Competitive strategies for service organisations

Competitive strategies for service organisations – the role of information technology in business

Botten, Neil

The advancement of communications and computing technologies has increased the stature of IT from an operational resource unrelated to strategic goals, to a component in strategy formulation and implementation leading to competitive advantage. The need to integrate technology into the strategic plans of a firm is widely recognised as vital to the health and longevity of the company.’ If service organisations are to compete in a global arena they must embrace the customer driven concept and adopt those best practices that will satisfy customers and lead to market success. The information society implies the best use of technology as a strategic tool and its coordination with other factors such as financial and human resources planning.

For the UK and European economy to grow, the same message and practice must be taken up widely throughout the business community, especially by the mass of service industries, in whom lies the greatest wealth creating potential across the European Union.

The availability of global information technology has altered the nature of business by increasing the speed at which things can be organised. A commitment can be made by telephone or electronic mail (e-mail) much quicker than by letter. Electronic means of ordering goods has made possible `just in time’ supply strategies. Product promotion can now reach a mass consumer market through the use of television advertising. A great deal of information about your industry and competition is readily available on various databases from a variety of sources. All this has enabled business to be conducted at an increasing pace.

Consumers within the global community are demanding products and services irrespective of their national origin. Consumers with wider choice will develop more articulated demands and preferences. In response businesses must provide best practice in meeting those demands especially where the best practice has impact on customer relationships, eg price, service, delivery. The need to provide greater customer satisfaction is more likely to be achieved by joint approaches between suppliers and technology providers, who can together take into account the wider global issues in order to find the most cost effective solutions. Without doubt information technology is changing the way companies do business. It is affecting the entire process by which companies create their service offerings. Orlikowski and Gash- define information technology as: `any form of computer-based information system, including mainframe as well as microcomputer applications.’ Table 6.1 shows the evolution of information technology during the last 30 years. In business applications, the range and strategic impact of such systems are vast. For example, in financial services the construction of customer-led information databases aims to improve levels of service quality by building long-term relationships with customers, thereby maintaining or increasing customer share.’ In the financial services sector deregulation accompanied by increasing customer sophistication, has led to mounting levels of competition. Building societies, in particular, have had to respond to encroachment from banks and other institutions into their core activities such as mortgage provision and investment opportunities. As a means of combating competition from other players in the personal financial service sector; building societies are adopting a more information technology led approach.

In 1997, the five major UK building societies spent close on 1 billion on new IT.’ In a sector where excess capacity now exists many building societies will be looking to the development of information systems which allow them to develop an advantage as information providers.5

For information technology, the 1990s have brought a turn toward flexibility as the dominant competitive thrust. Emerging information technology strategies emphasise leveraging technology architecture’s to support the key success activities to the business. Organisation revolutions are underway at IBM and Digital Equipment Corporation (DEC) for example. Both companies are forward integrating their businesses into software and support functions, to deliver application-based solutions, rather than hardware boxes which have become a commodity product. On the information systems side technology will focus more and more on the design of tailored workstations for service and knowledge workers within a highly networked information-based organisation. The environment for information processing is likely to be multimedia and extensively used knowledge based concepts and technology oriented to the individual cognitive needs and styles of knowledge workers.

In his book Intellectual Capital: The New Wealth of Organisations, Thomas Stewart cites numerous statistics to show that the longheralded new dawn has truly arrived. In the US the proportion of knowledge workers – those working with information rather than things – will have risen from 17 to 59 percent over the course of the century, while that handling material things will have halved to 41 percent. Perhaps most revealing of all, in 1991 US business for the first time spent more money on information technology – equipment to capture, process, analyse and distribute information – than on production plant and equipment. The gap has steadily widened since. Call 1991, says Stewart, year one of the information age.”

