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How Information G ives YouCompetitive Advantage

by Michael E. Porter and Victor E. Millar

Reprint 85415

Harvard Business Review

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HBRJ U LY– A U G U S T 1 9 8 5

How Informa tion G ivesYou Competitive Advantage

Michael E. Porter and Victor E. Millar

The information revolution is sweepingthrough our economy. No company can es-cape its effects. Dramatic reductions in the

cost of obtaining, processing, and transmitting infor-mation are changing the way we do business.

Most general managers know that the revolution isunder way, and few dispute its importance. Asmore and more of their time and investment capi-tal is absorbed in information technology and itseffects, executives have a growing awareness thatthe technology can no longer be the exclusive terri-tory of EDP or IS departments. As they see their rivalsuse information for competitive advantage, these ex-ecutives recognize the need to become directly in-volved in the management of the new technology. Inthe face of rapid change, however, they don’t knowhow.

This article aims to help general managers respondto the challenges of the information revolution. Howwill advances in information technology affect com-petition and the sources of competitive advantage?What strategies should a company pursue to exploitthe technology? What are the implications of actionsthat competitors may already have taken? Of themany opportunities for investment in informationtechnology, which are the most urgent?

To answer these questions, managers must firstunderstand that information technology is more thanjust computers. Today, information technology must

be conceived of broadly to encompass the informa-tion that businesses create and use as well as a widespectrum of increasingly convergent and linked tech-nologies that process the information. In addition tocomputers, then, data recognition equipment, com-munications technologies, factory automation, andother hardware and services are involved.

The information revolution is affecting competi-tion in three vital ways:

It changes industry structure and, in so doing,alters the rules of competition.

Mr. Porter is professor of business administration at theHarvard Business School. He is the author of the newbest-seller Competitive Advantage (Free Press, 1985) andCompetitive Strategy (Free Press, 1980), and he recentlyserved on the Presidential Commission on IndustrialCompetitiveness.

Mr. Millar is the managing partner for practice of ArthurAndersen & Co. and is responsible for the professionalpractices of the firm worldwide. He has worked exten-sively with executives to increase their understanding ofinformation in the management function.

Authors’ note: We wish to thank Monitor Company andArthur Andersen for their assistance in preparing this arti-cle. F. Warren McFarlan also provided valuable comments.

Editor’s note: All references appear at the end of the article.

Copyright © 1985 by the President and Fellows of Harvard College. All rights reserved.

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It creates competitive advantage by giving com-panies new ways to outperform their rivals.

It spawns whole new businesses, often fromwithin a company’s existing operations.

We discuss the reasons why information technol-ogy has acquired strategic significance and how it isaffecting all businesses. We then describe how thenew technology changes the nature of competitionand how astute companies have exploited this. Fi-nally, we outline a procedure managers can use toassess the role of information technology in theirbusiness and to help define investment priorities toturn the technology to their competitive advantage.

STRATEG IC SIG N IFIC A N CE

Information technology is changing the way compa-nies operate. It is affecting the entire process bywhich companies create their products. Furthermore,it is reshaping the product itself: the entire packageof physical goods, services, and information compa-nies provide to create value for their buyers.

An important concept that highlights the role ofinformation technology in competition is the “valuechain.”1 This concept divides a company’s activitiesinto the technologically and economically distinctactivities it performs to do business. We call these“value activities.” The value a company creates ismeasured by the amount that buyers are willing topay for a product or service. A business is profitableif the value it creates exceeds the cost of performingthe value activities. To gain competitive advantageover its rivals, a company must either perform theseactivities at a lower cost or perform them in a waythat leads to differentiation and a premium price(more value).2

A company’s value activities fall into nine genericcategories (see Exhibit I). Primary activities are thoseinvolved in the physical creation of the product, itsmarketing and delivery to buyers, and its support andservicing after sale. Support activities provide theinputs and infrastructure that allow the primary ac-tivities to take place. Every activity employs pur-chased inputs, human resources, and a combinationof technologies. Firm infrastructure, including suchfunctions as general management, legal work, andaccounting, supports the entire chain. Within each ofthese generic categories, a company will perform anumber of discrete activities, depending on the par-ticular business. Service, for example, frequently in-cludes activities such as installation, repair, adjust-ment, upgrading, and parts inventory management.

A company’s value chain is a system of interde-pendent activities, which are connected by linkages.

Linkages exist when the way in which one activity isperformed affects the cost or effectiveness of otheractivities.Linkages often create trade-offs in perform-ing different activities that should be optimized. Thisoptimization may require trade-offs. For example, amore costly product design and more expensive rawmaterials can reduce after-sale service costs. A com-pany must resolve such trade-offs, in accordance withits strategy, to achieve competitive advantage.

Linkages also require activities to be coordinated.On-time delivery requires that operations, outboundlogistics, and service activities (installation, for ex-ample) should function smoothly together. Good co-ordination allows on-time delivery without the needfor costly inventory. Careful management of linkagesis often a powerful source of competitive advantagebecause of the difficulty rivals have in perceivingthem and in resolving trade-offs across organizationallines.

