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Sustained IT Competitiveness

InformationTechnology andSustained CompetitiveAdvantage: AResource-BasedAnalysis

By: Francisco J. MateDepartment of Business Analysis &

ResearchGraduate Schooi of BusinessTexas A&M UniversityCoiiege Station, TX 77843-4217U.S.A.

literature, yet the sustainability of the competi-tive advantage provided by iT applications isnot weii-explained. This work discusses theresource-based theory as a means of analyzingsustainability and deveiops a modei founded onthis resource-based view of the firm. Thismodei is then appiied to four attributes of iT—capitai requirements, proprietary technoiogy,technicai iT skiils. and manageriai iT skills—which might be sources of sustained competi-tive advantage. From this resource-basedanaiysis, we conciude that managerial iT skillsis the only one of these attributes that can pro-vide sustainabiiity.

Keywords: Competitive advantage, resource-based theory, IT resources

iSRL Categories: AF0401, GA01, E10225,EL03

William L. FuerstDepartment of Business Anaiysis &

ResearchGraduate Schooi of BusinessTexas A&fA UniversityCoiiege Station, TX [email protected]

Jay B. BarneyDepartment of Management and Human

ResourcesFisher College of BusinessOhio State UniversityColumbus, OH [email protected]

Abstract

The concept of IT as a powerful competitiveweapon has been strongiy emphasized in the

Introduction

The field of strategic management focuses onunderstanding sources of sustained competitiveadvantages for firms (Porter, 1980; 1985;Rumelt, et al., 1991). A variety of factors havebeen shown to have an important impact on theability of firms to obtain sustained competitiveadvantage, including the relative cost positionof a firm (Porter, 1980), a firm's ability to differ-entiate Its products (Caves and Williamson,1985; Porter, 1980), and the ability of firms tocooperate in strategic alliances (Kogut, 1988).

Information technology (IT) has also been men-tioned for its possible role in creating sustainedcompetitive advantages for firms (Barney,1991; Ciemons, 1986; 1991; Ciemons andKimbrough, 1986; Ciemons and Row 1987;1991a; Feeny, 1988; Feeny and tves, 1990).While the assertion that IT might be able to cre-ate sustained competitive advantage for firms isprovocative, work in this area is relativelyunderdeveloped, both empirically and theoreti-cally (Jarvenpaa and Ives, 1990). Research onIT and competitive advantage has emphasized"describing how, rather than systematically

MIS Ouarteriy/December 1995 487


why" IT can lead to such an advantage (Reichand Benbasat, 1990, p. 326).

The purpose of this paper is to capitalize onsome relatively recent developments in strate-gic management theory, in order to developand apply a model that specifies the conditionsunder which IT can, and cannot, be a source ofsustained competitive advantage. Similar to thework of demons (1991) and Clemons and Row(1987; 1991a), we apply the resource-basedview of the firm (see Barney (1991) and Conner(1991)) in developing this model. With themodel in place, it is possible to anticipate theconditions under which aspects of a firm's ITwill be sources of competitive disadvantage,when they will be sources of competitive parity.and when they will be sources of either tempo-rary or sustained competit ive advantage(Clemons and Kimbrough, 1986).

The model developed in this paper has implica-tions for both researchers and practitioners. Forresearchers, the model suggests the types ofvariables that need to be included in futureempirical tests of the relationship between ITand competitive advantage. Consequently, themodel extends understanding of what isbecoming an increasingly important issue in ITmanagement, the relationship between IT andcompetitive advantage (see Brancheau andWetherbe, 1987; Niederman, et al., 1991).Practitioners, on the other hand, can use themodel to refine their thinking about IT and theirfirm's other strategic resources. In particular,the model suggests the types of IT investmentsthat are most likely to be sources of sustainedcompetitive advantage.

IT and CompetitiveAdvantage: PreviousLiterature

The value of IT

Traditionally, most research in strategic IT hasfocused on the ability of IT to add economic

value to a firm by either reducing a film's costsor differentiating its products or services (seeBakos and Treacy, 1986; McFarlan, 1984;Porter and Millar, 1985; Wiseman, 1988). Forexample, when WalMart adopted itspurchase/inventory/distribution system, it wasable to reduce its inventory costs (Ghemawat,1986; Huey, 1989; Stalk, et al., 1992). On theother hand. General Electric has been able todifferentiate its service support from its com-petitors by means of its answer center technol-ogy (Benjamin, et al., 1984; Porter and Millar,1985), and Otis Elevator similarly has differenti-ated its service operations thanks to its Otislinesystem (Balaguer, 1990; McFarlan andStoddard, 1986). In all these cases, the judi-cious use of IT either reduced these firms' costsof operations or increased their revenues by dif-ferentiating their products or services, andtherefore was valuable.

There is little doubt that, in a wide variety of cir-cumstances, IT can add value to a f irm.However, IT adding value to a firm—by reducingcosts and/or increasing revenues—is not thesame as IT being a source of sustained compet-itive advantage for a firm. For example, whenWalMart adopted its purchase/inventory/distribu-tion system, it gained a competitive advantageover its closest rival, K-Mart. However, K-Marthas not remained idle and is in the process ofdeveloping its own similar system (Steven,1992). To the extent that K-Mart is able to imple-ment its system and apply it like WalMart has,WalMart's system will have been only a sourceof temporary, but not sustained, competitiveadvantage (Barney, 1994). Put another way.WalMart's purchase/inventory/distribution sys-tem would have been valuable, but vaiue, perse, is a necessary but not sufficient condition fora sustained competitive advantage.

More generally, a firm is said to have a sus-tained competitive advantage when it is imple-menting a strategy not simultaneously imple-mented by many competing firms and wherethese other firms face significant disadvantagesin acquiring the resources necessary to imple-ment this strategy. A fimn has a temporary com-petitive advantage when it is implementing avaluable strategy currently pursued by few com-peting firms, but where these competing firms

488 MIS Quarterly/December 1995


do not face significant disadvantages in acquir-ing the resources necessary to implement thisstrategy. A firm experiences competitive paritywhen it is implementing a vaiuabie strategybeing simuitaneously implemented by severaicompeting firms. A firm is at a competitive dis-advantage when it is impiementing a strategythat is not valuable, i.e., a strategy that does notreduce its costs or increase its revenues.