Porter and Millar’ state that information technology offers organisations the opportunity either to lower costs or, perhaps more significantly within the financial services sector; to enhance differentiation. In 1996 the Royal Bank of Scotland became the first bank in the UK to offer a full range of banking services on the Internet. The Royal Bank of Scotland offers Direct Banking by PC for its customers. According to Bill Bougourd, head of electronic services at the bank, some 50,000 of its 500,000 telephone banking customers have the technology to use the internet. He said: “we wanted to add a service as there is a growing expectation from customers for us to provide this channel though we are not trying to pretend that everyone will be connected”. Strategic information systems and their capabilities play a significant role in the business domain and information technology integration will equally be of vital importance. Both have significant customisation aspects and imply loose links between customer and provider. For example, a Gallup survey conducted at the end of 1996 found more than 60 percent of people in the UK would like to check their accounts and pay bills using a home computer.

According to the survey Internet Banking in Europe, by consultancy Booz Allen and Hamilton, 80 percent of European banks will provide a full banking service over the Internet within three years. In the future of Internet banking there is scope for new services (see table 6.2) new ways of doing things and ways for people to make money.8

A recent paper by Dutta and Dozy, in which they discuss the case of the Banco Commercial Portugues (BCP) which in less than a decade has grown to become one of Portugal’s largest and most profitable banks since its inception in May 1986. BCP’s extraordinary growth has been marked by a series of innovations including extensive research of client needs in the target markets, careful segmentation of the bank groups, the appointment of a personal account manager for each customer, rigorously designed and efficient branches and the introduction of new products. Information technology has played a crucial role in enabling these innovations, such as strategic databases for prospecting and selling to clients, distributed processing with centralised data for the different bank groups, comprehensive information support systems for account managers, sophisticated automation in branches and the flexible and rapid deployment of systems support for new banking products. BCP is in many ways a leader in the strategic use of information technology among European banks. Its leadership position however, arises less from the use of cutting-edge technology as from a deliberate attempt to link information technology to its business strategy and built a competence in the business use of information technology.

The initial decision by BCP to invest heavily in large scale computer and software systems was painful, absorbing about one-third of BCP’s start up capital. As one board member described it: “We invest a lot in technology, but sometimes it is not easy to justify the investment for the future. It is a question of culture. If you spend a lot to buy a building the result is visible. But if you spend a lot to buy a computer then everyone complains – but the computer is more important for the company.”

BCP’s flexible technology infrastructure gives it the unique ability to create and handle complex financial products, which consistently appealed to the Portuguese market. For instance, BCP produced an account paying interest at different rates depending on the average daily outstanding balance. Technology also helped to differentiate BCP in the eyes of its customers by enabling it to meet rapidly changing market conditions.

Shifting investment technology boundaries

Information technology is not just affecting how individual organisational activities are performed, but through integrated networks it is greatly enhancing a firm’s ability to exploit linkages between internal and external value chains. For example, the UK state owned postal service continues to exploit information technology to increase its marketshare. Its four main businesses Parcelforce World-wide, Post Office Counters, Royal Mail and Subscription Services have recently been reengineered to take advantage of technological economies of scale. The latest strategy identifies three areas of systems integration. The sales channel, which addresses the likes of call centres; the service channel, which looks at manufacturing-type systems; and business support. The group is looking to standardise its core processes which will require a significant amount of investment in the next 2-3 years. In the sales channel, the Post Office Pathway project is installing 40,000 terminals in its 19,000 retail outlets in a bid to cut down fraud, boost efficiency and open up opportunities for offering new services. In the service channel it is focusing on mail automation. A new Integrated Mail Processing system is planned at a cost of 200 million. The group is also developing processes for getting computers to recognise addresses so it can upgrade its mail sorting lines without having to upgrade address-interpretation information technology.

