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USING INFORMATION TECHNOLOGY

AS A COMPETITIVE WEAPON

Prepared for

Dr. Mary Lacity

IS 6800

Management of Information Systems

Prepared by

Svetlana A. Panicheva

David J. Bracci

09 December 2005

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Executive Summary

Information technology has been the platform many companies have used to gain a competitive advantage over their competitors. Coupled with a well thought-out strategy and company commitment, information technology can provide value to not only the company but to the consumer as well. This paper presentstwo company case studies that demonstrate how information technology, when properly applied and managed, can add value to a company and generate millions of dollars of revenue. The companies presented in the case study are very different. One company is a start-up selling groceries in New York. The other is an established company selling fertilizer in India. Although seeming quite different, a commonality they share is they both have used information technology to create a competitive advantage.

A company’s competitive advantage initiates from their business strategy. Using the cost advantage strategy, a company strives to become the low-cost producer within its industry. When the differentiation strategy is used, a company sets out to establish a unique element to their product or process that is greatly valued by consumers. A company using the focus strategy chooses a sector of an industry and shapes their strategy to serve this sector exclusively. Information technology has a tremendous effect on competitive advantage using either cost or differentiation strategies.

Michael Porter believes competitive advantage develops out of the value a company creates for its buyers [1]. Porter calls the collection of activities in a company uses to design, produce, market, deliver, and support a product the value chain. A company can claim a competitive advantage when it is able to provide the same products or services to its customers as its competitors but at a lower cost or with benefits that exceed those of its competitor’s products. Information technology alone does not allow a company to gain a competitive advantage.

FreshDirect Case Study

According to the Food Marketing Institute Survey the online groceries sales were 85 millions in 1998, and was expected to reach 1.3 billion by 2002 [7]. FreshDirect started its operation in September, 2002 as seller of raw, semi-prepared and prepared food. It was recognized by the New Yorkers as an On-line Grocer. FreshDirect was formed in 1999 by the ex-investment banker Jason Ackerman and Joe Fedele, famous in grocery industry for the Fairway Uptown. The CEO hired category experts to ensure product quality. He also invested in a high-tech plant to protect product quality. The CEO closely controlled geographic reach to shield quality. FreshDirect’s ideal customer is one who buys 70 % of perishable food at least twice a week and purchases packaged food from Costco or Sam’s Club once or twice a month [8] [10]. To achieve the operation efficiencies, FreshDirect hired Myles Trachtenberg, a 15-year IT veteran, for the position of chief technology officer [12]. Being 99% dependent on the internet service FreshDirect had been struggling with IT performance during the first year. In November 2003 Myles Trachtenberg, as CTO of the company, rebuilt the IT structure based on three standard systems. Trachtenberg identified the new FreshDirect system as three types of businesses pulled together: “FreshDirect has sought to emulate the E-commerce success of Amazon.com, the just-in-time manufacturing capabilities of Dell, and the distribution expertise of FedEx” [13]. FreshDirect buys directly from growers or producers that normally sell through distributors, eliminating middle man in the supplying chain. Even though the high technology is applied through the order processing, all key positions are controlled and operated by people. The CEO of FreshDirect, Dean Furbush, recognizes the current operations as completely reliant on the company’s software platform. FreshDirect is not the first company that followed the great internet grocery scheme, but it is eager to avoid the other’s mistakes. FreshDirect has 250,000 registered customers, which place up to 23,000 orders per week.

Nagarjuna Fertilizers and Chemicals Ltd. Case Study

Nagarjuna Fertilizers and Chemicals Ltd. (NFCL) is an Indian company that has used information technology to gain a competitive advantage in the fertilizer market in the Indian state Andhra Pradesh. In 1943 British-ruled India was the site of the world’s worst recorded food related disaster. India’s Green Revolution had several elements that contributed to its success in preventing another similar disaster. India’s fertilizer industry also played a vital role in sustaining the Green Revolution and achieving self-sufficiency in food-grain production. In the late 1990’s, NFCL restructured their business and operational objectives to grow the base of the company. NFCL realized that information technology could help the company in many ways. NFCL used the i-Kisan Agricultural Portal to differentiate themselves from their competition and add value to their customers – the rural farmer. i-Kisan.com is not only an example of how a company can differentiate itself from the competition, it is an example how differentiation can be achieved using information technology. i-Kisan is deployed to rural India through internet kiosks. i-Kisan provides many elements of information for the customer. i-Kisan is used to add value to NFCL as defined by Porter’s Value Chain model [1]. Applying information technology, NFCL believes they have created a competitive advantage through their creation of i-Kisan agricultural portal [23]. Although i-Kisan marketing and sales approach could be duplicated by a competitor, the immediate future appears to be bright for i-Kisan.