The create-capture-keep paradigm

Several authors have gone beyond examiningthe value of IT in reducing a firm's costs and/orincreasing its revenues to suggest ways that ITcan be a source of sustained competitiveadvantage. Perhaps the most important ofthese efforts began with Clemons (1986) andfocuses on the role of IT-based customerswitching costs as a source of sustained com-petitive advantage for firms seliing IT appiica-tions. This set of ideas has come to be knownas the "create-capture-keep" paradigm(demons and Kimbrough, 1986; Clemons andRow, 1987, 1991b; Feeny and Ives, 1990).

Switching costs are created when customersmake investments that are specific to a particu-iar suppiier of IT.i These investments mightinclude the cost of employee technical trainingto use a supplier's unique IT, managementexperience working with a particular supplier'ssaies and support staff, and familiarity with aparticular supplier's business policies and pro-cedures. Aii these investments can be veryvaiuabie for firms in their acquisition of IT, asiong as they continue purchasing IT from thesame supplier. However, these investmentshave little or no value in facilitating IT purchas-es from other suppliers.

A principle argument in this line of reasoning isthat the creation of significant customer switch-ing costs in the acquisition of IT creates an eco-

An investment is said to be specific when Us value in aparticuiar exchange, with particuiar exchange partners, issignificantly greater than Its value In any alternativeexchanges (Wiiiiamson, 1989). in this sense, the redeploy-ment of a specific investment in a new exchange, with newexchange partners, has the effect of destroying much ofthe value of that investment

nomic opportunity for IT suppliers (Clemons,1986; Clemons and Kimbrough, 1986; Clemonsand Row, 1987, 1991b). Once these switchingcosts are created, IT suppliers oan increase theprice, reduce the level of service, or in otherways extract additional value out of their rela-tionships with their "captured" customers. Aslong as the cost to customers of switching sup-pliers is less than the extra" value that is beingextracted from this relationship by a supplier,customers wiil continue purchasing IT from thatsupplier. Prescriptively, this argument suggeststhat IT suppliers should attempt to createunique IT that requires specific investments bycustomers, to be used by customers. Whencustomers begin using this IT, they become"captured" by their switching costs. Given theseswitching costs, suppliers are able to "keep"customers despite the extra value suppliers areable to extract from their relationship with theircaptured customers. Examples of firms thathave attempted to use IT switching costs in thismanner include Baxter Healthcare, with its pro-prietary ASAP ordering system (Vitale andKonsynski, 1991; Venkatraman and Short,1992), and various airline reservation systems(Copeland and McKenney, 1988).

While the "create-capture-keep" paradigm hasreceived some support in the literature, it hasalso been the object of significant criticism(Hopper, 1990; Malone et al., 1989; Wiseman,1988). There are at least three reasons whythis "create-capture-keep" approach is unlikelyto be a source of sustained competitive advan-tage for IT suppliers (Klein, et al., 1978).

First, customers will usually be able to antici-pate the risk of being captured by an IT supplierIf investments specific to that supplier aremade. Typicaily, customers wiii only be willingto make these kinds of specific investments ifthey receive some form of guarantee that asupplying firm wiil not take unfair advantage ofthese investments. For example, the effort toavoid significant switching costs has led manyhardware firms to insist on second sources forkey hardware components. Rather than design-ing an entire hardware system around a com-ponent supplied by a single firm, these firmsinsist that suppliers license other firms to act assecond suppliers. Second sources have the

MIS Quarterly/December 1995 489

Sustained iT Competitiveness

effect of reducing a customer's switching costs,and they act as a credible guarantee againstsuppliers exploiting customers. If switchingcosts were a significant problem in IT, a similarsecond-source strategy could be used.

if guarantees cannot be made in a credibleway, then customers will attempt to avoid thecreation of significant switching costs by pursu-ing alternative technologies or perhaps bydeveloping their own technologies. For exam-pie, many travel agencies have found that usinga particular airline's "back-end" IT applications(i.e., accounting services, travei reporting) cancreate significant switching costs and ties themto the reservation system of that airline.Rosenbluth Travel decided to develop its ownback-end iT applications, thereby enhancing itsability to interact with severai different reserva-tion systems (Ciemons, 1986; Feeny and Ives,1990; Johnston and Vitale, 1988; McFarlan,1984).

Whether customers neutralize the threat ofswitching costs by receiving guarantees upfront or by seeking alternative iT suppliers, theeffect of these actions wiil be to reduce the abil-ity of IT suppliers to extract extra vaiue fromtheir reiationships with captured" customers, inan important sense, these customers are notrealty captured, even if specific investments aremade, in this context, the existence of switchingcosts will not be a source of competitive advan-tage for a firm selling IT.

Second, iT suppliers that do exploit their cus-tomer's switching costs wiil often gain a reputa-tion for being untrustworthy. The effects of thistype of reputation can be devastating. Whilefirms may gain iarge profits from their currentlycaptured customers, they wiil be unable toattract future customers. The value of opportu-nities lost because of a reputation for exploitingcaptured customers can be much larger thanthe value extracted from those captured cus-tomers. In this setting, rational suppliers will notfind it in their best interest to exploit their cap-tured customers, despite the existence of signif-icant customer switching costs. For this reason,significant customer switching costs cannot bea source of competitive advantage for a firmsupplying IT.

Third, the number of options for customers toobtain IT has increased over time. Perhaps theonly way that customer switching costs couldbe a source of competitive advantage for a firmseiling iT is if the IT in question is absolutelyunique, if it is absolutely essential to a cus-tomer's business operations, if there are cur-rentiy no other suppliers of the IT, and if it isvery unlikely that there wiii be any additionalsuppliers of the IT in the near future. This nearmonopoly situation may have existed duringsome periods of time for some IT, especially inthe 1960s and early 1970s. However, changesin technology, the emergence of various stan-dards, and the development of inteitigent dis-tributed systems have made it virtually impossi-ble for IT firms to enjoy this situation and thus,have further undemnined the ability of the "cre-ate-capture-keep" paradigm to be a source ofcompetitive advantage for IT firms.

