Strategy is the prerequisite for establishing competitive …lacity/olpaperf05g2.doc · Web viewMichael Porter believes competitive advantage develops out of the value a company creates

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USING INFORMATION TECHNOLOGYAS A COMPETITIVE WEAPON

Prepared forDr. Mary Lacity

IS 6800Management of Information Systems

Prepared bySvetlana A. Panicheva

David J. Bracci

09 December 2005

document.doc 2 of 21

Executive SummaryInformation technology has been the platform many companies have used to gain a competitive advantage over their competitors. Coupled with a well thought-out strategy and company commitment, information technology can provide value to not only the company but to the consumer as well. This paper presents two company case studies that demonstrate how information technology, when properly applied and managed, can add value to a company and generate millions of dollars of revenue. The companies presented in the case study are very different. One company is a start-up selling groceries in New York. The other is an established company selling fertilizer in India. Although seeming quite different, a commonality they share is they both have used information technology to create a competitive advantage.

A company’s competitive advantage initiates from their business strategy. Using the cost advantage strategy, a company strives to become the low-cost producer within its industry. When the differentiation strategy is used, a company sets out to establish a unique element to their product or process that is greatly valued by consumers. A company using the focus strategy chooses a sector of an industry and shapes their strategy to serve this sector exclusively. Information technology has a tremendous effect on competitive advantage using either cost or differentiation strategies.

Michael Porter believes competitive advantage develops out of the value a company creates for its buyers [1]. Porter calls the collection of activities in a company uses to design, produce, market, deliver, and support a product the value chain. A company can claim a competitive advantage when it is able to provide the same products or services to its customers as its competitors but at a lower cost or with benefits that exceed those of its competitor’s products. Information technology alone does not allow a company to gain a competitive advantage.

FreshDirect Case Study

According to the Food Marketing Institute Survey the online groceries sales were 85 millions in 1998, and was expected to reach 1.3 billion by 2002 [7]. FreshDirect started its operation in September, 2002 as seller of raw, semi-prepared and prepared food. It was recognized by the New Yorkers as an On-line Grocer. FreshDirect was formed in 1999 by the ex-investment banker Jason Ackerman and Joe Fedele, famous in grocery industry for the Fairway Uptown. The CEO hired category experts to ensure product quality. He also invested in a high-tech plant to protect product quality. The CEO closely controlled geographic reach to shield quality. FreshDirect’s ideal customer is one who buys 70 % of perishable food at least twice a week and purchases packaged food from Costco or Sam’s Club once or twice a month [8] [10]. To achieve the operation efficiencies, FreshDirect hired Myles Trachtenberg, a 15-year IT veteran, for the position of chief technology officer [12]. Being 99% dependent on the internet service FreshDirect had been struggling with IT performance during the first year. In November 2003 Myles Trachtenberg, as CTO of the company, rebuilt the IT structure based on three standard systems. Trachtenberg identified the new FreshDirect system as three types of businesses pulled together: “FreshDirect has sought to emulate the E-commerce success


of Amazon.com, the just-in-time manufacturing capabilities of Dell, and the distribution expertise of FedEx” [13]. FreshDirect buys directly from growers or producers that normally sell through distributors, eliminating middle man in the supplying chain. Even though the high technology is applied through the order processing, all key positions are controlled and operated by people. The CEO of FreshDirect, Dean Furbush, recognizes the current operations as completely reliant on the company’s software platform. FreshDirect is not the first company that followed the great internet grocery scheme, but it is eager to avoid the other’s mistakes. FreshDirect has 250,000 registered customers, which place up to 23,000 orders per week.

Nagarjuna Fertilizers and Chemicals Ltd. Case Study

Nagarjuna Fertilizers and Chemicals Ltd. (NFCL) is an Indian company that has used information technology to gain a competitive advantage in the fertilizer market in the Indian state Andhra Pradesh. In 1943 British-ruled India was the site of the world’s worst recorded food related disaster. India’s Green Revolution had several elements that contributed to its success in preventing another similar disaster. India’s fertilizer industry also played a vital role in sustaining the Green Revolution and achieving self-sufficiency in food-grain production. In the late 1990’s, NFCL restructured their business and operational objectives to grow the base of the company. NFCL realized that information technology could help the company in many ways. NFCL used the i-Kisan Agricultural Portal to differentiate themselves from their competition and add value to their customers – the rural farmer. i-Kisan.com is not only an example of how a company can differentiate itself from the competition, it is an example how differentiation can be achieved using information technology. i-Kisan is deployed to rural India through internet kiosks. i-Kisan provides many elements of information for the customer. i-Kisan is used to add value to NFCL as defined by Porter’s Value Chain model [1]. Applying information technology, NFCL believes they have created a competitive advantage through their creation of i-Kisan agricultural portal [23]. Although i-Kisan marketing and sales approach could be duplicated by a competitor, the immediate future appears to be bright for i-Kisan.

