Information System Strategies for Dealing with Competitive Forces

What is a firm to do when it is faced with all these competitive forces? And how can the firm use information systems to counteract some of these forces? How do you prevent substitutes and inhibit new market entrants? There are four generic strategies, each of which often is enabled by using information technol­ogy and systems: low-cost leadership, product differentiation, focus on market niche, and strengthening customer and supplier intimacy.

1. Low-Cost Leadership

Use information systems to achieve the lowest operational costs and the lowest prices. The classic example is Walmart. By keeping prices low and shelves well stocked using a legendary inventory replenishment system, Walmart became the leading retail business in the United States. Walmart’s continuous replenish­ment system sends orders for new merchandise directly to suppliers as soon as consumers pay for their purchases at the cash register. Point-of-sale terminals record the bar code of each item passing the checkout counter and send a pur­chase transaction directly to a central computer at Walmart headquarters. The computer collects the orders from all Walmart stores and transmits them to sup­pliers. Suppliers can also access Walmart’s sales and inventory data using web technology.

Because the system replenishes inventory with lightning speed, Walmart does not need to spend much money on maintaining large inventories of goods in its own warehouses. The system also enables Walmart to adjust purchases of store items to meet customer demands. Competitors, such as Sears, have been spending 24.9 percent of sales on overhead. But by using systems to keep oper­ating costs low, Walmart pays only 16.6 percent of sales revenue for overhead. (Operating costs average 20.7 percent of sales in the retail industry.)

Walmart’s continuous replenishment system is also an example of an efficient customer response system. An efficient customer response system directly links consumer behavior to distribution and production and supply chains. Walmart’s continuous replenishment system provides such an efficient customer response.

2. Product Differentiation

Use information systems to enable new products and services or greatly change the customer convenience in using your existing products and services. Big Tech firms like Google, Facebook, Amazon, Apple, and others are pouring billions of dollars into research and deployment of new services, and enhancements to their most valuable services and products in order to differentiate them from potential competitors. For instance, in 2018 Google updated its Google Assistant to enable more natural continuous conversations and smart displays that can display the output of Assistant to screens. Google added Assistant support to its core Google Maps service to make interaction with Maps more natural, and released a Machine Language Kit for developers that supports text recogni­tion, face detection, image labeling, and landmark recognition. The continual stream of innovations flowing from Big Tech companies ensures their products are unique, and difficult to copy.

Crayola, not known as a tech company, is another firm that is creating new technology-based products and services to inspire children, parents, and edu­cators, and differentiate their products from competitors. (See the Interactive Session on Organizations.)

Manufacturers and retailers are using information systems to create prod­ucts and services that are customized and personalized to fit the precise specifications of individual customers. For example, Nike sells customized sneakers through its NIKEiD program on its website. Customers are able to select the type of shoe, colors, material, outsoles, and even a logo of up to eight characters. Nike transmits the orders via computers to specially equipped plants in China and Korea. The sneakers take about three weeks to reach the customer. This ability to offer individually tailored products or services using the same production resources as mass production is called mass customization.

Table 3.3 lists a number of companies that have developed IT-based products and services that other firms have found difficult to copy—or at least taken a long time to copy.

3. Focus on Market Niche

Use information systems to enable a specific market focus and serve this nar­row target market better than competitors. Information systems support this strategy by producing and analyzing data for finely tuned sales and marketing techniques. Information systems enable companies to analyze customer buy­ing patterns, tastes, and preferences closely so that they efficiently pitch adver­tising and marketing campaigns to smaller and smaller target markets.

The data come from a range of sources—credit card transactions, demo­graphic data, purchase data from checkout counter scanners at supermarkets and retail stores, and data collected when people access and interact with websites. Sophisticated software tools find patterns in these large pools of data and infer rules from them to guide decision making. Analysis of such data drives one-to-one marketing that creates personal messages based on individualized preferences. For example, Hilton Hotels’ OnQ system analyzes detailed data collected on active guests in all of its properties to determine the preferences of each guest and each guest’s profitability. Hilton uses this information to give its most profitable customers additional privileges, such as late checkouts. Contemporary customer relationship management (CRM) systems feature analytical capabilities for this type of intensive data analysis.

Credit card companies are able to use this strategy to predict their most prof­itable cardholders. The companies gather vast quantities of data about con­sumer purchases and other behaviors and mine these data to construct detailed profiles that identify cardholders who might be good or bad credit risks.

4. Strengthen Customer and Supplier Intimacy

Use information systems to tighten linkages with suppliers and develop intimacy with customers. Toyota, Ford, and other automobile manufacturers use information systems to facilitate direct access by suppliers to production schedules and even permit suppliers to decide how and when to ship supplies to their factories. This allows suppliers more lead time in producing goods.

On the customer side, Amazon keeps track of user preferences for book and CD purchases and can recommend titles purchased by others to its customers. Strong linkages to customers and suppliers increase switching costs (the cost of switching from one product to a competing product) and loyalty to your firm.

Table 3.4 summarizes the competitive strategies we have just described. Some companies focus on one of these strategies, but you will often see com­panies pursuing several of them simultaneously. For example, Starbucks, the world’s largest specialty coffee retailer, offers unique high-end specialty coffees and beverages but is also trying to compete by more targeted marketing.

Source: Laudon Kenneth C., Laudon Jane Price (2020), Management Information Systems: Managing the Digital Firm, Pearson; 16^th edition.