Many of the firms that used "create-capture-keep" in the past have had to change their ITstrategies. For example, Baxter Healthcare pre-viously used a proprietary communication stan-dard in its ASAP ordering system. This stan-dard required Baxter customers to make highlyspecific IT investments. However, in 1988,Baxter was forced by market pressures toadopt the ANSI X.12 standard for electronicdata interchange, thus reducing the need for itscustomers to make specific investments in itsASAP system (Venkatraman and Short, 1992;Vitale and Konsynski, 1991). In a similar way,SABRE and Apollo previously required cus-tomers to utilize "black boxes" with fixed func-tionality for connection to their systems. Now,these systems allow connections through intelii-gent workstations that have local programmingcapabilities (Ciemons and Row, 1991b; Hopper,1990). The use of these intelligent workstationsmakes it easier for travel agencies to convertdata from one airline system to another, thusfacilitating the ability of agencies to change sys-tems at will.

For these reasons, some authors have conclud-ed, "Companies that try to lock-in customersmay lose them instead" (Malone, et al., 1989, p.166), and "It is increasingly difficult, if not down-right impossible, for... [IT] to bind customers toproducts" (Hopper, 1990, p. 123). Thus, the

490 MiS Quarterly/December 1995


search for IT-based sources of competitiveadvantage must look beyond the "create-cap-ture-keep" paradigm.

The resource-based perspective

Another approach to understanding the rela-tionship between IT and sustained competitiveadvantage has recently emerged (Clemons,1991; Clemons and Row, 1991a). In thisapproach, the ability to use IT to leverage thefundamental resource advantages of firmsenables IT to be a potential source of sustainedcompetitive advantage. Fundamental to thisparadigm is the resource-based view of thefirm, which is used throughout this paper toexplain IT'S link to sustained competitive advan-tage. This approach is explained in detail in thenext section.

The Resource-Based Viewof the Firm

The resource based view of the firm is basedon two underlying assertions, as developed instrategic management theory (Barney, 1986a,1991; Rumelt. 1984; Wernerfelt, 1984): (1) thatthe resources and capabilities possessed bycompeting firms may differ (resource hetero-geneity); and (2) that these differences may belong lasting (resource immobility). In this con-text, the concepts of a firm's resources andcapabilities are defined very broadly,2 and couldcertainly include the ability of a firm to conceive,implement, and exploit valuable IT applications(Barney, 1991).

The conditions of resource heterogeneity andresource immobility are connected to sustainedcompetitive advantage in the following way. If afirm possesses a resource or capability that ispossessed by numerous other competing firms,that resource or capability cannot be a sourceof competitive advantage. In the context of IT, if

See Bamey (1991). Grant (1991), and Wemertelt (1984)for additional discussion of resourcs heterogeneity andImmobility.

several competing firms in an industry all oper-ate the same automated inventory manage-ment system, for example, then possessingsuch a system, by itself, cannot be a source ofcompetitive advantage for any of these firms.Common resources do not meet the resourceheterogeneity requirement, and thus are, atbest, sources of competitive parity.

On the other hand, if a firm possesses aresource or capability that is not currently pos-sessed by competing firms, the condition ofresource heterogeneity is met. and a firm mayobtain at least a temporary competitive advan-tage. This was the situation described earlierfor WalMart's purchase/inventory/distributionsystem. As long as WalMart was the only dis-count retailer with this system in operation, thatsystem was a source of at least a temporarycompetitive advantage for WalMart.

The second resource-based condition, the con-dition of resource immobility, becomes impor-tant in understanding when a firm's resourcesand capabilities will be sources of sustainedcompetitive advantage. A resource is mobile iffirms without a resource (or capability) face nocost disadvantage in developing, acquiring, andusing that resource compared to firms thatalready possess and use it. tn this case, thatresource (i.e., mobile resource) can onfy be asource of temporary competitive advantage atbest. On the other hand, if a firm without aresource or capability does face a cost disad-vantage in obtaining, developing, and using itcompared to a firm that already possesses thatresource (i.e., resource immobility), then thefirm that already possesses that resource canhave a sustained competit ive advantage(Barney, 1991). Thus, if K-Mart was unable toimitate WalMart's purchase/inventory/distribu-tion system, then WalMart's system would be asource of sustained competitive advantage.Also, if K-Mart could imitate WalMart's system(i.e., the hardware and software), but not use itas effectively as WalMart, WalMart's systemcould still be a source of sustained competitiveadvantage.

The requirement that firms must face a cost dis-advantage in developing, acquiring, and using aresource in order for that resource to be a



source of sustained competitive advantagedoes not imply that the only way to gain suchadvantages is through cost leadership strate-gies (Porter, 1980). For example, it has alreadybeen suggested that GE and Otis Elevator usetheir IT resources to help implement a differen-tiation strategy. If this IT-based product differ-entiation is economically valuable, then GE andOtis would have gained at least a temporarycompetitive advantage over their competitionthrough their product differentiation efforts. Ofcourse, GE's and Otis' competitors are likely torespond to these competitive advantages byattempting to develop their own IT-based prod-uct differentiation strategies. If these competi-tors can develop the same IT resources as GEand Otis, and can do so as efficiently as GEand Otis, then they wiil be able to implementtheir own IT-based product differentiation strat-egy, and GE's and Otis' strategies will nolonger be a source of competitive advantage.On the other hand, if it is more difficult (i.e.,more costly) for these competitors to develop,acquire, and use them, then GE's and Otis' IT-based product differentiation competitiveadvantage would be sustained.

More generally, a firm may use its IT resourcesto help implement a wide range of strategies,including cost leadership, product differentia-tion, strategic ailiance strategies, divet^ificationstrategies, and vertical integration strategies(Barney, 1996). If those resources are hetero-geneously distributed across competing firms,and if firms without these resources find it morecostly to develop, acquire, and use them toimplement a strategy than firms that havealready used them to implement that strategy,these resources can be a source of sustainedcompetitive advantage.

The importance of resource immobility in creat-ing sustained competitive advantage has ledstrategic management researchers to askanother question: Under what conditions willfirms be at a cost disadvantage in developing,acquiring, and using the resources and capabil-ities possessed by a firm with a competitiveadvantage? In other words, under what condi-tions will a firm's heterogeneously distributedresources and capabilities be a source of sus-tained competitive advantage?