The value chain for a company in a particularindustry is embedded in a larger stream of activitiesthat we term the “value system” (see Exhibit II). Thevalue system includes the value chains of suppliers,who provide inputs (such as raw materials, compo-nents, and purchased services) to the company’s valuechain. The company’s product often passes throughits channels’ value chains on its way to the ultimatebuyer. Finally, the product becomes a purchased in-put to the value chains of its buyers, who use it toperform one or more buyer activities.

Linkages not only connect value activities inside acompany but also create interdependencies betweenits value chain and those of its suppliers and chan-nels. A company can create competitive advantage byoptimizing or coordinating these links to the outside.For example, a candy manufacturermay save process-ing steps by persuading its suppliers to deliver choco-late in liquid form rather than in molded bars. Just-in-time deliveries by the supplier may have the sameeffect. But the opportunities for savings through co-ordinating with suppliers and channels go far beyondlogistics and order processing. The company, suppli-ers, and channels can all benefit through better rec-ognition and exploitation of such linkages.

Competitive advantage in either cost or differentia-tion is a function of a company’s value chain. A com-pany’s cost position reflects the collective cost of per-forming all its value activities relative to rivals. Eachvalue activity has cost drivers that determine the po-tential sources of a cost advantage. Similarly, a com-pany’s ability to differentiate itself reflects the contri-bution of each value activity toward fulfillment ofbuyerneeds. Many of a company’s activities—not justits physical product or service—contribute to differ-entiation.Buyerneeds, in turn, depend notonly on theimpact of the company’s producton the buyerbutalso

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on the company’s other activities (for example, logis-tics or after-sale services).

In the search for competitive advantage, companiesoften differ in competitive scope—or the breadth oftheir activities. Competitive scope has four key di-mensions: segment scope, vertical scope (degree ofvertical integration), geographic scope, and industryscope (or the range of related industries in which thecompany competes).

Competitive scope is a powerful tool for creatingcompetitive advantage. Broad scope can allow thecompany to exploit interrelationships between thevalue chains serving different industry segments,geographic areas, or related industries. For example,two business units may share one sales force to selltheir products, or the units may coordinate the pro-curement of common components. Competing na-tionally or globally with a coordinated strategy canyield a competitive advantage over local or domesticrivals. By employing a broad vertical scope, a com-pany can exploit the potential benefits of performingmore activities internally rather than use outsidesuppliers.

By selecting a narrow scope, on the other hand, a

company may be able to tailor the value chain to aparticular target segment to achieve lower cost ordifferentiation. The competitive advantage of a nar-row scope comes from customizing the value chainto best serve particular product varieties, buyers, orgeographic regions. If the target segment has unusualneeds, broad-scope competitors will not serve it well.

Transforming the va lue cha inInformation technology is permeating the valuechain at every point, transforming the way valueactivities are performed and the nature of the linkagesamong them. It also is affecting competitive scopeand reshaping the way products meet buyer needs.These basic effects explain why information technol-ogy has acquired strategic significance and is differentfrom the many other technologies businesses use.

Every value activity has both a physical and aninformation-processing component. The physicalcomponent includes all the physical tasks required toperform the activity. The information-processingcomponent encompasses the steps required to cap-ture, manipulate, and channel the data necessary toperform the activity.

EXHIBIT IThe va lue cha in

Firminfrastructure

Human resourcemanagement

Technologydevelopment

Procurement

Inboundlogistics

Outboundlogistics

Supportactivities

Operations

Margin

Marketing andsales

Service

Primaryactivities

Supplier valuechains

Firm valuechain

Channel valuechains

Buyer valuechains

Upstreamvalue

Firmvalue

Downstreamvalue

EXHIBIT IIThe va lue system

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Every value activity creates and uses informationof some kind. A logistics activity, for example, usesinformation like scheduling promises, transportationrates, and production plans to ensure timely andcost-effective delivery. A service activity uses infor-mation about service requests to schedule calls andorder parts, and generates information on productfailures that a company can use to revise productdesigns and manufacturing methods.

An activity’s physical and information-processingcomponents may be simple or quite complex. Differ-ent activities require a different mix of the two com-ponents. For instance, metal stamping uses morephysical processing than information processing;processing of insurance claims requires just the op-posite balance.

Formost of industrial history, technological progressprincipally affected the physical component of whatbusinesses do. During the Industrial Revolution,companies achieved competitive advantage by sub-stituting machines for human labor. Information proc-essing at that time was mostly the result of humaneffort.