Creating a competitive advantage using information technology is difficult, and many believe that the opportunity no longer exists [25]. The lack of success in using information technology for a competitive advantage could be blamed on the limited emphasis most companies place on technology. Jack Welch believes, “strategy is a living, breathing, totally dynamic game” [9]. Recognizing the need for dynamic information technology companies are able to keep up with the fast developing competition [27].

Information technology can be used in a varied assortment of industries to gain a competitive advantage. The use of information technology as a competitive weapon is typically thought of as being applied by large or technology driven companies, such as Wal-Mart and Dell. The case studies presented in this paper, however, demonstrate that the technology can be applied successfully by smaller companies and in other markets as well. With FreshDirect, the study showed that if a start-up company applies information


technology appropriately it can be used to create a competitive advantage. This was true despite a recent failure by a company with the same type of business venture. NFCL demonstrated how an established company could use information technology to gain a competitive advantage in a low-technical business field. Both companies were able to use information technology to add value to their company and for their customers.

document.doc 5 of 21USING INFORMATION TECHNOLOGY

AS A COMPETITIVE WEAPON

Introduction

Information technology has been the platform many companies have used to gain a competitive advantage over their competitors. Coupled with a well thought-out strategy and company commitment, information technology can add value to not only the company but to the consumer as well. This paper presents two company case studies that demonstrate how information technology, when properly applied and managed, can add value to a company and generate millions of dollars of revenue. The companies presented in the case study are very different. One company is a start-up selling groceries in New York. The other is an established company selling fertilizer in India. Although seeming quite different, a commonality they share is they both have used information technology to create a competitive advantage.

Strategy Is the Prerequisite for Establishing Competitive Advantage

A company’s competitive advantage initiates from their business strategy. It is important to understand the role strategy plays in gaining a competitive advantage before exploring the ways competitive advantages are obtained. The strategy will determine what products are made, how they are made, what assets are needed, who the product will be marketed to, etc. Michael Porter describes strategy as an “internally consistent configuration of activities that distinguishes a firm from its rivals” [1]. Strategy makes a company unique and can give them a competitive advantage by providing direction, building brand reputation, setting the right goals, adding superior performance, defining a market position, and creating a unique value proposition [2]. It is the strategy that makes most assets and processes valuable to a company. If the strategy is changed, these assets and processes may change in value. Strategy is the design of activities a company uses to add value for a chosen customer [1].

Competitive Advantage Strategies

Michael Porter believes competitive advantage develops out of the value a company creates for its buyers [1]. Porter identifies two basic types of competitive advantage: cost advantage and differentiation [1]. A company uses these types of competitive advantage, along with the scope of activities, to achieve one of three generic strategies. The strategies are cost leadership, differentiation, and focus. Figure 1 shows the relationship between these competitive advantages and strategies.



1. CostLeadership 2. Differentiation

3a. CostFocus

3a. DifferentiationFocus

Lower Cost Differentiation

BroadTarget

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Competitive Advantage

CompetitiveScope

1. CostLeadership 2. Differentiation

3a. CostFocus

3a. DifferentiationFocus

Lower Cost Differentiation

BroadTarget

NarrowTarget


CompetitiveScope

Figure 1. Three Generic Strategies [1]

Cost leadership and differentiation strategies try to find competitive advantage in a broad range of an industry segment, while the focus strategies attempts cost advantage (cost focus) or differentiation (differentiation focus) in a narrow segment [1].

Using the cost advantage strategy, a company strives to become the low-cost producer within its industry. The sources of the cost advantage differ between industries and companies. Examples of cost advantage sources include economies of scale, proprietary technology, and preferential access to raw materials [1].

When the differentiation strategy is used, a company sets out to establish a unique element to their product or process that is greatly valued by consumers. The company selects one or more elements highly desired by consumers and focuses on uniquely positioning itself to meet those needs. They must establish themselves in the consumer’s view as offering something different from the competition and offering value. If successful, the company can command premium prices. The differentiation can be based on the product, the sales delivery system, the marketing approach, and a variety of other variables [1].

A company using the focus strategy chooses a sector of an industry and shapes their strategy to serve this sector exclusively. The focuser does not seek a competitive advantage over the entire industry but instead optimizes its strategy to concentrate only on the target sector. The focus strategy has two variants; cost focus and differentiation focus. A company uses the cost focus strategy to establish a cost advantage in its target sector and a differentiation focus to establish differentiation in the target sector. Both of the variants of the focus strategy rely on differences between the selected industry sector and the remaining portion of the industry. The cost focus takes advantage of differences



in cost behavior in some sectors while differentiation focus takes advantage of unique needs of consumers in a particular sector. Competitive advantage can be gained by a company using the focus strategy by devoting its attention to a select sector of an industry [1].

