How Information Gives You Competitive Advantage

Competitive Advantage

by Michael E. Porter and Victor E. Millar

Harvard Business Review

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Michael E. Porter and Victor E. Millar

To answer these questions, managers must first understand that information technology is more than just computers. Today, information technology must be conceived of broadly to encompass the information that businesses create and use as well as a wide spectrum of increasingly convergent and linked technologies that process the information. In addition to computers, then, data recognition equipment, communications technologies, factory automation, and other hardware and services are involved.

The information revolution is affecting competition in three vital ways:

It changes industry structure and, in so doing, alters the rules of competition.
It creates competitive advantage by giving companies new ways to outperform their rivals.
It spawns whole new businesses, often from within a company’s existing operations.

This article aims to help general managers respond to the challenges of the information revolution. How will advances in information technology affect competition and the sources of competitive advantage? What strategies should a company pursue to exploit the technology? What are the implications of actions that competitors may already have taken? Of the many opportunities for investment in information technology, which are the most urgent?

We discuss the reasons why information technology has acquired strategic significance and how it is affecting all businesses. We then describe how the new technology changes the nature of competition and how astute companies have exploited this. Finally, we outline a procedure managers can use to assess the role of information technology in their business and to help define investment priorities to turn the technology to their competitive advantage.

STRATEGIC SIGNIFICANCE

Information technology is changing the way companies operate. It is affecting the entire process by which companies create their products. Furthermore, it is reshaping the product itself: the entire package of physical goods, services, and information companies provide to create value for their buyers.

An important concept that highlights the role of information technology in competition is the "value chain." This concept divides a company’s activities into the technologically and economically distinct activities it performs to do business. We call these "value activities." The value a company creates is measured by the amount that buyers are willing to pay for a product or service. A business is profitable if the value it creates exceeds the cost of performing the value activities. To gain competitive advantage over its rivals, a company must either perform these activities at a lower cost or perform them in a way that leads to differentiation and a premium price.

A company’s value activities fall into nine generic categories. Primary activities are those involved in the physical creation of the product, its marketing and delivery to buyers, and its support and servicing after sale. Support activities provide the inputs and infrastructure that allow the primary activities to take place. Every activity employs purchased inputs, human resources, and a combination of technologies. Firm infrastructure, including such functions as general management, legal work, and accounting, supports the entire chain.

Within each of these generic categories, a company will perform a number of discrete activities, depending on the particular business. Service, for example, frequently includes activities such as installation, repair, adjustment, upgrading, and parts inventory management. A company’s value chain is a system of interdependent activities, which are connected by linkages. Linkages exist when the way in which one activity is performed affects the cost or effectiveness of other activities. Linkages often create trade-offs in performing different activities that should be optimized.

Careful management of linkages is often a powerful source of competitive advantage because of the difficulty rivals have in perceiving them and in resolving trade-offs across organizational lines.

The value chain for a company in a particular industry is embedded in a larger stream of activities that we term the "value system." The value system includes the value chains of suppliers, who provide inputs (such as raw materials, components, and purchased services) to the company’s value chain. The company’s product often passes through its channels’ value chains on its way to the ultimate buyer. Finally, the product becomes a purchased input to the value chains of its buyers, who use it to perform one or more buyer activities.

Information technology is generating more data as a company performs its activities and is permitting it to collect or capture information that was not available before. Such technology also makes room for a more comprehensive analysis and use of the expanded data.

Senior executives can follow five steps to take advantage of opportunities that the information revolution has created:

Determine the role of information technology in industry structure. Managers should predict the likely impact of information technology on their industry’s structure.
Identify and rank the ways in which information technology might create competitive advantage. The starting assumption must be that the technology is likely to affect every activity in the value chain.
Investigate how information technology might spawn new businesses. Managers should consider opportunities to create new businesses from existing ones.
Develop a plan for taking advantage of information technology. The first four steps should lead to an action plan to capitalize on the information revolution.
Assess the influences of competitive advantage and competition created by information technology.