Information technology (IT) cuts a wide swath across many industries and businesses. IT
acts as a key and integral resource to contribute to a businesses’ success. Moreover, business
drives technology so IT performs as a key enabler to allow an organization’s business strategy to
align with IT to form a formidable partnership. Organization requires IT to work with people,
and data cohesively to offer a competitive advantage balanced against inherent risks. However, each organization needs to determine the best way to leverage IT and reap benefits resulting in
competitive advantages. As organizations consider the role of IT, businesses need to
maintain an awareness of competitive forces that affect industry and place IT in an important
position for success. Ultimately to understand the relationship between IT and competitive advantages for an organization, an organization needs to identify the major competitive forces, examine the specific major competitive forces’ risks, describe the competitive advantages offered by the identified competitive forces, and provide a detailed analysis of specific advantages and disadvantages. IT importance to the formulation of a business strategy
underpins the need to identify the competitive forces that shape and affect industry.
Major Competitive Forces in Industry
Developing strategies for business requires a delicate balance between broad and narrow
industry focuses. Although IT enables business strategy, industry rivals, customer or buyer power, supplier power, potential new entrants, and substitute products or services pose the major competitive forces in shaping industry. These major forces help businesses to understand their effects upon industry and influence strategy. For instance, competitive rivals within an industry use marketing, product innovation, lower pricing and quality service to differentiate from their main competition. While many claim healthy competition provides a boost for business, “high rivalry limits the profitability of an industry” (Porter, 2008, p. 85). Rival competitors focused solely on price threaten profits as seen in the airline industry. However, rivals smartly design business strategies and align with IT to meet demands of customers.
Second, the customer possesses buyer power and presents a major competitive force toward organizations and businesses. A business strategy, therefore, needs to account for buyer power. As buyer power increases with choices, an industry offers fewer choices and buyer power diminishes. A competitive advantage presents itself when an organization makes a product or service more appealing through an attribute such as lower price or superior quality. “Factors used to assess buyer power include number of customers, size of orders…and availability of substitute products” (Baltzan, 2010, p. 17). In the end, buyers rely upon suppliers.
Third, supplier power presents another major competitive force because of the effect upon critical factors and use of the supply chain. Suppliers influence the critical factor of pricing. Supplier uses the supply chain, which spans the requirement to retirement of products. The supply chain involves the property management, inventory, warehouse, procurement, and transportation. If over-looked, the supplier becomes a serious obstacle or major force for industry competitors.
Fourth, the threat of new entrants adds to the competitive forces mix by introducing other competitors into an industry space where incumbents do not want to share the landscape. However, with the use of technology, previous technical challenges no longer hinder other businesses as much from joining the fray and as a consequence present a challenge to new rival competitors. For example, within the banking industry, new entrants need to “offer its customers an array of IT-enabled services, including ATMs…” (Baltzan, 2010, p. 19). New entrants bring a potential threat of alternative services.
Finally, the threat of substitute products or services creates a major competitive force because the alternative substitute to something unaffordable like season tickets to a sports event results in doing without. In a similar manner, cheaper options by new entrants or existing competitors pose a threat by incumbents themselves offering substitute services. This threat takes the form of providing a service in a different form. For example, the high cost of season ticket offers the alternatives of satellite or cable TV as a substitute service at a lower cost. Collectively, these five major competitive forces present a certain amount of risk when using IT.
Risks to Competitive Advantages
The five major competitive forces offer specific instances, which the use of IT affects, risk of competitive advantages. First, rivals among existing competitors not only depend on the industry but also on the “intensity with which companies compete and, second, on the basis they compete” (Porter, 2008, p. 85). An IT risk for rivals involve the over reliance of IT to deliver service or product as a competitive advantage. Next buyers hold a certain amount of power that when leveraged correctly lowers pricing. The IT risk for buyers becomes the increased need for IT access to obtain greater speeds and capacity to achieve greater bargaining power. Third, a reduced supplier power between supplier and organization provides a competitive advantage for the organization. An IT risk exists for compromise of IT system and proprietary pricing or products. This threat normally stems from external systems sources. Fourth, new entrants use IT to enter industry. The threat of new entrants and effect on competitive advantage presents an IT risk of technical failure of IT systems required to gain market presence. Last, substitute products or services threaten competitive advantage by offering alternatives to incumbents. The IT risk involves cheaper products or services via lower parts prices and offshore sourcing. Consequently, the brief descriptions of the IT risks to competitive advantages in the five specific major competitive forces help to understand the role of technology with potential risks and possible advantages.
