Is Creating Competitive Advantage For Firms Commerce Essay

Published:

Understanding the role of IS in creating competitive advantage for firms has gained considerable interest among IS researchers. Based on the resource-based view, a number of studies have attempted to explain the role of IS as a resource, in generating strategic benefits. Anyhow, there is little understanding of how firms combine various resources that work in coordination with each other to generate competitive advantage in a given area. This research intends to identify the set of supply chain resources that when augmented by IS could generate competitive advantage in supply chain. We further identify the effect of this competitive advantage on firm performance. Hence the purpose of research is 1. Identification of key complementary resources for IS to generate supply chain advantage, 2. In the presence of these resources, showing the effect of IS on competitive advantage and 3. Demonstrating the impact of supply chain competitive advantage on firm performance. The research will focus on firms in the dairy sector in Pakistan. Further research may show if the same set of resources can lead to supply chain advantage in other sectors and contexts.

Prior Research & Problem Identification

Introduction:

Lady using a tablet
Lady using a tablet

Professional

Essay Writers

Lady Using Tablet

Get your grade
or your money back

using our Essay Writing Service!

Essay Writing Service

One important concern for researchers in strategic management is to understand how firms create and sustain competitive advantage (Porter, 1985; Rumelt, 1984). A number of theories in strategic management literature have been proposed to explain the existence and size of firms, for example the Transaction Cost Economics (Williamson, 1975) that is based on the premise that firms exist to reduce market transaction costs. One of the most prominent in this area, the positioning school has dominated strategy research for several decades. According to this school firm's performance depend both on the industry in which the firm operates and on firm's position in the industry. Following from the positioning school, the framework that has been most widely used to understand and formulate strategy suggests that firms gain competitive advantage by capitalizing on strengths and avoiding weaknesses while exploiting opportunities and neutralizing threats in environment. Although both internal analyses of organizational strengths and weaknesses and external analyses of opportunities and threats have received some attention in literature, there has been primary focus on analyzing firm's opportunities and threats in its competitive environment (Barney, 1985). For example, Porter's (1980) five forces model emphasizes the actions a firm can take to create defensible position against competitive forces.

Resource-based view exists as another theory of the firm emphasizing internal strengths of organizations derived from costly-to-copy resources (Penrose 1959, Peteraf 1993).

A number of information systems' (IS) researchers have used resource-based view to explain the role of IT in generating competitive advantage for firms (Mata et al., 1995, Powell and Dent-Micallef, 1997, Ray et al., 2001).

Resource-based view focuses on strategic resources. These resources, according to resource-based view, are the sources of economic rent and hence fundamental drivers of performance and competitive advantage (Conner, 1991). Resource-based view builds on two fundamental assumptions i.e. resource heterogeneity and immobility. Resource heterogeneity means that resources differ across firms. If all firms had same resources than no one firm will be able to generate above normal returns because all firms would be able to use the resources in similar fashion thereby limiting the advantage any one firm may get by possessing these resources. Similarly if resources could be easily transferred from one organization to another than any one firm possessing resources with ability to generate extra returns would not be able to do so because other firms may acquire such resources. According to Barney (1991), firm resources to have the potential to generate sustained competitive advantage should have four attributes. Firstly, they must be valuable to exploit opportunities and/or neutralize threats in a firm's environment. Valuable resources enable a firm to conceive of or implement strategies that improve its efficiency or effectiveness. The resources must also be rare among firm's current and potential competition. If a particular valuable firm resource is possessed by a large number of firms, then any one firm will not be able to gain a competitive advantage since all firms will be in a position to exploit the resources in the same way. Thirdly resources should be imperfectly immobile. If other organizations could acquire the resources that a firm possesses than it would soon loose its advantage. Finally the resources should be non-substitutable. If substitutes are available for a firm's resource, then other firms will be able to substitute this resource hence depriving the resource from its ability to generate above normal returns.