Now the pace of technological change is reversed.Information technology is advancing faster than tech-nologies for physical processing. The costs of infor-mation storage, manipulation, and transmittal arefalling rapidly and the boundaries of what is feasiblein information processing are at the same time ex-panding. During the Industrial Revolution, the rail-road cut the travel time from Boston, Massachusetts,to Concord, New Hampshire, from five days to fourhours, a factor of 30.3 But the advances in informationtechnology are even greater. The cost of computerpower relative to the cost of manual informationprocessing is at least 8,000 times less expensive thanthe cost 30 years ago.Between 1958 and 1980 the timefor one electronic operation fell by a factor of 80million. Department of Defense studies show thatthe error rate in recording data through bar coding is1 in 3,000,000, compared to 1 error in 300 manualdata entries.4

This technological transformation is expanding thelimits ofwhat companies can do faster than managerscan explore the opportunities. The information revo-lution affects all nine categories of value activity,from allowing computer-aided design in technologydevelopment to incorporating automation in ware-houses (see Exhibit III). The new technology substi-tutes machines for human effort in information proc-essing. Paper ledgers and rules of thumb have givenway to computers.

Initially, companies used information technologymainly for accounting and record-keeping functions.In these applications, the computers automated re-petitive clerical functions such as order processing.

Today information technology is spreading through-out the value chain and is performing optimizationand control functions as well as more judgmentalexecutive functions. General Electric, for instance,uses a data base that includes the accumulated expe-rience and (often intuitive)knowledge of its applianceservice engineers to provide support to customers byphone.

Information technology is generating more data asa company performs its activities and is permitting itto collect or capture information that was not avail-able before. Such technology also makes room for amore comprehensive analysis and use of the ex-panded data. The number of variables that a companycan analyze or control has grown dramatically. Hunt-Wesson, for example, developed a computer model toaid it in studying distribution-center expansion andrelocation issues. The model enabled the company toevaluate many more different variables, scenarios,and alternative strategies than had been possible be-fore. Similarly, information technology helped SulzerBrothers’ engineers improve the design of diesel en-gines in ways that manual calculations could not.

Information technology is also transforming thephysical processing component of activities. Com-puter-controlled machine tools are faster, more accu-rate, and more flexible in manufacturing than theolder, manually operated machines. Schlumbergerhas developed an electronic device permitting engi-neers to measure the angle of a drill bit, the tempera-ture of a rock, and other variables while drilling oilwells. The result: drilling time is reduced and somewell-logging steps are eliminated. On the West Coast,some fishermen now use weather satellite data onocean temperatures to identify promising fishinggrounds. This practice greatly reduces the fisher-men’s steaming time and fuel costs.

Information technology not only affects how indi-vidual activities are performed but, through new in-formation flows, it is also greatly enhancing a com-pany’s ability to exploit linkages between activities,both within and outside the company. The technol-ogy is creating new linkages between activities, andcompanies can now coordinate their actions moreclosely with those of their buyers and suppliers. Forexample, McKesson, the nation’s largest drug dis-tributor, provides its drugstore customers with termi-nals. The company makes it so easy for clients toorder, receive, and prepare invoices that the custom-ers, in return, are willing to place larger orders. At thesame time, McKesson has streamlined its orderprocessing.

Finally, the new technology has a powerful effecton competitive scope. Information systems allowcompanies to coordinate value activities in far-flunggeographic locations. (For example, Boeing engineers

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EXHIBIT IIIInforma tion Technology permea tes the va lue cha in

Planning models

Procurement

Operations Service

Margin

Supportactivities

Firminfrastructure

Human resourcemanagement

Automatedpersonnel scheduling

Electronicmarket research

Computer-aideddesign

On-lineprocurement of parts

Technologydevelopment

Flexiblemanufacturing

Automatedwarehouse

Automatedorderprocessing

Telemarketing

Remoteterminals forsalespersons

Remoteservicing ofequipment

Computerscheduling androuting ofrepair trucks

Marketing andsales

Outboundlogistics

Inboundlogistics

Primaryactivities

EXHIBIT IVInforma tion intensity ma trix

Low

High

Low Cement

BankingOilrefining Newspapers

Airlines

High

Informationcontent of theproduct

Infor-mationintensityofthe valuechain

EXHIBIT VDeterminants of industry a ttractiveness

Threat of newentrants

Bargainingpowerof suppliers

Threat ofsubstituteproducts orservices

Bargainingpowerof buyers

Rivalry amongexistingcompetitors

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work on designs on-line with foreign suppliers.) In-formation technology is also creating many new in-terrelationships among businesses, expanding thescope of industries in which a company must com-pete to achieve competitive advantage.

So pervasive is the impact of information technol-ogy that it confronts executives with a toughproblem:too much information. This problem creates new usesof information technology to store and analyze theflood of information available to executives.

Transforming the productMost products have always had both a physical andan information component. The latter, broadly de-fined, is everything that the buyer needs to know toobtain the product and use it to achieve the desiredresult. That is, a product includes information aboutits characteristics and how it should be used andsupported. For example, convenient, accessible infor-mation on maintenance and service procedures is animportant buyer criterion in consumer appliances.