Information technology has a tremendous effect on competitive advantage using either cost or differentiation strategies. Information technology can be used to lower costs on any part of the value chain, which will be described later. Cost drivers can be altered by information technology to improve a company’s relative cost position. Information technology can also play a positive role in enhancing differentiation [3]. Value chain activities can be modified and tailored by information technology to differentiate a company from the rest of the industry.

Two Case Studies will be presented. This paper will present two company case studies where information technology, along with two different strategies, is used to gain a competitive advantage. Freshdirect, a New York grocery business operating through the internet, has used information technology to apply a cost focus strategy on a sector of the market to gain a competitive advantage. Nagarjuna Fertilizers and Chemicals Ltd, an Indian fertilizer company, has used the differentiation strategy along with information technology to gain a competitive advantage in an entire sector of India – the state of Andra Pradesh.

Value Chain

Porter calls the collection of activities in a company uses to design, produce, market, deliver, and support a product the value chain. These activities in Porter’s model are shown in Figure 2 [1].

Firm Infrastructure (eg. Finance, Planning)

Human Resource Management

Technology Development

Procurement

InboundLogistics

Operations(Manufac-

turing)

OutboundLogistics

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MA

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IN

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Firm Infrastructure (eg. Finance, Planning)

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turing)

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MA

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IN

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Figure 2. Value Chain [1]

The value chain activities can be divided into two broad types; primary activities and support activities. The primary activities shown along the bottom of Figure 2 involve the physical creation of the product or service, its sale and transfer to the consumer, and after-sale assistance. The bottom layer in Figure 2 value chain model contains all of the primary functions found in any company. The support activities support the primary activities and themselves and are shown layered above the primary activities in Figure 2. The value chain activities are individual elements that individually or collectively can produce competitive advantage. For the two case studies presented in this paper, the value chain model will be used to show where information technology is used to gain competitive advantage [1].


A company can claim a competitive advantage when it is able to provide the same products or services to its customers as its competitors but at a lower cost or with benefits that exceed those of its competitor’s products. A competitive advantage allows a company to create a greater value for its customers and greater profit for itself [4]. To achieve competitive advantage, a company needs to attain a capability that their competitors cannot equal. This is what is referred to as “asymmetry.” Wal-Mart’s data mining program, where they analyze consumer’s buying habits and use the information to increase sales, is an example of asymmetry. Anheuser-Busch has also established asymmetry by using demographic analysis to align products and distribution to consumer demand. Asymmetries in business may result from structural advantages, such as the size of the company, privileged relationships, extraordinary abilities in execution, or unusual insight or foresight [5]. Information technology can be used to create or increase the asymmetries for any of these advantages.

How Information Technology Can Be Used to Gain a Competitive Advantage

Information technology alone does not allow a company to gain a competitive advantage. However, information technology used strategically to improve key business activities can strengthen a company’s position [6]. These activities can be seen in Porter’s value chain model in Figure 2. A company that is first in its industry to transform and infuse information technology into their business can gain an edge. For many leading companies, strategic information technology management has become a core competency. They have seen a stronger bottom line business performance and a competitive advantage [6].

Business priorities and information technology must be aligned to maximize success and is critical for achieving and sustaining a competitive advantage. Many companies believe they have these functions aligned; however few truly do [6].



FreshDirect Case Study

According to the Food Marketing Institute Survey, the online groceries sales were 85 millions in 1998 and were expected to reach 1.3 billion by 2002 [7]. However, most of the “pure-place” grocery on-line stores have failed, opening the online market to traditional “bricks-and-mortars” stores. The following reasons were behind the fail of first wave of online grocery stores: traditional supermarket approach, too broad a range of products varieties, and logistics problems due to attempts to cover large. So, in 2002 why did another on-line grocer, FreshDirect, think they could succeed when others had failed?

FreshDirect started its operation in September, 2002 as a seller of raw, semi-prepared and prepared food. It was recognized by New Yorkers as an on-line grocer. From day one, 99% of their business was generated through the internet (www.freshdirect.com). The company opened its operation one year after the first great internet grocery distributor, Webvan, failed.