Lady using a tablet
Lady using a tablet

Comprehensive

Writing Services

Lady Using Tablet

Plagiarism-free
Always on Time

Marked to Standard

Order Now

Adding to the resource-based view, some researchers have pointed out the importance of resource appropriability which relates to the rent earning potential of a resource (Wade and Hulland, 2004). This means that unless a firm is able to use a resource for a cost less than the value generated by the resource, the firm will not enjoy the benefit of possessing the resource. If, for instance, one organization has a talented employee who adds value to it but asks for a salary higher than his value addition then the firm will not benefit from the value addition that the employee provides.

The resource-based view may further be developed by making some basic distinctions among the type of resources that can generate above normal returns (Miller and Shamsie, 1996). These resources may hence be grouped based on their similarities and differences. For instance, we may have a group of resources falling into the domain of supply chain and term them as supply chain resources. Similarly we may have marketing resources, knowledge-based resources and so on.

Furthermore, resources are industry specific i.e. resources in one industry may have the potential to generate sustained competitive advantage for a firm operating in one industry but not for firms in other industries. For example, product R&D resources may be source of competitive advantage for firms operating in microprocessors' industry but may not be so for firms in commodities' business. Similarly brand name may be more valuable in experiential service industries than in industries where quality can be determined prior to purchase (Nayyar, 1990)

Previous research work to understand the application of resource-based view in specific industries has been conducted in the bearings industry (Collis D.J., 1991), film industry (Miller and Shamsie, 1996) and with logistic service providers (Wong and Karia, 2009). Anyhow, resource requirements for sustained competitive advantage in the dairy industry are not well understood.

As far as IS researchers are concerned, a number of them have used RBV in determining how information systems resources may generate competitive advantage for firms (Powell and Dent-Micallef, 1997, Ray et al., 2001). Mata et al. (2009) concluded that 'managerial IT skills' was the only IT attribute (out of the four considered in their analysis) that could lead to sustained competitive advantage (SCA). Anyhow, resources and specifically IS resources, act in conjunction with other firm resources to generate strategic advantage (Ravichandran and Lertwongsatien, 2002). Though managerial IT skills fulfill the criteria for a resource to generate sustained competitive advantage (Mata et al., 2009) these skills cannot produce SCA in isolation. If a firm has better managerial IT skills but improper distribution network, managerial skills may help get customer information in a timely manner, but cannot itself lead to timely delivery of order, for instance. Managerial IT skills may therefore, be a source of competitive advantage only when combined with other resources (Wade & Hulland, 2004). Thus any attribute of IT can only lead competitive advantage, if it can synchronize with other resources to generate this advantage.

Pavlou and El Sawy (2006) have studied the effect of IT on competitive advantage in new product development through enhancement of new product development capabilities. Anyhow, it is not clear which resources when combined with IT can lead to competitive advantage in supply chain. Furthermore, since inbound supply chain is different from outbound supply chain, both employing different resources and capabilities these need to be analyzed separately.

Focusing on the dairy sector, we study the effect of IS resources on inbound and outbound supply chain capabilities. We furthermore investigate the effect of these supply chain capabilities on supply chain competitive advantage and firm performance. We begin by explaining the constructs information systems resource, inbound and outbound supply chain capabilities, supply chain competitive advantage and performance.

Information Systems Resources

We, in this study, use the typology of key IS resources and capabilities developed by Wade and Hulland (2004). They classify IS resources into inside-out, outside-in and spanning. Inside-out capabilities are deployed in response to market requirements and are usually internally focused. Outside-in capabilities include anticipating market requirements, creating durable customer relationships etc. which are all externally focused. Spanning capabilities involve both internal and external analysis and are required to integrate inside-out and outside-in capabilities (for details see Wade and Hulland, 2004).

