Information Strategy & Economics
Strategic planning is the process of determining the goals and objectives of an organization and developing a plan to use the company's resources to reach these goals and objectives. To aid in this process, many businesses develop a competitive strategy — a plan of action by which a business attempts to increase its competitive advantage. The approaches to competitive strategies used by most businesses can be expressed by three generic models i.e. the provision of low cost products or services; differentiation of products from those of the competition, and, focus on the market niche. Information systems can add strategic value to the organization and enhance its economic outcomes. However, this does not necessarily mean that the implementation of information systems will save the organization money. More often, information systems enable the organization to increase profits by offering new possibilities.
Keywords Competitive Advantage; Competitive Strategy; Differentiation; Information System; Information Technology; Logistics; Return on Investment; Value Chain
Yogi Berra once observed that “if you don’t know where you’re going, you’ll end up somewhere else.” This is sound advice to businesses that want to increase their market share, profitability, or meet any other goal or objective. Strategic planning is the process of determining the goals and objectives of an organization and developing a plan to use the company’s resources – including materials and personnel – in reaching these goals and objectives. Developing a strategy helps the organization to better focus its attention and resources in a way that reaches its goals and objectives. Information technology – the use of computers and other electronic communications networks to create, store, and disseminate data and information – can significantly help the organization to reaching its goals.
Today's emphasis in many industries on a global economy and a global marketplace means that there is a potentially larger market to sell products or services to as well as greater opportunities for outsourcing in order to decrease labor or production costs. However, globalization also means that the business has more competition than ever before. Therefore, if a business wants to achieve a competitive advantage and outperform its competitors on major indicators of success such as profitability, it is essential to develop and implement a strategic plan that will help them get there.
The proliferation of information technology that has been a factor in the increased globalization of many industries has become so essential to the success of businesses today that an organization's information strategy has become indistinguishable from its strategy in general. In the 21st century, the distinction between business and technology issues is virtually gone. Most businesses depend on the efficient transmission and access of data whether it be an inventory control system in a mom-and-pop grocery store or a database management system of financial and personal information needed for transactions in an international bank. Service organizations that provide technical help to customers need to be able to quickly and efficiently access customer records as well as troubleshoot information from disparate databases and bring them together to help the customer solve a problem. Businesses involved in e-commerce need to be able to quickly access the stock in their inventory or in their suppliers' inventories, provide user-friendly methods for users to find items in their on-line catalogs and input orders, and provide a secure method for the exchanging of financial information.
Competitive Strategies for Increasing Competitive Advantage
To help meet their goals and objectives, many businesses develop a competitive strategy — a plan of action by which a business attempts to increase its competitive advantage. The approaches to competitive strategies used by most businesses can be expressed by three generic models: (1) the provision of low cost products or services, (2) differentiation of products from those of the competition, and (3) focus on the market niche.
Low Cost Strategy
The goal of the low cost strategy is to gain a larger market share by offering acceptable quality products or services at prices lower than those of the competition. Businesses using this strategy expect to earn an acceptable return on investment by increasing volume of sales. For example, a restaurant may reduce the price of wine but make up the shortfall in income by selling twice as much as they did at the higher price. Similarly, Wal-Mart uses a combination of effective management and information technology practices to reduce operations costs in order to deliver the lowest possible prices on its merchandise. Methods used in low-cost leadership strategies include reduction of overhead, buying or production costs and focused marketing strategies.
Product Differentiation Strategy
The second generic approach to competitive strategy is product differentiation. In this approach, the business strives to produce a product or service whose quality is perceived by customers to have unique features or characteristics that set it apart from similar offerings from its competitors. The philosophy behind this strategy is to build customer loyalty by offering something of value that is offered by no one else in the marketplace. If this situation can be developed, keeping the price of the product or service down becomes less important because customers are frequently willing to pay more to get their favorite brand. However, brand loyalty is not necessarily sufficient to make this strategy successful. Value can be a subjective quality, and there is a point beyond which most customers are no longer willing to pay a premium price. However, carefully managed, the differentiation strategy can be highly successful. For example, Merrill Lynch was able to differentiate itself from its competitors by offering integrated financial services to attract the most desirable investors. This strategy yielded not only a well recognized and highly valued brand that differentiated Merrill Lynch from its competitors, but also resulted in substantial customer loyalty and a competitive advantage over competing brokerages.
The third generic approach to competitive strategy is niche marketing. A market niche is a proportion of total sales of a given type of product or service that are earned by a particular business or organization. Businesses that utilize this strategy concentrate on one or more specific market groups based on characteristics such as buyer group, segment of a product line or market, or geographical area. For example, rather than marketing itself as a generalist, a management consulting firm might specialize in working with the telecommunications industry or only businesses of a certain side in metropolitan Chicago. This strategy is indicated in situations where the business believes that it can better serve a segment of the market rather than the entire market. For example, in the illustration of the management consulting firm, the founding partners may have come out of the telecommunications industry and, therefore, are more familiar with the nuances of that industry than they are with other industries. This puts them in a unique position (through a type of differentiation) to be better able to market to that focused segment than to the market as a whole.
Factors that Influence Competitive Advantage
There are a number of factors that can influence the competitive advantage that a business can gain from using any of these strategies. These factors include the other competitors in the industry who are also seeking to gain a competitive advantage in the same market, the bargaining power of buyers and suppliers, the threat of substitute products, and the threat from potential new competitors in the field. The interplay and relative strengths and weaknesses of these factors can influence the prices, costs, and need for investment the organizations need to make in order to be profitable. As a result, these factors affect the profitability of the industry. For example, if there is a threat of substitute products from China at a lower cost than the...
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