FreshDirect was formed in 1999 by the ex-investment banker Jason Ackerman and Joe Fedele, famous in grocery industry for the Fairway Uptown. The Fairway Uptown was one of the largest sensations New York’s grocery industry, known for low prices and ultra-fresh produce and meats. Jason Ackerman and Joe Fedele introduced FreshDirect not as an internet grocery store but as a high-quality food preparation and delivery service. Their idea was to organize a perishable food company through the internet as the most advanced method of product price reduction. Starting from day one, a basket of 25 items at FreshDirect was selling for 28% less than at a high-end New York grocer, Garden of Eden, and 12.5% less than the sale-circular products at grocery chain Gristede’s. FreshDirect Strategy is to deliver the highest quality perishable food at lowest cost to the customer with the help of the best experts which apply the best practices to delivery the quality 99.9% [8] [9] [10].

The CEO hired category experts to ensure product quality. Joe Fedele put together a team of industry veterans to operate the food processing facility, which has been considered the most automated plant in food industry. Each food category was organized into separate departments headed by an expert in that category. The managers run the daily operations and recommend food storage, processing and preparation. Their recommendations and recipes have been converted into program formats for manufacturing software system. The SAP software guides the workers through the procedures during order processing. Each member of the management team has been introduced to the customer on the website; their best recipes are also available to the customer through the website. FreshDirect’s management team has created new industry standards in processing and handling of perishable foods. Their requirements may be considered as extreme, but they guarantee the quality.

http://www.freshdirect.com/



The CEO invested in a high-tech plant to protect product quality. The heart of the operation is the fully refrigerated plant with climate control rooms for each type of product. Seven miles of fiber-optic cable connect every thermometer, scale, and conveyer belt to a high-tech control room. The plant also includes a gigantic restaurant kitchen to prepare customer orders based on FreshDirect expert’s recommendations. From the moment perishable foods enter the plant, they are kept under the optimal temperature conditions through the whole process of processing, packing and shipping.

Sanitary and hygiene control is another priority of the processing company. FreshDirect maintains its own microbiological laboratory to test the incoming and outgoing product quality. The quality control group is directed by a veteran of the U.S. Department of Agriculture. All food preparation areas, including processing equipment and computers, go through the daily sanitation processes. It is easy to recognize that the managing team of FreshDirect has a level of expertise that places the company above the other retailers.

The CEO closely controlled geographic reach to shield quality. The short term strategy was to stay local, deliver only in five zip codes and not to expand beyond the New York area to keep delivery costs low. The long term strategy was to open another processing facility after the current facility exceeded 60% of its capacity, and expand the business area to four or five other densely populated East coast cities. The goal is not to lose the quality of perishable food in the process of business expansion.

FreshDirect’s ideal customer as the one who buys 70 % of perishable food at least twice a week and purchases packaged food from Costco or Sam’s Club once or twice a month [8] [10]. To define their customer, FreshDirect recognized that the grocery stores operate today based on the consumers of the 1970-s, when about 70% of food was purchased in package form verses 30% fresh, as shown in Figure 3. As food-industry veterans, they knew that East coast consumers’ culture has changed dramatically. Today only 30% of food purchased at the stores is packaged food. They identified their ideal customer as the one who buys 70 % of perishable food at least twice a week and purchases packaged food from Costco or Sam’s Club once or twice a month. They also recognized that their ideal customer had to be educated to understand how to find the product and use the service provided through the internet. The goal became to introduce the product on the website in such a form that could replace the sensory channels (tactile, gustatory and olfactory) with visual only and be sufficient for the customer to place an order once and re-order it over and over again [11].



0%

10%

20%

30%

40%

50%

60%

70%

1970s 2000s

Packaged FormFresh

Figure 3. Packaged vs. Fresh Food Sales [8] [11]

To achieve the operation efficiencies FreshDirect hired Myles Trachtenberg, 15-year IT veteran, for the position of chief technology officer [12]. Today FreshDirect uses IT tools for order processing and inventory control. As customers place an order, the inventory system can track the product availability in real time. The placed order is guaranteed for the next evening delivery. Customers can view all details for their previous orders and reorder the same kind of product.

Being 99% dependent on the internet service FreshDirect had been struggling with IT performance during the first year. In 2001 the company hired Blue Martini Software developing company to build a website that would make it easy for the customer to create shopping lists and place orders. They spent a “few million” dollars and a year of development before the company gave up. The software project never did live up to its promise.

In 2002 the company purchased a set of Sun Solaris Servers. For the server operation the IT group provided most of the work at night between 1a.m. and 6 a.m. Every night they had to shut down the site to make the changes, rebuild the platform, and then validate it. The site was very sensitive to the traffic and crashed occasionally.

In November 2003 Myles Trachtenberg, as CTO of the company, rebuilt the IT structure based on three standard systems: SAP System, EGENERA Blades and Oracle database [13]. His current IT team consists of 43 specialists. With Trachtenberg’s initiative, the company achieved great results:

- Software upgrades that used to take up to five hours a night and a full system shutdown now can be done in less than 30 minutes during day time (between 1p.m. and 2p.m.) and do not require to shut down the web site.

