Originally published December 6, 2007
Many companies have isolated decision support capabilities that are hard to use or hard to access. For example, a data mart may have been built for accessing customer data, a project management system may exist for tracking large-scale projects, or Excel analyses may be routinely used in a specific business decision process. In general, managers are experiencing information overload and are having difficulty finding the right information when it is needed. Potentially, innovative decision support systems (DSSs) can yield competitive advantage for an organization or at least maintain an organization’s competitive position.
Evidence indicates managers can now use sophisticated data-driven and document-driven DSSs to obtain information that was buried for many years in filing cabinets or archived on computer storage systems. Model-driven DSSs can reduce waste in production operations and improve inventory management. Knowledge-driven DSSs can help managers evaluate employees or help technical staff diagnose problems. Communications-driven DSSs can support teams working all over the world. Inter-organizational DSSs can support a company’s suppliers and customers. Real-time decision support systems are now possible for tactical decision support.
A decision support system creates a competitive advantage if three criteria are met. First, once the DSS is implemented, it must be used and it must become a major or significant strength or capability of the organization. Second, the DSS must be unique and proprietary to the organization. Third, the advantage provided by the DSS must be sustainable until an adequate payback is received, usually at least three years. Managers who are searching for strategic investments in information technology need to keep these three criteria in mind. Just because a vendor says a product will create a competitive advantage doesn’t make the claim true. A competitive advantage means an organization does something important much better than its competitors.
The widespread use of computer technology has changed the way companies do business. Information technology has altered relationships between companies and their suppliers, customers and rivals. Porter and Millar (1985) discuss two specific ways that information technology can affect competition: by altering industry structures and by supporting cost and/or differentiation strategies. A common approach used to identify opportunities to change the structure and profitability of an industry is to examine five competitive forces. Michael Porter (1979) argued that the power of buyers, the power of suppliers, the threat of new entrants, the threat of substitute products and the rivalry among existing competitors determines the profitability of an industry. How a company uses information technology can affect each of the five competitive forces and can create the need and opportunity for change. For example, information technology has altered the bargaining relationships between companies and their suppliers, channels and buyers. Today it is easy for information systems to cross company boundaries. These inter-organizational systems have become common and, in some instances, they have changed the boundaries of the participating industries. Decision support systems can reduce the power of buyers and suppliers. Decision support systems can erect new barriers that reduce the threat of entrants. Decision support systems can help differentiate products and services and reduce the threat from substitutes. Also, decision support systems can help managers reduce the cost of rivalry actions and, in some cases, reduce the need for competitive actions and reactions.
Decision support systems can potentially help a firm create a cost advantage. Decision support systems can provide many benefits including improving personal efficiency and reducing staff needs, expediting problem solving and increasing organizational control. Managers who want to create a cost advantage should search for situations where decision processes seem slow or tedious and where problems reoccur or solutions are delayed or unsatisfactory. In some cases, DSSs can reduce costs where decision makers have high turnover and training is slow and cumbersome, and in situations where activities, departments and projects are poorly controlled.
Also, DSSs can create a major cost advantage by increasing efficiency or eliminating value chain activities. For example, a bank or mortgage loan firm may reduce costs by using a new DSS to consolidate the number of steps and minimize the number of staff hours needed to approve loans. Technology breakthroughs can sometimes continue to lower process costs, and rivals who imitate an innovative DSS may nullify or remove any advantage.
Decision support systems can potentially create a differentiation advantage. Providing a DSS to customers can differentiate a product and possibly provide a new service. Differentiation increases profitability when the price premium charged is greater than any added costs associated with achieving the differentiation. Successful differentiation means a firm can charge a premium price, and/or sell more units, and/or increase buyer loyalty for service or repeat purchases. In some situations, competitors can rapidly imitate the differentiation, and then all competitors incur increased costs for implementing the DSS.
Finally, decision support systems can be used to help a company better focus on a specific customer segment and hence gain an advantage in meeting that segment’s needs. Management information systems and decision support systems can help track customers, and DSSs can make it easier to serve a specialized customer group with special services. Some customers won’t pay a premium for targeted service, and larger competitors also target specialized niches using their own DSSs.
It is important to recognize that some firms have no competitive advantage. Firms can achieve a competitive advantage by making strategic changes, and firms can lose a competitive advantage when competitors make strategic changes. Implementing computerized decision support does not necessarily create a competitive advantage. In fact, most decision support does not have such a broad enterprise-wide impact.
Decision support systems can be important and useful and very necessary, and yet not provide a competitive advantage. Many consulting firms and vendors focus on gaining competitive advantage from a data warehouse or a business intelligence system, and that can happen. Many DSS projects do not, however, deliver such results and the projects probably were not intended to create competitive advantage.
A now classic study (Kettinger et al –1994) identified a number of companies that had gained an advantage from information systems. Some of those systems were decision support systems, but most were transaction processing systems. The following DSS examples are from their paper: Air Products, a vehicle scheduling system; Cigna, a risk assessment system; IBM, a marketing management system; Owens-Corning, a materials selection system; and Procter & Gamble, a customer response system. Most companies wisely do not provide many details on their success with computerized decision support. Competitive responses and technology have had a negative impact on how some of the aforementioned systems are perceived today.
If a company is trying to develop a decision support system that provides a competitive advantage, managers and analysts should ask how the proposed DSS affects company costs, customer and supplier relations, and managerial effectiveness. Managers should also attempt to assess how the proposed strategic system will impact the structure of the industry and the behavior of competitors. Finally, companies must continuously improve their information and decision support technology to gain and maintain any competitive advantage.
Kettinger, W., Grover, V., Guha, S., and Segars, A., “Strategic Information Systems Revisited,” MIS Quarterly, 1994, pp. 31-55.
Porter, M. E. and V. E. Millar, “How Information Gives You Competitive Advantage,” Harvard Business Review, July-August, 1985.
Porter, M. E., "How Competitive Forces Shape Strategy," Harvard Business Review, March-April, 1979.
Power, D. J., Decision Support Systems Hyperbook. Cedar Falls, IA: DSSResources.COM, HTML version, Fall 2000, accessed on November 6, 2007.
Power, D. J., Decision Support Systems: Concepts and Resources for Managers, Quorum/Greenwood, 2002.
Recent articles by Dan Power