Creating a competitive advantage using information technology is difficult, and many believe that the opportunity no longer exists [25]. The lack of success in using information technology for a competitive advantage could be blamed on the limited emphasis most companies place on technology. Jack Welch believes, “strategy is a living, breathing, totally dynamic game” [9]. Recognizing the need for dynamic information technology companies are able to keep up with the fast developing competition [27].

Information technology can be used in a varied assortment of industries to gain a competitive advantage. The use of information technology as a competitive weapon is typically thought of as being applied by large or technology driven companies, such as Wal-Mart and Dell. The case studies presented in this paper, however, demonstrate that the technology can be applied successfully by smaller companies and in other markets as well. With FreshDirect, the study showed that if a start-up company applies information technology appropriately it can be used to create a competitive advantage. This was true despite a recent failure by a company with the same type of business venture. NFCL demonstrated how an established company could use information technology to gain a competitive advantage in a low-technical business field. Both companies were able to use information technology to add value to their company and for their customers.

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USING INFORMATION TECHNOLOGY

AS A COMPETITIVE WEAPON

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Introduction

Information technology has been the platform many companies have used to gain a competitive advantage over their competitors. Coupled with a well thought-out strategy and company commitment, information technology can add value to not only the company but to the consumer as well. This paper presents two company case studies that demonstrate how information technology, when properly applied and managed, can add value to a company and generate millions of dollars of revenue. The companies presented in the case study are very different. One company is a start-up selling groceries in New York. The other is an established company selling fertilizer in India. Although seeming quite different, a commonality they share is they both have used information technology to create a competitive advantage.

Strategy Is the Prerequisite for Establishing Competitive Advantage

A company’s competitive advantage initiates from their business strategy. It is important to understand the role strategy plays in gaining a competitive advantage before exploring the ways competitive advantages are obtained. The strategy will determine what products are made, how they are made, what assets are needed, who the product will be marketed to, etc. Michael Porter describes strategy as an “internally consistent configuration of activities that distinguishes a firm from its rivals” [1]. Strategy makes a company unique and can give them a competitive advantage by providing direction, building brand reputation, setting the right goals, adding superior performance, defining a market position, and creating a unique value proposition [2]. It is the strategy that makes most assets and processes valuable to a company. If the strategy is changed, these assets and processes may change in value. Strategy is the design of activities a company uses to add value for a chosen customer [1].

Competitive AdvantageStrategies

Michael Porter believes competitive advantage develops out of the value a company creates for its buyers [1]. Porter identifies two basic types of competitive advantage: cost advantage and differentiation [1]. A company uses these types of competitive advantage, along with the scope of activities, to achieve one of three generic strategies. The strategies are cost leadership, differentiation, and focus. Figure 1 shows the relationship between these competitive advantages and strategies.

Figure 1. Three Generic Strategies [1]

Cost leadership and differentiation strategies try to find competitive advantage in a broad range of an industry segment, while the focus strategies attempts cost advantage (cost focus) or differentiation (differentiation focus) in a narrow segment [1].

Using the cost advantage strategy, a company strives to become the low-cost producer within its industry. The sources of the cost advantage differ between industries and companies. Examples of cost advantage sources include economies of scale, proprietary technology, and preferential access to raw materials [1].

When the differentiation strategy is used, a company sets out to establish a unique element to their product or process that is greatly valued by consumers. The company selects one or more elements highly desired by consumers and focuses on uniquely positioning itself to meet those needs. They must establish themselves in the consumer’s view as offering something different from the competition and offering value. If successful, the company can command premium prices. The differentiation can be based on the product, the sales delivery system, the marketing approach, and a variety of other variables [1].

A company using the focus strategy chooses a sector of an industry and shapes their strategy to serve this sector exclusively. The focuser does not seek a competitive advantage over the entire industry but instead optimizes its strategy to concentrate only on the target sector. The focus strategy has two variants; cost focus and differentiation focus. A company uses the cost focus strategy to establish a cost advantage in its target sector and a differentiation focus to establish differentiation in the target sector. Both of the variants of the focus strategy rely on differences between the selected industry sector and the remaining portion of the industry. The cost focus takes advantage of differences in cost behavior in some sectors while differentiation focus takes advantage of unique needs of consumers in a particular sector. Competitive advantage can be gained by a company using the focus strategy by devoting its attention to a select sector of an industry [1].

Information technology has a tremendous effect on competitive advantage using either cost or differentiation strategies. Information technology can be used to lower costs on any part of the value chain, which will be described later. Cost drivers can be altered by information technology to improve a company’s relative cost position. Information technology can also play a positive role in enhancing differentiation [3]. Value chain activities can be modified and tailored by information technology to differentiate a company from the rest of the industry.

