Strategy and Competitive Advantage

When eSewa launched in 2009 it did not have the best technology in the world; it had the first useful position: merchants and users joined because other users had joined, and each new merchant made the wallet more valuable to the next customer.

That is a strategic use of an information system: IT is not just making an existing operation cheaper, it is changing the competitive position of the firm.

This unit gives you the standard tools for reasoning about such positions: Porter's five forces, the value chain, generic strategies, and the economics of switching costs and network effects, each with numbers you can recompute.

2.1 Strategy and the role of information systems

A strategy is a plan for achieving a goal in a competitive environment: where to compete (which customers and products) and how to win. Information systems enter at three levels.

Operational excellence: do the same things better, cheaper and faster. New products, services and business models: do new things (internet banking, mobile wallets). Customer and supplier intimacy: know customers so well that they stay.

At the extreme, IT enables business model innovation: a ride-hailing app such as Pathao owns no taxis, a marketplace such as Daraz holds little stock of its own.

An information system gives competitive advantage when it lets the firm do something rivals cannot easily copy.

The test is sustainability: a technology that any competitor can buy next month (a website, a POS terminal) is a requirement to compete, not an advantage.

Advantage comes from the combination of technology with unique data, relationships, processes and brand.

2.2 Porter's five forces

Michael Porter explained industry profitability by five competitive forces. The stronger the forces, the lower the profit available to any firm.

1. Threat of new entrants. Low barriers (little capital, no licence, no brand needed) invite entry. Barriers include economies of scale, network effects, regulation (a Nepali payment service needs a Nepal Rastra Bank licence), capital and access to distribution.
2. Bargaining power of suppliers. Few suppliers, unique inputs and high switching costs make suppliers strong (a single cloud vendor or telecom operator).
3. Bargaining power of buyers. Concentrated, price-sensitive, well-informed buyers with many alternatives are strong. The internet raises buyer power by making prices easy to compare.
4. Threat of substitutes. A different product meeting the same need: remittance through a wallet instead of a money-transfer shop; video calls instead of travel.
5. Rivalry among existing competitors. Many equal rivals, slow industry growth, high fixed costs and undifferentiated products produce price wars.

Information technology affects all five. The Internet lowers entry barriers for pure-online businesses but raises the stakes through scale and data.

It increases buyer power (price comparison), may reduce supplier power (many e-marketplaces) and expands the range of substitutes.

Scoring the forces

A manager can turn the qualitative discussion into a rough intensity score: rate each force 1 (weak) to 5 (strong), weight the forces by their importance to this industry (weights add to 1) and take the weighted sum.

The scoring below is for a hypothetical online grocery start-up.

Force	Weight	Intensity (1 low – 5 high)	Weight × intensity
Threat of new entrants	0.2	4	0.80
Bargaining power of suppliers	0.15	2	0.30
Bargaining power of buyers	0.25	5	1.25
Threat of substitutes	0.25	4	1.00
Rivalry among competitors	0.15	4	0.60
Total	1.00		3.95

The industry pressure score is 3.95 out of 5: high.

The dominant contributors are buyer power and substitutes, so the strategy should aim at the loyalty and switching costs that reduce buyer power (a subscription, a delivery-time guarantee) and at differentiation against substitutes (a local market, a kirana store).

The scores are judgements, so the useful output is the conversation and the sensitivity (how much would the total change if buyer power were 3 instead of 5?), not the decimal.

Market concentration: the HHI

Rivalry depends on how many firms share the market. The Herfindahl–Hirschman Index (HHI) is the sum of squared market shares (in percent): 10,000 for a monopoly, near zero for perfect competition.

Regulators treat roughly below 1,500 as unconcentrated and above 2,500 as highly concentrated (the thresholds differ by authority). Here is an invented four-wallet market:

Firm	Share s (%)	s²
Wallet A	45	2025
Wallet B	30	900
Wallet C	15	225
Wallet D	10	100
HHI	100	3250

HHI = 3250, highly concentrated. If Wallet C (15%) and Wallet D (10%) merged, the new firm would have 25% and the HHI would become 3550.

The change is 300, which equals 2 × 15 × 10: a merger always raises the HHI by twice the product of the merging shares, a quick screen for competition regulators.

