2

STRATEGIC USE OF INFORMATION RESOURCES

Zara, a global retail and apparel manufacturer based in Arteixo, Spain, needed a dynamic business model to keep up with the ever-changing demands of their customers and their industry. At the heart of their model was a set of business processes and an information system that linked demand to manufacturing and manufacturing to distribution. The strategy at Zara stores was simply to have a continuous flow of new products that were typically in limited supply. As a result, regular customers visited their stores often—on an average of 17 times a year, whereas most stores only enticed their customers inside on an average of four times a year. When customers saw something they liked, they bought it on the spot because they knew it would probably be gone the next time they visited the store. The result was a very loyal and satisfied customer base and a wildly profitable business model.

How did they do it? It was possible, in part, because Zara aligned its information system strategy with its business strategy. The Zara corporate Web site gave some insight:

The entire process from factory to shop floor is coordinated from Zara's headquarters using information systems. The point-of-sale (POS) system records the information from each sale, and the information is transmitted to headquarters at the end of each business day. Using a handheld device, the Zara shop managers also report back daily to the designers at headquarters to let them know what has sold and what the customers wanted but couldn't find. The information is used to determine which product lines and colors should be kept and which should be altered or dropped. The designers communicate directly with the production staff to plan for the incredible number of designs—more than 30,000—that will be manufactured every year.²

The shop managers have the option of ordering new designs twice a week using handheld computers. Before ordering, they can use their handheld computers to check out the new designs. Once an order is received at the manufacturing plant at headquarters, a large computer-controlled piece of equipment calculates how to position patterns to minimize scrap and cut up to 100 layers of fabric at a time. The cut fabric is then sent from Zara factories to external workshops for sewing. The completed products are sent to distribution centers, where miles of automated conveyor belts are used to sort the garments and recombine them into shipments for each store. Zara's Information Systems (IS) department wrote the applications controlling the conveyors, often in collaboration with vendors of the conveyor equipment.

As the Zara example illustrates, innovative use of a firm's information resources can provide companies with substantial and sustainable advantages over competitors. Every business depends on IS, making its use a necessary resource every manager must consider. But IS can create a strategic advantage for firms who bring creativity, vision, and innovation to their IS use. The Zara case is an example. This chapter uses the business strategy foundation from Chapter 1 to help general managers visualize how to use information resources for competitive advantage. This chapter highlights the difference between simply using IS and using IS strategically, and explores the use of information resources to support the strategic goals of an organization.

The material in this chapter can enable a general manager to understand the linkages between business strategy and information strategy on the Information Systems Strategy Triangle. General managers want to find answers to questions such as: Does using information resources provide a sustainable and defendable competitive advantage? What tools are available to help shape strategic use of information? What are the risks of using information resources to gain strategic advantage?

EVOLUTION OF INFORMATION RESOURCES

The Eras model shows how organizations have used IS over the past decades. Figure 2.1 summarizes this view and provides a road map for a general manager to use in thinking strategically about the current use of information resources within the firm.

IS strategy from the 1960s to the 1990s was driven by internal organizational needs. First came the need to lower existing transaction costs. Next was the need to provide support for managers by collecting and distributing information, followed by the need to redesign business processes. As competitors built similar systems, organizations lost any advantages they held from their IS, and competition within a given industry once again was driven by forces that existed prior to the new technology. Most recently, enterprises found that social IT platforms and capabilities drove a new evolution of applications, processes, and strategic opportunities.

FIGURE 2.1 Eras of information usage in organizations.

As each era begins, organizations adopt a strategic role for IS to address not only the firm's internal circumstances but its external circumstances as well. Thus, in the value-creation era, companies seek those applications that again provide them with an advantage over competition. They also seek applications that keep them from being outgunned by start-ups with innovative business models or traditional companies entering new markets. For example, a plethora of “dot-coms” challenged all industries and traditional businesses by entering the marketplace armed with Internet-based innovative systems.

The Information System Strategy Triangle introduced in Chapter 1 reflects the link between IS strategy and organizational strategy and the internal requirements of the firm. The link between IS strategy and business strategy focuses on the firm's external requirements. Maximizing the effectiveness of the firm's business strategy requires that the general manager be able both to identify and use information resources. This chapter looks at how information resources can be used strategically by general managers.

INFORMATION RESOURCES AS STRATEGIC TOOLS

Crafting a strategic advantage requires the general manager to cleverly combine all the firm's resources, including financial, production, human, and information resources, and to consider external resources such as the Internet and opportunities in the global arena. Information resources are more than just the infrastructure. This generic term, information resources, is defined as the available data, technology, people, and processes within an organization to be used by the manager to perform business processes and tasks. Information resources can either be assets or capabilities. An IT asset is anything, tangible or intangible, that can be used by a firm in its processes for creating, producing, and/or offering its products (goods or services). An IT capability is something that is learned or developed over time for the firm to create, produce, or offer its products. An IT capability makes it possible for a firm to use its IT assets effectively.³

An IS infrastructure (a concept that is discussed in detail in Chapter 6) is an IT asset. It includes each of an information resource's constituent components (i.e., data, technology, people, and processes). The infrastructure provides the foundation for the delivery of a firm's products or services. Another IT asset is an information repository, which is logically related data that is captured, organized, and retrievable by the firm. Some information repositories are filled with internally oriented information designed to improve the firm's efficiency. Other repositories tap the external environment and contain significant knowledge about the industry, the competitors, and the customers. Although most firms have these types of information repositories, not all firms use them effectively.

In the continually-expanding Web 2.0 space, the view of IT assets is broadening to include potential resources that are available to the firm, but that are not necessarily owned by the firm. These additional information resources are often available as a service, rather than as a system to be procured and implemented internally. For example, Internet-based software (also called Software as a Service, or SAAS) such as SalesForce.com offers managers the opportunity to find new ways to manage their customer information with an externally based IT resource. Social networking systems such as Facebook or LinkedIn offer managers the opportunity to find expertise or an entire network of individuals ready to participate in the innovation processes of the corporate using relatively little capital or expense.

The three major categories of IT capabilities are technical skills, IT management skills, and relationship skills. Technical skills are applied to designing, developing, and implementing information systems. IT management skills are critical for managing the IS department and IS projects. They include an understanding of business processes, the ability to oversee the development and maintenance of systems to support these processes effectively, and the ability to plan and work with the business units in undertaking change. Relationship skills can either be externally focused or span across departments. An externally focused relationship skill includes the ability to respond to the firm's market and to work with customers and suppliers. The relationship between a firm's IS managers and its business managers is a spanning relationship skill and includes the ability of IS to manage partnerships with the business units. Even though it focuses on relationships in the firm, it requires spanning beyond the IS department. Relationship skills develop over time and require mutual respect and trust. They, like the other information resources, can create a unique advantage for a firm. Figure 2.2 summarizes the different types of information resources and provides examples of each.