Several authors have suggested variousanswers to this question (Dierickx and Cool,1989; Rumelt, 1984). However, most of theseanswers tend to fall into one or more of thethree broad categories suggested by Barney(1991): the role of history, the role of causalambiguity, and the role of social complexity.^

The role of history

History can play at least two roles in increasingthe cost of imitating a successful f irm'sresources and capabilities. First, a firm's abilityto develop or acquire resources and capabilitiesin a low-cost way may depend on a firm beingin the "right place at the right time" in history. Ashistory moves on, these opportunities can onlybe recreated at very high (perhaps infinitelyhigh) cost. Consider, for exampie, Caterpiliar,Inc. Caterpillar was able to develop a worldwideservice and support network for its heavy con-struction equipment business because it wasthe sole supplier of this equipment to Alliedforces during World War II. The Ailies agreed tosubsidize the development of this service andsupport network because no constructionequipment fimi had such a service in place, andit was essential for the war effort. After WorldWar II, Caterpillar continued to be the onlyheavy construction equipment company withsuch an international service and support net-work in place. Obviously, such a network was asource of enormous competitive advantage forCaterpillar. In order for competing firms to buildthis same kind of network, at the same cost asCaterpillar, the unique conditions that existedduring World War II would have to be recreat-ed. The cost fo a fimi of recreating these condi-tions is obviously high—perhaps infinitely high(Rukstadand Horn, 1989).

History can also play a role in increasing thecost of imitating a firm's resources and capabili-ties because some of these firm attributes canonly be developed over long periods of time.U.S. manufacturers have often coveted the

Attributes of firm resources and capabiiities that retard imi-tation have atso been refered to as isolating mechanisms(Rumett, 1984) or barriers to imitation (Mahoney andPandian, 1992).



close cooperative relations that seem to existbetween Japanese firms and their suppliers.However, quick imitation of these relations hasbeen elusive to many U.S. firms. This difficultyis more understandabie when it is recognizedthat many Japanese firms have been workingwith the same suppliers for over 500 years. Theexperience that is developed over 500 years iscostly to duplicate in a short period of time(Dierickx and Cool, 1989).

Causal ambiguity

A firm can imitate another firm's resources andcapabilities at a low cost only if the imitatingfirm knows what it is about the successfui firmthat should be imitated. When there is causalambiguity* about the source of competitiveadvantage, imitation becomes more costly.

There are at least two reasons why causalambiguity about the sources of a firm's sus-tained competitive advantage might exist. First,these sources of advantage may be taken forgranted and are unspoken, tacit attributes of afirm (Reed and DeFiliippi, 1990). Such organi-zational attributes have been described as"invisible assets" (Itami, 1987) and can includean organization's culture (Barney 1988a), itsstandard operating procedures, and its opera-tional routines (Nelson and Winter, 1982).Invisible assets may be valuable for a firm,enabling managers to communicate more effec-tively, providing guidance to managers inuncertain and complex situations, and in otherways making business decision making moreefficient. Moreover, such invisible assets arecostly to imitate, since it is not entirely clearwhat imitating firms should duplicate.

Second, a firm's competitive advantage maydepend on a large number of small decisionsand actions in a firm, rather than on a few largedecisions. For example, firms that successfullyimplement total quality management end upaffecting thousands, or even hundreds of thou-sands, of decisions made by labor, manage-

Causal ambiguity can be defined as "... the annbiguityconcerning the nature of the causal connections betweenactions and results.'*

ment, and suppliers each day (Blackburn andRosen, 1993). From a competitive point of view,these numerous little decisions have a distinctadvantage over a few large, strategic choices.These little decisions are, again, almost invisi-ble to imitating firms. Moreover, even if an imi-tating firm is able to duplicate 200 or even2,000 of these little decisions. It still will not fullyimitate the successful firm's fuil resource andcapability advantage. Only by duplicating thehundreds of thousands of little decisions in afirm can complete imitation occur.

Social complexity

Finally, resources and capabilities that aresocially complex may also be costly to imitate.Firm attributes such as an organization's cul-ture (Barney, 1986a), its reputation among cus-tomers and suppliers (Klein, et al., 1978), itstrustworthiness (Barney, 1994), and so forth aregenerally beyond management's ability tochange rapidly. Rather, these socially complexattributes evolve and change over time. Thedelays associated with changing these complexsocial relationships suggest that firms with com-petitive advantages based on these types ofresources and capabilities may be immunefrom low cost imitation in the short run.

A resource-based model ofcompetitive advantage

The impact of resource heterogeneity andimmobility on competitive advantage can beorganized into the model presented in Figure 1(Barney, 1991; 1994). This model is organizedwith reference to a set of three questions abouta firm's resources and capabilities. The firstquestion is: Does a particular resource or capa-bility add value to a firm, i.e., does its exploita-tion reduce a firm's cost below and/or increaseits revenues above what would have been thecase if these resources or capabiiities were notexploited? As suggested previously, resourcevalue is a necessary but not sufficient conditionfor competitive advantage. Firms that possessresources or capabilities that are not valuable



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will gain a competitive disadvantage fromexploiting these resources. On the other hand,firms with valuable resources and capabilitiesmay gain at least competitive parity fromexploiting these resources.

The second question is: Is a particular resourceor capability heterogeneously distributed acrosscompeting firms? Obviously, resources andcapabiiities possessed by many competingfirms cannot be a source of competitive advan-tage for any of them, although they will be asource of at least competitive parity. On theother hand, if a resource or capability is valu-able and heterogeneously distributed acrosscompeting firms, then that resource or capabiii-ty will be a source of at least a temporary com-petitive advantage for firms that possess thatresource.

The final question in this model is: !s a resourceor capabiiity imperfectly mobile? If firms withouta valuable resource are at no disadvantage inacquiring, developing, and using It compared tofirms that already possess this resource, then itwill only be a source of temporary competitiveadvantage for the firms that originally controlledit. On the other hand, when a resource or capa-bility is immobile, then firms without thisresource face significant challenges in acquir-ing, developing, and using it. This resource orcapability may then be a source of sustainedcompetitive advantage for firms that control it. Aresource or capability may be immobile for anyof the reasons mentioned previously, i.e., therole of history, causal ambiguity, and/or socialcomplexity.

