INFORMS Annual Meeting 2008

Information Systems and Sustained Competitive Advantage: A Resource-Based Analysis

Yan Chen1, Jun Tian1 1 School of Management, Xi'an Jiaotong University, Xi'an, 710049, China [email protected], [email protected] Björn Johansson2 2 Center for Applied ICT, Copenhagen Business School, DK-2000 Frederiksberg, Denmark [email protected]

Abstract：This paper discusses relationships between information systems and sustained competitive advantages from a resource-based perspective. From the resource-based analysis, we conclude that Information Systems Flexibility, Relationship between IT and Business Units, and IT-Business Alignment Process are three major sources that companies are able to gain sustained competitive advantages from information systems. Key words：Information Systems; Competitive Advantage; Resource-Based View

1 Introduction According to research conducted by China Computer World (CCW Research, 2007), the total sales of management software in China in 2006 is 20.67 billion RMB. Although a number of companies have invested a great deal of funds in management software, the deployment results are far from satisfactory. Martinsons (2004) conducted in-depth case studies in 8 companies that used the same SAP suit. However, Martinsons found that results were considerably different. Some have achieved desired results, while others may be considered as failure. The issue of how identical software can lead to completely different results captures the attentions of many scholars and practitioners. As more and more companies deploy, or will deploy, management software in China, there is growing awareness of information systems related issues, such as the information technology (IT) productivity paradox, business value gained by IT, and whether IT enables competitive advantage (Quan, Hu, and Wang, 2005). When it comes to whether information systems can bring competitive advantages to companies, scholars’ opinions differ. Using value chain analysis and five forces models, Porter and Millar (1985) argued that IT would contribute to companies’ competitive positions. On the other hand, Carr (2003) maintained that as IT became commodities, no companies could gain competitive advantages through applying IT. Though the issue of whether information systems can sustain a company’s long-term growth is becoming conspicuous in China recently, insufficient researches

in this respect cannot provide substantial evidence to establish cause-and-effect relationship. In this paper, we address the following issues: 1.

Whether information systems can contribute to company’s sustained competitive

advantages? 2.

How information systems contribute to company’s sustained competitive

advantages? 2 Resource-based view and information systems research Wernerfelt (1984) proposed the Resource-Based View (RBV) in a classical article in 1984. Then, scholars begin applying this theory to every aspect of strategy. Using RBV, Barney (1991) tried to discovery the sources of sustained competitive advantages. Barney argued that a resource that can bring competitive advantages to a company should be valuable, rare, imperfectly imitable, and imperfectly substitutable. Scholars who hold the resource-based view believe that internal resources are more important than external conditions in determining a company’s competitive position (David and Cynthia, 1995). 2.1 Resource-based view: approach Resource-based view rests on two basic assertions: (1) companies may possess different resources; (2) the resource differences among companies can exist for a long time. A resource that is conducive to a company’s long-term competitive advantage must have the following features (Barney, 1991). 1.

Valuable: only valuable resources can bring competitive edges to companies.

2.

Rare: scarcity is the prerequisite of value.

3.

Imperfectly imitable: a valuable, rare resource contributes to a company’s

competitive advantage; however, only when this resource cannot be easily duplicated by competitors can the competitive advantage sustain. 4.

Imperfectly substitutable: if competitors can find substitutable resources to

support their strategies, the incumbent company’s competitive advantage cannot sustain. In order to distinguish imitable resources from imperfectly imitable ones, Barney and colleges (Barney, 1991; Mata, Fuerst, and Barney, 1995) proposed three isolation mechanisms that distinguish imperfectly imitable resources. 1.

The role of history: if a successful company acquires certain resources in some

specific periods, it will be difficult or costly for other companies to attain such resources. 2.

The ambiguity of cause-and-effect relationship: if the relationship between

resources and competitive advantages cannot be fully understood, or cannot be understood at all, imitators can hardly find the right resources to duplicate. 3.