The major competitive forces offer a variety of advantages that involve IT. For example, rivals among existing competitors use IT strategy to identify and secure advantages. IT provides rivals an advantage with technical infrastructure that uses the Internet for business service delivery. Next customer or buyer power when reduced creates competitive advantage opportunities using IT to enhance customer service delivery. Customer Relationship Management (CRM) permits IT to help improve services through application, and IT system support. In addition, IT competitive advantage of supplier power results “when it is costly for the firm to switch suppliers…when switching suppliers may affect the quality of the firm’s products or services…” and IT enables supply chain management efficiencies (Luftman, 2004, p. [chapter 2]). Further, new entrants use IT break through barriers as seen with e-commerce; however, IT also provides an advantage with use of proprietary technology to gain a temporary “window of opportunity” (Luftman, 2004, p. [chapter 2]). Last, the threat of substitutes creates an opportunity for an IT advantage with the loyalty of integrated IT services that compels customers to stick with current provider. For example, merging CRM with supply chain makes it difficult to separate the two services and offer a replacement or alternative. These brief descriptions of advantages provide a snapshot of IT’s positive role.
Advantages and Disadvantages
Specific advantages and disadvantages help an organization understand the effects of IT strategy upon competitive forces and offer risk mitigation and improvement opportunities. Earlier, the specific advantage toward use of IT to establish a responsive and secure infrastructure to offer a competitive advantage over rivals competing among each other. Within saturated industries such as manufacturing, IT helps to deliver speed of services and information assurance. This advantage results from an architecture that uses efficient servers like Oracle® Weblogic, Cisco® routers and switches, a virtual private network (VPN) for secure third party supplier access, and defense-in-depth firewall and demilitarized zones to segregate the public and private intranet to improve secure operations. Because an organization infrastructure covers so many components, the complexity of IT emphasizes the importance of correctly using an industry best practice like IT Infrastructure Library (ITIL) to ensure the business drives technology and that technology delivers on its promise to secure and provide a competitive advantage with reduced risks.
Although IT makes available an opportunity to create specific advantages, IT also presents challenges in the form of specific risks. For example, the inherent risk of compromise to an organization IT system presents a concern for addressing threats to the power of suppliers. Supplier power rests in the integrity of the supply chain. Once the chain becomes weak or broken, the effects hurt suppliers, customers, organizations, distributors, and retailors. Therefore, the protection of supplier relationships and the artifacts of doing business such as safekeeping of proprietary pricing and raw material sources create a business imperative for IT to secure transactions. The risk stems from the threat of misuse or hacking the supplier network possibly through the Internet. However, the applications hosted on server such as e-mail provide the potential for exploitation. In addition, malware threaten the disruption of services and may siphon critical supplier data. This threat requires a strategy to defeat attempts to diminish supplier power.
As a consequence, the supplier needs a risk mitigation to thwart threat. The mitigation plan involves the use of a good anti-virus program, anti-spyware program, and firewall architecture. The organization network security needs to employ automatic updates to security software to make certain computers connected to Internet remain current. In addition, each week new malware seems to threaten computer network with many involving the use of hidden spyware. Therefore, software patches downloaded and updated help to protect against known vulnerabilities, especially against operating systems like Microsoft Windows® and Macintosh®. Firewalls filter out harmful known threats based on signatures but offer a protective layer draped over the network as a security blanket to shield against infectious and dangerous threats emanating from the Internet and other entry points. Risk mitigation helps to limit effects and dangers of specific threats toward major competitive forces.
The major competitive forces of rivals among existing competitors, buyer power, supplier power, threat of new entrants, and the threat of substitutes products or services influence competition within industries. Each major force retains their specific effects on competition and help to shape and shift IT strategy. As the major forces work with and against each other, the dynamic of competition yields advantages and disadvantages. For instance, advantages between supplier and organization contrast the buyer power between organization and customer. Meanwhile, specific advantages like a strong infrastructure speeds and secures delivery of services, whereas the Internet poses a risk for compromise of critical supplier data if left unchecked. Therefore, risk mitigation helps to overcome disadvantages and advantages benefit from IT improvements. Ultimately, an understanding of the major competitive forces and their relationship to IT offers an organization the ability to develop better IT strategies for their business.
Baltzan, P., & Phillips, A. (2010). Business driven technology (4th ed.). New York, NY:
Luftman, J. N., Bullen, C. V., Liao, D., Nash, E., & Neumann, C. (2004). Managing the information technology resource: Leadership in the information age. Upper Saddle River, NJ: Pearson Education.
Porter, M. E. (2008, January). The five competitive forces that shape strategy. Harvard Business Review, 86(1), 78.