Five attributes of IT have been suggested as possible sources of sustained competitive advantage in the literature. These five attributes are evaluated here using resource-based logic.
1. CUSTOMER SWITCHING COSTS
At one time, it was suggested that customer switching costs could create competitive advantages for some firms. This logic was summarized in the ‘create-capture-keep’ paradigm (Clemons and Kimbrough 1986; Clemons and Row 1987, 1991b; Feeny and Ives 1990). In this paradigm, certain customers are forced to make supplier-specific investments in acquiring IT. Once made, these investments make it possible for IT suppliers to appro- priate a disproportionate share of the value created by IT—an example of holdup as described by Williamson (1975). Firms that did not make these specific investments, or firms that buy IT from suppliers that do not engage in holdup, will have competitive advantages over firms that are captured by opportunistic suppliers.
While this argument is consistent with transactions cost theory, changes in the nature of IT over the years have made it less important for firms to make supplier-specific investments to obtain and use IT. Without such investments, holdup cannot occur and the results of holdup cannot benefit some firms more than others. Indeed, even in those areas of IT where spe- cific investments are still required—such as in enterprisewide systems sold by firms like PeopleSoft—increasingly sophisticated contracts seem to have reduced the threat of opportunism in these exchanges. Moreover, these contracting skills are available to most firms (Mayer and Argyres 2004). All of this suggests that supplier-specific investments are unlikely to be a source of competitive advantage for firms in the acquisition and use of IT.
2. ACCESS TO CAPITAL
The capital needed to develop and apply IT—whether in the form of debt, equity, or from retained earnings—has been suggested as a source of sustainable competitive advantage for at least some firms (McFarlan 1984). The logic underlying this assertion is straightforward. First, IT investments can be very risky, and thus the capital needed to make these investments can be very costly. Second, IT investments can require huge amounts of this risky capital. It may often be the case that only a few firms competing in a particular product market will have the financial capability needed to acquire the necessary capital to make certain IT investments. Thus, the few firms that are able to acquire the needed capital to make these investments can gain a sustained competitive advantage from them.
Two kinds of uncertainty can be considered as the major sources of risk in IT investments, and are, therefore, determinants of the cost of capital required to make those investments: technological uncertainty and market uncertainty. Technological uncertainty reflects the risk that an IT investment may not meet its expected performance targets in a timely way. Specific sources of technological uncertainty in IT investments include (McFarlan 1981): (a) failure to obtain the anticipated IT results because of implementation difficulties, (b) higher than anticipated implementa- tion costs, (c) longer than anticipated implementation time, (d) technical performance below what was anticipated at the outset of the investment, and (e) incompatibility of the developed IT with selected hardware and software.1
When they were first developed, airline reservation systems were char- acterized by high levels of technological uncertainty. Their development required the solution of a number of unforseen problems, which reflected the technological limitations and scarce experience available at the time. These problems were solved in part by IBM’s direct involvement and commitment in the development of these systems (see Copeland and McKenney 1988, for details).
Market uncertainty, on the other hand, reflects risks related to the cus- tomer’s acceptance of new IT products or services. Market uncertainty was a major cause of failure for the Pronto and ZapMail systems. Even though these systems met their technical objectives, they were not adopted by customers. The Pronto system, an early foray into electronic banking, did not attract enough customers in six years to break even and had to be abandoned (Gunther 1988; Clemons and Weber 1990). Similarly, low- cost substitutes led to the failure of Federal Express’s ZapMail, a system designed to transmit facsimile documents through a nationwide network (Keller and Wilson 1986; Wiseman 1988).