Committing and developing information resources require substantial financial resources. A general manager evaluating an information resource might consider the following questions to better understand the type of advantage the information resource can create:⁴

• What makes the information resource valuable? In Eras I through III, the value of information was tied to the physical delivery mechanisms. In these eras, value was derived from scarcity reflected in the cost to produce the information. Information, like diamonds, gold, and MBA degrees, was more valuable because it was found in limited quantities. However, the networked economy beginning in Era IV drives a new model of value—value from plenitude. Network effects offer a reason for value derived from plenitude; the value of a network node to a person or organization in the network increases when others join the network. For example, an e-mail account has no value without another e-mail account that could receive the e-mail. As e-mail accounts become relatively ubiquitous, the value of having an e-mail account increases as its potential for use increases. Further, copying additional people on an e-mail is done at a very low cost (virtually zero). As the cost of producing an additional copy of an information product within a network becomes trivial, the value of that network increases. Therefore, rather than using production costs to guide the determination of price, information products might be priced to reflect their value to the buyer.⁵

  

  FIGURE 2.2 Information resources.

  Source: Adapted from G. Piccoli and B. Ives, “IT-Dependent Strategic Initiatives and Sustained Competitive Advantage: A Review and Synthesis of the Literature,” MIS Quarterly (2003), 29(4), 755.

• Who appropriates the value created by the information resource? Determining where a resource's value lies and how it can be improved in a firm's favor is part of the analysis of determining the value. The attributes of information resources that impact the value make it possible to create and sustain competitive advantage. For example, at Zara, the speed of information sharing is the source of the value to the firm. Information from the retail shops is quickly sent and analyzed by designers to identify future products.
• Is the information resource equally distributed across firms now and in the future? At the beginning of the life cycle of a new technology, early adopters may experience a competitive advantage from using an information resource. For example, a manager who has mastered the value from internal wikis may find uses for them that give his or her firm a momentary advantage. However in the longer term, these resources become more common and others are able to gain similar benefits. But the experience gained when using the information resource may cause inequities between firms. Within an industry, firms likely have different experiences with a resource, and that difference creates value because it can create strategic advantage. In addition, in some industries, the value of information mushrooms under conditions of information asymmetries. Finally, the possessor of information may use it against, or sell it to, companies or individuals who are not otherwise able to access the information.
• Is the information resource highly mobile? A reliance on the individual skills of IT professionals exposes a firm to the risk that key individuals will leave the firm, taking their experience with them. Developing unique knowledge-sharing processes and creating an organizational memory can help reduce the impact of the loss of a mobile employee. Recording the lessons learned from all team members after the completion of each project and using social technologies to record interactions and activity streams are two examples of ways to lower this risk. At Zara, customer information is compiled centrally, so any one store's experience, while valuable, is not likely to provide the same information as the consolidated information seen by the designers who analyze data from thousands of stores.
• How quickly does the information resource become obsolete? While information itself does not “wear out” like physical things, information can become obsolete. In the highly dynamic environment, information becomes obsolete much faster than ever before since like most other assets, information resources lose value over time. A general manager must understand the rate of decline of value, as well as factors that may speed or slow it. Consider, for example, a database of customer information. How long, on average, is the current address of each customer valid? What events in the economy might change their purchasing pattern and reduce the forecasting capability of the current information? Are the trends derived from analyzing past sales valid to predict future sales patterns?

Information resources exist in a company alongside other resources. The general manager is responsible for organizing all resources so that business goals are met. Understanding the nature of the resources at hand is a prerequisite to using them effectively. By aligning IS strategy with business strategy, the general manager maximizes its profit potential. Meanwhile, the firm's competitors are working to do the same. In this competitive environment, how should the information resources be organized and applied to enable the organization to compete most effectively?

HOW CAN INFORMATION RESOURCES BE USED STRATEGICALLY?

The general manager confronts many elements that influence the competitive environment of his or her enterprise. Overlooking a single element can bring about disastrous results for the firm. This slim tolerance for error requires the manager to take multiple views of the strategic landscape. Three such views can help a general manager align IS strategy with business strategy. The first view uses the five competitive forces model by Michael Porter to look at the major influences on a firm's competitive environment. Information resources should be directed strategically to alter the competitive forces to benefit the firm's position in the industry. The second view uses Porter's value chain model to assess the internal operations of the organization and partners in its supply chain. Information resources should be directed at altering the value-creating or value-supporting activities of the firm. We extend this view further to consider the value chain of an entire industry to identify opportunities for the organization to gain competitive advantage. The third view specifically focuses on the types of IS resources needed to gain and sustain competitive advantage. These three views provide a general manager with varied perspectives from which to identify strategic opportunities to apply the firm's information resources.

Using Information Resources to Influence Competitive Forces

Porter provides the general manager with a classic view of the major forces that shape the competitive environment of a firm. These five competitive forces are shown in Figure 2.3, along with some examples of how information resources can be applied to influence each force. This view reminds the general manager that competitive forces result from more than just the actions of direct competitors. Each force now will be explored in detail from an IS perspective.

Potential Threat of New Entrants

Existing firms within an industry often try to reduce the threat of new entrants to the marketplace by erecting barriers to entry. Barriers to entry help the firm create a stronghold by offering products or services that are difficult to displace in the eyes of customers based on apparently unique features. Such barriers include controlled access to limited distribution channels, public image of a firm, and government regulations of an industry. Information resources also can be used to build barriers that discourage competitors from entering the industry. For example, Google's search algorithm is a source of competitive advantage for the search company, and it's a barrier of entry for new entrants, who would have to create something better to compete against Google. Walmart, another example, effectively blocked competition with their inventory control system, which helped them drive down expenses and ultimately offer low costs to customers. Any company entering Walmart's marketplace would have to spend millions of dollars to build the inventory control system and IS required to provide its operations with the same competitive advantage. Therefore, the system at Walmart may be a barrier to entry for new companies. Twitter is another example of a company that has erected a barrier to entry for new microblogging sites in the United States. Individuals wanting to tweet with the largest number of others will gravitate to Twitter, making it difficult for another U.S. microblogging site to enter the industry. Facebook has erected similar barriers in the social networking marketplace.

FIGURE 2.3 Five competitive forces with potential strategic use of information resources.

Sources: Adapted from M. Porter, Competitive Strategy (New York: The Free Press, 1998); and Lynda M. Applegate, F. Warren McFarlan, and James L. McKenney, Corporate Information Systems Management: The Issues Facing Senior Executives, 4th ed. (Homewood, IL: Richard D. Irwin, 1996).