Applying the Resource-Based View to Attributes ofIT

Armed with the mode! presented in Figure 1, itis now possible to examine the ability of IT togenerate sustained competitive advantages forfirms. A review of the IT literature indicates thatfive specific attributes of IT have been suggest-ed, so far, as possible sources of sustainedcompetitive advantage for firms. The first of

these, customer switching costs, has alreadybeen discussed and shown not to be a sourceof sustained competitive advantage in all butthe most unusual circumstances (i.e., when afirm currently is, and is likely to remain, amonopoly supplier of IT that is absolutelyessential to the business activities of cus-tomers). The other four attributes of IT thathave been suggested as possible sources ofsustained competitive advantage—access tocapital, proprietary technology, technical ITskills, and managerial IT skills—are discussedbelow.

While these five attributes of IT have all beensuggested as possible sources of sustainedcompetitive advantage in the IT literature, theycertainly do not represent a comprehensive listof all the attributes of IT that might be sourcesof sustained competitive advantage. Futurework will need to address the competitive impli-cations of these other attributes of IT, using themodel presented in Figure 1.

Access to capital

The capital needed to develop and apply IT—whether in the form of debt, equity, or fromretained earnings—has been suggested as asource of sustainable competitive advantage forat least some firms (McFarland, 1984). Thelogic underlying this assertion is straightfor-ward. First, IT investments can be very risky,and thus the capital needed to make theseinvestments can be very costly. Second, ITinvestments can require huge amounts of thisrisky capital. It may often be the case that onlya few firms competing in a particular productmarket will have the financial capability neededto acquire the necessary capital to make certainIT investments. Thus, the few firms that areable to acquire the needed capital to makethese investments can gain a sustained com-petitive advantage from them.

Two kinds of uncertainty can be considered asthe major sources of risk in IT investments, andare, therefore, determinants of the cost of capi-tal required to make those investments: techno-logical uncertainty and market uncertainty.Technological uncertainty reflects the risk that


Sustained iT CompetiWeness

an IT investment may not meet Its expectedperformance targets in a timely way. Specificsources of technological uncertainty in ITinvestments include (McFarlan, 1981): (1) fail-ure to obtain the anticipated IT results becauseof implementation difficulties, (2) higher thananticipated impiementation costs, (3) longerthan anticipated implementation time, (4) tech-nical performance below what was anticipatedat the outset of the investment, and (5) incom-patibility of the developed iT with selected hard-ware and software.5 When they were first devel-oped, airline reservation systems were charac-terized by high levels of technological uncer-tainty. Their development required the solutionof a number of unforseen probiems, whichrefiected the technological limitations andscarce experience available at the time. Theseproblems were solved in part by IBM's directinvolvement and commitment in the develop-ment of these systems (see Copeland andMcKenney, 1988, for details).

Market uncertainty, on the other hand, reflectsrisks related to the customer's acceptance ofnew IT products or services. Market uncertaintywas a major cause of failure for the Pronto andZapMaii systems. Even though these systemsmet their technical objectives, they were notadopted by customers. The Pronto system.Chemical Bank and AT&T's joint venture ineiectronic banking, did not attract enough cus-tomers in six years to break even and had to beabandoned (Ciemons and Weber, 1990;Gunther, 1988). Similarly, insufficient demandwas one of the reasons for the failure ofFederal Express's ZapMail, a system designedto transmit facsimiie documents through anationwide network (Keller and Wilson, 1986;Wiseman, 1988).

Of couree, not all IT investments are large, norare they all risky. If IT investments are not largeand risky, then it is likely that several firms wiiihave access to the capital necessary to makethem. In this context, access to capita! is notlikely to be a source of sustainable competitiveadvantage. On the other hand, some IT invest-ments may be both large and very risky.However, even in this context, access to capital

See ciemons and Weber (1990) for a broader classifica-tion of technological risks for IT projects.

for IT investments, per se, is not likely to be asource of sustained competitive advantage forfirms. Consider, for example, several firms withidentical IT resources and capabilities seekingcapital to make particular IT investments. Whilethese investments may be both risky and largeand because these firms are about equallyskilled in making IT investments, the risks ofthese investments are not heterogeneously dis-tributed across these firms. According to Figure1, firm attributes that are not heterogeneouslydistributed across fimis will only be a source ofcompetitive parity. While the capital used bythese firms to make these IT investments willbe risky and large, it will not be any more so toany one of these firms than it is to the others(Barney, 1986b). Furthermore, technological ormarket uncertainty is usualiy resolved once afirst-mover has been able to successfully imple-ment a system. Therefore, these risks actuallyaffect first-movers more than followers(Lieberman and Montgomery, 1988), and con-sequently, in many circumstances, technologyfollowers can have access to lower cost of capi-tal than technology first-movers.

Of course, this simple example makes thestrong assumption that competing firms havethe same resources and capabilities in makingIT investments- Obviously, this will often not bethe case. Different firms may be differentiallyskilled in managing the technical and marketrisks associated with particular kinds of ITinvestments. Put another way, firms that aremore skilled in managing their IT investmentsface fewer technical and market risks than lessskilled finns. These more skilled firms wiil haveaccess to lower cost of capital than less skiiledfirms and will be able to pursue IT investmentsthat are not avaiiable to iess skilled firms.Consequently, some firms may gain competi-tive advantages over other firms through theirIT investments.

However, again in this situation it is inappropri-ate to conclude that access to capital, per se, isa source of competitive advantage. Rather, it isthe special resources and capabilities of somefirms that enable them to manage the technicaland market risks more efficiently and allowsthem to gain an advantage. As suggested inFigure 1, if these resources and capabilities are

496 MIS Quarterty/December 1995


valuable (which in this case, they are) and het-erogeneously distributed across competingfirms (again in this case, they are), they can bea source of at least a temporary competitiveadvantage. Whether the skills needed to man-age technical and market risk are imperfectlymobile (i.e., whether they reflect a firm's uniquehistory, are causally ambiguous, or sociallycomplex) and thus sources of sustained com-petitive advantage, is discussed in later sec-tions of this paper.