- The web servers can handle 18,000 simultaneous shopping sessions.



- Customers can view the details of their previous orders and reorder the same kind of product

- Check out time for customers reduced from 8 seconds (14 seconds during peak time) to 1 second (2 seconds in peak time)

- The company claims $1.2 million in savings in licensing fees, service and hardware costs.

Trachtenberg identified new FreshDirect system as three types of businesses pulled together: “FreshDirect has sought to emulate the E-commerce success of Amazon.com, the just-in-time manufacturing capabilities of Dell, and the distribution expertise of FedEx.” Trachtenberg recognized FreshDirect as a very dynamic business, where every day they have new customers, new products, or new prices and different promotions that had to be added to the web site. Most of the new customers are in the age of 25 – 36 years old. As a result of dynamic IT, the company is able to respond faster to customer’s needs. They are able to develop and integrate applications, data, and workflow to monitor business performance and speed operational adjustment to market changes. During the past year the company started four new departments: kosher foods, organic and natural foods, local foods, and wines. The customer can browse through the website’s (www.freshdirect.com ) food departments and sort products by price or brand. FreshDirect is now has over 500 kinds of cheese, deli meats, and farm-fresh produce. It also stocks brand-name goods such as Kraft cheese slices, Cocoa Puffs, and Chef Boyardee canned pasta. Items are introduced by photographs, ingredients, recipes, and nutrition facts. Everyone now can search FreshDirect web site for valuable information and special recipes. However, if they are not in New York City, they will see the sign: “

”

FreshDirect buys directly from growers or producers that normally sell through distributors, eliminating middle man in the supplying chain. The company’s management recognized the benefits of internet communication with their customers and their suppliers. They offered to provide suppliers with FreshDirect’s market research based on direct contact with the customers. From day one Joe Fedele tried to buy items such as beef, fish, and vegetables directly from the growers and producers eliminating distributors from the supply chain. He also encouraged them to put their own brand names on the labels. He introduced the local suppliers to New Yorkers as the source of the seasonal food. He also arranged payment to suppliers in three-four days verses 35 days typical for the industry. FreshDirect claims that as a result of direct communication, suppliers charge significantly lower prices than they charge local supermarkets.

Even though the high technology is applied through the order processing, all key positions are controlled and operated by people. From the moment the customers place orders and process payments, the orders are aggregated by the delivery time and location through the SAP system. The orders are then sent to the production floor, where food specialists prepare them strictly by the written instruction and label them with bar code




stickers. Bins of products then travel on a conveyor belt past a worker. A light shows the worker how many of a certain product to grab to fill an order and which bin the product is in. After all the items in an order are placed in a packing box, they are repacked and sorted into one of ten delivery bays, where they board a temperature-controlled FreshDirect truck. This flow is shown in Figure 4.

Point of Sale

Customer Data

ProductData

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Production Reporting

Resource Planning

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Figure 4. FreshDirect Order-Operation Flow

The CEO of FreshDirect, Dean Furbush, recognizes the current operations as completely reliant on the company’s software platform. Data on sale, supply chain, manufacturing procedures, finances, human resources and other business components is sorted by Business Intelligent (BI) systems. FreshDirect’s BI systems has the classic three part structure: data aggregated from operational applications, data is integrated from data warehouse to be examined, and data is analyzed based on decision parameters and reported to the users – right to their computers. BI gives Dean Furbush information about the groceries to be ordered, when they must be delivered, and customers’ preferences. The BI systems make it possible to use tools from several vendors. FreshDirect applies Crystal Report for their analysis. The possibility to keep track of customers and analyze their preferences turned on line FreshDirect into “shop around the corner”.

FreshDirect is not the first company that followed the great internet grocery scheme, but it is eager to avoid the Webvan mistakes. The first one was Webvan. However, Webvan did not have the food experts as a part of their team. They didn’t want to be in the grocery business, but they saw it as the “last mile to consumer’s home”. Louis Border, the creator and founder of Webvan stated that “Groceries, as an ongoing ‘replenishment’ purchase, would provide the base load for delivering a plethora of products bought online.” He described a vision of carrying a million stock-keeping units in his business plans. Webvan reproduced the typical business store carrying about 25,000 different packaged items and less than 2,200 perishable foods (mostly fruits and vegetables). Their goal was to roll out into 26 markets. Spending more than one billion dollars on distribution facilities in seven cities, Webvan closed its operation 16 months later.