Two Case Studies will be presented. This paper will present two company case studies where information technology, along with two different strategies, is used to gain a competitive advantage. Freshdirect, a New York grocery business operating through the internet, has used information technology to apply a cost focus strategy on a sector of the market to gain a competitive advantage. Nagarjuna Fertilizers and Chemicals Ltd, an Indian fertilizer company, has used the differentiation strategy along with information technology to gain a competitive advantage in an entire sector of India – the state of Andra Pradesh.

Value Chain

Porter calls the collection of activities in a company uses to design, produce, market, deliver, and support a product the value chain. These activities in Porter’s model are shown in Figure 2 [1].

Figure 2. Value Chain [1]

The value chain activities can be divided into two broad types; primary activities and support activities. The primary activities shown along the bottom of Figure 2 involve the physical creation of the product or service, its sale and transfer to the consumer, and after-sale assistance. The bottom layer in Figure 2 value chain model contains all of the primary functions found in any company. The support activities support the primary activities and themselves and are shown layered above the primary activities in Figure 2. The value chain activities are individual elements that individually or collectively can produce competitive advantage. For the two case studies presented in this paper, the value chain model will be used to show where information technology is used to gain competitive advantage [1].

Competitive Advantage

A company can claim a competitive advantage when it is able to provide the same products or services to its customers as its competitors but at a lower cost or with benefits that exceed those of its competitor’s products. A competitive advantage allows a company to create a greater value for its customers and greater profit for itself [4]. To achieve competitive advantage, a company needs to attain a capability that their competitors cannot equal. This is what is referred to as “asymmetry.” Wal-Mart’s data mining program, where they analyzeconsumer’s buying habits and use the information to increase sales, is an example of asymmetry. Anheuser-Busch has also established asymmetry by using demographic analysis to align products and distribution to consumer demand. Asymmetries in business may result from structural advantages, such as the size of the company, privileged relationships, extraordinary abilities in execution, or unusual insight or foresight [5]. Information technology can be used to create or increase the asymmetries for any of these advantages.

How Information Technology Can Be Used to Gain a Competitive Advantage

Information technology alone does not allow a company to gain a competitive advantage. However, information technology used strategically to improve key business activities can strengthen a company’s position [6]. These activities can be seen in Porter’s value chain model in Figure 2. A company that is first in its industry to transform and infuse information technology into their business can gain an edge. For many leading companies, strategic information technology management has become a core competency. They have seen a stronger bottom line business performance and a competitive advantage [6].

Business priorities and information technology must be aligned to maximize success and is critical for achieving and sustaining a competitive advantage. Many companies believe theyhave these functions aligned; however few truly do [6].

FreshDirect Case Study

According to the Food Marketing Institute Survey, the online groceries sales were 85 millions in 1998 and were expected to reach 1.3 billion by 2002 [7]. However, most of the “pure-place” grocery on-line stores have failed, opening the online market to traditional “bricks-and-mortars” stores. The following reasons were behind the fail of first wave of online grocery stores: traditional supermarket approach, too broad a range of products varieties, and logistics problems due to attempts to cover large. So, in 2002 why did another on-line grocer, FreshDirect, think they could succeed when others had failed?

FreshDirect started its operation in September, 2002 as a seller of raw, semi-prepared and prepared food. It was recognized by New Yorkers as an on-line grocer. From day one, 99% of their business was generated through the internet ( The company opened its operation one year after the first great internet grocery distributor, Webvan, failed.

FreshDirect was formed in 1999 by the ex-investment banker Jason Ackerman and Joe Fedele, famous in grocery industry for the Fairway Uptown. The Fairway Uptown was one of the largest sensationsNew York’s grocery industry, known for low prices and ultra-fresh produce and meats. Jason Ackerman and Joe Fedele introduced FreshDirect not as an internet grocery store but as a high-quality food preparation and delivery service. Their idea was to organize a perishable food company through the internet as the most advanced method of product price reduction. Starting from day one, a basket of 25 items at FreshDirect was selling for 28% less than at a high-end New York grocer, Garden of Eden, and 12.5% less than the sale-circular products at grocery chain Gristede’s. FreshDirect Strategy is to deliver the highest quality perishable food at lowest cost to the customer with the help of the best experts which apply the best practices to delivery the quality 99.9% [8] [9] [10].

The CEO hired category experts to ensure product quality. Joe Fedele put together a team of industry veterans to operate the food processing facility, which has been considered the most automated plant in food industry. Each food category was organized into separate departments headed by an expert in that category. The managers run the daily operations and recommend food storage, processing and preparation. Their recommendations and recipes have been converted into program formats for manufacturing software system. The SAP software guides the workers through the procedures during order processing. Each member of the management team has been introduced to the customer on the website; their best recipes are also available to the customer through the website. FreshDirect’s management team has created new industry standards in processing and handling of perishable foods. Their requirements may be considered as extreme, but they guarantee the quality.