Supply Chain Capabilities

Lady using a tablet
Lady using a tablet

This Essay is

a Student's Work

Lady Using Tablet

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Examples of our work

Council of Logistics Management (CLM) defines supply chain capabilities as the ability to systematically, strategically coordinate the traditional business functions and tactics across business functions within a particular organization and across businesses within the supply chain for the purposes of improving long term performance of individual organizations and the supply chain as a whole. According to Collis (1994), supply chain capabilities refer to the ability of an organization to identify, utilize, and assimilate both internal and external resources to facilitate the entire supply chain activities. Supply chain capabilities may be divided into inbound and outbound supply chain capabilities (Chase et al., 2001). Inbound supply chain capabilities, from purchasing and supply chain management perspective, involves integration of the supply base that evolved from the traditional purchasing and materials functions. Topics such as supplier selection, supplier involvement, manufacturing performance, supplier performance have been studied from supplier side (Choi and Hartley, 1996). Outbound supply chain capabilities, from transportation and logistics management perspective, focus on distribution and logistics management with the goal of reducing inventory and transportation cost.

We measure inbound supply chain capability as the ability of organization to seamlessly integrate both information and material flows to the firm from the suppliers. Outbound supply chain capability is measured as the ability of an organization to deliver its product to the end consumer at the right time, in right quantity and at right place. If the organization is not able to distribute its product to the consumers when they want it, in the quantity they want it and at the place they want it, customers will have the opportunity to move to competitors' product.

Supply Chain Competitive Advantage

Competitive Advantage comes from a firm's ability to differentiate itself from the competitor or its ability to sell at a lower cost than competitors and still be able to maintain above normal returns (Conner, K.R., 1991). In other words, it is the extent to which an organization is able to create a defensible position over its competitors (Porter, 1985, McGinnis and Vallopra, 1999). It hence comprises of capabilities that enable a firm to create such position. The empirical literature has consistently shown cost, quality, delivery and flexibility to be important competitive capabilities (Tracey et al., 1999).

Firms may have competitive advantage in some business activities and competitive disadvantage in others (Ray et al., 2004). Supply chain can also be a source of competitive advantage for firms. Globalization has made it possible for organizations to disaggregate the transformation process to achieve benefits of global competencies. Many organizations are selecting their suppliers and moving their processes such that they could get that maximum value for minimum cost. Since reconfiguration of supply chain lends enormous benefits for organizations (Chase et al., 2001), companies that can operate a superior supply chain as compared to competitors have the opportunity to reap above-normal returns. Hence gaining competitive advantage in supply chain can be important for organizations.

In supply chain the two most important determinants of competitive advantage are cost and responsiveness (Fisher, M. L., 1997). Responsiveness is defined as the extent to which channel partners respond cooperatively to environmental changes. We hence measure our supply chain competitive advantage construct based on these two variables.

Firm Performance

Organizational performance refers to the ability of an organization to achieve its market-oriented and financial goals (Yamin et al., 1999). Performance has been operationalized using various criteria, including return on investment, market share and profit. We use market share and operating profit to measure firm performance.

Theory, framework & hypothesis

The effect of information systems (IS) on competitive advantage and its impact on financial performance has been an important area of discussion for information systems' (IS) researchers and practitioners (Devraj and Kohli, 2003). Despite a number of papers that have appeared in this area there are still debates about the strategic value of IS (Carr, 2003). Results relating IS investment to performance show variation across firms. We hence need to understand what types of organizational factors and management practices contribute to a firm's ability to generate business value from IS (Aral and Weill, 2007). More specifically we need to understand whether IS effects competitive advantage directly or indirectly (Wade and Hulland, 2004). Several researchers have argued that the value of IS needs to take into account complementary resources (Ranganathan and Brown, 2006). Though there is evidence of a general relationship between IS and organizational performance, we still need to understand the specific factors driving these general results (Aral and Weill, 2007).

