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Seeking strategic advantage in the post-net era:viewing ERP systems from the resource-based
perspective
Jon W. Bearda,*, Mary Sumnerb
aWebster University, 898 Prestonwood Dr., Edwardsville, IL 62025-4136, USAbDepartment of Computer Management and Information Systems, Southern Illinois University Edwardsville,
Box 1106, Edwardsville, IL 62026-1106, USA
Received 25 March 2002; accepted 25 February 2004Available online 17 April 2004
Abstract
The purpose of this research is to explore whether enterprise resource planning (ERP) systems can
provide an organization with a sustained competitive advantage. Using the VRIO framework of the
resource-based model of competitive advantage, four questions are posed to consider this issue. Is
the ERP system valuable? Is the ERP system a resource that is heterogeneously distributed across
competing firms? Is the ERP system imperfectly mobile? And, is the firm organized to exploit the
full potential of its ERP system? An examination of the existing research suggests that ERP systems
may not provide a competitive advantage based upon the premises of system value, distribution, and
imitability. This is largely due to the common systems approach used for the implementation of
most ERP systems. Instead, the source of competitive advantage may lie in the careful planning and
successful management of ERP projects, refinement of the reengineering of the organization, and thepost-implementation alignment of the ERP system with the organizations strategic direction.
Suggestions for future research are offered.
q 2004 Elsevier B.V. All rights reserved.
Keywords: Enterprise resource planning; Resource-based model; VRIO model; Competitive advantage; Common
systems
The capture, processing, storage, and dissemination of data and information to
enhance managerial decision-making have been significant motivators for integrated,
0963-8687/$ - see front matter q 2004 Elsevier B.V. All rights reserved.
doi:10.1016/j.jsis.2004.02.003
Journal of Strategic Information Systems 13 (2004) 129150
www.elsevier.com/locate/jsis
* Corresponding author.
E-mail addresses: [email protected], [email protected] (J.W. Beard); [email protected](M. Sumner).
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organization-wide information systems (IS). These motivators have driven the develop-
ment of ever-more-sophisticated hardware environments (such as upward-compatible
families of mainframe computers, mini-computers, microcomputers, and networks) and
increasingly complex and elaborate software environments (such as advanced generations
of programming languages, database management systems, and the Internet). Further, the
alignment of an IS with the strategic goals and operational objectives of an organizationhas been an important issue through the 1980s and 1990s ( Brancheau et al., 1996). This
desire dates back to the mid-1960s with the earliest conceptions of organization-wide IS.
Unfortunately, until recent years the processing power of the hardware and the complexity
and sophistication of the software have not been sufficient to meet these expectations.
Even the promise of the Internet has not been sufficient to meet these requirements,
leading, at least in part, to the demise of the Internet boom. A new era, sometimes
described as the Post-Net era, is emerging creating new challenges for the integration of
IS and organization strategy.
Today, enterprise resource planning (ERP) systems are one of the most significant
business software investments being made in this new era. Davenport (1998) has declared
that the business worlds embrace of enterprise systems may in fact be the most important
development in the corporate use of information technology in the 1990s (p. 122). Mabert
et al. (2001) noted that industry reports suggest as many as 30,000 companies worldwidehave implemented ERP systems. AMR Research has projected as much as $180 billion in
global investments in ERP (as cited in Kalling, 2003). While not as glamorous as the
Internet and electronic commerce, ERP systems offer the advantage of providing
organizations with a single, integrated software system linking the core business activities
such as operations, manufacturing, sales, accounting, human resources, and inventory
control (Lee and Lee, 2000; Newell et al., 2003; Shanks and Seddon, 2000). As Brown and
Vessey (2003) note, this integrated perspective may be the first true organization-wide
view available to management. And, with the increasing awareness of the availability and
capability of information technology (IT), particularly following the Internet boom,
organizations are seeking every benefit that can be gleaned from the technology.