Bargaining Power of Buyers

Customers often have substantial power to affect the competitive environment. This power can take the form of easy consumer access to several retail outlets to purchase the same product or the opportunity to purchase in large volumes at superstores like Walmart. Information resources can be used to build switching costs that make it less attractive for customers to purchase from competitors. Switching costs can be any aspect of a buyer's purchasing decision that decreases the likelihood of “switching” his or her purchase to a competitor. Such an approach requires a deep understanding of how a customer obtains the product or service. For example, Amazon.com's One Click encourages return purchases by making buying easier. Amazon.com stores buyer information, including contact information and credit card numbers, so that it can be accessed with one click, saving consumers the effort of data reentry. Similarly, Apple's iTunes simple-to-use interface and proprietary software on the iPod make it difficult for customers to use other formats and technologies than the iPod, effectively reducing the power of the buyers, the customers.

Another good example of the power of buyers occurred at Facebook. When Facebook announced a new service, called Beacon, press releases from Facebook shouted that “users gain ability to share their actions from 44 participating sites with their friends on Facebook.” The concept was called “Social Distribution” and gave Facebook information from the participating sites that would be posted on the Facebook customer's page. Customers erupted in protest, and one month later, CEO Mark Zuckerberg, personally issued an apology for the way Facebook handled the new feature. “We simply did a bad job with this release, and I apologize for it. While I'm disappointed with our mistakes, we appreciate all the feedback we have received from our users. I'd like to discuss what we have learned and how we have improved Beacon.”⁶ Zuckerberg continued by sharing why they built Beacon in the first place (to let people share with their friends a lot of information across sites) and why it was designed the way it was (to be as easy to use as possible and so users “didn't have to touch it to make it work”). But the blogosphere quickly lit up with issues of privacy, control, and security as well as general dislike of the strategy, forcing the company to respond. The power of the buyer community, the users of Facebook, banded together to force a change in the firm's activity.

Bargaining Power of Suppliers

Suppliers' bargaining power can reduce a firm's options and ultimately its profitability. Suppliers often strive to “lock in” customers through the use of systems (and other mechanisms). For example, there are many options for individuals to back up their laptop data, including many service options. The power of any one supplier is low, since there are a number of options. But when Apple's operating system makes it simple to back up to their iCloud, their power increases. Customers find it easy to use the iCloud and they do.

This force is strongest when a firm has few suppliers from which to choose, the quality of supplier inputs is crucial to the finished product, or the volume of purchases is insignificant to the supplier. For example, steel firms lost some of their bargaining power over the automobile industry because car manufacturers developed technologically advanced quality control systems. Manufacturers can now reject steel from suppliers when it does not meet the required quality levels.

Through the Internet, firms continue to provide information for free as they attempt to increase their share of visitors to their Web sites and gather information about them. This decision reduces the power of information suppliers and necessitates finding new ways for content providers to develop and distribute information. Many Internet firms are integrating backward or sideways within the industry by creating their own information supply and reselling it to other Internet sites. Well-funded firms simply acquire these content providers, which is often quicker than building the capability from scratch. One example is eBay's acquisition of PayPal, the system used to transact payment for goods and services all over the Web. Another is Amazon.com's acquisition of Zappos, the shoe retailer.

Threat of Substitute Products

The potential of a substitute product in the marketplace depends on the buyers' willingness to substitute, the relative price-to-performance of the substitute, and the level of switching costs a buyer faces. Information resources can create advantages by reducing the threat of substitution. For example, Internet auction site eBay used innovative IT to create a set of services for their small businesses, a major source of revenue for the online auctioneer. At a time when customers were beginning to complain, sellers were wondering about the fees, and competition was trying to lure them both away, eBay brought out ProStores, a service to help all sellers build their own Web site. eBay managers noticed that many sellers did not have any Web presence other than eBay, and the move was another way to lock in these customers to the eBay environment. “The more those sellers are locked into an eBay environment, the less likely they will work with rivals,” according to one Web site.⁷ It seemed to work. One seller, a Tennessee-based, wholesale distributor of ball bearings and chains, reportedly doubled its eBay sales four months after its ProStores site was launched.⁸ For competitors to be successful, they need to offer not just a substitute, but also a better service to these sellers. So far none has.

Substitutes that cause a threat come from many sources. Internal innovations can cannibalize existing revenue streams for a firm. For example, new iPhones motivate current customers to upgrade, essentially cannibalizing the older product line revenue. Of course, this is also a preemptive move to keep customers in the iPhone product family, rather than switch to another competitor's product. The threat might come from potentially new innovations that make the previous product obsolete. Some argue that the iPad is a substitute for laptops and personal computers. Consider how digital cameras have made film (and the cameras that use them) obsolete. CDs and more recently digitally based MP3 files have made vinyl records (and the record players that play them) obsolete. Free Web-based applications are a threat to software vendors who charge for their products and who do not have Web-based delivery. Managers must watch for potential substitutes from many different sources to fully manage this competitive threat.

Industry Competitors

Rivalry among the firms competing within an industry is high when it is expensive for a firm to leave the industry, the growth rate of the industry is declining, or products have lost differentiation. Under these circumstances, the firm must focus on the competitive actions of a rival to protect market share. Intense rivalry in an industry ensures that competitors respond quickly to any strategic actions. Facebook enjoys a competitive advantage in the social networking industry. Other sites have tried to compete with Facebook by offering a different focus, either a different type of interface, or additional features. Competition is fierce and many start-ups hope to “be the next Facebook.” However Facebook continues to lead the industry, in part by continued innovation and in part by its huge customer base, which continues to raise the bar for competitors.

The processes firms use to manage their operations, and lower costs or increase efficiencies, can provide an advantage for cost-focus firms. However as firms within an industry begin to implement standard business processes and technologies—often using enterprise-wide systems such as those of SAP and Oracle—the industry becomes more attractive to consolidation through acquisition. Standardizing IS lowers the coordination costs of merging two enterprises and can result in a less-competitive environment in the industry.

One way competitors differentiate themselves with an otherwise undifferentiated product is through creative use of IS. Information provides advantages in such competition when added to an existing product. For example, the iPod, iPhone, and iPad are each differentiated in part because of the iTunes store and the applications available only to users of these devices. Competitors offer some of the same information services, but Apple was able to take an early lead by using information systems to differentiate their products.

The competitive forces identified by Porter's model are each acting on firms at all times, but perhaps to a greater or lesser degree. There are forces from potential new entrants, buyers, sellers, substitutes and competitors at all times, but their threat varies. Consider Zara, the case discussed in at the beginning of this chapter. Figure 2.4 summarizes these five forces working simultaneously at the retailer and manufacturer.