Even small firms, with apparently small debtcapacity and few retained earnings, can over-come capital market disadvantages if they haveaccess to the required IT investment resourcesand capabilities. These small firms can cooper-ate in their IT investments, gaining access toboth the needed skills and the required capital(Cash and Konsynski, 1985; Clemons andKnez, 1988; Clemons and Row, 1992; Vitale,1986). For example, such cooperative effortswere used in the development of the Europeanairline reservation systems, Amadeus andGalileo, to overcome the problems of a singlefirm acquiring large amounts of capital neededto develop such systems (Etheridge, 1988).

Proprietary technology

Technology that can be kept proprietary hasalso been suggested as a source of sustainedcompetitive advantage (Bain, 1956; Porter,1980). Although proprietary technology can beprotected through patents or secrecy (Porter,1980), IT applications are difficult to patent(Jakes and Yoches, 1989). Moreover, even ifthey could be patented, there is evidence thatpatents provide little protection against Imitation(Mansfield, 1985; Mansfield, et al., 1981). Thus,secrecy is the only alternative for keeping ITproprietary.

Clearly, if a firm possesses valuable proprietarytechnology that it can keep secret, then thatfirm will obtain a sustained competitive advan-tage. The fact that the technology is proprietarysuggests that it is heterogeneously distributedacross competing firms; the fact that it is secretsuggests that it is imperfectly mobile. However,most research indicates that it is relatively diffi-

cult to keep a firm's proprietary technologysecret, and thus, it is unlikely that proprietarytechnology will be a source of sustained com-petitive advantage. This is especially true for IT(Clemons and Row, 1987).

A wide variety of factors act to reduce theextent to which proprietary IT can be keptsecret. Workforce mobility, reverse engineering,and formal and informal technical communica-tion all act to reduce the secrecy surroundingproprietary technology (Lieberman andMontgomery, 1988). Thus, if one firm finds itselfat a competitive disadvantage to anotherbecause that other firm has some proprietary ITapplication, the disadvantaged firm can hireaway one or more of the individuals who devel-oped the advantaged firm's application; it canpurchase that application and discover its char-acter through reverse engineering; it can dis-cover the nature of the application throughinfomial discussions with developers or users;or it can read published reports about thenature of the proprietary application and dupli-cate it in that way. Put another way, while aparticular firm may gain a "head start" (i.e., atemporary competitive advantage) from its pro-prietary IT application, competing firms are usu-ally not disadvantaged in imitating that technol-ogy by history, causal ambiguity, or social com-plexity. Thus, that technology usually is not asource of sustained competition advantage.^

Over the last several years, IT has become, toa large extent, generic and available to mostfirms (Clemons and Row, 1987; 1991b). Evencomplex systems that used to be immune fromimitation are now broadly available from numer-ous sources. For example, the software used inairline reservation systems currently can beacquired from the companies that developedthem for internal purposes (Etheridge, 1988;Hopper, 1990). As this diffusion of IT continues,the ability of proprietary technology to be asource of competitive advantage—sustained ortemporary—continues to erode.

Indeed, there is even some evidence that suggests thatthe cost of imitating another firm's proprietary technologyis often much less than the cosl to the original firm ofdeveloping that technology (Liebeman and Montgomer,1988).



Technical IT skills

A third possible source of sustained competitiveadvantage from IT may be a firm's technical ITskills (Copeland and f^cKenney, 1988).Technical skills refer to the know-how neededto build IT applications using the available tech-nology and to operate them to make productsor provide services (Capon and Glazer, 1987).Examples of such technicai skilis might includeknowledge of programming languages, experi-ence with operating systems, and understand-ing of communication protocols and products.These technical skills enable firms to effectivelymanage the technical risks associated withinvesting in IT, as discussed previously.

While technicai skills are essential in the useand application of IT, they are usuaiiy notsources of sustained competitive advantage.Using the language presented in Figure 1,these skills are valuable, but they are usuallynot heterogeneously distributed across firms.Moreover, even when they are heterogeneouslydistributed across firms, they are typically highlymobile. For instance, firms without the requiredanalysis, design, and programming skillsrequired to make an IT investment can hiretechnical consultants and contractors.Specifically, airlines acquired technical exper-tise for developing their complex airline reser-vation systems by hiring programmers fromother airlines and by making alliances withother carriers and hardware vendors (Copelandand McKenney, 1988).

This mobility of technical IT skills shows thatsuch skills are usually explicit and codifiable bymeans of equations, procedures, blueprints,etc. Since codifiable knowledge "can be com-municated from its possessor to another personin symbolic form, the recipient becomes asmuch 'in the know' as the originator^ (Winter,1987, p. 171). These codifiable skills are easyto transmit and receive (Teece, 1988). Thus,technical skills can easily diffuse among a setof competing firms.

If a firm is at a competitive disadvantagebecause of its inadequate technical IT skills, ithas a variety of obvious solutions. For example,this firm could train its own employees in the

relevant technical skills, hire new employeesthat already have the technical skills, ask itsemployees to take various classes to leam therelevant technical skills, etc. tn alt these ways, afirm at a competitive disadvantage could solveits technical problems and regain competitiveparity in technical IT skills. Consequently,although there's no question that technical ITskilis are valuable to the firm, they rarely meetboth additional conditions of being heteroge-neously distributed across firms and highlyimmobile. Without meeting these conditionsfrom the resource-based view of the firm aspresented in Figure 1, it is unlikely that techni-cal IT skills can be used to sustain a competi-tive advantage.

Managerial IT skills

Technical skills are not the only skills requiredto build and use IT applications. A secondbroad set of skills are managerial skills (Caponand Glazer, 1987). In the case of IT, manageri-ai skills include management's abiiity to con-ceive of, develop, and exploit IT applications tosupport and enhance other business functions.Examples of important IT management skillsinclude: (1) the ability of IT managers to under-stand and appreciate the business needs ofother functional managers, suppliers, and cus-tomers; (2) the ability to work with these func-tionai managers, suppliers, and customers todevelop appropriate IT applications; (3) the abil-ity to coordinate IT activities in ways that sup-port other functional managers, suppliers, andcustomers; and (4) the ability to anticipate thefuture IT needs of functional managers, suppli-ers, and customers. Managerial IT skilis enablefirms to manage the market risks associatedwith investing in IT. Firms can acquire technicalIT skills by hiring programmers and analysts.They then use their managerial IT skiiis to helpprogrammers and analysts fit into an organiza-tion's culture, understand its policies and proce-dures, and learn to work with other businessfunctional areas on IT-related projects.