In 1986 Otis Elevator, France a leader in the sale and service of elevators and related products in the French market, started reviewing the managerial and operational procedures surrounding the processing of customer orders. The resulting ‘Master Plan’ project was aimed at simplifying the procedures, from the initial contact with the customer through to the installation of the elevator, with the decentralisation of responsibility driving the design. Central to the master plan was the need to adjust the organisation’s structure to the decentralisation of responsibility and to develop new information technology applications to support business and management activities. These applications – developed between 1986 and 1993, concerned negotiation, sales/contract management, invoicing/ accounts receivable, purchasing management, and accounting. The five new information technology applications include SALVE, a support system used by sales representatives in their negotiations with the customer from the initial contact to the booking stage. Once the order has been booked, it is forwarded to SAGA, a contract management system which creates and maintains the sales order. SAGA can be viewed as a special contract control system. Information gained from SALVE and SAGA serves as input to START, the purchasing and supplier management system. SAFRANN,S,K handles invoicing and other accounting functions related to the modernisation as well as sales of new equipment. SAFRAN-O, handles the billing of maintenance services.”

From the above it would appear that there is a wide range of amounts invested in new technology, together with wide variation in the technical change taking place. Some organisations are producing in the same way as they have for many years, others are investing heavily in new technology. But technology is not an end in its own right. Although companies can invest for a variety of reasons. Butler et al” have classified the objectives of new technology invest ment according to what companies are trying to achieve:

Efficiency objectives;

Development objectives in the sense of learning about new technology;

Market opportunity objectives;

Standardisation objectives, trying to standardise with customers and suppliers;

Regulatory objectives that have to be met for example, health and safety;

Grant and loan objectives from the EC or government;

Image objective, that is the use of new technology to attract new customers.

Technology and systems planning

Being a leader in information technology innovation entails many risks, such as committing management to a new way of thinking, using new and perhaps untried technology, investing a large proportion of organisational resources and ensuring cooperation from other parts of the firm’s internal and external environment.” Experience with information technology is one of the critical success factors in establishing competitive systems and facilitating quick responses to competitive challenges. The major factor that prevents many firms from achieving their technical objectives and, therefore their strategic objectives, is lack of resources and a clear direction or vision.

A critical feature in the development of IT enabled competitive advantage is the integration of the firm’s strategic and information system plans. In essence, a level of strategic validity is achieved when long term corporate strategy is formulated with both the existing and potential uses of information technology considered. Without this integration, strategic options for the firm can be severely limited as IT architecture resembles the vision of technical rather than strategic planners. Conversely, a link between both corporate and information system strategic plans facilitates competitive flexibility, (the capability to respond to changing conditions) as well as competitive innovation (the capability to change the rules of competition).’3 Thus the strategic use of information technology can be conceptualised as technological architecture’s developed, deployed, and used as a result of – and in support of – the overall strategic objectives of the firm.

One school of thought is that Technology and Systems Planning (TSP) has gained steadily increasing organisational attention in the last decade. A recent survey among 245 of the 1000 largest manufacturing and service companies in the USA however, showed that 54 percent of those firms dedicated only 2 percent of their staff resources to planning, while only 9 percent dedicated 12 percent or more.14 Current research in the area suggests that the successful adoption of integrated business and TSP is still far from being common place. In fact a study by Grover and Teng15 of large organisations indicates that the least effective data resource management function is the development of integrated, organisation-wide data models and data architecture.

According to Hagmann and McCahon 16 there is still some disagreement concerning what TSP accomplishes. Different planning methodologies, such as IBM’s Business Systems Planning (BSP) and Information Quality Analysis (IQA), Andersen Consulting’s Strategic Information Planning, and Rockart’s Critical Success Factors (CSF) frequently lead to significantly different planning results and decisions, because they use different techniques. BSP focuses on extensive analysis of business objectives and processes to create an ‘information architecture for information systems development, but CSF emphasises that priority should be given to TSP that supports the areas of factors critical to organisational success.

An exploratory study of successful implementations by Neo17 found that, for the firms classified as innovators and leaders in competitive systems, the most important factors leading to success were the perceived need to improve internal operations, the experience obtained from their existing TSP portfolio and the stated objective of satisfying customer needs. Experience with TSP applications allowed organisations to implement system improvements effectively and to modify and/or expand them when others sought to implement similar systems. The integration of TSP and business planning was found to be very important for start up businesses such as Federal Express and USA Today, which incorporated TSP into their strategy for success.