General managers can use the five competitive forces model to identify the key forces currently affecting competition, to recognize uses of information resources to influence forces, and to consider likely changes in these forces over time. The changing forces drive both the business strategy and IS strategy, and this model provides a way to think about how information resources can create competitive advantage for a business unit and, even more broadly, for the firm. They also can reshape a whole industry—compelling general managers to take actions to help their firm gain or sustain competitive advantage.

Consider an example of a large grocery retailer. Because of many factors, including the number of items on the shelves of the store, the complexity of managing customers, and the logistics necessary to keep inventory moving and reordered as necessary, these retailers are no longer are able to compete without information systems. The basis of competition has changed in part because of the innovative use of information systems by industry leaders. Keeping track of inventory is a given, but large chains must also intimately know their customers and find new ways to provide innovative services to keep their loyalties. The entire industry has changed from one of locally providing groceries to one of managing information about every aspect of their business. The alternative perspective presented in the next section provides the general manager with an opportunity to select the proper mix of information resources and to apply them to achieve strategic advantage by altering key activities.

Using Information Resources to Alter the Value Chain

The value chain model addresses the activities that create, deliver, and support a company's product or service. Porter divided these activities into two broad categories, as shown in Figure 2.5: support and primary activities. Primary activities relate directly to the value created in a product or service, whereas support activities make it possible for the primary activities to exist and remain coordinated. Each activity may affect how other activities are performed, suggesting that information resources should not be applied in isolation. For example, more efficient IS for repairing a product may increase the possible number of repairs per week, but the customer does not receive any value unless his or her product is repaired, which requires that the spare parts be available. Changing the rate of repair also affects the rate of spare parts ordering. If information resources are focused too narrowly on a specific activity, then the expected value increase may not be realized, as other parts of the chain are not adjusted.

FIGURE 2.4 Application of five competitive forces model for Zara.

FIGURE 2.5 Value chain of the firm.

Source: Adapted from Michael Porter and Victor Millar, “How Information Gives You Competitive Advantage,” Harvard Business Review (July–August 1985), reprint no. 85415.

The value chain framework suggests that competition stems from two sources: lowering the cost to perform activities and adding value to a product or service so that buyers will pay more. To achieve true competitive advantage, a firm requires accurate information on elements outside itself. Lowering activity costs only achieves an advantage if the firm possesses information about its competitors' cost structures. Even though reducing isolated costs can improve profits temporarily, it does not provide a clear competitive advantage unless a firm can lower its costs below a competitor's. Doing so enables the firm to lower its prices as a way to grow its market share.

Adding value can be used to gain strategic advantage only if a firm possesses accurate information regarding its customer. Which product attributes are valued, and where can improvements be made? Improving customer service when its products fail was a goal behind Otis Elevator's Otisline system, a classic story about value-added customer service. The customer's elevator service call is automatically routed to the field technician with the skill and knowledge to complete the repair. Otis Elevator managers know that customers value a fast response to minimize the downtime of the elevator. This goal is achieved by using information resources to move the necessary information between activities. When customers call for service, their requests are automatically and accurately entered and stored in the customer service database and communicated to the technician linked to that account. This technician is then contacted immediately over the wireless handheld computer network and told of the problem. That way the service technician can make sure he or she has both the parts and knowledge to make repairs. This approach provides Otis with an advantage because the response is fast, and the technician arrives at the job properly prepared to fix the problem.

Likewise, many Web sites sell memory to upgrade laptops. But some sites, such as crucial.com, have an option that automates the process prior to the sales process. Their site has the “Crucial System Scanner Tool,” which scans the customer's Mac, identifies the current configuration and the capacity, then suggests compatible memory upgrade kits. The customer uses the scanner, which identifies the configuration of the Mac, and automatically opens up a Web page with the appropriate memory upgrades. The customer does not have to figure out the configuration or requirements; it's done automatically. By combining a software program like their configurator, with the sales process, crucial.com has added value to the customer's experience by automating a key part of the customer service process.

Although the value chain framework emphasizes the activities of the individual firm, it can be extended, as in Figure 2.6, to include the firm in a larger value system. This value system is a collection of firm value chains connected through a business relationship and through technology. From this perspective, a variety of strategic opportunities exist to use information resources to gain a competitive advantage. Understanding how information is used within each value chain of the system can lead to new opportunities to change the information component of value-added activities. It can also lead to shakeouts within the industry, as the firms that fail to provide value are forced out and as new business models are adopted by the surviving firms.

Opportunity also exists in the transfer of information across value chains. For example, sales forecasts generated by a manufacturer such as a computer or automotive company and linked to supplier systems, creates an order for the manufacture of the necessary components for the computer or car. Often this coupling is repeated from manufacturing company to vendor/supplier for several layers, linking the value chains of multiple organizations. In this way, value is added by each member of the supply chain by directly linking the elements of their value chains together.

FIGURE 2.6 The value system: interconnecting relationships between organizations.

Optimizing a company's internal processes, such as their supply chain, operations, and customer relationship processes, can be another source of competitive advantage. Tools such as supply chain management (SCM), an approach to how companies source materials for operations, enterprise resource planning (ERP) systems, a tool that automates functions of the operations activities of the value chain, and customer relationship management (CRM) systems, a tool to optimize the processing of customer information are routinely used to automate the internal operations of a firm's value chain. These systems are discussed in more detail in Chapter 5.

In an application of the value chain model to the Zara example discussed earlier in the chapter, Figure 2.7 describes the value added to primary and support activities provided by information systems at Zara. The focus in Figure 2.7 is on value added to Zara's processes, but suppliers and customers in its supply chain also realize the value added by information systems. Most notably, the customer is better served as a result of the information systems. For example, the stores place orders twice a week over personal digital assistants (PDAs). Each night, managers use their PDAs to learn about newly available garments. The orders are received and promptly processed and delivered. In this way Zara can be very timely in responding to customer preferences.

Unlike the five competitive forces model, which focuses on industry dynamics, the focus of the value chain is on the firm's activities. Yet, in applying the value chain, competitive forces may be affected to the extent that the proposed technology may add value to suppliers, customers, or even competitors and potential new entrants.

Using the Resource-Based View (RBV)

The third framework, the resource-based view (RBV),⁹ is useful in determining whether a firm's strategy has created value by using IT. Unlike Porter's competitive forces framework, this view maintains that competitive advantage comes from the information and other resources of the firm. On the other hand, Porter's competitive forces framework argues that aspects of the firm's industry create sources of competitive advantage that remain relatively stable. Like the value chain model, the resource-based view concentrates on areas that add value to the firm. Whereas the value chain model focuses on a firm's activities, the resource-based view focuses on the resources that it can manage strategically in a rapidly changing competitive environment.