Historically, a product’s physical component hasbeen more important than its information compo-nent. The new technology, however, makes it feasibleto supply far more information along with the physi-cal product. For example, GeneralElectric’s applianceservice data base supports a consumer hotline thathelps differentiate GE’s service support from its ri-vals’. Similarly, some railroad and trucking compa-nies offer up-to-the-minute information on thewhereabouts of shippers’ freight, which improvescoordination between shippers and the railroad. Thenew technology is also making it increasingly possi-ble to offer products with no physical component atall. Compustat’s customers have access to corporatefinancial data filed with the Securities and ExchangeCommission, and many companies have sprung upto perform energy use analyses of buildings.

Many products also process information in theirnormal functioning. A dishwasher, for example, re-quires a control system that directs the various com-ponents of the unit through the washing cycle anddisplays the process to the user. The new informationtechnology is enhancing product performance and ismaking it easier to boost a product’s informationcontent. Electronic control of the automobile, forexample, is becoming more visible in dashboard dis-plays, talking dashboards, diagnostic messages, andthe like.

There is an unmistakable trend toward expandingthe information content in products. This compo-nent, combined with changes in companies’ valuechains, underscores the increasingly strategic role ofinformation technology. There are no longer matureindustries; rather, there are mature ways of doingbusiness.

Direction & pace of changeAlthough a trend toward information intensity incompanies and products is evident, the role and im-portance of the technology differs in each industry.Banking and insurance, for example, have alwaysbeen information intensive. Such industries werenaturally among the first and most enthusiastic usersof data processing. On the other hand, physical pro-cessing will continue to dominate in industries thatproduce, say, cement, despite increased informationprocessing in such businesses.

Exhibit IV, which relates information intensity inthe value chain to information content in the prod-uct, illuminates the differences in the role and inten-sity of information among various industries. Thebanking and newspaper industries have a high infor-mation-technology content in both product and pro-cess. The oil-refining industry has a high use of infor-mation in the refining process but a relatively lowinformation content in the product dimension.

Because of the falling cost and growing capacity ofthe new technology, many industries seem to bemoving toward a higher information content in bothproduct and process. It should be emphasized thattechnology will continue to improve rapidly. Thecost of hardware will continue to drop, and managerswill continue to distribute the technology amongeven the lower levels of the company. The cost ofdeveloping software, now a key constraint, will fallas more packages become available that are easilytailored to customers’ circumstances. The applica-tions of information technology that companies areusing today are only a beginning.

Information technology is not only transformingproducts and processes but also the nature of compe-tition itself. Despite the growing use of informationtechnology, industries will always differ in their po-sition in Exhibit IV and their pace of change.

C HA N G I N G THE N ATUREO F C O MPETITI O N

After surveying a wide range of industries, we findthat information technology is changing the rules ofcompetition in three ways. First, advances in infor-mation technology are changing the industry struc-ture. Second, information technology is an increas-ingly important lever that companies can use tocreate competitive advantage. A company’s search forcompetitive advantage through information technol-ogy often also spreads to affect industry structure ascompetitors imitate the leader’s strategic innova-tions. Finally, the information revolution is spawningcompletely new businesses. These three effects are

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critical for understanding the impact of informationtechnology on a particular industry and for formulat-ing effective strategic responses.

Chang ing industry structureThe structure of an industry is embodied in fivecompetitive forces that collectively determine indus-try profitability: the power of buyers, the power ofsuppliers, the threat of new entrants, the threat ofsubstitute products, and the rivalry among existingcompetitors (seeExhibitV). The collective strength ofthe five forces varies from industry to industry, asdoes average profitability. The strength of each of thefive forces can also change, either improving or erod-ing the attractiveness of an industry.5

Information technology can alter each of the fivecompetitive forces and, hence, industry attractive-ness as well. The technology is unfreezing the struc-ture of many industries, creating the need and oppor-tunity for change. For example:

M Information technology increases the power ofbuyers in industries assembling purchased compo-nents. Automated bills for materials and vendor quo-tation files make it easier for buyers to evaluatesources of materials and make-or-buy decisions.

M Information technologies requiring large invest-ments in complex software have raised the barriersto entry. For example, banks competing in cash man-agement services for corporate clients now need ad-vanced software to give customers on-line accountinformation. These banks may also need to invest inimproved computer hardware and other facilities.

M Flexible computer-aided design and manufactur-ing systems have influenced the threat of substitu-tion in many industries by making it quicker, easier,and cheaper to incorporate enhanced features intoproducts.

M The automation of order processing and cus-tomer billing has increased rivalry in many distribu-tion industries. The new technology raises fixed costsat the same time as it displaces people. As a result,distributors must often fight harder for incrementalvolume.

Industries such as airlines, financial services, dis-tribution, and information suppliers (see the upperright-hand corner ofExhibit IV) have felt these effectsso far.6 (See the insert, “Information Technology andIndustry Structure,” for more examples.)

Information technology has had a particularlystrong impact on bargaining relationships betweensuppliers and buyers since it affects the linkagesbetween companies and their suppliers, channels,and buyers. Information systems that cross companylines are becoming common. In some cases, theboundaries of industries themselves have changed.7

Systems that connect buyers and suppliers arespreading. Xerox gives manufacturing data to suppli-ers electronically to help them deliver materials. Tospeed up order entry, Westinghouse Electric SupplyCompany and American Hospital Supply have fur-nished their customers with terminals. Among otherthings, many systems raise the costs of switching toa new partner because of the disruption and retrainingrequired. These systems tend to tie companies moreclosely to their buyers and suppliers.