Information planning tools

By using a diversity of tools, ranging from assessing information flows and volumes, communication styles and patterns, to data entities and architectures, it is possible to build an `information profile’ of an organisation.

This has several advantages:

Identification of what is corporate, divisional and individual information.

Identification of what information must be shared and at what levels within the organisation.

Identification and qualification of the effort and cost of maintaining the various information bases.

Identification of the value information has or should bring to the organisation.

Identification of what decisions are required to invest in individual projects.

If we see information technology as one of the building components of a firm’s activities, information is the adhesive that comes in contact with all the other blocks that binds them together. The strength of the corporate structure will be determined by the quality of each of the blocks and of the adhesive which keeps them in place.

Technological alliances

Today’s strategic planners must broaden their view of the global technology environment from the traditional perspective of individual firms competing against each other. The formation of strategic alliances means that strategic power often resides in sets of firms acting together. For example Digital Equipment Corporation (DEC), like many of its competitors, crossed the ocean in an effort to increase its market share. DEC is buying 10 percent of Italy’s Ing C Olivetti & Co. The Olivetti purchase was DEC’s third such arrangement to gain market position in Europe. DEC bought the computer division of Philips, the Dutch electronics firm, and also formed a computer company with Mannesmann AG a German conglomerate.

Cross-border strategies are not the preserve of US companies. Stymied by small, insular markets and ever-escalating research and development costs, European computer manufacturers have been pursuing strategic alliances since 1980s. The UK’s ICL found a deep-pockets parent in Fujitsu of Japan. Finland’s Nokia Data was later purchased by ICL, and Group Bull of France (already in partnership with Honeywell) accepted $100 million from IBM in exchange for a ‘small’ stake in the company. BCE Inc, the Canadian telecommunications giant situated in a smallish home market, announced a major alliance with cable and wireless plc, a leading British telecoms company. In one of 1993’s biggest deals, British Telecommunications plc paid $4.3 billion for a 20 percent stake in MCI Communications Corp, the US long distance carrier. The two companies also plan to pour $1 billion into the joint venture. Their objective is to make the new company one of the few global carriers in the fast growing market of global corporate network services. They face some stiff competition. AT&T has already launched Worldsource in partnership with Kokusia Denshin Denwa of Japan and Singapore Telecom for the same purpose, and its purchase of McCaw Cellular puts it into wireless telephony.”

According to John Naisbitt”, as computer, telephone and cable TV companies come to realise that their markets ultimately will be one and the same, cross border, cross industry alliances will become the norm. Joint ventures, mergers and creative co-marketing arrangements of all kinds will quickly turn the three legs of the telecommunications industry into a single, global industrial sector albeit made up of thousands of companies. Governments everywhere are liberalising, paving the way for the telecommunications revolution.

Hamel and Prahalad’9 however, suggest that many firms are unwilling to invest the enormous energy required to delve deeply into the emerging trends in technology, and globalisation that point to new opportunities. They suggest that unless the firm has built a sole and compelling view of the future, the firm will be caught within the orthodoxies of the past.

Future of technological alliances

The decision to form a technological alliance is visible under many circumstances. Much depends upon how the alliance is forged and managed. While the decision to enter into an alliance may be to gain access to capital or greater technology, there are still pitfalls for the unwary firm. Such risks include loss of: incompatible culture objectives, competitive knowledge, technical expertise, and competition instead of cooperation. As information technology alliance decisions involve organisations on a more interdependent level, the issues of cultural fit and cultural conflict arise. In any type of interorganisational alliance there can be a combination of the following factors.20

Professional conflicts: Professional/ cultural conflicts arise when managers within the same company come from different educational or professional backgrounds. For example, the more scientific and engineering backgrounds of managers in the product development and R&D divisions can bring them into professional conflict with marketing managers who may have more social backgrounds.

2 Organisation Conflict: Organisational cultural conflicts can often arise as corporations set up decisions in different parts of the country or abroad. For example, as many Japanese companies have shifted their R&D activities to Malaysia, there can be an ‘organisational’ cultural conflict. This is because the headquarters desire for control, as is usually the case with most Japanese corporations can be in conflict with the Malaysian R&D division to maintain its relative independence.

