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  • Competitive Advantage

    Creating CompetitiveAdvantage WithInterorganizationalInformation Systems

    By: H. Russell JohnstonAssociate ProfessorBoston UniversityBoston, Massachusetts 02215

    Michael R. VitaleAssociate ProfessorHarvard Business SchoolAnderson 25Boston, Massachusetts 02163

    Abstract

    Many well-known examples of the use of infor-mation technology for competitive advantage in-volve systems that link an organization to sup-pliers, distribution channels, or customers. Ingeneral, these systems use information or proc-essing capabilities in one organization to im-prove the performance of another or to improverelationships among organizations.

    Decfin~ng costs of capturing and using informa-tion have joined with increasing competitive pres-sures to spur numerous innovations in use ofinformation to create value. This article drawson concepts of competitive advantage and onexperience gained from successful innovationsto generate classifications and a framework toguide the search for opportunities. The ideasdo not constitute a procedure leading inexora-bly to competitive advantage. However, theyhave been of value when combined with an ap-preciation of the competitive dynamics of spe-cific industries and a grasp of the power ofinformation.

    Keywords: Competitive advantage, interorgani-zational systems, performance im-pacts of information, opportunitysearch, shared information, sharedsystems

    ACM Categories: H.4, J.1, K.6

    IntroductionThe notion that information systems can be usedto achieve competitive advantage has passedfrom concept to cliche. The dramatic successesof United Airlines Apollo reservations system,American Hospital Supplys ASAP, and otherlarge computer and communications systemshave been publicized in the business press andanalyzed in academic journals (Business Week,1985; Fortune, 1985; Porter and Millar, 1985).Managers in many companies look to these ex-amples as indications of what might be accom-plished in their own organizations.

    Many of the best known and most successfulexamples of competitively advantageous infor-mation systems are those that link a companyto its suppliers, distributors, or customers. Suchsystems, called interorganizational systems(lOS), enable the movement of informationacross organizational boundaries. Apollo andASAP are interorganizational systems, as are net-works of automated teller machines, the Econo-most electronic order entry system sponsoredby McKesson Drug Company, and GeneralMotors computer-to-computer links with its pri-mary suppliers.

    It is not entirely clear whether lOS provides thebest opportunities for the strategic use of infor-mation systems, or whether the public natureof these systems has simply made them betterknown. What is clear is that lOS can bring sig-nificant competitive advantages, including lowercosts, tighter links to customers, and increasedproduct differentiation. These benefits are some-times shared among industry participants at sev-eral levels. In many cases, however, the first com-pany to build an lOS in a given industry achievesa long-term, sustainable advantage.

    This article first defines and describes lOS, cate-gorizing them both technologically and organi-zationally. An explanatory framework for the com-petitive advantages achieved through lOSs ispresented next, followed by some process stepsfor finding new lOSs. The article concludes witha list of important questions for top managementto consider before embarking on lOSdevelopment.

    What is anInterorganizational System?The essential characteristics of an lOS are both

    MIS Quarterly/June 1988 153

  • Competitive Advantage

    technological and organizational. Cash andKonsynski (1985).give a simple, useful defini-tion of an lOS as "an automated informationsystem shared by two or more companies" (p.134). An lOS is built around information tech-nology, i.e., around computer and communica-tions technology that facilitates the creation, stor-age, transformation, and transmission ofinformation. An lOS differs from an internal, dis-tributed information system by allowing informa-tion to be sent across organizational bounda-ries. Access to stored data and applicationsprograms is shared, sometimes to varying de-grees, by the participants in an lOS.