Information technology is altering the relationshipamong scale, automation, and flexibility with poten-tially profound consequences. Large-scale productionis no longer essential to achieve automation. As aresult, entry barriers in a number of industries arefalling.

At the same time, automation no longer necessar-ily leads to inflexibility. For example, General Elec-tric rebuilt its Erie locomotive facility as a large-scaleyet flexible factory using computers to store all de-sign and manufacturing data. Ten types of motor

Information technology and industrystructure

Buyer power Videotex home shopping services, such asComp-U-C ard , increases buyers’ informa tion.Buyers use their persona l computers to browsethrough electronic ca ta logs and compare pricesand product specifica tions. Customers canmake purchases a t any hour a t prices typica lly25% to 30% below suggested reta il levels.Comp-U-C ard is grow ing quickly: revenueshave quintupled in two years to $9 .5 millionand membership is now 15 ,000 . According tosome projections, by the mid-1990s, 75% ofU .S. households w ill have access to suchservices.

Buyer power Shelternet, an electronic informa tion exchangeoffered by First Boston Corpora tion, a llows rea lesta te brokers to determine quickly and easilywha t mortgage packages are ava ilable andwhether the buyer w ill qua lify for financing .This improves the position of both brokers andhomebuyers in shopping for mortgages. Theparties can make preliminary commitmentsw ithin 30 minutes.

Substitution Electronic da ta bases, such as N EXIS, aresubstituting for library research and consultingfirms. N EXIS subscribers can quickly search thefull text of any article in 225 periodica ls. Usersdrastica lly reduce the time spent in litera turesearches. In addition, the buyer avoids the costof the journa l subscriptions and pays only forthe informa tion required .

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frames can be accommodated withoutmanual adjust-ments to the machines. After installation of a“smart” manufacturing system, BMW can build cus-tomized cars (each with its own tailored gearbox,transmission system, interior, and other features) onthe normal assembly line. Automation and flexibilityare achieved simultaneously, a pairing that changesthe pattern of rivalry among competitors.

The increasing flexibility in performing manyvalue activities combined with the falling costs ofdesigning products has triggered an avalanche of op-portunities to customize and to serve small marketniches. Computer-aided design capability not onlyreduces the cost of designing new products but alsodramatically reduces the cost of modifying or addingfeatures to existing products. The cost of tailoringproducts to market segments is falling, again affect-ing the pattern of industry rivalry.

While managers can use information technology toimprove their industry structure, the technology alsohas the potential to destroy that structure. For exam-ple, information systems now permit the airline in-dustry to alter fares frequently and to charge manydifferent fares between any two points. At the sametime, however, the technology makes the flight andfare schedules more readily available and allowstravel agents and individuals to shop around quicklyfor the lowest fare. The result is a lower fare structurethan might otherwise exist. Information technologyhas made a number of professional service industriesless attractive by reducing personal interaction andmaking service more of a commodity. Managers mustlook carefully at the structural implications of thenew technology to realize its advantages or to beprepared for its consequences.

Crea ting competitive advantageIn any company, information technology has a pow-erful effect on competitive advantage in either costor differentiation. The technology affects value ac-tivities themselves or allows companies to gain com-petitive advantage by exploiting changes in competi-tive scope.

Lowering cost. As we have seen, information tech-nology can alter a company’s costs in any part of thevalue chain.8 The technology’s historical impact oncost was confined to activities in which repetitiveinformation processing played a large part. Theselimits no longer exist, however. Even activities likeassembly that mainly involve physical processingnow have a large information-processing component.

Canon, for example, built a low-cost copier assem-bly process around an automated parts-selection andmaterials-handling system. Assembly workers havebins containing all the parts needed for the particular

copier. Canon’s success with this system derivesfrom the software that controls parts inventory andselection. In insurance brokerage, a number of insur-ance companies usually participate in underwritinga contract. The costs of documenting each company’sparticipation are high. Now a computer model canoptimize (and often reduce) the number of insurersper contract, lowering the broker’s total cost. In gar-ment production, equipment such as automated pat-tern drawers, fabric cutters, and systems for deliver-ing cloth to the final sewing station have reduced thelabor time for manufacturing by up to 50%. (See theinsert, “Aim: A Competitive Edge,” for further exam-ples.)

In addition to playing a direct role in cost, informa-tion technology often alters the cost drivers of activi-ties in ways that can improve (or erode) a company’srelative cost position. For example, Louisiana Oil &Tire has taken all ten of its salespeople off the roadand made them into telemarketers. As a result, salesexpenses have fallen by 10% and sales volume hasdoubled. However, the move has made the nationalscale of operations the key determinant of the cost ofselling, rather than regional scale.