Of course, not all IT investments are large, nor are they all risky. If IT investments are not large and risky, then it is likely that many firms will have access to the capital necessary to make them. In this context, access to capital is not likely to be a source of sustained competitive advantage. On the other hand, some IT investments may be both large and very risky. However, even in this context, access to capital for IT investments, per se, is not likely to be a source of sustained competitive advantage for firms. Consider, for example, several firms with identical IT resources and capabilities seeking capital to make particular IT investments. While these investments may be both risky and large, and because these firms are about equally skilled in making IT investments, the risks of these investments are not heterogeneously distributed across these firms. According to resource- based theory, firm attributes that are not heterogeneously distributed across firms will only be a source of competitive parity. While the capital used by these firms to make these IT investments will be risky and large, it will not be any more so to any one of these firms than it is to the others (Barney 1986a). Furthermore, technological or market uncertainty is usually resolved once a first mover has been able to successfully implement a system. Therefore, these risks actually affect first movers more than followers (Lieberman and Montgomery 1988), and consequently, in many circumstances, technology followers can have access to lower cost of capital than technology first movers.
Of course, this simple example makes the strong assumption that com- peting firms have the same resources and capabilities in making IT invest- ments. Obviously, this will often not be the case. Different firms may be differentially skilled in managing the technical and market risks associated with particular kinds of IT investments. Put another way, firms that are more skilled in managing their IT investments face fewer technical and market risks than less skilled firms. These more skilled firms will have access to lower cost of capital than less skilled firms and will be able to pur- sue IT investments that are not available to less skilled firms. Consequently, some firms may gain competitive advantages over other firms through their IT investments.
However, in this situation it is inappropriate to conclude that access to capital, per se, is a source of competitive advantage. Rather, it is the special resources and capabilities of some firms that enable them to manage the technical and market risks more efficiently, and allows them to gain an advantage. If these resources and capabilities are valuable (which in this case, they are) and heterogeneously distributed across competing firms (again in this case, they are), they can be a source of at least a temporary competitive advantage. Whether the skills needed to manage technical and market risks are imperfectly mobile (i.e. whether they reflect a firm’s unique history, are causally ambiguous, or socially complex) and thus sources of sustained competitive advantage, is discussed in later sections of this chapter.
Even small firms, with apparently small debt capacity and few retained earnings, can overcome capital market disadvantages if they have access to the required IT investment resources and capabilities. These small firms can cooperate in their IT investments, gaining access to both the needed skills and the required capital (Cash and Konsynski 1985; Vitale 1986; Clemons and Knez 1988; Clemons and Row 1992). For example, such cooperative efforts were used in the development of the European airline reservation systems, Amadeus and Galileo, to overcome the problems of a single firm acquiring large amounts of capital needed to develop such systems (Etheridge 1988).
3. PROPRIETARY TECHNOLOGY
Technology that can be kept proprietary has also been suggested as a source of sustained competitive advantage (Bain 1956; Porter 1980). Although proprietary technology can be protected through patents or secrecy (Porter 1980), IT applications are difficult to patent (Jakes and Yoches 1989). Moreover, even if they could be patented, there is evidence that patents pro- vide little protection against imitation (Mansfield, Schwartz, and Wagner 1981; Mansfield 1985). Thus, secrecy is the only alternative for keeping IT proprietary.
Clearly, if a firm possesses valuable proprietary technology that it can keep secret, then that firm will obtain a sustained competitive advantage. The fact that the technology is proprietary suggests that it is heteroge- neously distributed across competing firms; the fact that it is secret suggests that it is imperfectly mobile. However, most research indicates that it is relatively difficult to keep a firm’s proprietary technology secret, and thus, it is unlikely that proprietary technology will be a source of sustained competitive advantage. This is especially true for IT (Clemons and Row 1987).
