Business managers can use investments in information technology to directly support a firm’s competitive strategies. Key strategies associated with information technology include locking in customers or suppliers, building switching costs, raising barriers to entry, and leveraging investment in information technology. Investments in information systems technology can help build relationships between a firm and its customers or suppliers. This means investments in the IT sector can make customers or suppliers dependent on the continued use of innovative, mutually beneficial inter-enterprise information systems.
Then they become so used to these systems that they will not easily switch to any other company. They will not be willing to pay the costs in time, money, effort, and inconvenience that it would take to switch to a new company. By making investments in information technology to improve its operations or promote innovation and also by building relationships with its customers, a firm could erect barriers of entry that would discourage or delay other companies from entering a market.
Typically, this happens by increasing the amount of investment or the complexity of the technology required to compete in an industry or market segment. Such actions not only tend to discourage firms already in the industry but also deters other external firms from entering the industry.
As much as one-third of current U.S. capital investment is in the form of new information technology. With the price tag of complex information systems reaching into the tens of millions of dollars, the size of information technology investments can become a potential barrier to entry. Merrill Lynch’s invention of the cash management account is an example of a strategic information system.
This information represented a significant capital investment on Merrill Lynch’s part; an investment few organizations are capable of making. Thus the sheer size of the investment operates as a barrier to entry.
There are numerous ways that a company, that has invested in information technology, can lever this investment to create, grow, or maintain barriers to entry. IT investment in a company’s core competency can be a significant barrier to entry. Leverage IT investment in supply chain networks ensures quick delivery times, problem-free delivery, and an assured supply. It can also entail price discounts and other preferential treatment.
The inability of new entrants to get onto a supply chain/inventory management system can be a major barrier to entry. The investment in this technology, and the experience gained in learning how to use it, can be an important barrier to entry. Often firms have invested large sums of money in brand advertising through marketing information systems and customer relationship management systems. An indomitable brand name is a formidable barrier to entry.
Firms investing in IT can more easily obtain economies of scale in promotion, purchasing, and production; economies of scope in distribution and promotion; reduced overhead allocation per unit; and shorter break-even times. This absolute cost advantage can be an important barrier to entry. So also IT investment in the realm of production processes, best practices, mass customization production processes, product differentiation, customer loyalty through websites, the monumental appearance of stability, and requirement of capital funds act as barriers to entry.
Nicholas G. Carr, in his book “Does IT Matter?,” points out that at one time, information technology was so expensive and so difficult to manage that companies could make large amounts of money simply by being able to make systems work. According to New York Times article by Hal R. Varian, over the years, as information technology has become cheaper and more manageable; this source of competitive advantage has been reduced and perhaps eliminated. The ability to manage technology effectively is no longer the barrier to entry it once was.