Enhancing differentiation. The impact of informa-tion technology on differentiation strategies is equallydramatic. As noted earlier, the role of a company andits product in the buyer’s value chain is the keydeterminant of differentiation. The new informationtechnology makes it possible to customize products.Using automation, for instance, Sulzer Brothers hasincreased from five to eight the number of cylinder

Aim: a competitive edge

Lowering cost C asinos spend up to 20% of revenues oncomplimentary services for high rollers. O neassignment for pit bosses has a lways been tokeep an eye out for the big spenders. N ow,however, many casinos have developedcomputer systems to ana lyze da ta oncustomers. C aesar’s Pa lace lowered itscomplimentary budget more than 20% bydeveloping a player-ra ting system for moreaccura te identifica tion of big spenders.

Enhancingdifferentiation

American Express has developeddifferentia ted travel services for corpora tecustomers through the use of informa tiontechnology. The services include arrang ingtravel and close monitoring of individua lexpenses. Computers search for the lowesta irplane fares, track travel expenses for eachcardholder, and issue monthly sta tements.

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bore sizes of new low-speed marine diesel engines.Shipowners now choose an engine that is more pre-cisely suited to their needs and thereby recoup sig-nificant fuel savings. Similarly, Digital Equipment’sartificial intelligence system, XCON, uses decisionrules to develop custom computer configurations.This dramatically reduces the time required to fillorders and increases accuracy—which enhances Digi-tal’s image as a quality provider.

By bundling more information with the physicalproduct package sold to the buyer, the new technol-ogy affects a company’s ability to differentiate itself.For example, a magazine distributor offers retailersprocessing credits for unsold items more efficientlythan its competitors. Similarly, the embedding ofinformation systems in the physical product itself isan increasingly powerful way to distinguish it fromcompeting goods.

Changing competitive scope. Information technol-ogy can alter the relationship between competitivescope and competitive advantage. The technologyincreases a company’s ability to coordinate its activi-ties regionally, nationally, and globally. It can unlockthe power of broader geographic scope to create com-petitive advantage. Consider the newspaper industry.Dow Jones, publisher of the Wall Street Journal,pioneered the page transmission technology thatlinks its 17 U.S. printing plants to produce a trulynational newspaper. Such advances in communica-tion plants have also made it possible to move towarda global strategy. Dow Jones has started the AsianWall Street Journal and the Wall Street Journal-Euro-peanEdition and shares much of the editorial contentwhile printing the papers in plants all over the world.

The information revolution is creating interrela-tionships among industries that were previouslyseparate. The merging of computer and telecommu-nications technologies is an important example. Thisconvergence has profound effects on the structure ofboth industries. For example, AT&T is using its po-sition in telecommunications as a staging point forentry into the computer industry. IBM, which re-cently acquired Rolm, the telecommunicationsequipment manufacturer, is now joining the compe-tition from the other direction. Information technol-ogy is also at the core of growing interrelationshipsin financial services, where the banking, insurance,and brokerage industries are merging, and in officeequipment, where once distinct functions such astyping, photocopying, and data and voice communi-cations can now be combined.

Broad-line companies are increasingly able to seg-ment their offerings in ways that were previouslyfeasible only for focused companies. In the truckingindustry, Intermodal Transportation Services, Inc. ofCincinnati has completely changed its system for

quoting prices. In the past, each local office set pricesusing manual procedures. Intermodal now uses mi-crocomputers to link its offices to a center that cal-culates all prices. The new system gives the companythe capacity to introduce a new pricing policy to offerdiscounts to national accounts, which place theirorders from all over the country. Intermodal is tailor-ing its value chain to large national customers in away that was previously impossible.

As information technology becomes more wide-spread, the opportunities to take advantage of a newcompetitive scope will only increase. The benefits ofscope (and the achievement of linkages), however,can accrue only when the information technologyspread throughout the organization can communi-cate. Completely decentralized organizational designand application of information technology willthwart these possibilities, because the informationtechnology introduced in various parts of a companywill not be compatible.

Spawning new businessesThe information revolution is giving birth to com-pletely new industries in three distinct ways. First, itmakes new businesses technologically feasible. Forexample, modern imaging and telecommunicationstechnology blend to support new facsimile servicessuch as Federal Express’s Zapmail. Similarly, ad-vances in microelectronics made personal computingpossible. Services such as Merrill Lynch’s Cash Man-agement Account required new information technol-ogy to combine several financial products into one.

Second, information technology can also spawnnew businesses by creating derived demand for newproducts. One example is Western Union’s EasyLinkservice, a sophisticated, high-speed, data-communi-cations network that allows personal computers,word processors, and other electronic devices to sendmessages to each other and to telex machinesthroughout the world. This service was not neededbefore the spread of information technology caused ademand for it.