The purpose of this research is to answer what resources IS need to combine with to generate competitive advantage in supply chain. The research will also show the importance of IS resources in generating this advantage. Looking at the dairy sector, we identify supply chain capabilities that firms acquire with the help of IS. We furthermore analyze the effect of these capabilities on supply chain advantage leading to firm performance.

We develop and test hypotheses regarding role of information systems in business performance through supply chain capabilities and advantage.

IS Resources and supply chain capabilities

Resource-based theory presents firm assets and capabilities as two sources of competitive advantage and firm performance (Day, 1994). According to Day (1994) firm capabilities are 'complex bundles of skills and accumulated knowledge, exercised through organizational processes' that enable firms to bring assets together and deploy them advantageously. Examples include Wal-Mart's logistics capabilities and L.L.Bean's superior order fulfillment processes.

Information systems resources augment supply chain capabilities that lead to competitive advantage in supply chain. Since, IS has the potential to develop, add, integrate, and release other key resources over time (Wade & Hulland, 2004), specifically with respect to supply chains where timely information processing is necessary to reduce costs, we highlight the special role that IS plays in generating supply chain advantage.

As far as inbound supply chain is concerned, IS resources can help improve capabilities in this area by timely sharing information regarding requirement of materials with the suppliers. Suppliers can hence be better prepared to deliver the right quantity at the right time. Sharing of information may also mean that organizations would develop trust and relationship with its suppliers that would be long term. This relationship would further enhance inbound supply chain capability to work in coordination and hence deliver results.

IS resources can play an important role in the development of outbound supply chain capabilities as well. Integrating the outbound supply chain using information systems would enable organizations to capture consumer information in real time and hence make them more responsive to customer needs and requirements. The system would also help organizations to track the movement of their products through systems like RFID (Radio Frequency Identification Device) and hence be able to better control the delivery of goods to consumers. Hence we develop the following hypotheses.

H1A: Information systems enhance inbound supply chain capabilities for organizations in dairy sector.

H1B: Information systems enhance outbound supply chain capabilities for organizations in dairy sector.

Supply chain capabilities and supply chain competitive advantage

Supply chain capabilities and resources are the building blocks for supply chain strategy and potential source of competitive advantage (Morash and Lynch, 2002). We develop hypotheses regarding the effect of inbound and outbound supply chain capabilities on supply chain competitive advantage.

Inbound supply chain or supply base in dairy industry is more commonly known as the milk collection network. The purpose of milk collection resources is to ensure consistent supply of quality milk. Resources, in this category, include relationships with farmers, collection centers to ensure proper collection of milk and avoid milk wastage etc. In developing countries, supplier development is an integral part of milk collection network. This is to ensure that quality milk is available in desired quantities throughout the year. The collection network is a huge investment of capital. Developing the network also takes time and brings significant learning with it. Once the network is developed, it is difficult for competitors to copy. Collection network hence becomes an idiosyncratic resource group that can generate competitive advantage for firms in dairy sector.

Outbound supply chain or distribution network though valuable is not a rare resource as it is easy for organizations to duplicate any advantage that one firm has in distribution. Although distribution of chilled milk remains a challenge, UHT treated packaged milk has a shelf life of nearly a month and does not pose great difficulty in distribution. Anyhow, distribution network resources remain important and valuable since high costs are incurred in distribution. Nevertheless organizations with years in business have learned the tricks of the trade. Also the availability of experienced third party logistic service providers has made this resource category non-rare. Hence distribution network cannot be a source of supply chain competitive advantage in dairy sector.

H2A: Inbound and outbound supply chain capabilities are not collectively required to gain supply chain competitive advantage in dairy sector.

H2B: Inbound supply chain capabilities would lead to competitive advantage for firms in dairy sector.

H2C: Outbound supply chain capabilities will not lead to competitive advantage for firms in dairy sector.