2.3 The value chain

Porter's value chain splits a firm into the activities that create value and the margin that remains. Primary activities directly create and deliver the product:

• Inbound logistics: receiving, storing, inventory control.
• Operations: converting inputs into the product or service.
• Outbound logistics: order fulfilment and delivery.
• Marketing and sales: promotion, channels, pricing.
• Service: installation, support, warranty.

Support activities make the primary ones possible: firm infrastructure (finance, legal, planning), human resource management, technology development and procurement.

The margin is the difference between the value customers pay and the total cost of all the activities.

Information systems are a thread through every box: warehouse management in inbound logistics, ERP production planning in operations, route optimisation in outbound, CRM in marketing and service, and the integrated ERP in the infrastructure.

Activity	Typical information system	Value created
Inbound logistics	Inventory control, supplier portal	Lower stock, fewer stock-outs
Operations	Production planning, quality systems	Lower cost, fewer defects
Outbound logistics	Order management, delivery tracking	Faster, more reliable delivery
Marketing and sales	CRM, e-commerce site, analytics	Better targeting, higher conversion
Service	Help desk, ticketing, knowledge base	Retention, fewer repeat visits
Firm infrastructure	ERP, accounting, compliance reporting	Control, lower overhead
Human resources	HRIS, e-learning	Productivity, lower turnover
Technology	R&D tools, version control	Faster innovation
Procurement	e-procurement, vendor management	Lower purchase price

The value system (or value network) extends the view: your value chain sits between suppliers' chains and customers', and the largest gains often come at the interfaces: a shared inventory system with a supplier, or a customer-facing order status page.

2.4 Generic strategies and supporting IT

Porter identified three generic ways to outperform rivals:

Strategy	Idea	Information systems support	Risk
Cost leadership	Be the lowest-cost producer in the industry	Automation, ERP, e-procurement, process control	A rival with lower costs or a technological shift
Differentiation	Offer something customers value and will pay extra for	Personalisation, mobile app, quality data, innovation	Imitation; uniqueness not valued
Focus	Serve a narrow segment (by region, customer type) better than broad rivals	Segment analytics, niche e-commerce	Segment shrinks or is entered by large firms

Other IT-based strategic moves:

• Lock-in through switching costs: once a firm's data, staff skills and integrations are built around a system, changing is expensive, so customers stay.
• Alliances and partnerships: shared platforms among banks (interbank switches, Unit 5), loyalty programmes.
• Innovation first-mover: the first mobile wallet or the first online ticketing service gains users before rivals.
• Mass customisation: producing individualised products at near-mass-production cost through configurable online orders.

2.5 Network effects and Metcalfe's law

Some products become more valuable as more people use them: a telephone, a payment network, a marketplace.

Metcalfe's law is a model, not a law of nature: the number of possible connections among n users is n(n − 1)/2 and the network's value is approximated as proportional to it.

With 1,000 users there are 4,99,500 possible pairs; with 2,000 users, 19,99,000, about four times as many for twice the users.

The practical lessons: the early growth phase is hard (the value to the first users is almost zero, so firms subsidise it with cashback), and once a network is ahead the winner takes most.

The law overstates value, because most possible connections are never used; later models suggest value proportional to n log n.

2.6 Aligning IS strategy with business strategy

An IS strategy states which systems the organisation will build or buy and why.

It must be aligned with business strategy: a bank that competes on branch convenience needs ATM and branch-network systems, while one that competes on low-cost digital service needs mobile and API platforms.

A common planning technique is the critical success factors (CSF) method: ask executives for the few things that must go right (for a wallet: user growth, fraud rate, merchant coverage, settlement uptime), then derive the information needed to monitor them.

Other tools: the balanced scorecard (financial, customer, internal process, learning and growth perspectives), and IT governance (who decides, who funds, how benefits are measured).

2.7 Business process reengineering and change

Business process reengineering (BPR) (Hammer and Champy) is the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in cost, quality, speed and service.

Instead of automating the existing steps (paving the cow path), BPR asks why each step exists.

Example a district land-registration office whose process had nine hand-offs and four signatures is redesigned so that a single case officer handles the file with a shared system, cutting the cycle from 15 days to 3.

Continuous improvement (Kaizen, Six Sigma) gives smaller, steady gains. BPR often fails because of resistance, unclear ownership and loss of the knowledge embedded in the old process, so it needs sponsorship, communication and training.