Further, given the IT spending frenzy of the Internet boom and Y2K remediation,
organizations are taking greater care in how they allocate their technology dollars. ERP
research has explored how these types of systems contribute value to an organization(Markus and Tanis, 1999; Ross and Vitale, 2000; Somers and Nelson, 2001), as well as
how they should be integrated with already-existing IT resources ( Hayman, 2000). Still,
large and small companies continue to invest between $300,000 and hundreds of millions
of dollars in ERP software and accompanying hardware (Markus, 1999), using a variety of
business justifications, including improved productivity, reduced costs, greater operational
efficiency, enhanced customer relationship management, and better supply chain
management (Communications of the ACM, 2000; Brown and Vessey, 2003; Mabert
et al., 2001). In spite of the hopeful nature of ERP investments, many companies have
ended up in litigation over ERP implementation issues (cf. Boudette, 1999; MacDonald,
1999; Nash, 2000) and even bankruptcy (cf. Montoya, 1998; Nash, 2000). Scott and
Wagner (2003) portray organizations as being caught between the perceived need to
implement ERP and the challenge of realizing the benefits from them (p. 287).
Ultimately, for the return on investment in ERP systems to be achieved, these systems
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should yield a strategic advantage. Yet, Kalling (2003) notes that it is still an open question
on whether ERP systems actually produce a competitive advantage.
One challenge to achieving a competitive advantage is that ERP systems impose a
common systems approach by establishing a common set of applications supporting
business operations. In fact, successful implementation of an ERP system typically
requires re-engineering business processes to better align with the ERP software, so thatthe common systems approach is imposed (Brown and Vessey, 2003; Dahlen and Elfsson,
1999). This common structure approach allows for faster implementation of the ERP
system because there are fewer customized pieces to the software. In addition, the limited
customization means that it will be simpler to upgrade the ERP software as new versions
and features emerge over time.
A second related challenge associated with achieving a competitive advantage through
ERP is the significant complexity of the implementation and integration process. It often
takes several years to fully implement the ERP system. This includes integrating ERP with
already-exisiting IS and accomplishing the related reengineering of the organization.
Several additional years may then be required to recover from and fine-tune the
organization following the reengineering process. Concurrently, it takes time to refine the
alignment of organization to the ERP system and to more fully leverage the opportunities
offered by the ERP system. This challenge is represented by the stage theories (cf. Hollandand Light, 2001; Markus et al., 2000).
The focus of this manuscript is whether or not a common systems approach can provide
a competitive advantage when a variety of firms within the same industry adopt the same
ERP software and employ almost identical business processes with similar IS supporting
these processes. In addition, we explore whether organizations can find mechanisms for
gaining a competitive advantage within an environment in which common systems are
being implemented within their industry. One perspective for gaining and sustaining a
competitive advantage is the resource-based model, sometimes called the VRIO model
(Barney, 1999). It is this theoretical perspective that is used to frame our exploration.
1. The resource-based model of competitive advantage
It is clearly recognized that both the external environment (cf. Porter, 1980) and
internal characteristics (cf. Barney, 1991, 1999) have an effect on the level of firm
profitability (Henderson and Mitchell, 1997; Oliver, 1997). The resource-based model of
competitive advantage, also called the resource-based model of superior returns, focuses
primarily on the internal characteristics of a firm. These internal characteristics consist of
both the tangible and intangible semi-permanent assets of the firm ( Wernerfelt, 1984).
More specifically, in the resource-based model the origin of the firms strategy and the
primary source of its financial returns are the unique collection and dynamic management
of a firms resources and its evolving capabilities (Hitt et al., 2003) that create what
Wernerfelt (1984) termed resource position barriers (p. 172). Resources are the
organizational capital, physical, and human inputs into the production process. A set of
resources becomes a capability when they are combined or integrated in the performance
of a task or activity (Hitt et al., 2003). Capabilities, in turn, can develop into core
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competencies that ultimately become the source of competitive advantage over rivals.
Research increasingly supports the contention that a firm must acquire a unique set of
resources and capabilities to successfully compete in the 21st century (Barney, 1999;
Henderson and Mitchell, 1997; Hitt et al., 2003; Oliver, 1997).
In fact, when the external environment is rapidly evolving and in a state of flux, an
internal perspective, such as the resource-based approach, may provide the only stablebasis on which to make strategic decisions (Narayanan, 2001). In other words, when the
marketplace is in transition and the competition is evolving, it is difficult to look outward
for direction or guidance in making strategic decisions. For example, in Porters (1980,
2001) Competitive Forces Model, he identifies five external forces as creating the
environmental stress that should drive a firms strategic choices and actions. These forces
are the bargaining power of suppliers, the bargaining power of customers, the threat of new
entrants to the marketplace, the threat of substitutes, and the competition from within the
industry. Unfortunately, in a dynamic environment, attention to these five forces may not
provide sufficient guidance to make meaningful strategic choices about how to allocate an
organizations resources. Instead, by focusing inward and identifying the particular
strengths of the firm, especially the set of resources and capabilities that are unique,
decision makers in a firm may be able to make superior strategic choices on the allocation
and acquisition of resources and capabilities.