3 Corporate cultural conflicts: can arise when two corporations from the same or different countries form a strategic partnership, or any other type of cooperative agreement including major information technology outsourcing decision. A strategic alliance based on differing cultures may become problematic, though there is evidence from the IT literature, as for example with the alliance between the major vendor EDS and the multinational glass manufacturer Pilkington plc, that the differences can be worked through.

4 National conflicts: conflicts can arise when companies begin to work in countries where they have had relatively little experience in the past. Differences ranging from languages, to customs, traditions, business ethics – can add up to substantial conflicts due to national factors.

Finally alliances that contain more competitiveness than cooperation are doomed to failure. Management should be wary of `hidden agendas’. A partner may enter the alliance under the pretext of creating a commercial technology, when in reality the alliance was formed to fund self-serving research interests. If the research is irrelevant to the strategic objectives of one of the partners, or there is a feeling of uncertainty about the output value, the alliance will probably fail.2′

linking information technology with the corporate strategy

A framework that describes linkages between corporate strategy and alternative information technology strategies has been developed by Camillus and Lederer.22 In this framework (figure 6.3 – on the previous page) three key dimensions are defined to describe alternative information technology strategies. The first dimension is the type of system that is used, where transaction processing systems (TPS) is one extreme and decision support systems (DSS) is the other. The second dimension describes what type of computers are used. The extremes in this dimension are mainframes and single, independent personal computers. The third dimension concerns the procurement of hardware and software – where purchases can be either centralised with little regard to the needs of the single user, or can be initiated by the individual user. These extremes are then linked with the `Porter generic strategies cost efficiency and differentiation’. The information technology strategy that involves TPS minimises the total cost of information technology and is therefore the appropriate alternative for a company that competes through cost leadership. For a company which competes through differentiation, the appropriate alternative is DSS-Micro-Flexible.

According to Bjornsson and Lundegard=3, it is debatable whether it is the corporate strategy that should be linked to strategic information technology alternatives. It may be more fruitful to describe the information structure in the company in terms of information technology strategic alternatives. The needs of information technology in two companies that compete through cost leadership (for example, Barclays and NatWest banks) in two different businesses can differ significantly because of variations in information intensity.

A more comprehensive, procedural example of a business strategy framework is Wiseman’s `strategic options generator’. Wiseman believes that competitive edge results from strategic thrusts founded on the logic of Chandler’s growth strategies and Porter’s competitive strategy frameworks. Figure 6.4 (previous page) reproduces his strategic option generator. The strategic target equates to three of Porter’s competitive forces. The strategic thrusts combine Porter’s generic strategies with the mechanisms Chandler plotted in his theory of organisational growth. The mode indicates whether the thrust is being used to attack or defend within the competitive arena. The potential value of the option generator is not only its conflation of previous framework analysis, but the logical list of analytical questions it provides. Like Porter’s model, it therefore helps most in clarifying the firm’s business strategy and suggesting the direction of information technology strategy.24

In general corporate strategy, concerned with future directions and performance – which businesses are we in, and what is our structure – is a board responsibility and suggests how information technology should be positioned and managed. It is the main influence on the management information strategy. Business strategies are the product-market analyses and plans which each strategic business unit formulates in pursuit of its mission given by the corporate strategy. These are the main influences on information systems strategy. Activity strategies are required to implement and support business strategies, examples being finance, or human resource strategies. The information technology strategy is another and is mainly determined by information technology functional management but influenced and approved by business unit top management.


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The Authors John McManus

John, a Member of the Institute, currently works in the financial services sector, as a senior project consultant. He is the author of four books – his latest with Neil Botten explores Competitive Strategy in Service Organisations.

Neil Botten

Neil is Director of the Strategic Change Research Group, at the London Management Centre, University of

Westminster. Neil has 28 years experience in management as both a practitioner and academic. His research interests cover the application and use of strategic methods in commercial enterprise.

Copyright Institute of Management Services Oct 1998

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