FIGURE 2.7 Application of value chain model to Zara.

The RBV has been applied in the area of IS to help identify two types of information resources: those that enable a firm to attain competitive advantage and those that enable a firm to sustain the advantage over the long term. From the IS perspective,¹⁰ some types of resources are better than others for creating attributes that enable a firm to attain (i.e., value, rarity) competitive advantage while other resources are better for creating attributes to sustain competitive value (i.e., low substitutability, low mobility, low imitability).

Resources to Attain Competitive Advantage

Valuable and rare resources that firms must leverage to establish a superior resource position help companies attain competitive advantage. A resource is considered valuable when it enables the firm to become more efficient or effective. It is rare when other firms do not possess it. For example, many banks today would not think of doing business without ATMs. ATMs are very valuable to the banks in terms of their operations. A bank's customers expect it to provide ATMs in many convenient locations. However, because many other banks also have ATMs, they are not a rare resource, and they do not offer a strategic advantage. Some call them table stakes or resources required just to be in the business. Many systems in Eras I and II, and especially Era III, were justified on their ability to provide a rare and valuable resource. In some cases these very systems have become table stakes.

Other examples of initially rare and valuable resources are the communities many companies implemented using social IT. People joined a community because they had a common interest with others and early on, they had only one or possibly a few communities to choose from. These communities were a valuable resource for the firms that sponsored them. For example, Rodale, Inc. Men's Health for Belly Off! Club won an award in 2009 for demonstrating that online communities can enhance a traditional franchise when they offered readers a diet supplemented with a program that included user-generated content, profiles progress reports, and additional tools for managing user goals. The program attracted 20,000 members, which was double the goal, and members provided positive, encouraging and goal-driven comments to each other, giving Rodale a valuable resource. At the time, no other community offered such a valuable service.

Resources to Sustain Competitive Advantage

Many firms who invested in systems learned that gaining a competitive advantage does not automatically mean that you can sustain it over the long term. The only way to do that is to continue to innovate and to protect against resource imitation, substitution, or transfer. For example, Walmart's complex logistics management is deeply embedded in both its own and its supplier's operations that imitations by other firms is unlikely. It was not easy for eBay customers to find a substitute for ProStores, discussed earlier in this chapter. The Oakland A's use of information systems propelled them to victory, as depicted in the movie “Moneyball,” but as soon as other teams learned about the secret success Oakland was having with information systems, they, too began to use similar techniques, reducing the advantage Oakland initially enjoyed. Finally, to sustain competitive advantage, resources must be difficult to transfer or replicate, or relatively immobile. Some resources such as computer hardware and software can be easily bought and sold. However, technical knowledge, especially that relates to the firm's operation, a gung-ho company culture, and managerial experience in the firm's environment is less easy to obtain and, hence, considered harder to transfer to other firms.

Some IT management skills are general enough in nature to make them easier to transfer and imitate relationship skills. Although it clearly is important for IS executives to manage internally oriented resources such as IS infrastructure, systems development, and running cost-effective IS operations, these skills can be acquired in many different forums. They are basic IT management skills possessed by virtually all good IS managers. Other skills, however, are unique to a firm and require considerable time and resources to develop. For example, it takes time to learn how the firm operates and to understand critical processes and socially complex working relationships. However, the message posed by the resource-based view is that IS executives must look beyond their own IS shop and concentrate on cultivating resources that help the firm understand changing business environments and allow them to work well with all their external stakeholders. Even when considering internally oriented information resources, there are differences in the extent to which they add value. Many argue that IS personnel are willing to move, especially when offered higher salaries by firms needing these skills. Yet, some technical skills, such as knowledge of a firm's use of technology to support business processes and technology integration skills are not easily moved to another firm. Further, hardware and many software applications can be purchased or outsourced, making them highly imitable and transferrable. Because it is unlikely that two firms will have exactly the same strategic alternatives, resources at one firm have only moderate substitutability in the other firm.

Zara and RBV

Figure 2.8 indicates the extent to which the attributes of each information resource may add value to Zara, discussed earlier in the chapter. Zara's advantage did not come from the specific hardware or software technologies it employed. Its management spent five to ten times less than its rivals on technology. Zara skillfully uses the POS equipment, handheld computers, automated conveyors, and the large computer-controlled equipment to cut patterns, but Zara could eventually be purchased or imitated by competitors. The IT infrastructure in terms of value creation (i.e., value and rarity) has a moderate rating. It is easy to imitate and transfer and only moderately difficult to substitute considering the automated conveyors; hence Zara's infrastructure would not be a particularly good resource for maintaining strategic value. In contrast, Zara has created considerable value from the other information asset—its valuable information repository with customers' preferences and body types. The information about customer preferences that the store managers communicate daily is captured and saved in Zara's information repository. That information is easily retrievable by the designers, market specialists, procurement planners, and production managers. It would be a challenge for other companies to develop and apply the rich information not only because of the volume of data, but also because of the working relationships that leverage its use. Thus, the information repository has great value to Zara and is relatively rare because of its integration with Zara's operations and personnel. It would be relatively difficult to imitate or transfer and extremely difficult to substitute.

FIGURE 2.8 Information resources at Zara, by attribute. (L = low; M = medium; H = high).

Source: Based on M. Wade and J. Hulland, “The Resource-Based View and Information Systems research: Review, Extension and Suggestions for Future Research,” MIS Quarterly (2004), 28(1), 107–142.

In terms of information capability, much of Zara's value creation is from its valuable and rare IT management skills. Zara's technical skills, while not exceptionally valuable or rare, may offer some sustainable value because they are used to integrate across Zara's range of systems, and would thus not be overly easy to imitate, substitute or transfer. However, its IT management skills are strong to the extent that they can leverage the use of IT resources, a skill that is not easily replicable, transferrable, or substitutable. Zara's relationship skills also serve as a tool for value creation and sustainablitility. The spanning capabilities demonstrated by the tight-knit teams at headquarters are very unusual and are not easy to replicate, imitate, or purchase in the market place. They allow Zara the ability to correctly interpret and quickly respond to customers' needs. IT is integrally involved in supporting the spanning. Zara is also able to maintain and sustain external reliationships with their suppliers. The externally focused relationships Zara maintains with manufacturers in Europe allow for a turnaround time of under five weeks from conception to distribution. Overall, Zara is able to create high value from its IT management and relationship skills. It would be moderately to extremely difficult to substitute, imitate, or transfer them.