Third, information technology creates new busi-nesses within old ones. A company with informationprocessing embedded in its value chain may haveexcess capacity or skills that can be sold outside.Sears took advantage of its skills in processing creditcard accounts and of its massive scale to providesimilar services to others. It sells credit-authorizationand transaction-processing services to Phillips Petro-leum and retail remittance-processing services toMellon Bank. Similarly, a manufacturer of automo-tive parts, A.O. Smith, developed data-communica-tions expertise to meet the needs of its traditionalbusinesses. When a bank consortium went lookingfor a contractor to run a network of automated teller

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machines, A.O. Smith got the job. Eastman Kodakrecently began offering long-distance telephone anddata-transmission services through its internal tele-communications system. Where the informationtechnology used in a company’s value chain is sensi-tive to scale, a company may improve its overallcompetitive advantage by increasing the scale of in-formation processing and lowering costs. By sellingextra capacity outside, it is at the same time generat-ing new revenue.

Companies also are increasingly able to create andsell to others information that is a by-product of theiroperations. National Benefit Life reportedly mergedwith American Can in part to gain access to data onthe nine million customers ofAmerican Can’s direct-mail retailing subsidiary. The use of bar-code scan-ners in supermarket retailing has turned grocerystores into market research labs. Retailers can run anad in the morning newspaper and find out its effectby early afternoon. They can also sell this data tomarket research companies and to food processors.

C O MPETI N G I N THE A GEO F I N F O RM ATI O N

Senior executives can follow five steps to take advan-tage of opportunities that the information revolutionhas created.

1 Assess information intensity. A company’s firsttask is to evaluate the existing and potential informa-tion intensity of the products and processes of itsbusiness units. To help managers accomplish this, wehave developed some measures of the potential im-portance of information technology.

It is very likely that information technology willplay a strategic role in an industry that is charac-terized by one or more of the following features:

M Potentially high information intensity in thevalue chain—a large number of suppliers or custom-ers with whom the company deals directly, a productrequiring a large quantity of information in selling, aproduct line with many distinct product varieties, aproduct composed of many parts, a large number ofsteps in a company’s manufacturing process, a longcycle time from the initial order to the deliveredproduct.

M Potentially high information intensity in theproduct—a product that mainly provides informa-tion, a product whose operation involves substan-tial information processing, a product whose userequires the buyer to process a lot of information, aproduct requiring especially high costs for buyertraining, a product that has many alternative uses or

is sold to a buyer with high information intensity inhis or her own business.

These may help identify priority business units forinvestment in information technology. When select-ing priority areas, remember the breadth of informa-tion technology—it involves more than simple com-puting.

2 Determine the role of information technologyin industry structure. Managers should predict thelikely impact of information technology on theirindustry’s structure. They must examine how infor-mation technology might affect each of the five com-petitive forces. Not only is each force likely to changebut industry boundaries may change as well. Chancesare that a new definition of the industry may benecessary.

Many companies are partly in control of the natureand pace of change in the industry structure. Compa-nies have permanently altered the bases of competi-tion in their favor in many industries through aggres-sive investments in information technology and haveforced other companies to follow. Citibank, with itsautomated teller machines and transaction process-ing; American Airlines, with its computerized reser-vations system; and USA Today, with its newspaperpage transmission to decentralized printing plants,are pioneers that have used information technologyto alter industry structure. A company should under-stand how structural change is forcing it to respondand look for ways to lead change in the industry.

3 Identify and rank the ways in which informa-tion technologymight create competitive advantage.The starting assumption must be that the technologyis likely to affect every activity in the value chain.Equally important is the possibility that new linkagesamong activities are being made possible. By takinga careful look, managers can identify the value activi-ties that are likely to be most affected in terms of costand differentiation. Obviously, activities that repre-sent a large proportion of cost or that are critical todifferentiation bear closest scrutiny, particularly ifthey have a significant information-processing com-ponent. Activities with important links to other ac-tivities inside and outside the company are also criti-cal. Executives must examine such activities forways in which information technology can createsustainable competitive advantage.

In addition to taking a hard look at its value chain,a company should considerhow information technol-ogy might allow a change in competitive scope. Caninformation technology help the company serve newsegments?Will the flexibility of information technol-ogy allow broad-line competitors to invade areas thatwere once the province of niche competitors? Will

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information technology provide the leverage to ex-pand the business globally? Can managers harnessinformation technology to exploit interrelationshipswith other industries? Or, can the technology help acompany create competitive advantage by narrowingits scope?

A fresh look at the company’s product may also bein order:

Can the company bundle more information withthe product?

Can the company embed information technol-ogy in it?

4 Investigate how information technologymightspawn new businesses. Managers should consideropportunities to create new businesses from existingones. Information technology is an increasingly im-portant avenue for corporate diversification. Lock-heed, for example, entered the data base business byperceiving an opportunity to use its spare computercapacity.

Identifying opportunities to spawn new businessesrequires answering questions such as:

What information generated (or potentially gen-erated) in the business could the company sell?

What information-processing capacity exists in-ternally to start a new business?

Does information technology make it feasible toproduce new items related to the company’sproduct?