A wide variety of factors act to reduce the extent to which proprietary IT can be kept secret. Workforce mobility, reverse engineering, and for- mal and informal technical communication all act to reduce the secrecy surrounding proprietary technology (Lieberman and Montgomery 1988). Thus, if one firm finds itself at a competitive disadvantage to another because that other firm has some proprietary IT application, the disadvan- taged firm can hire away one or more of the individuals who developed the advantaged firm’s application; it can purchase that application and discover its character through reverse engineering; it can discover the nature of the application through informal discussions with developers or users; or it can read published reports about the nature of the proprietary application and duplicate it in that way. Put another way, while a particular firm may gain a ‘head start’ (i.e. a temporary competitive advantage) from its proprietary IT application, competing firms are usually not disadvantaged in imitating that technology by history, causal ambiguity, or social complexity. Thus, that proprietary technology usually is not a source of sustained competitive advantage.2
IT has become, to a large extent, generic and available to most firms (Clemons and Row 1987, 1991b). Even complex systems that used to be immune from imitation are now broadly available from numerous sources. For example, the software used in airline reservation systems currently can be acquired from the companies that developed them for internal purposes (Etheridge 1988; Hopper 1990). As this diffusion of IT continues, the ability of proprietary technology to be a source of competitive advantage— sustained or temporary—continues to erode.
4. TECHNICAL IT SKILLS
A third possible source of sustained competitive advantage from IT may be a firm’s technical IT skills (Copeland and McKenney 1988). Technical skills refer to the know-how needed to build IT applications using the available technology and to operate them to make products or provide services (Capon and Glazer 1987). Examples of such technical skills might include knowledge of programming languages, experience with operating systems, and understanding of communication protocols and products. These technical skills enable firms to effectively manage the technical risks associated with investing in IT, as discussed previously.
While technical skills are essential in the use and application of IT, they are usually not sources of sustained competitive advantage. Although these skills are valuable, they are usually not heterogeneously distributed across firms. Moreover, even when they are heterogeneously distributed across firms, they are typically highly mobile. For instance, firms without the required analysis, design, and programming skills required to make an IT investment can hire technical consultants and contractors. Specifically, airlines acquired technical expertise for developing their complex airline reservation systems by hiring programmers from other airlines and by making alliances with other carriers and hardware vendors (Copeland and McKenney 1988).
This mobility of technical IT skills shows that such skills are usually explicit and codifiable by means of equations, procedures, blueprints, etc. Since codifiable knowledge ‘can be communicated from its possessor to another person in symbolic form, the recipient becomes as much “in the know” as the originator’ (Winter 1987: 171). These codifiable skills are easy to transmit and receive (Teece 1988). Thus, technical skills can easily diffuse among a set of competing firms.
If a firm is at a competitive disadvantage because of its inadequate technical IT skills, it has a variety of obvious solutions. For example, this firm could train its own employees in the relevant technical skills, hire new employees that already have the technical skills, ask its employees to take various classes to learn the relevant technical skills, etc. In all these ways, a firm at a competitive disadvantage could solve its technical problems and regain competitive parity in technical IT skills. Consequently, though there’s no question that technical IT skills are valuable to the firm, they rarely meet both additional conditions of being heterogeneously distrib- uted across firms and highly immobile. Without meeting these conditions from resource-based theory, it is unlikely that technical IT skills can be used to sustain a competitive advantage.
5. MANAGERIAL IT SKILLS
Technical skills are not the only skills required to build and use IT applica- tions. A second broad set of skills are managerial skills (Capon and Glazer 1987). In the case of IT, managerial skills include management’s ability to conceive of, develop, and exploit IT applications to support and enhance other business functions. Examples of important IT management skills include: (a) the ability of IT managers to understand and appreciate the business needs of other functional managers, suppliers, and customers; (b) the ability to work with these functional managers, suppliers, and cus- tomers to develop appropriate IT applications; (c) the ability to coordinate IT activities in ways that support other functional managers, suppliers, and customers; and (d) the ability to anticipate the future IT needs of functional managers, suppliers, and customers. Managerial IT skills enable firms to manage the market risks associated with investing in IT. Firms can acquire technical IT skills by hiring programmers and analysts. They then use their managerial IT skills to help programmers and analysts fit into an organization’s culture, understand its policies and procedures, and learn to work with other business functional areas on IT-related projects.