Social complexity: social complex resources, such as relations, culture, and

reputation, are hard to duplicate. 2.2 Information systems research People began to apply the resource-based view to information systems research in mid-1990s. Many scholars have tried to identify and define what constitutes information systems resources, such as Kalling (1999) and Bharadwaj, Sambamurthy and Zmud (1999). According to Wade and Hulland (2004), resources are comprised of

assets and capabilities. Assets refer to all tangible and intangible things in a company, while capabilities refer to repeated patterns that are used to capitalize assets. In terms of assets, Ross, Beath and Goodhue (1996) pointed out that there are three types of assets: 1.

Human: employees’ knowledge and skills about technology, business and

problem-solving. 2.

Technology: technical platforms, databases, and standards in the company.

3.

Relationship: cross-functional cooperation, customer relationship, and support

from top management team. In terms of capabilities, Collis (1994) defined them as socially complex routines, which determine the input-output effectiveness of the company. To be specific, Ravichandran and Lertwongsatien (2005) defined information systems capabilities as the quality and sophistication of information systems processes. According to previous research, scholars concur that tangible assets can hardly bring any sustained competitive advantage to companies. The reasons are not far to seek: since competitors can easily acquire similar tangible assets, such imitable resources can seldom become sources of competitive advantages. Even though tangible assets may sometimes contribute to competitive position, such advantages tend to be short-lived (Mata, Fuerst and Barney, 1995; Wade and Hulland, 2004). Because Carr simply focused on the tangible aspects of information technology, Carr’s conclusion that IT does not matter is subject to questions.

3 Information systems and sustained competitive advantage Information Systems Flexibility Relationship between IT and Business Units

Sustained Competitive Advantage

IT-Business Alignment Process

Figure 1 Conceptual Model This section will explore the relationships between information systems flexibility and sustained competitive advantage, between relationship between IT and business units and sustained competitive advantage, and between IT-business alignment process and sustained competitive advantage. The conceptual model shown in Figure 1 will be discussed in the subsection 3.1-3.3 and the model act as basic input for the propositions presented. According to resource-based view, information systems flexibility belongs to technological assets; relationship between IT and business units belongs to relationship assets; IT-business alignment process belongs to capabilities. 3.1 Information systems flexibility and sustained competitive advantage Using resource-based view, some scholars argue that tangible IT assets, such as hardware and networking devices, do not bring competitive advantages to companies (Barney, 1991; Mata, Fuerst and Barney, 1995). On the other hand, Bharadwaj (2000) pointed out that those scholars may simply regard IT as individual components and ignore the synergy of integrated systems. According to Byrd and Turner (2001), if the IT components in a company were highly integrated and highly modularized, they would contribute to the flexibility of the information systems and eventually to the

competitive advantages of the company. In terms of empirical evidence, Watkins (1998) investigated a large number of financial service companies in United Kingdom and found that many companies are locked-in by their inflexible IT infrastructures and cannot swiftly switch to new systems. Moreover, employees in these companies also lacked flexibility. They wanted to maintain the status quo and resisted changes. Due to lack of flexibility, the IT resources that once provided companies with competitive advantages became competitive disadvantages. Information systems flexibility is an important feature of information systems assets. According to Wang, Li, and Liu (1998), flexible assets are able to perform multiple tasks, are adaptable, and can accommodate new assets. Using this definition, we define information systems flexibility in the following way: information systems flexibility not only refers to the usability and adaptability of the technical, human, relational assets of information systems, but also refers to the ability that current systems are capable of accommodating future components. Since flexible information systems can make full use of reusable data and applications, such systems considerably reduce the workload of developers and shorten the lead time of new systems releases. In addition, the more flexible the systems are, the easier the new systems can be integrated into the old systems. Consequently, flexibility enables companies to quickly and cost-effectively apply cutting-edge technologies (Ravichandran and Lertwongsatien, 2005). In conclusion, information systems flexibility belongs to the intangible assets of