Most firms don't really have a choice of creating competitive advantage by manipulating industry forces either through their use of information resources or IT-enhanced activities. Yet, like Zara, they can leverage the IT resources they do have to create and sustain strategic value for their firms.

STRATEGIC ALLIANCES

The value chain helps a firm focus on adding value to the areas of most value to its partners. The resource-based view suggests adding value using externally oriented relationships skills. The most recent eras of information usage evolution emphasized the importance of collaborative partnerships and relationships. The increasing number of Web applications focused on collaboration and social networking only foreshadow even more emphasis on alliances. These relationships can take many forms, including joint ventures, joint projects, trade associations, buyer–supplier partnerships, or cartels. Often such partnerships use information technologies to support strategic alliances and integrate data across partners' information systems. A strategic alliance is an interorganizational relationship that affords one or more companies in the relationship a strategic advantage. An example was the strategic alliance between game-maker Zynga and Facebook. As documented in Facebook's IPO filing in January 2012, the relationship is a mutually beneficial one. Zynga developed some of the most popular games on Facebook, including Mafia Wars, Farmville, and WordsWithFriends. Facebook got exclusive rights to Zynga's games many of which generated thousands of new members of Facebook. The alliance generated significant revenue for both parties. Zynga accounted for 12% of Facebook's revenue in 2011, according to the IPO documents, since players of these games purchase virtual goods with real money and Zynga purchases significant advertising space from Facebook to promote its games. Zynga benefits from the revenue resulting from its gamers on Facebook community.¹¹

IS can be the platform upon which a strategic alliance functions. Technology can help produce the product developed by the alliance, share information resources across the partners' existing value systems, or facilitate communication and coordination among the partners. For example, Delta formed a strategic alliance with e-Travel Inc., a travel service software company that targets large corporations, to promote Delta's online reservations system. The alliance was strategic because it helped Delta reduce agency reservation fees and offered e-Travel new corporate leads. As introduced earlier, linking value chains through SCM is another way firms build an IT-facilitated strategic alliance.

Co-opetition

Clearly, not all strategic alliances are formed with suppliers or customers as partners. Rather, co-opetition is an increasingly popular alternative model. As defined by Brandenburg and Nalebuff in their book of the same name, co-opetition is a strategy whereby companies cooperate and compete at the same time with companies in its value net.¹² The value net includes a company and its competitors and complementors, as well as its customers and suppliers, and the interactions among all of them. A complementor is a company whose product or service is used in conjunction with a particular product or service to make a more useful set for the customer. For example, Goodyear is a complementor to Ford and GM because tires are a complementary product to automobiles. Likewise, Amazon is a complementor to Apple in part because the Amazon reading application, the Kindle, named after the reading tablet Amazon sells, is one of the most popular apps for the iPad.

Co-opetition, then, is the strategy for creating the best possible outcome for a business by optimally combining competition and cooperation. It frequently creates competitive advantage by giving power in the form of information to other organizations or groups. For example, Covisint, the auto industry's e-marketplace, grew out of a consortium of competitors General Motors, Ford, and DaimlerChrysler, Nissan, and Renault. By addressing multiple automotive functional needs across the entire product life cycle, Covisint offers support for collaboration, supply chain management, procurement, and quality management. Thus, co-opetition as demonstrated by Covisint, not only streamlines the internal operations of its backers, but also has the potential to transform the automotive industry.

RISKS

As demonstrated throughout this chapter, information resources may be used to gain strategic advantage, even if that advantage is fleeting. When information systems are chosen as the tool to outpace their firm's competitors, executives should be aware of the many risks that may surface. Some of theses risks include the following:

• Awaking a sleeping giant. A firm can implement IS to gain competitive advantage, only to find that it nudged a larger competitor with deeper pockets into implementing an IS with even better features. FedEx offered its customers the ability to trace the transit and delivery of their packages online. FedEx's much larger competitor, UPS, rose to the challenge. UPS not only implemented the same services, but also added a new set of features eroding some of the advantages FedEx enjoyed, and causing FedEx to update its offerings. Both the UPS and FedEx sites passed through multiple Web site iterations as the dueling delivery companies continue to struggle for competitive advantage.
• Demonstrating bad timing. Sometimes customers are not ready to use the technology designed to gain strategic advantage. For example, Grid Systems created the GRiDPAD in 1989. It was a tablet computer designed for businesses to use in the field, and was well reviewed at its time. But it didn't get traction. Three decades later, in 2010, Apple introduced the iPad, and tablet computing took off.
• Implementing IS poorly. Stories abound of information systems that fail because they are poorly implemented. Typically these systems are complex and often global in their reach. Web snafus plagued Virgin America's implementation of its online reservation system. It had turned to Sabre Holdings Corp, an industry standard, to develop a reservations system to interface with other airlines and handle its future growth. But apparently, its other systems aren't compatible with Sabre's and systems problems still exist four months after the installation was supposed to be completed. During the lengthy installation period, customers were unable to book or modify their flights, check-in on-line. These created a huge amount of problems for Virgin America's customers during the busy flying periods over the Thanksgiving and Christmas holidays.¹³

  Another implementation fiasco took place at Hershey Foods, when it attempted to implement its supply and inventory system. Hershey developers brought the complex system up too quickly and then failed to test it adequately. Related systems problems crippled shipments during the critical Halloween shopping season, resulting in large declines in sales and net income. More recently, in 2012, more than 100,000 Austin Energy customers received incorrect utility bills due to problems with their vendor-supplied bill collection system. Some customers went months without a bill, others were incorrectly billed. Some businesses that owed $3,000 were billed $300,000. Still others tried to pay their bill online, only to be told it wasn't recorded when it was. The utility calculated that the problems cost it more than $8 million.¹⁴

• Failing to deliver what users want. Systems that do not meet the needs of the firm's target market are likely to fail. For example, in 2011, Netflix leadership divided the company into two, calling the DVD-rental business Qwikster, and keeping the streaming business under Netflix. But customers complained, and worse, closed their accounts, and less than a month later, Qwikster was gone. Netflix reunited both businesses under the Netflix name.¹⁵
• Mobile-based alternative removes advantages. With increasingly more applications moving to mobile-based platforms, managers must consider the risk of losing any advantage obtained by a Web-based information resource that later becomes available as a service on mobile platforms. The mobile-based alternative may be much simpler to use, be more easily available, and include a similar set of advantages. An example was iHeartRadio launched by Clear Channel Communications, a mobile application that streamed live radio broadcasts from more than 800 radio stations from all over the country on mobile devices. It allowed listeners to build customized channels of just the music or programming they like, and to share them with friends. It also had the ability to suggest new music the listener might like based on predictive software routines. These features outweighed advantages local radio stations enjoyed. Likewise, mobile phones were able to stream videos from YouTube and movie sites like Netflix, offering advantages such as portability and watching videos any place and any time.
• Running afoul of the law. Using IS strategically may promote litigation if the IS results in the violation of laws or regulations. Years ago, American Airlines' reservation system, Sabre, was challenged by American Airlines' competitors on the grounds that it violated antitrust laws. More recently, in 2010, Google said it was no longer willing to adhere to Chinese censorship. The Chinese government responded by banning searching via all Google search sites (not only google.cn but all language versions, e.g. google.co.jp. google.com.au, etc.), including Google Mobile. Google then created an automatic re-direct to Google Hong Kong, which stopped June 30, 2010 so that Google would not lose its license to operate in China. Today, Google, Inc. is acting in compliance with the Chinese government's censorship laws and Chinese users of Google.cn see filtered results as before.

