Information technology (IT) has historically influenced organizational performance and competitive standing. However, this means of obtaining market position provides only temporary benefits, considering the ability for competitors to rapidly implement and imitate hardware and software. The following discussion presents generic strategies for obtaining competitive advantage and the role of IT in competitive positioning and the integration of data warehousing with the various views of competitive advantage.

Applying an IT strategy for competitive advantage
Traditionally, research in strategic IT and its competitive impact has focused on the ability of IT to add economic value to a firm by either reducing a firm’s costs or differentiating its products or services. Cost leadership means being the low-cost producer in an industry. The company that is recognized as the cost leader is capable of offering the same products as its competitors at lower prices or offering better quality products at an equal price. Differentiation means being the producer of unique value for the product in the industry. The unique value of products leads to customer acceptance of a price higher than that of the standard product.

To achieve cost leadership, a company must be the cost leader yet maintain parity on the basis of differentiation relative to its competitors. To implement the differentiation strategy, a company must sell its product at a premium in order to cover the costs that make the product unique. A third strategy, focus, utilizes the above two approaches but targets a well-defined segment of the market.

While cost leadership or differentiation may lead to competitive advantage, it may be only temporary or unsustainable. Sustained competitive advantage is recognized when a firm is implementing a strategy not simultaneously implemented by many competing firms and when these other firms face significant disadvantages in acquiring the resources necessary to implement this strategy. Competitive advantage can be short-lived. A firm’s above-average performance can be expected to collapse toward the averages.

Implementing a data warehouse for competitive advantage
Machines can be purchased; therefore, any strategy that exploits just the machines themselves can probably be imitated and is thus not a source of sustained competitive advantage. Organizations, however, often see their only source of competencies as their technologies and skills, ignoring business practices that have developed over time to determine market needs. Yet it is the exploitation of these practices that can be critical to an organization’s success. Information systems (IS) that are an integral part of management decision-making may hold the potential for prolonged competitive advantage.

A data warehouse by itself does not create value, but value comes from the use of the data in the warehouse. A data warehouse is a tool allowing decision-makers access to strategic information in a timely fashion. This in turn can result in more effective decisions and a stronger market position. The information may be in support of either a low cost strategy or a differentiation strategy.

In support of a low cost strategy, the data warehouse can provide savings in billing processes, reduce fraud losses, and reduce the cost of reporting. The data warehouse can provide analysts with precalculated reports and graphs. This increases the productivity of business analysts. In the production process, a data warehouse can be used to extract process data and improve operational efficiency.

However, data warehouses are still an expensive solution and typically found in large firms. The development of a central warehouse is a huge undertaking and capital intensive with large, potentially unmanageable risks. Thus, a more prevalent approach is building data marts. Data marts are designed for strategic business units or departments and are smaller and more affordable.

Data warehouse projects often begin in sales and marketing due to the financial benefits that can be derived in these areas. These customers may be industrywide or concentrated in a niche market. Differentiation occurs as an organization learns its customers and provides them with a superior product or service. The warehouse can provide the information necessary for determining customer needs and habits so that individual service can be tailored to the customer. This aids efforts in customer attraction and retention. Retention is of utmost importance in many industries. It is thought to be five times more difficult and expensive to attract new customers than to retain existing ones. As competition increases and technology advances, customers can demand customized quality products often with very low switching costs.

Businesses can use information to individualistically serve their customers and, with the aid of information technology, may be able to provide mass customization. Companies are now able to mass-produce their product, serving customers industrywide, yet customize the product to fit the individual demands of consumers. A combination of cost leadership and differentiation strategies is necessary to obtain and sustain a competitive advantage in this newly defined market.

This move to mass customization forces firms to differentiate their product, but at the same time, it keeps operating costs low. An example is Dell Computers, Inc. When experiencing financial difficulties, Dell was able to implement IT to contain operational costs and yet provide a product that was essentially designed by the customer. Data warehouses enable new perspectives on operational effectiveness and customer behaviors that can lead to increases in market share while maintaining processing efficiencies.

Planning the data warehouse for competitive advantage
Most companies can benefit from a data warehouse when the proper tools are in place and users are trained in analysis of results. However, some companies may gain a greater return on their investments than others and some companies may find that only certain functional areas can justify the expense of such an endeavor. Some general guidelines are presented that may help the evaluation process.

First, an organization-wide analysis should articulate the mission and the company’s long-term goals. The company’s position in the market is also necessary. A basic SWOT (strengths, weaknesses, opportunities, and threats) analysis will guide the IT department in the determination of the greatest return on investment (ROI). It should be determined if the firm is a cost leader or a differentiator and where the market is focused.

Cost leaders may want to begin their data warehousing projects with data that will guide decisions in operational efficiency. For example, BP International’s data warehouse collects data from multiple systems to assist managers in the planning process as well as to monitor current projects. Others are using data warehousing to reduce scrap in the production process. CA One Services, an operator of more than 200 food and beverage retail shops in large airports, plans to use data warehousing tools and techniques to control labor costs by utilizing payroll data and time and attendance software.