That these managerial skills are valuable isalmost self-evident. Without them, the fullpotential of IT for a finn will almost certainly not

498 MIS Ouarterly/December 1995


be realized. How frequently different competingfirms will possess similar IT management skillsis an empiricai question. However, it is reason-able to expect that close working reiationshipsamong those in IT and between IT and otherbusiness functions are not ali that common, andthus, these relationships may be heteroge-neously distributed across firms.

Unlike technical IT skills, managerial IT skillsare often developed over longer periods of timethrough the accumulation of experience by trialand error learning (Katz, 1974). Skills devel-oped in this way are called "learning by doing"skills (Williamson, 1975). For example, friend-ship, trust, and interpersonal communicationcan take years tc deveiop to the point where ITmanagers and managers in other businessfunctions are able to effectively work together tocreate and exploit novei IT appiications. Thus,history is important for developing these skilis.Manageriai skills in many cases are tacit(Castanias and Helfat, 1991) and may involvehundreds to thousands of small decisions thatcannot be precisely imitated. As long as theseskiils are part of the "taken for granted" part of afirm's skill base, they may remain causallyambiguous. Finally, the development and useof many cf these managerial skills depends onciose interpersonai relationships between ITmanagers and those working in the IT function,between IT managers and managers in otherbusiness functions, and between IT managersand customers. Thus, the development of theseskills is often a socially complex process.Therefore, if managerial IT skills are valuableand heterogeneously distributed across firms,then they usually will be a source cf sustainedcompetitive advantage, since these relation-ships are developed over time; and they aresocially compiex and thus not subject to low-cost imitation.

Of course, while many managerial IT skills aredeveloped over long periods of time and arecausally ambiguous and socially complex, notall such skills have the attributes needed to besources of sustained competitive advantage. Ingeneral, when managerial,IT skills can be writ-ten down, codified, and transferred at low costand with little loss in richness or understanding,those skills are not likely to be sources cf sus-

tained competitive advantage. On the otherhand, when managerial IT skills cannot be writ-ten down, codified, or transferred at low cost orwithout significant loss of richness and under-standing, those managerial IT skills may be asource of sustained competitive advantage.

Consider two examples. It has been suggestedthat management's understanding of the poten-tial for IT to be a source of competitive advan-tage was important for American Airline's abilityto develop the SABRE system (Copeiand andMcKenney, 1988). Moreover, the close relation-ship between American's IT personnel and per-sonnel in other business functions enabledthese groups to work together, to make andlearn from mistakes, and to build on successesin a way that ied to the SABRE system. If man-agement at American had not been committedto the innovative use of IT, or if relationshipsbetween the iT function and other businessfunctions had not been cooperative, the SABREsystem may never have been developed orimplemented. Imitation of the SABRE systemwas slowed, while other airlines developed theIT management skills necessary to developthese systems.

WalMart's purchase/inventory/distribution sys-tem, which has allowed a reduction in its cost ofsales 2-3 percent below the industry average,is another example of the importance of man-agerial iT skills in creating sustained competi-tive advantage. A competitively interesting noteabout this just-in-time system is that it appliesvery little proprietary technology and uses veryfew inimitable IT technical skills. Instead, IT isused to support constant and direct communi-cation among WalMart's stores, distributioncenters, and suppliers. It is this constant com-munication and the relationships it builds thathas enabled WalMart to retain its competitiveadvantage despite the successful efforts ofmany of WalMart's competitors to imitateWalMart's hardware and software (Stalk, et al.,1992). Put differently, while WalMart's technicalIT skills have been imitated, its IT managementskills have been shown to be a source of sus-tained competitive advantage.

Part of WalMart's advantage results from itsability to link its IT function with its stores, its

MiS Ouarteriy/December 1995 499


distribution centers, and even with its suppliera.This suggests that managerial IT skills are rele-vant not only in linking different functions withinthe same firm, but may also be important inlinking different firms in ways that generate IT-based competitive advantages through strate-gic alliances. It may also be the case that man-agerial IT skills can be used to link a firm withits customers (Jackson, 1985). In all thesecases, if the linkages are valuable, if they arepossessed by relatively few competing firms,and if they are socially compiex (and thusimperfectly mobile), they may be sources ofsustained competitive advantage.

Conclusions andImplications

Of the five attributes of IT studied in this paper,application of the resource-based logic summa-rized in Figure 1 suggests that only IT manage-rial skills are likely to be a source of sustainedcompetitive advantage. IT management skiiisare often heterogeneously distributed acrossfirms. Moreover, these skills reflect the uniquehistories of individual firms, are often part of the'1aken for granted" routines in an organization,and can be based on socially complex relationswithin the IT function, between the IT functionand other business functions in a firm, andbetween the IT function and a firm's suppliersor customers.

On the other hand, customer IT-based switch-ing costs are usually not even economicallyvaluable, let alone a source of sustained com-petitive advantage. Customers will generallyanticipate the risks associated with such switch-ing costs and will insist on various guaranteesbefore making these kinds of investments.Even if a customer makes these investmentswithout such guarantees, the exploitation ofswitching costs can lead a firm to gain a reputa-tion as an untrustworthy supplier. Indeed, giventhe evolution of IT, it is becoming progressivelymore difficult to "capture" customers throughswitching costs. Access to capital is also notlikely to be a source of sustained competitiveadvantage, especially for ITs that are neither

large nor particularly risky. Even when theseinvestments are large and risky, differentialaccess to capital, per se, is not a source of sus-tained competitive advantage. Rather, differen-tial access to capital reflects a firm's differentialtechnical and managerial IT skills. Also, it isbecoming increasingly difficult to keep informa-tion technology proprietary, and thus, propri-etary IT is not likely to be a source of sustainedcompetitive advantage. Finally, while technicalIT skills are absolutely essential for a firm togain even competitive parity in IT, they are, bythemselves, not likely to be a source of sus-tained competitive advantage.