FreshDirect learned from Webvan’s mistakes. In oppose to Webvan’s free delivery services for unlimited order size, FreshDirect charges $ 3.95 for delivery (no tips are allowed) and requires $ 40.00 minimum order. The delivery time is scheduled for next day as oppose to the same day delivery (initially within 30-minutes window) promised by Webvan. In addition, FreshDirect organizes their delivery time during the lowest rush hours: between 8p.m. and 10p.m. during week days and Saturday mornings.

The main success of FreshDirect delivery model is the location of its processing plant. Because more than 4 million people are living in less than a 10-miles radius, FreshDirect can average up to 10 delivers per hour with a two-person crew. Webvan delivery had never exceeded three deliveries by single driver per hour. Forrester Research identified the FreshDirect business model as the model that makes sense within the context of New York, in particular, because it's a city where it has been very difficult to find quality fresh produce and meats without paying “exorbitant prices.”

FreshDirect has 250,000 registered customers, which place up to 23,000 orders per week. FrshDirect can be recognized as one of the most dynamic companies. In three years they were able to increase their annual sales by almost 100%, gaining 25% revenue per month [14].They opened new product areas for their customers, such as Kosher, Organic and Local foods, being extremely relevant to contemporary diets. They introduced local foods by seasons, influencing the consumer’s culture at the same time. Their website became the source of valuable information and open cookbook to their customers and other people that live outside of their delivery zone. FreshDirect’s recipes are discussed on the internet by their customers and it also became part of New York’s culture. The popularity of their service is growing with the average size of the customers orders- from $78.00 in 2002 it grew up to $110.00 in 2005 [14]. At the same time their delivery price has not increased. The operation structure of FreshDirect is processing up to 1 million items per week. FreshDirect annual sales are shown in Figure 5. They claim that their processing facility has reached 30% of its capacity, which means there is place to grow before they can open another processing facility. Does it mean that for another year they will stay local? Today FreshDirect has 1400 employees, 400 of whom are the manufacturing workers, 300 delivery drivers and 43 IT specialists.



020406080

100120140160

2003 2004 2005

Annual Sales

$ millions

020406080

100120140160

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$ millions

Figure 5. FreshDirect Annual Sales [15]

Nagarjuna Fertilizers and Chemicals Ltd. Gaining a Competitive Advantage in Rural India

Nagarjuna Fertilizers and Chemicals Ltd. (NFCL) is an Indian company that has used information technology to gain a competitive advantage in the fertilizer market in the Indian state Andhra Pradesh. NFCL has used a differentiation strategy, as described by Porter [1], to gain their advantage by creating a web site to service and market a rural region of India. They have differentiated themselves from their competition by creating additional value for the rural farmer.

India’s Fertilizer Industry

India is no stranger to famine. In 1943 British-ruled India was the site of the world’s worst recorded food related disaster. An estimated four million people died from hunger that year alone. Although several factors contributed to the starvation, food shortage was a contributor. Haunted by these events, the Indian government, which was established when the British left in 1947, placed food security high on its agenda. Despite the concern, little improvement to food production took place between 1947 and 1967 and starvation deaths were still being reported in the newspapers. In an effort to change this trend, India started what they called a Green Revolution in 1967 [16].



India’s Green Revolution had several elements that contributed to its success. Some of the elements included the continued expansion of farmland, double-cropping in which two farming seasons occur rather than one, and the use of genetically improved seeds. The Green Revolution initiatives resulted in a record grain output of 131 million tons in 1979, establishing India as one of the world’s biggest agricultural producers [16] .

India’s fertilizer industry also played a vital role in sustaining the Green Revolution and achieving self-sufficiency in food-grain production. India had become the third largest producer and consumer of fertilizer in the world with 60 large plants manufacturing a wide range of fertilizers. India is now poised to enter a second Green Revolution with the Indian government aiming to double the food production by 2010-2012 and again the fertilizer industry expects to play a significant role [17].

The Indian fertilizer industry is not without its challenges. Sales and marketing fertilizer is one of their biggest challenges which include, price regulations, broad consumer segments with varying requirements and seasonal demands, product differentiation since fertilizers are typically a commodity, low level of customer knowledge and information, and a vast geographical area to market [17]. These challenges must be address in order for a company to be successful in the Indian fertilizer industry and gain a competitive advantage.

Nagarjuna Fertilizers and Chemicals Ltd.

NFCL was founded in 1976 in Hyderabad, India as part of the Nagarjuna Group. The company produces fertilizer and farming related products and services including ammonia and urea macro/micro fertilizers, farm management services, and micro irrigation solutions [18]. NFCL markets products in 14 states through 22 area offices. NFCL has more than 8500 dealers and 183 warehouses [19]. The financial performance for NFCL over the past several years is shown in Figure 6.