Supply chain competitive advantage and firm performance

Competitive advantage can lead to high levels of economic performance, customer satisfaction and relationship. For instance, brands with high customer loyalty would face less switching in their target segments thereby increasing sales and profitability. Similarly an organization offering premium quality that competitors are not, can demand higher prices from consumers and hence increase its profit margins. Similarly, organizations that have responsive supply chain can quickly respond to customer requirements and hence demand higher market share. Given fixed prices, firms with low cost supply chain can enhance their profit margins as compared to competitors if they are facing higher costs. Hence we have the following hypothesis.

H3: Supply chain competitive advantage will positively affect performance of firms in dairy sector.

Effect of IS Resources on Firm Performance via supply chain competitive advantage

Market

Share

Inbound SC capabilities

O-I

H1A

H2B

Outbound SC capabilities

Spanning

Firm performance

Competitive advantage in SC

IS Resources

H3

H2A

H2C

Operating Profit

O-I

H1B

SC responsiveness

SC cost

Fig. 1

Research Approach/ Methodology

We will collect data from organizations in the dairy sector in Pakistan. We will conduct field interviews of supply chain managers, logistics managers and procurement managers who are responsible for a firm's supply chain activities. Following Seidler (1974) we identify whether the respondent was in a position to generalize 'about patterns of (relevant) behavior, after summarizing either observed or expected organizational relations'. Since our respondents would be corporate managers handling supply chain activities, it would be reasonable to expect that they can offer adequate overview of supply chain activities. We will identify the types of information systems that organizations are using and classify them into the typology developed by Wade and Hulland (2004). This will indicate the number of organizations that are using inside-out, outside-in, spanning or a combination of these resources.

We then study the effect of information systems' deployment on inbound and outbound supply chain capabilities. We identify the number of firms whose supply chain capabilities enhanced after implementation of IS. If the number of firms whose supply chain capabilities were enhanced after the implementation of IS are significantly greater than the number of firms whose capabilities were not enhanced we conclude that IS has a positive effect on supply chain capabilities or vice versa.

To analyze the effect of supply chain capabilities on supply chain competitive advantage we collect performance metrics on cost and responsiveness from our target organizations before and after development of supply chain capabilities. We then compare these metrics with other organizations in the industry. If there is significant improvement in a metric (outweighing the effect of competition) after development of supply chain capabilities then we conclude that supply chain capabilities lead to competitive advantage in supply chain.

Similarly the effect of supply chain competitive advantage on firm performance may be tested by collecting figures on market share and operating profit. If the value of these has significantly improved after development of supply chain competitive advantage then hypothesis regarding the positive effect of supply chain competitive advantage on performance would be supported.

As mentioned in Boudreau et al. (2001), we can run confirmatory factor analysis to investigate the convergent and discriminant validity of construct. Reliability may be tested using internal consistency results. We can determine the goodness of fit index and CFI to demonstrate model fit.

In our analysis, the control variables will be the industry and environment. In this case we are targeting the dairy sector. Furthermore, environment in Pakistan can be termed as turbulent (keeping in view the uncertainty in country's environment). So our research will post results for such environment.

Theoretical/ Practical Outcomes of Research

This research will identify the set of resources that are required to gain sustained competitive advantage in dairy sector. It will also highlight the important role that IS resources play in generating this advantage. It will hence be an important addition to literature as it will identify the resource combination required for IS to actually provide above-normal supply chain performance in turbulent environment. It will also be an interesting insight for managers as it will help them identify the set of resources that a firm has been able to acquire to generate competitive advantage. The research will identify the complimentary supply chain capabilities developed by IS resources that lead to supply chain competitive advantage. Since the effect of IS on performance is not well understood, this will be beneficial in understanding how IS can lead to organizational performance through improvement of supply chain capabilities. Further research is possible to find out resources possessed by firms that don't have supply chain competitive advantage and hence identify the difference between resource set of a firm that has competitive advantage in supply chain vs. those that don't. Research may also be conducted to show if the results are valid across industries.