Mata et al. (1995) applied the resource-based model in considering IT and its
contribution to a sustained competitive advantage. Guided by the developed body of
research on the resource-based model from strategic management theory (cf. Barney,
1991, 1999; Wernerfelt, 1984), Mata et al. (1995) presented a model, reproduced and
adapted in Fig. 1, to guide this assessment by asking three questions. The first question is:
Is the resource or capability valuable? A negative response yields an outcome of a
competitive disadvantage, for energy and effort are being spent on a resource or capability
that does not add value to the firm. An answer in the affirmative leads to the second
question: Is the resource or capability heterogeneously distributed across competing
firms? In other words, is the resource or capability differently distributed among
competing firms? An answer of No, meaning that the resource or capability is evenly or
similarly distributed, will yield a result of competitive parity due to the resource orcapability. This suggests that most, or all, competing firms have a similar set of resources
or capabilities. A positive answer will lead to the third question.
Is the resource or capability imperfectly mobile; i.e. is it imperfectly imitable
(Barney, 1986)? Stated another way, is it costly, or even possible, to imitate (Hitt et al.,
2003)? A negative response to this question will yield a result where the resource or
capability can be a source of at least a temporary competitive advantage. In other words,
the resource or capability can be duplicated, but it will take some time to do so. During that
time, the firm will have a temporary competitive advantage. A positive answer to this
question leads to a result where the resource or capability can be a source of sustained
competitive advantage. Therefore, answering in the affirmative for all three questions
suggests that a resource or capability meets the necessary, but not sufficient, conditions to
be a source of a sustained competitive advantage. It is not sufficient because it does not
guarantee a competitive advantage. Bad luck, bad timing, a market shift, and poor decision
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Fig. 1. The resource-based model of sustained competitive advantage (VRIO framework).
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making, among other circumstances, may diminish or eliminate the opportunity for a
competitive advantage (Mata et al., 1995).
Three factors contribute to the creation of an imperfectly mobile resource or
capability. These are the role of history, causal ambiguity, and social complexity.
(These factors are also portrayed in Fig. 1). As described by Mata et al. (1995), history
can increase the cost or difficulty of imitation in two general ways: when a firm is inthe right place at the right time yielding an outcome that other firms cannot
reproduce, and when the resource or capability can be developed only over a long
period of time. Causal ambiguity suggests that it will be difficult, and therefore more
costly, to imitate a firms resources or capabilities when it is difficult to clearly discern
the features of those attributes, i.e. it is not entirely clear what imitating firms should
duplicate (Mata et al., 1995, p. 493). These attributes, sometimes thought of as
invisible assets (Itami, 1987) or tacit attributes (Reed and DeFillippi, 1990), include
features such as organizational culture (Barney, 1986), operating procedures and
routines (Nelson and Winter, 1982), or the many small decisions and actions that make
up the day-to-day operations of a firm (Mata et al., 1995). Finally, social complexity
refers to the relationships a firm has with its suppliers, customers, other organizations,
including competitors, and even among people within the firm. These relationships take
time to build and typically evolve slowly, meaning that they would be difficult toquickly duplicate. These three factors provide additional depth and richness in
elaborating the concept of a resource or capability being imperfectly mobile.
A recent addition to this framework suggests that an additional component is needed to
refine the last portion of the model. Is the firm organized to exploit the full competitive
potential of its resources and capabilities (Barney, 1999, p. 160)? It is also portrayed as is
the resource or capability nonsubstitutable (Hitt et al., 2003)? Complimentary resources
and capabilities, such as the firms formal reporting structure, compensation policies, and
management control systems, in isolation are not sufficient to generate a sustained
competitive advantage. However, when taken together, and in combination with other
characteristics of the resources and capabilities, they do represent a situation where a
resource or capability may result in a sustained competitive advantage (Amit and
Schoemaker, 1993; Barney, 1999). Barney (1999) has named this entire model the VRIO
framework, for Valuable, Rare, Imitability, and Organization. The VRIO framework,portraying the resource-based model as presented by Mata et al. (1995) and refined by
Barney (1999), provides the structure for this exploration.