That these managerial skills are valuable is almost self-evident. Without them, the full potential of IT for a firm will almost certainly not be realized. How frequently different competing firms will possess similar IT manage- ment skills is an empirical question. However, it is reasonable to expect that close working relationships among those in IT and between IT and other business functions are not all that common, and thus, these relationships may be heterogeneously distributed across firms.
Unlike technical IT skills, managerial IT skills are often developed over longer periods through the accumulation of experience by trial-and-error learning (Katz 1974). Skills developed in this way are called ‘learning- by-doing’ skills (Williamson 1975). For example, friendship, trust, and interpersonal communication can take years to develop to the point where IT managers and managers in other business functions are able to effec- tively work together to create and exploit novel IT applications. Thus, history is important for developing these skills. Managerial skills in many cases are tacit (Castanias and Helfat 1991) and may involve hundreds to thousands of small decisions that cannot be precisely imitated. As long as these skills are part of the ‘taken-for-granted’ part of a firm’s skill base, they may remain causally ambiguous. Finally, the development and use of many of these managerial skills depend on close interpersonal relation- ships between IT managers and those working in the IT function, between IT managers and managers in other business functions, and between IT managers and customers. Thus, the development of these skills is often a socially complex process. Therefore, if managerial IT skills are valuable and heterogeneously distributed across firms, then they usually will be a source of sustained competitive advantage, since these relationships are developed over time; and they are socially complex and thus not subject to low-cost imitation.
Of course, while many managerial IT skills are developed over long periods and are causally ambiguous and socially complex, not all such skills have the attributes needed to be sources of sustained competitive advantage. In general, when managerial IT skills can be written down, codified, and transferred at low cost and with little loss in richness or understanding, those skills are not likely to be sources of sustained com- petitive advantage. On the other hand, when managerial IT skills cannot be written down, codified, or transferred at low cost or without significant loss of richness and understanding, those managerial IT skills may be a source of sustained competitive advantage.
Consider two examples. It has been suggested that management’s under- standing of the potential for IT to be a source of competitive advantage was important for American Airline’s ability to develop the SABRE system (Copeland and McKenney 1988). Moreover, the close relationship between American Airline’s IT personnel and personnel in other business functions enabled these groups to work together, to make and learn from mistakes, and to build on successes in a way that led to the SABRE system. If manage- ment at American Airline had not been committed to the innovative use of IT, or if relationships between the IT function and other business functions had not been cooperative, the SABRE system may never have been devel- oped or implemented. Imitation of the SABRE system was slowed, while other airlines developed the IT management skills necessary to develop these systems.
Wal-Mart’s purchase–inventory–distribution system, which has allowed a reduction in its cost of sales 2–3 percent below the industry average, is another example of the importance of managerial IT skills in creating sustained competitive advantage. A competitively interesting note about this just-in-time system is that it applies very little proprietary technology and uses very few inimitable IT technical skills. Instead, IT is used to support constant and direct communication among Wal-Mart’s stores, dis- tribution centers, and suppliers. It is this constant communication and the relationships it builds that has enabled Wal-Mart to retain its competitive advantage despite the successful efforts of many of Wal-Mart’s competitors to imitate Wal-Mart’s hardware and software (Stalk, Evans, and Shulman 1992). Put differently, while Wal-Mart’s technical IT skills have been imi- tated, its IT management skills have been shown to be a source of sustained competitive advantage.
Part of Wal-Mart’s advantage results from its ability to link its IT func-tion with its stores, its distribution centers, and even with its suppliers. This suggests that managerial IT skills are relevant not only in linking different functions within the same firm, but may also be important in linking dif- ferent firms in ways that generate IT-based competitive advantages through strategic alliances. It may also be the case that managerial IT skills can be used to link a firm with its customers (Jackson 1985). In all these cases, if the linkages are valuable, if they are possessed by relatively few competing firms, and if they are socially complex (and thus imperfectly mobile), they may be sources of sustained competitive advantage.
Source: Barney Jay B., Clark Delwyn N. (2007), Resource-Based Theory: Creating and Sustaining Competitive Advantage, Oxford University Press; Illustrated edition.