the firm. The value of flexibility lies in the ability of information systems to quickly adapt to the changes of business. Information systems that lack flexibility may become obstacles of the company. Therefore, we raise the following proposition. Proposition 1: High level of flexibility of a company’s information systems will positively affect the company’s sustained competitive advantages. 3.2 Relationship between IT and business units and sustained competitive advantage Relationship between IT and business units refers to sharing risks and responsibilities between IT and business departments (Ross, Beath and Goodhue, 1996). In order to excavate the potential of information systems, the information systems department must be willing to meet business demands (Bhatt and Grover, 2005). Bassellier, Horner and Benbasat (2001) pointed out that the ability to utilize information systems resources largely depends on the relationship between information systems department and business departments. Furthermore, it is unlikely that every company can achieve good relationship between information systems function and business functions. Venter (2000) conducted a research on service organizations and concluded that marketing decision makers generally was not satisfied with the information systems department, mainly due to lack of communications between information systems department and business departments. It seems that good relationship between information systems department and business departments is hard to achieve. Finally, Nahapiet and Ghoshal (1997) argued that trust is the foundation of

relationships. However, it takes time for information systems department and business departments to develop mutual trust. Therefore, according to the opinions of Barney and Hansen (1994), good relationship between IT and business unit constitutes sources of sustained competitive advantages. Hence, we raise the following proposition. Proposition 2：High level of relationship between information systems department and business departments will positively affects the company’s sustained competitive advantages. 3.3 IT-business alignment process and sustained competitive advantage IT-business alignment is and has been in focus of both academia and industry. Some people regard IT-business alignment as an outcome, such as Reich and Benbasat (1996; 2000). Reich and Benbasat (1996) defined alignment as “the degree to which the information technology mission, objectives, and plans support and are supported by the business mission, objectives, and plans.” On the other hand, many people view alignment as a process. For example, Luftman and Brier (1999: 115) had defined alignment as a six-step process: “Set the goals and establish a team; Understand the business-IT linkage; Analyze and prioritize gaps; Specify the actions (project management); Choose and evaluate success criteria; Sustain alignment.” IT-business alignment is such a process that it combines both IT and business knowledge and use this knowledge to create competitive advantages for firms (Kearns and Lederer, 2003). In this paper, we consider IT-business alignment as a process. The issue of IT-business alignment has captured people’s attentions since late

1970s (Luftman, 2000). According to a survey conducted by Society for Information Management in 2006 (SIM, 2006), IT-business alignment was the No.1 concern in corporate executives. Similarly, a survey conducted in China revealed that IT-business alignment was also among the top concerns of Chinese executives (Li and Wang, 2005). Empirical evidence reveals that alignment capabilities are also rare. Luftman and Brier (2000) designed a model to measure the maturity of the IT-business alignment process. They found that in a 5 levels model, 80 percent of the companies in the survey could only achieve Level-2 maturity with some characteristics of Level-3. The importance of the IT-business alignment Process lies in the fact that when companies achieve high level of alignment, it is more likely for them to apply information systems to create competitive advantages (Johnston and Carrico, 1988). Therefore, we raise the following proposition. Proposition 3: High level of the IT-business alignment process positively affects the company’s sustained competitive advantages. 4 Conclusions From the resource-based view, we analyze the relationship between information systems resources and sustained competitive advantages of the firms. The relationships between information systems flexibility and competitive advantage, between relationship between IT and business units and competitive advantage, and between IT-business alignment process and competitive advantage are explored in this paper. According to the resource-based analysis, we conclude that information

systems flexibility, relationship between IT and business units, and IT-business alignment process are three major sources of sustained competitive advantages. This model is proposed in order to explain the successes and failures of information systems deployment. The model needs to be tested with further empirical research in order to provide more implications for both academia and industry.

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