5 Develop a plan for taking advantage of informa-tion technology. The first four steps should lead to anaction plan to capitalize on the information revolu-tion. This action plan should rank the strategic in-vestments necessary in hardware and software, andin new product development activities that reflectthe increasing information content in products. Or-ganizational changes that reflect the role that thetechnology plays in linking activities inside and out-side the company are likely to be necessary.

The management of information technology canno longer be the sole province of theEDP department.Increasingly, companies must employ informationtechnology with a sophisticated understanding of therequirements for competitive advantage. Organiza-tions need to distribute the responsibility for systemsdevelopment more widely in the organization. At thesame time, general managers must be involved toensure that cross-functional linkages, more possibleto achieve with information technology, are ex-ploited.

These changes do not mean that a central informa-tion-technology function should play an insignificant

Sears and the consensus

By the early 1920s, however, the “buyer for the Ameri-can farmer” concept had begun to lose its relevance toeconomic and socia l rea lities. W ith the coming of theautomobile and good roads, rura l America rapidly be-came less isola ted , and the kinds of merchandise of in-terest to the farm family came more and more to bethe kinds of merchandise of interest to city dwellers aswell. In this process, radio advertising a lso played asignificant role . There was no longer a separa tely de-finable rura l market w ith its own unique characteristicsand needs; tha t market, and the previously distinct ur-ban market, were homogeniz ing into a genera l Ameri-can mass market.

The then managements of Sears and W ard’s a likefa iled to grasp the significance of these new develop-ments. They knew tha t their companies had problems;sa les were increasingly difficult to get and profits wereslipping .

Sears found the answer first—fortuitously. By bring-ing G enera l Wood into the company in N ovember of1924 , Julius Rosenwa ld acquired much more than thehigher order of manageria l skills he was seeking . Heacquired a man who was capable of introducing anew entrepreneuria l concept as fully responsive to theneeds and opportunities of the times as Rosenwa ld’sown had been to the needs and opportunities of aquarter-century earlier.

O ne of Wood’s interesting persona l tra its was a fas-cina tion w ith census da ta . This had its orig ins duringhis years on the C ana l, where good reading ma te-ria l—or, for tha t ma tter, any reading ma teria l—wasscarce . The story is told tha t once , while confined tothe infirmary w ith a minor a ilment, the only thingWood could find to read was the Sta tistica l Abstract ofthe United Sta tes, which he began perusing simply topass the time but soon came to study avidly. W hetheror not the infirmary story is apocrypha l, it is clear tha tin his C ana l experience he acquired a taste for andan understanding of demographic and economic sta tis-tics tha t stayed w ith him for the rest of his life . Duringhis ma ture years, there was a w idely circula ted myth(probably grounded in fact) tha t the Sta tistica l Abstractwas his favorite bedside reading . In any event, hiskeen grasp of ma jor trends in American life was evi-dent in his business planning and even ordinary con-versa tion.

From Shaping an American Institution: Robert E. W ood andSears, Roebuck by James C . Worthy (Urbana and Chicago, Ill.: Uni-versity of Illinois Press) Copyright © 1984 Reprinted w ith permissionof the publisher.

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role. Rather than control information technology,however, an IS manager should coordinate the archi-tecture and standards of the many applicationsthroughout the organization, as well as provide assis-tance and coaching in systems development. Unlessthe numerous applications of information technol-ogy inside a company are compatible with each other,many benefits may be lost.

Information technology can help in the strategyimplementation process. Reporting systems cantrack progress toward milestones and success factors.By using information systems, companies can meas-ure their activities more precisely and help motivatemanagers to implement strategies successfully.

The importance of the information revolution isnot in dispute. The question is not whether informa-tion technology will have a significant impact on acompany’s competitive position; rather the questionis when and how this impact will strike. Companiesthat anticipate the power of information technologywill be in control of events. Companies that do not

respond will be forced to accept changes that othersinitiate and will find themselves at a competitivedisadvantage.

1. Formore information on the value chain concept, see MichaelE. Porter, Competitive Advantage (New York: Free Press, 1985).

2. For a discussion of the two basic types of competitive advan-tage, see Michael E. Porter, Competitive Strategy (New York: FreePress, 1980), Chapter 2.

3. Alfred D. Chandler, Jr., The Visible Hand (Cambridge:Belknap Press of Harvard University Press, 1977), p. 86.

4. James L. McKenney and F. Warren McFarlan, “The Informa-tion Archipelago—Maps and Bridges,” HBR September–October1982, p. 109.

5. See Michael E. Porter, “How Competitive Forces ShapeStrategy,” HBR March–April 1979, p. 137.

6. See F. Warren McFarlan, “Information Technology Changesthe Way You Compete,” HBR May–June 1984, p. 98.

7. James I. Cash, Jr. and Benn R. Konsynski, “IS RedrawsCompetitive Boundaries,” HBR March–April 1985, p. 134.

8. See Gregory L. Parsons, “Information Technology: A NewCompetitive Weapon,”SloanManagementReview, Fall 1983, p. 3.

9. Victor E. Millar, “Decision-Oriented Information,” Datama-tion, January 1984, p. 159.

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