Every business decision has risks associated with it. However, with the large expenditure of IT resources needed to create sustainable, strategic advantages, the manager will want to carefully identify and then design a mitigation strategy to manage the associated risks.

CO-CREATING IT AND BUSINESS STRATEGY

This chapter has discussed the alignment of IT strategy with business strategy. Certainly they must be carefully choreographed to ensure that maximum value is achieved from IT investments and the maximum opportunity to achieve the business strategy. However in the fast-paced business environment where information is increasingly a core component of the product or service offered by the firm, managers must co-create IT and business strategy. That is to say that IT strategy is business strategy; one cannot be created independent of the other. In many cases they are now one in the same.

For companies whose main product is information, such as financial services companies, it's clear that how information is managed is the core of the business strategy itself. How an investment firm manages the clients' account, how their clients interact with the company, and how investments are made are all done through the management of information. A financial services company must co-create business and IT strategy.

But consider a company like FedEx, most well known as the package delivery company. Are customers paying to have a package delivered or to have information about that package's delivery route and timetable? One could argue that they are one in the same, and that increasingly the company's business strategy is its IS strategy. Certainly there are components of the operation that are more than just information. There are actual packages to be loaded on actual trucks and planes, which are then actually delivered to their destinations. However, to make it all work, the company must rely on IS. Should the IS go down, FedEx would be unable to do business. A company like this must co-create IT strategy and business strategy.

This was not true a few years ago. Companies could often separate IS strategy from business strategy, in part because their products or services did not have a large information component. For example, a few years ago, should the IS of a trucking company stop working, the trucks would still be able to take their shipments to their destination and pick up new shipments. It might be slower or a bit more chaotic, but the business wouldn't stop. Today, that's not the case. Complicated logistics are the norm, and IS are the foundation of the business, such as seen at FedEx.

With the increasing number of IS applications on the Web and on mobile devices, firm will increasingly need to co-create business and IT strategy. Managers who think they can build a business model without considering the opportunities and impact of information systems, both the resources owned by the firm and those available on the Web will find they have significant difficulties creating business opportunities as well as sustainable advantage in their marketplace.

SUMMARY

• Information resources include data, technology, people, and processes within an organization. Information resources can be either assets or capabilities.
• IT infrastructure and information repositories are IT assets. Three major categories of IT capabilities are technical skills, IT management skills, and relationship skills.
• Using IS for strategic advantage requires an awareness of the many relationships that affect both competitive business and information strategies.
• The five competitive forces model implies that more than just the local competitors influence the reality of the business situation. Analyzing the five competitive forces—new entrants, buyers, suppliers, industry competitors, and substitute products—from both a business view and an information systems view helps general managers use information resources to minimize the effect of these forces on the organization.
• The value chain highlights how information systems add value to the primary and support activities of a firm's internal operations, as well as to the activities of its customers, and other components of its supply chain.
• The resource-based view (RBV) helps a firm understand the value created by their strategy. RBV maintains that competitive advantage comes from the information resources of the firm. Resources enable a firm to attain and sustain competitive advantage.
• IT can facilitate strategic alliances. Supply chain management (SCM) is a mechanism that may be used for creating strategic alliances.
• Co-opetition is the complex arrangement through which companies cooperate and compete at the same time with other companies in its value net.
• Numerous risks are associated with using information systems to gain strategic advantage: awaking a sleeping giant, demonstrating bad timing, implementing poorly, failing to deliver what customers want, avoiding mobile-based alternatives, and running afoul of the law.

KEY TERMS

co-opetition (p. 65)

customer relationship management (CRM) (p. 59)

enterprise resource planning (ERP) (p. 59)

information resources (p. 47)

IT asset (p. 47)

IT capability (p. 47)

network effects (p. 48)

resource-based view (RBV) (p. 59)

strategic alliance (p. 64)

supply chain management (SCM) (p. 59)

Web 2.0 (p. 47)

DISCUSSION QUESTIONS

1. How can information itself provide a competitive advantage to an organization? Give two or three examples. For each example, describe its associated risks.
2. Use the five competitive forces model as described in this chapter to describe how information technology might be used to provide a winning position for each of these businesses:
   1. A global airline
   2. A local dry cleaner
   3. A mobile phone company
   4. A bank
   5. A Web-based wine retailer
3. Using the value chain model, describe how information technology might be used to provide a winning position for each of these businesses:
   1. A global airline
   2. A local dry cleaner
   3. A mobile phone company
   4. A bank
   5. A Web-based wine retailer
4. Use the resource-based view as described in this chapter to describe how information technology might be used to provide and sustain a winning position for each of these businesses:
   1. A global airline
   2. A local dry cleaner
   3. A mobile phone company
   4. A bank
   5. A Web-based wine retailer
5. Some claim that no sustainable competitive advantages can be gained from IT other than the capability of the IS organization itself. Do you agree or disagree? Defend your position.
6. Cisco Systems has a network of component suppliers, distributors, and contract manufacturers that are linked through Cisco's extranet. When a customer orders a Cisco product at Cisco's Web site, the order triggers contracts to manufacturers of printed circuit board assemblies when appropriate and alerts distributors and component suppliers. Cisco's contract manufacturers are aware of the order because they can log on to Cisco's extranet and link with Cisco's own manufacturing execution systems. What are the advantages of Cisco's strategic alliances? Does this Cisco example demonstrate SCM? Why or why not?

CASE STUDY 2-1
GROUPON

Groupon, Inc. raised $700 million at its IPO in the fall of 2011, instantly providing a valuation of almost $13 billion for a company that was only 3 years old at the time. Some question the value claiming Groupon has no sustainable competitive advantage. Others see Groupon as an innovative company with high potential.