This analysis has important implications forboth researchers and managers. Forresearchers, the resource-based view of thefirm suggests that the search for IT-basedsources of sustained competitive advantagemust focus less on iT, per se, and more on theprocess of organizing and managing IT within afirm. It is the ability of IT managers to work witheach other, with managers in other functionalareas in a firm, and with managers in otherfirms that is most likely to separate those firmsthat are able to gain sustained competitiveadvantages from their IT and those that areonly able to gain competitive parity from theiriT. These skills, and the relationships uponwhich they are built, have been called manage-rial IT skills in this paper. Future research willneed to explore, in much more detail, the exactnature of these managerial IT skills, how theydevelop and evolve in a firm, and how they canbe used to leverage a firm's technical IT skillsto create sustained competitive advantage.

Also, while this paper examined the ability offive widely cited potential IT-based sources ofsustained competitive advantage, there may beother attributes of IT whose competitive implica-tions have not been fully evaluated. This papersuggests a framework that can be used to eval-uate these competitive implications. Additionalconceptual work will be required to describethese other IT attributes and their relationshipto the resource-based view of the firm.Moreover, empirical tests of the arguments pre-sented here and other resource-based argu-ments about IT attributes will also need to beconducted.



This analysis also has important implications forIT managers. First, simply because IT manage-rial skills are the only likely source of sustainedcompetitive advantage discussed in this paper,it does not follow that other attributes of IT arecompetitively unimportant. For example, whiletechnical IT skills are not likely to be a source ofsustained competitive advantage, they may bea source of temporary competitive advantage.A firm may be able to get an IT-based "head-start" on its competition based on these techni-cal skills (i.e., they may be heterogeneouslydistributed among competing firms, but notimperfectly mobile). Moreover, even when sucha head start is not possible, it is still essentialthat a firm be as technically skilled in its IT asits competitors. After all, managerial IT skillscan only be used to leverage a firm's technicalIT skills if those skills exist in a f irm.Responsible IT managers will constantly com-pare their technical skills with their competitorsand seek to meet, or exceed, their competi-tion's level of technical competence.

Second, this analysis suggests that firms can-not gain sustained competitive advantages by"playing games" with customers. Prescriptively,the traditional "create-capture-keep" paradigmseemed to imply that it was possible to mistreatyour "captured" customers—by raising prices,reducing quality, reducing service, etc.—withimpunity. Since captured customers had nooptions, this seemed like a viable strategicoption. However, it is now clear that most cus-tomers do have IT options and that even if theydo not have them right now, they will probablyhave them soon. In this more competitive ITworld, firms that mistreat their customers toexploit switching costs are likely to see theirperformance fall.

Third, this analysis suggests that, in addition todeveloping and maintaining a technically com-petent IT organization, IT managers also shouldseek to develop close working relationshipswith managers in other business functions andeven with managers in other firms. Clearly,these relationships are sometimes difficult tobuild and often difficult to maintain. However, itis these kinds of relationships that will enablethe IT function to ieverage its technical IT skillsto address real business problems. Moreover,

to the extent that these kinds of relationshipsare heterogeneously distributed across a firm'scompetitors, they are likely to be a source of atleast a temporary competitive advantage.Indeed, since these reiationships are, by defini-tion, socially complex, they are also likely to beimpertectly mobile and thus a source of sus-tained competitive advantage.

Finally, this analysis suggests that using IT togain sustained competitive advantage is notlikely to be easy. Indeed, if it was relatively sim-ple for firms to use IT in this way, then IT wouldnot be impertectly mobile and therefore not asource of sustained competitive advantage.The fact that it is often difficult to develop ITmanagerial skills, that relationships betweenthe IT function and other business functions areoften slow to evolve, and that the technical ori-entation of many of those in the IT function canclash with the business orientation of others ina fimi is good for those firms who have beenable to develop these IT managerial skills. Thisimplies that other firms will have a difficult timeimitating these skills, and therefore they can bea source of sustained competitive advantage.

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About the Authors

Francisco J. Mata is currently executive direc-tor at the Earth Council headquartered in SanJose, Costa Rica. He received a Ph.D. in man-agement information systems from Texas A&MUniversity and an M.S. in computer sciencefrom Case Western Reserve University. He pre-viously worked as assistant professor at theUniversidad de Costa Rica and held IS posi-tions at the Tropical Agricultural Research andTraining Center and the Inter-American Institutefor Cooperation on Agriculture. His areas ofinterest are international IT management, ISplanning, and the use of IT to obtain sustain-able competitive advantage.

William L. Fuerst is an associate professor ofMIS in the Department of Business Analysis &Research, and Director of the Center for theManagement of Information Systems (CMIS),College of Business Administration andGraduate School of Business, Texas A&MUniversity. His research and teaching interestsinclude analysis and use of emerging informa-tion technologies, systems analysis and design,strategic impact of information technologies,and software development using CASE tech-nology. He has published in several leadingjournals, including MIS Quarterly, DecisionSciences, Journal of Management InformationSystems, and the international Journal of Man-Machine Studies. Dr. Fuerst's practical experi-ence includes a position as senior manager inManagement Consulting Services for Price



Waterhouse, as welt as additional consultingexperiences.

Jay B. Barney is a professor of managementand holder of the Bank One Chair forExceilence in Corporate Strategy at the FisherCoiiege of Business, Ohio State University. Hisresearch focuses on the relationship betweenidiosyncratic firm skills and capabilities and sus-tained competit ive advantage. ProfessorBamey teaches organizational strategy and pol-icy at Ohio State, and has taught in a variety of

executive training programs. He has written twotextbooks on organizational economics andmanaging organizations, and has publishedover 30 articles in a variety of journals, includ-ing the Academy of Management Review,Strategic Management Journai. ManagementScience, and Journai of Management. He hasconsulted with a wide variety of public and pri-vate organizations, focusing on implementinglarge-scale organizational change and strategicanalysis.

MIS Quarterty/December 1995 505

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