Change in the way office functions can be performed is one of the most important types of technological trends occurring today for many firms, though few are devoting substantial resources to it." ( Porter, 1985, p 168)

Competitive Advantage and Organizational Structure

Each strategy makes different requirements on the people who are to implement them and, according to Porter; these commonly translate into differences in organizational structure and culture. Just as there are economic inconsistencies in the pursuit of more than one competitive strategy, so there are what might be called "organizational inconstancies".

A firm may find that its organizational structure is sub-optimal for its particular strategy because it is attempting to pursue two incompatible organizational philosophies. For example, cost leadership usually implies very tight systems of control, the pursuit of economies of scale and a dedication to exploiting the learning curve; these could be counter productive in a firm that is attempting to differentiate itself through the constant production of a stream of new and innovative products.

References

1. Wendy Robson, Strategic Management and Information Systems: An Integrated Approach , (2nd Edition), Financial Times, 1997.
2. Porter. M.E. Competitive Advantage: Creating and Sustaining Superior Performance , (Revised edition), The Free Press, 2004.