    This spread across organizational boundarieshas several implications. First, lOS must provideincentives for use to all intended participants.Unlike some in-house systems, an lOS will rarelybe implemented by fiat. Thus, the search for com-petitive opportunity must consider the payoffs formultiple organizations, not just one organization.Second, since the participants typically have dif-ferent goals and interests, an lOS must includeprovisions for reliability, data security, user pri-vacy, and system integrity that exceed whatmight be built into an internal system. Third, itis not sufficient for an lOS to improve the overallefficiency of an industry; it must provide somepositive return to its sponsor. On the other hand,because lOS can improve the situation of sev-eral companies simultaneously, they may pro-vide more strategic leverage than traditionalsystems.

    lOSs are not new. Apollo and ASAP becameavailable more than ten years ago and havebeen replicated by competitors in the industry.In other industries order entry systems that havesimilar types of transactions between organiza-tions have appeared with less fanfare. However,recent changes in technology and economics,as well as increased competitiveness in manyindustries, are leading to further growth in thenumber, variety, and scope of lOSs. Both infor-mation systems professionals and line manag-ers are becoming more aware of the opportuni-ties for using lOS and of the barriers, bothinternal and external, to increased use. As man-agement teams begin to understand and carryout the adaptations necessary for effective useof lOS, as the potential of lOS continues to pushfirms toward agreement on standards and pro-tocols for data transmission, and as informationtechnology becomes even less expensive, the

    rapid pace of lOS development is certain tocontinue.

    Categorizing lOSIn order to understand strategic opportunities forthe use of lOS, it is helpful to categorize lOSin a number of ways. This article proposes clas-sifications based on the business purpose of thesystem, on the relationship between the spon-soring organization and the other participants,and on the information function in the system.

    Why utilize an lOS?First, let us look at business purpose. Althoughan lOS by definition crosses organizationalboundaries, in some cases the lOS is designedas a means to gain advantage over competitorsin a basic business of the sponsor. In othercases, the lOS itself is the basic business. Inboth scenarios, the sponsoring company is re-sponsible for making decisions about who canparticipate in the system, which participants canhave access to what data, how much each par-ticipant must pay, and so on.

    American Hospital Supplys ASAP system is aparadigm for the lOS as a means of doing busi-ness competitively. The terminals and other de-vices used to access ASAP are owned by thehospitals themselves, and the communicationslines are largely leased. But American HospitalSupply has ultimate control ovei" participation,data protocols, access to information, and otherconditions of ASAP use. American also has com-plete responsibility for planning, developing, main-taining, and managing ASAP. Another type oflOS is controlled by an organization that pro-vides nothing to lOS participants that is not veryclosely related to the interorganizational system.The sponsoring organization is essentially in thelOS business. For example, NewsNet offersalmost 300 online services, including access tonewsletters provided by independent publishers,airline reservations, stock quotations, sportsscores, and seminar registrations. NewsNet es-sentially acts as a facilitator, allowing organiza-tions to communicate through a network estab-lished and maintained by NewsNet. Similarly,Cirrus System Inc., a network of more than10,000 automated teller machines (ATMs) fromfinancial institutions in the U.S. and Canada, isowned by five large commercial banks. Custom-

    154 MIS Quarterly~June 1988

  • Competitive Advantage

    ers of any bank that participates in Cirrus canuse an ATM owned by another participant;Cirrus System, Inc. is responsible for the net-work that moves information among the banksbut provides no other services.

    There is little doubt that the lOS arena offersplentiful opportunities for building systems of thissecond type. Moreover, such systems raise im-portant questions, of cost and access that mustbe considered before customers agree to par-ticipate. In order to focus this article on moretraditional organizations, however, only lOSs thatare controlled by organizations having othergoods or services to sell and are seeking to usean lOS as part of a more inclusive strategy areconsidered here.

    Who will participate in the lOS?lOS can be further categorized on the basis ofthe relationship between the controlling organi-zation and other participants. Customers, deal-ers, suppliers, and even competitors are all po-tential participants, as are customers customers,suppliers suppliers, and other members of thedistribution chain. It is possible that participantswill be of several types: TWAs PARS reserva-tion system, for example, is used by the airlinesown clerks, by travel .agents, by employees ofother airlines, and by travelers themselves. De-veloping a clear understanding of how the lOSwill produce improved performance for each typeof participant is an important step toward gain-ing competitive advantage. The first key ques-tion is, "How will the lOS help this potential par-ticipant succeed in accomplishing valued goals?"

    For the lOS to provide competitive advantageto its sponso