2.8 Seeing strategy: forces, concentration, chains and networks

Strategy is full of numbers: weights, shares and counts. The figures below turn them into pictures. The plate shows the author of the five-forces and value-chain models, and a container port that is the physical end of a value chain.

(a) Michael Porter

(b) Container port, inbound logistics

2.8.1 Eight ways information systems create competitive advantage

1. Lower cost. Automating routine work removes labour and error from each unit sold. A wallet company that verifies customers online avoids a costly branch. Lower cost lets a firm lower prices or earn more on the same price.
2. Differentiation. A unique feature makes customers prefer one product, for example a service with bill payment, ticketing and remittance in one app. Differentiation lets a firm charge more or win more users at the same price. The feature must be hard for others to copy quickly.
3. Focus on a niche. Systems make it economical to serve a small group well. A Nepali agricultural app that gives farmers prices and weather in Nepali serves a group big firms ignore. Deep knowledge of the niche creates loyalty.
4. Raising switching costs. When customers store history, contacts and saved cards in a system, leaving is a nuisance. A bank app with years of saved payees keeps its customers. Care is needed: forced lock-in without service quality causes resentment.
5. Building network effects. Each new user adds value to all the others, as Figure 2.4 shows. A ride-hailing or messaging platform that reaches most users becomes the natural choice. The first to reach scale often wins.
6. Improving supplier and buyer relations. Electronic data exchange with suppliers shortens lead times and cuts stock. Sharing sales data with a supplier lets it plan production better. Closer links make rivals' offers less attractive to partners.
7. New products and services. Information turns into a product: online banking, e-ticketing, digital library membership. A theatre that sells seats online reaches buyers who would never visit the counter. New products open new markets.
8. Better decisions and speed. Real-time data helps a firm respond to demand, price and risk faster than a rival. An importer that tracks stock daily reorders before a stock-out. Speed in decisions turns into service quality and lower waste.

Chapter summary

• Strategic information systems change the firm's competitive position; sustainability requires data, relationships, scale or processes that rivals cannot easily copy.
• Porter's five forces (entrants, suppliers, buyers, substitutes, rivalry) can be scored; HHI measures concentration, and a merger raises it by twice the product of the shares.
• The value chain locates IS value in primary and support activities and in the interfaces with suppliers and customers.
• Generic strategies are cost leadership, differentiation and focus; switching costs, lock-in and network effects reinforce them.
• Alignment, CSFs and BPR connect IS investment to business goals.

Practice

1. List Porter's five forces and say how the Internet changes buyer power.
2. For the weights and intensities in the scoring table, what would the pressure score be if buyer power were 3 instead of 5?
3. Compute the HHI for shares 40, 30, 20 and 10.
4. Two firms with 20% and 30% shares merge. By how much does the HHI rise?
5. Name the five primary and four support activities of the value chain.
6. Give one IS for each of cost leadership, differentiation and focus.
7. Using Metcalfe's law, by what factor does the number of possible connections grow when users go from 500 to 1,000?
8. What is a switching cost? Give an example from banking.
9. Why is a website not a competitive advantage by itself?
10. State three reasons BPR projects fail.

Answers and worked solutions

1. Entrants, suppliers, buyers, substitutes, rivalry. The Internet makes prices and alternatives visible, so buyer power rises.

2. The buyer-power term changes from 0.25 × 5 = 1.25 to 0.25 × 3 = 0.75, so the total falls by 0.50 from 3.95 to 3.45.

3. 1,600 + 900 + 400 + 100 = 3,000.

4. 2 × 20 × 30 = 1,200.

5. Primary: inbound logistics, operations, outbound logistics, marketing and sales, service. Support: firm infrastructure, human resources, technology development, procurement.

6. Cost leadership: ERP and e-procurement. Differentiation: a personalised mobile app. Focus: an e-commerce site for one niche or region.

7. n(n − 1)/2 gives 124,750 for 500 users and 499,500 for 1,000 users: a factor of about 4.

8. The cost (money, time, risk, retraining) of moving to a competitor; for example re-registering salary accounts, standing orders and digital banking credentials at another bank.