In the case of the differentiating firm, it may be useful to establish a data mart for product research and development or consumer behavior. Customers’ characteristics and buying habits can be analyzed from multiple perspectives, and patterns can be detected through the use of data mining tools. A French mail-order firm is using data mining on the Internet. Intelligent shop assistants attempt to boost sales by displaying items related to the one the buyer has just ordered. Increased accuracy in buyer predictability allows mass customization and greater customer satisfaction. Sharing of information between operational systems and functional areas of the firm provides more efficient problem-solving capabilities. With enhanced problem-solving capabilities, the product can be improved faster than the competition.

As a second step, the intensity of transactions and the strategic impact of transactions need to be evaluated. Intensity of the transaction data refers to the number of transactions and frequency of occurrence. Strategic impact refers to the amount of reliance the organization has on IT for success. Those firms with high intensity of transactions and heavy reliance on IT may benefit the most from a data warehouse. However, those with low intensity and little IT reliance will not derive the same benefits.

Those high in one area but low in the other may want to consider a smaller financial investment by implementing a data mart. The banking industry offers an example of high intensity of transactions and heavy reliance on IT. Data warehouses are providing to banks the ability to create and target new products and services more accurately and profitably than the conventional "shotgun" marketing methods.

A third step in assessing the potential benefits of data warehousing is an evaluation of the company’s stage in the product life cycle. Whether or not the organization is developing new products or enhancing existing products may affect the degree of competitive advantage a data warehouse offers. Two views of competitive advantage help to explain the distinction.

The resource-based view (RBV) suggests that firms build competitive advantage upon tacit knowledge to avoid imitation by competitors. Knowledge is tacit when experts within the firm have an incomplete understanding of the causes that drive the performance of its products and processes. It is an intuitive understanding and difficult to articulate. When knowledge is tacit, it reduces the amount of information that employees can share with their peers in other organizations or with suppliers and customers who might deliberately or inadvertently pass the information.

In contrast, promoters of the dynamic capability view (DCV) of competitive advantage suggest that explicitness rather than tacitness enhances a firm’s ability to transform and renew existing technological knowledge. This has important implications for data gathering and information sharing. While complexity and tacitness create barriers to product imitation, the ability to utilize and transfer information efficiently may accelerate problem solving and enable a firm to improve existing product performance faster than competitors with poorly articulated knowledge.

A data warehouse has the ability to reveal causal relationships that may be difficult to recognize even by experts. The warehousing technology has the potential for disseminating this information throughout the firm and its business alliances. Thus, an organization with a product in its later stages of a life cycle may derive greater benefit from the data warehouse than an organization that is realizing new product advantages.

Lastly, a review of the relationships with existing and potential business partners should be evaluated. While data warehouses are touted as strong analysis tools for enhancing customer service and recognizing operational inefficiencies, they may also be a means of strengthening business partner relations that lead to a competitive edge. Wal-Mart is an example of an organization that freely shares data with its business partners. The major retailer collects sales data at its nearly 2,800 stores, super centers, and wholesale clubs and maintains that data in its more than 24TB-size warehouse. The company’s 4,000 suppliers have access to the warehouse and are jointly responsible for managing Wal-Mart’s inventory and shelf stock.

A review of interim knowledge-sharing routines suggests that a firm’s alliance partners are, in many cases, the most important source of new ideas and information that result in performance-enhancing technology and innovations. It is suggested that alliance partners who are particularly effective at transferring knowledge that is tacit, sticky, and difficult to codify (also termed "know-how") are likely to outperform competitors who are not.

Business partners can be one of the most important knowledge domains and may drive the direction of data warehousing to interim knowledge management systems. For example, Owens & Minor, the largest U.S. distributor of national name brand medical and surgical supplies, has signed a strategic data sharing agreement with Premier, Inc., an alliance of hospitals and healthcare systems. The relationship establishes a new level in cost reduction and operational efficiency within the healthcare setting.

Conclusion
The use of data warehouses touts multiple benefits for improved organizational efficiency and effectiveness. The ability to disseminate knowledge throughout an organization and even between business alliances enhances the decision-making process and thus provides a competitive edge. The prevailing benefits of a data warehouse can be influenced by the organizational positioning in the industry, the degree of reliance on information technology within the organization, the product life cycle stage, and the relationships with business alliances. An analysis of each of these factors can help determine the advantages to be realized from implementation of a data warehouse or data mart.

There are those who suggest that data warehouses provided strategic advantage to many of the early adopters but that it is now becoming increasingly necessary for many organizations to utilize data warehousing to simply maintain their position or survive. Technology alone cannot provide sustained competitive advantage. Sustained competitive advantage can come only from an organization’s knowledge workers interpreting, sharing, and acting on the information and knowledge that a data warehouse can provide. However, with the vast amount of data held in a data warehouse and the tools available for mining this data, the decision-maker is armed for battle.

Monica Parzinger is an assistant professor in the Department of Management at Clemson University in Clemson, SC. Mark N. Frolick is an associate professor of management information systems at the University of Memphis in Memphis, TN.