Groupon sells Internet coupons for events, services, and other popular items customers might want to buy. Customers sign up for daily emails targeted to their local market. The daily deal, offered for one-day only and only if a pre-determined minimum number of customers buy it, gives customers 50% off the “retail” price. For example, a $100 3-month health club membership would sell for $50 on Groupon. The customer pays $50 to Groupon and prints a certificate to redeem at the health club. Groupon keeps 50% of the revenue, or $25 in this case, and gives the rest to the health club. Effectively, retailers are offering 75% off, with the customer saving 50% and Groupon taking the rest.

Groupon pays the retailer when the coupon is redeemed, making money both on the float between the time revenue is collected and the time the retailer is paid, and on the certificates that are never redeemed at all, which the industry calls “breakage.” Retailers make money in the long run by introducing customers to their products, selling them additional products and services when they come in to redeem their coupons, and turning them into repeat customers. And retailers benefit from the buzz created when their business is on Groupon.

In August 2010, Groupon launched its first national deal, a coupon worth $50 of Gap apparel and accessories for $25. Over 440,000 coupons were sold, netting Groupon and the Gap close to $11 million. But not all vendors are the size of the Gap, and smaller vendors have been overwhelmed with too many coupons. One local business owner said they lost $8,000 on their Groupon promotion when too many coupons were issued. In fact a study of 150 retailers showed that only 66% found their deals profitable.

Around the time of the IPO, the analysts and observers alike claimed that Groupon's business model was not sustainable. In addition to the large number of retailers who found their deals unprofitable, observers noted that Groupon does not produce anything of value, and they are not adding value to the retailers. Further, there are no barriers to entry to stop competitors. In May 2011, there were over 450 competitors who offer discounts and deals including LivingSocial, another daily deal site, restaurant.com, a site for restaurant gift certificates at a deep discount, overstock.com and woot.com, sites offering discounted merchandise, not to mention deep-pocketed competitors like Amazon.com.

But Groupon added to its business strategy with mobile capability and new services. In February 2012, they purchased Kima Labs, a mobile payment specialist, and Hyperpublic, a company that builds databases of local information. In May 2011, in a few cities, the company launched GrouponNow, a time-based local application that gives customers instant deals at merchants nearby using location-based software. CEO Andrew Mason told Wall Street analysts in February 2012 that he saw significant growth potential, including working on new features that will help customers personalize offers and avoid deals they don't want.

Discussion Questions

1. How does information technology help Groupon compete?
2. Do you agree or disagree with the statement that “Groupon has no sustainable competitive advantage?” Please explain your point of view.
3. How does Groupon add value to the companies whose offers are sold on the site?
4. What impact, if any, will Groupon Now have on Groupon's competitive position? Explain.
5. What would you advise Groupon leaders to consider as their next application?
6. Apply the Resource-Based View to Groupon's business model to show how information resources may be used to gain and sustain competitive advantage.

Sources: Adapted from http://mashable.com/2010/08/19/gap-groupon/ (accessed on February 21, 2012); http://www.forbes.com/sites/petercohan/2011/06/06/memo-to-sec-groupon-has-no-competitive-advantage-stop-its-ipo/ (accessed on February 21, 2012); http://blogs.wsj.com/venturecapital/2010/09/29/rice-university-study-groupon-renewal-rate-not-so-hot/ (accessed on February 21, 2012); http://articles.chicagotribune.com/2011-05-18/business/ct-biz-0519-groupon-now-20110518_1_groupon-chief-executive-andrew-mason-first-phase (accessed on February 21, 2012); and http://www.reuters.com/article/2012/02/09/us-groupon-idUSTRE81727B20120209 (accessed on February 21, 2012).

CASE STUDY 2-2
ZIPCAR

Zipcar was an answer for customers who want to rent a car for a few hours in their home city, rather than for a few days from a traditional rental agency. Car reservations were for a specific pick-up time and location around the city, often in neighborhoods so the customers need only to walk to pick up their reserved car. Customers applied for a Zipcard, which enabled them to reserve a car online and unlock their car when they arrive at the car's location.

The company operated with a very small staff compared to traditional rental agencies. Very little human interaction was required between the customer and Zipcar for a transaction. A customer reserved a car online, entered into the reserved car by waving the RFID-enabled Zipcard against the card reader mounted behind the windshield on the driver side, returned the car to the same location, and was billed on the credit card already on file. The customer could check all rental records and print receipts from the online reservation system. The system also had a color-coded time chart showing availability and location of all rental cars in the vicinity. This transparent information exchange allows a customer to pick the car he or she wants, if available, or delay the reservation until the car was returned by another customer. Zipcar also created and installed a GPS-enabled wireless device in each car, which allowed members to find and reserve a nearest vehicle using a cell phone. Customers also can use an iPhone or Android app on their iPhone or Android mobile device to find and reserve a Zipcar on a 24/7 basis. Zipcar sends text alerts near the end of the rental period and customers can text back if they want to extend their rental time.

All the cars were outfitted with patented wireless technology. Their proprietary IT platform carried information flow between customers, vehicles, and the company. It was used to monitor car security, fulfill reservations, record hourly usage, and maintain mileage information. It also relayed vital technical information such as battery voltage and fuel level. It even informed the central system if a customer forgot to turn off headlights, which can quickly drain battery power.

This business model provided unique advantages over traditional car rentals. The customer did not have to stand in line or fill out papers to rent a car. The customer knew exactly which make and model he or she would be getting. Unlike most off-airport rental agency locations, which were only open during business hours, Zipcar locations were open 24 hours. The Zipcar rates also included the cost of gas and insurance, as well as reserved parking spots at some locations.

Additionally, the company used social networking technologies to develop an online community of Zipcar members—Zipsters. It encouraged Zipsters to talk about their Ziptrips (i.e., share their personal experiences with Zipcar).

Thus, information technology was not only the key enabler of this business model but also was a facilitator in creating a buzz and encouraging community development around the concept. Zipcar changed the rules of the rental car industry by bringing the new Web 2.0 mind-set of focusing on automation, customer empowerment, transparency, and community. Zipcar has been very successful, with over 200,000 paying members and renting over 5,000 vehicles in 50 markets in the United States, Canada, and the United Kingdom.

Discussion Questions

1. Analyze the business model of Zipcar using Porter's five forces model.
2. Discuss the synergy between the business strategy of Zipcar and information technology.
3. What network effects are part of the strategy of Zipcar? How do they add value?
4. As the CEO of Zipcar, where is your most threatening competition? What would you do to sustain a competitive advantage?

Sources: Adapted from Paul Boutin, “A Self-Service Rental Car,” BusinessWeek (May 4, 2006); Mary K. Pratt, “RFID: A Ticket to Ride,” ComputerWorld (December 18, 2006); and “Zipcar: Our technology downloaded,” http://www.zipcar.com/how/technology.