9. Rivals can build one next month; advantage needs something hard to copy such as data, brand or process.

10. Resistance to change, no executive sponsor, loss of tacit knowledge, unrealistic targets, inadequate training.

Model answers: medium (5 marks) and long (10 marks) questions

Q1 (5 marks). Explain Porter's five forces. For a mobile-wallet business the weights and intensities are entrants 0.20 x 4, suppliers 0.15 x 2, buyers 0.25 x 5, substitutes 0.25 x 4, rivalry 0.15 x 4. Find the total score and interpret it.

Introduction. Porter's five forces framework analyses the attractiveness of an industry by looking at five sources of competitive pressure (section 2.2, Figure 2.1).

1. Threat of new entrants. Low entry barriers (little capital, easy licences) let new firms in and push profits down.
2. Bargaining power of suppliers. Suppliers with few alternatives can raise prices; for a wallet, banks and telecom networks are important suppliers.
3. Bargaining power of buyers. Customers who can switch at no cost force prices down and demand more service.
4. Threat of substitutes. Another way of meeting the same need, such as bank apps, cash or cards, limits the price.
5. Rivalry among competitors. Many similar firms competing on price and promotion reduce profit.
6. Calculation. 0.80 + 0.30 + 1.25 + 1.00 + 0.60 = 3.95 out of 5.
7. Interpretation. A score above 3.5 shows a hostile industry with weak profits; buyers (1.25) and substitutes (1.00) are the biggest worry, so the firm should raise switching costs and differentiate.

Conclusion. The five forces turn a vague idea of competition into a scored analysis that points to the strategy to follow.

Q2 (5 marks). Four firms in a market have shares 45, 30, 15 and 10 percent. Calculate the HHI, state what it shows, and find the change if the two smallest firms merge.

Introduction. The Herfindahl-Hirschman Index measures market concentration as the sum of the squares of the percentage shares (section 2.2, Figure 2.2).

1. Formula. HHI = s1 squared + s2 squared + and so on, where s is the percentage share, so the value runs from near 0 to 10,000.
2. Before the merger. 45 squared = 2025; 30 squared = 900; 15 squared = 225; 10 squared = 100. HHI = 2025 + 900 + 225 + 100 = 3250.
3. Meaning. Above 2500 the market is highly concentrated: a few firms dominate and customers have little choice.
4. After the merger. The two firms form one with 25 percent, so HHI = 2025 + 900 + 625 = 3550.
5. Change. 3550 - 3250 = 300 points; a change above 100 points in a concentrated market normally attracts regulator attention.

Case	Shares	HHI
Before	45, 30, 15, 10	3250
After	45, 30, 25	3550

Conclusion. The HHI shows that a merger of small firms can raise concentration noticeably, which is why regulators examine such mergers.

Q3 (10 marks). Explain Porter's value chain and the generic strategies. Show how information systems support each primary and support activity.

Introduction. Michael Porter described a firm as a chain of activities that each add cost and value. The margin is the difference between what customers pay and the cost of the activities.

A firm gains a competitive advantage by performing activities at lower cost or in a way that customers value more (sections 2.3 and 2.4, Figures 2.3 and 2.1).

1. Inbound logistics. Receiving and storing inputs. IT: inventory and supplier systems, barcode scanning, EDI.
2. Operations. Turning inputs into the product. IT: ERP, production planning, quality tracking.
3. Outbound logistics. Delivering to customers. IT: order tracking, route planning, GPS.
4. Marketing and sales. Making customers aware and taking orders. IT: CRM, e-commerce, social media analytics.
5. Service. After-sales support. IT: help-desk systems, chat, complaint tracking.
6. Support activities. Firm infrastructure (accounting, MIS), human resources (payroll and e-recruitment), technology development (design software, research databases) and procurement (e-tendering, supplier portals).
7. Generic strategies. Cost leadership (lowest cost: automation, scale), differentiation (unique features or service: personalised apps, quality) and focus (a narrow segment served better than anyone else).
8. Using the chain. Draw the chain for the firm, find the activities that are costly or that customers value, and apply IT there; compare the margin with rivals.

Strategy	Aim	IT example
Cost leadership	Lowest cost	Automated order processing
Differentiation	Unique value	Personalised app, loyalty data
Focus	Serve a niche	Farmer-price app in Nepali

Conclusion. The value chain shows where a firm makes or loses money, and information systems can improve every box. Combined with a clear generic strategy, they turn IT spending into a lasting advantage.