55.25

1266.39

March 2005*

113.546.539.70(127.47)#17.43Net Profit**

561.61502.84454.94215.44359.13Operating Profit**

1437.061217.181064.76752.221082.12Net Sales**

March 2000March 2001March 2002March 2003March 2004Year End

55.25

1266.39

March 2005*

113.546.539.70(127.47)#17.43Net Profit**

561.61502.84454.94215.44359.13Operating Profit**

1437.061217.181064.76752.221082.12Net Sales**

March 2000March 2001March 2002March 2003March 2004Year End

* Projected** In Crores (in 2005yr Rs 1 Crores = $0.23M)# Loss due to two highly capitalized projects - the 1015 MW power plant at

Mangalore in Karnataka and the 6-million tonne per annum refinery project at Cuddalore in Tamil Nadu. NFCL restructured to reverse-mergeprojects into Nagarjuna Group

NFCL Financial Performance

Figure 6. NFCL Financial Performance [18] [20] [21]

Nagarjuna Fertilizers and Chemicals Ltd Business Objectives

In the late 1990’s, NFCL restructured their business and operational objectives to grow the base of the company. NFCL wanted to move away from solely a product oriented approach to more of a product and service approach. Examples of the services include soil testing and agricultural consulting to increase farmer’s productivity and earnings. The operational changes at NFCL included an improvement in the quality of marketing, a more efficient distribution of products, a more effective utilization of resources and cost control, an improvement in sales productivity, and an improvement in customer service [19]. These changes were necessary for NFCL to achieve the desired growth, efficiencies, and competitive advantage they were seeking. To meet many of these objectives, NFCL turned to information technology.

NFCL realized that information technology could help the company in many ways. NFCL believed information technology could benefit planning, business transactions, productivity, and customer service. Beginning in 1998, they began the implementation of two major information technology initiatives. An enterprise resource planning system, SAP R/3 4.0b, was to be used to improve planning, business transactions, and productivity [19]. In addition, an agricultural portal called i-Kisan was to be created to market and service the rural farmer through internet kiosks [22]. Both information technology initiatives went live in 2000 [19].

i-Kisan Agricultural Portal

NFCL used the i-Kisan Agricultural Portal to differentiate themselves from their competition and add value to their customers – the rural farmer. i-Kisan would be used



to provide customer service, product selection, local market conditions, weather conditions, advice on agricultural prospects, and counseling to the farmer in addition to exposing them to the agricultural products and services sold by NFCL. They believed India’s farmers were at a disadvantage compared to their counterparts elsewhere in the world. NFCL believed the i-Kisan would help close the gap that existed between India’s agricultural output versus the potential [19].

i-Kisan.com is not only an example of how a company can differentiate itself from the competition, it is an example how differentiation can be achieved using information technology. i-Kisan applies information technology to benefit the rural farmer in India by using the internet as a tool to efficiently communicate with them and provide e-commerce. NFCL envision rural prosperity through enhanced knowledge and technology brought to the farmer through i-Kisan. In doing so, NFCL exposes their customer to NFCL’s suite of products and services [19].

i-Kisan is deployed to rural India through internet kiosks. NFCL has established about 100 i-Kisan equipped kiosks throughout the state of Andhra Pradesh in villages with populations around 3000-5000 people [19]. In addition, 100 sites were also established in Tamil Nadu, Karnataka, Maharashtra, Gujarat, Madhya Pradesh, Haryana, Rajasthan and Orissa to support the cotton farmer [22]. The kiosks are operated by i-Kisan personnel to support the users.

i-Kisan provides many elements of information for the customer. Figure 7 shows the model for services.

iKisan Services Model

iKisanServices

Crop Information Output Agencies /Input Suppliers Info

AgriculturalBusiness

Infomormation

Crop DiagnosticServices

ExpertServices

WeatherInformation

http://www.ikisan.com



Figure 7. i-Kisan Service Model [17]

i-Kisan is used to add value to NFCL as defined by Porter’s Value Chain model [1]. As Porter’s model shows in Figure 2, the value of a company is the collection of its activities and processes. For NFCL, i-Kisan added value to the “Marketing and Sales” element of the Value Chain model. Using information technology, i-Kisan was able to create a competitive advantage for NFCL.

Competitive Advantage Created for NFCL by i-Kisan

Applying information technology, NFCL believes they have created a competitive advantage through their creation of i-Kisan agricultural portal [23]. A limited evaluation of the fertilizer market in the Andhra Pradesh region appears to bear this out. No other competitors were found to be active in this region. NFCL was first to the market with an agricultural portal [23].

Although i-Kisan marketing and sales approach could be duplicated by a competitor, the immediate future appears to be bright for i-Kisan. NFCL signed a contract with the Indian government in February 2005 to expand i-Kisan to 1200 additional kiosks throughout the Andhra Pradesh region. In addition, i-kisan.com and the Indian government plan to grow the usage to 6000 more kiosk sites [19]. NFCL is also exploring i-Kisan expansion into other agricultural-type industries such as dairy and poultry [24].

Difficulty Creating and Sustaining a Competitive Advantage

Creating a competitive advantage using information technology is difficult, and many believe that the opportunity no longer exists [25]. Since the dot-com boom of the late 1980’s, opportunities for information technology driven advantages have dwindled. Information technology is highly replicable. As its power and presence have grown, so has the ability to catch up quickly. When a window of opportunity to use information technology is open, it usually shuts quickly [25].

The lack of success in using information technology for a competitive advantage could be blamed on the limited emphasis most companies place on technology. “Maybe” 5% of Fortune 2000 companies could be characterized as leading-edge technology adopters. 15 to 20% just keep pace with current technology and remainder lag behind [26]. Without the proper focus, information technology will not yield a competitive advantage.

Information Technology can be used to Create a Competitive Advantage

Jack Welch believes, “strategy is a living, breathing, totally dynamic game” [9]. More and more companies demonstrate their ability to apply dynamic strategy in their business development by analyzing their customers’ needs and available information.



The companies in the case study gained their success through three strategic steps:

setting up goals and studying targeted markets bringing best experts to run the business using standard available IT tools implementation of the best knowledge and practices into their businesses.

Both cases clearly demonstrate the importance of information technology for business success. Information technology was successfully integrated into the businesses. The case studies show how information technology serves as a value-adding mechanism for the implementation of a smartly chosen strategy.

Recognizing the need for dynamic information technology the companies are able to keep up with the fast developing competition [27]. To stay competitive, companies have to determine the next steps in information development. FreshDirect was focused on service improvements and NFCL was focused on expanding their business through internet-equipped.

Conclusion

Information technology can be used by in a varied assortment of industries to gain a competitive advantage. The use of information technology as a competitive weapon is typically thought of as being applied by large or technology driven companies, such as Wal-Mart and Dell. The case studies presented in this paper, however, demonstrate that the technology can be applied successfully by smaller companies and in other markets as well. With FreshDirect, the study showed that if a start-up company applies information technology appropriately it can be used to create a competitive advantage. This was true despite a recent failure by a company with the same business venture. In NFCL, demonstrated how an established company could use information technology to gain a competitive advantage in a low-technical business field. Both companies were able to use information technology to add value to their company and for their customers.


References:

1) Porter, Michael, Competitive Advantage, The Free Press, New York, 19852) Porter, Michael, “Michael Porter on Strategy,” Leadership Excellence, Jun 2005

pg 143) Porter, Michael and Millar, Victor, “How information gives you a competitive

advantage,” Harvard Business Review, Jul-Aug 19854) http://www.quickmba.com/strategy/competitive-advantage/ 5) Rowsell-Jones, Andrew, “The Competitive Edge,” CIO Magazine, 03 August

20056) Kaplan, Jeffery, “Optimizing Business Performance: Using IT for Competitive

Advantage, Part III ,” CIO Magazine, 03 July 20037) Kempiak, Mike, Fox, Max, “On-line grocery shopping: Consumer motives,

concerns and Business models”, www.firstmonday.org, 20038) Kirkpatrick, David, “The Online Grocer Version 2.0.” Fortune November 25,

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stalin.pdf18) http://www.nagarjunafertilizers.com 19) Stalin S., Gaining Competitive Advantage in Marketing and Distribution through

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20) http://www.chemchannels.com/chemchannel/homepage/General/analysis/ Nagarjun.htm

21) Bureau, “Nagarjuna Fert To Reverse-merge Into Corporation; Swap At 1:1,” The Hindu Business Line, 27 May 2002

22) Reddy, Ch. Prashanth, “Internet Kiosks To Help Cotton Farmers — ECIL To Offer Technology, Ikisan.Com Content,” The Hindu Business Line, 25 April 2005

23) Sridhar, Kala Seetharam “Corporate diversification, again?,” The Hindu Business Line, 12 November 2001

24) ICT Promises More Possibilities For Corporates In Rural India,” Financial Express 24 July 2005

25) Carr, Nicholas, “IT Doesn’t Matter,” Harvard Business Review, May 2003, pp 41-49

26) Huffman, Thomas, “Panelists Debate Whether IT Offers Competitive Edge,” Media G8way, 11 February 2004

27) J. Gantz, F. Gens. Dynamic IT: Riding the Next Wave of Business Innovation and Productivity. Network World, October 4, 2004

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Strategy is the prerequisite for establishing competitive …lacity/olpaperf05g2.doc · Web viewMichael Porter believes competitive advantage develops out of the value a company creates