2. Research questions
The broad research question under consideration is whether ERP systems can provide
an organization with a sustained competitive advantage. More specifically, if ERP systems
are the resource or capability under direct consideration, do they yield a competitive
advantage? This question is approached in both a theoretical and descriptive way. In our
research, we will apply the VRIO framework of the resource-based model of competitive
advantage (Barney, 1999; Mata et al., 1995). Using this VRIO model, the questions related
to ERP systems are:
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1. Is the ERP system valuable? For example, does the implementation of an ERP system
reduce a firms cost below and/or increase its revenues above what would have been the
case if these resources or capabilities were not exploited?
2. Is the ERP system a resource that is heterogeneously distributed across competing
firms? For example, if all competing organizations have implemented ERP systems
then there will be no competitive advantage from ERP, i.e. the ERP resource is notheterogeneously distributed. On the other hand, if the ERP is heterogeneously
distributed across firms, then the resource will be a source of at least temporary
competitive advantage for firms that possess the ERP.
3. Is the ERP system imperfectly mobile? In other words, if firms without the ERP are at
no significant disadvantage in acquiring, developing, and using it compared to firms
that already possess this resource, then it will only be a source of temporary competitive
advantage for the firms that originally implement it. Once the competing organizations
implement ERP systems, the advantage will subside.
4. Finally, is the firm organized to exploit the full competitive potential of its ERP system?
For example, is the firm organized to take advantage of the benefits to be gained from
an ERP system?
3. Methodology and review of the erp literature
3.1. Methodology
The methodology used in this study is content analysis. Articles published between
January 1998 and March 2002 which appear in refereed journals and proceedings in IS on
the general topic of ERP systems were selected for review. This period of time was
selected because ERP systems were achieving a rapidly growing level of organizational
penetration, organizations were realizing some benefits from already-installed systems,
and it coincides with the dramatic effects of the Internet boom and Y2K. The journals used
were based on the list of MIS journals reviewed in a number of research studies
(Mylonopoulos and Theoharakis, 2001; Whitman et al., 1999; Hardgrave and Walstrom,
1997; Walstrom et al., 1995; Holsapple et al., 1994; Gillenson and Stutz, 1991). Inaddition, several new journals were included in the sample population.
Using the components of the resource-based model as a framework to guide our query,
we explore whether ERP systems enable organizations to achieve a competitive advantage
and how this can be achieved. Each of the articles was reviewed in order to obtain
information related to the research questions. With respect to the first question, Is the
ERP system valuable? we looked for evidence of financial benefits, including return on
investment, reduced costs, increased revenues, and payback. In terms of the second
question, Is the ERP system heterogeneously distributed across competing firms? we
looked for evidence of the extent of coverage and usage of ERP systems across industries
and within industries. In terms of the third question, Is the ERP system imperfectly
mobile? we looked for evidence indicating whether ERP implementations were gettingeasier, faster, and less expensive-largely as a result of an accumulated knowledge base,
vendor support, and industry and consultant experience. Finally, for the fourth question,
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Is the firm organized to exploit the full competitive potential of its ERP system? we
looked for evidence of management strategies contributing to the successful implemen-
tation of ERP systems and software.
3.2. ERP system value
The first question to consider in assessing the strategic impact of ERP is whether the
ERP system is valuable. This can be evaluated by whether the exploitation of ERP systems
can reduce a firms costs below what would have been the case if the ERP and its
capabilities were not implemented. The studies reviewed here indicate that measuring an
ERPs benefits is a long-term proposition, and that these measures are largely value-added
in nature.
Mabert et al. (2001) report that companies view the standardization and integration of
business processes across the enterprise as a key benefit. As one of the executives stated,
ERP is the digital nerve system that connects the processes across the organization and
transmits the impact of an event happening in one part to the rest accurately (Mabert et al.,
2001, p. 69). Of the tangible benefits, the companies studied most often reported lower
inventories, shorter delivery cycles, and shorter financial closing cycles. However, the
ERP system did not lead to reductions in work force or savings in operational costs in theshort term.
In a broader analysis of the business benefits of enterprise systems, Davenport (2000)
points to cycle time reduction (e.g. cost and time reductions in key business processes),
faster information transactions (e.g. faster credit checks), better financial management
(e.g. shorter financial closing cycle, improved management reporting), and laying the
groundwork for electronic commerce (e.g. providing the back office functions for Web-
based product ordering, tracking, and delivery processes), as well as a better understanding
of key business processes and decision rules (Davenport, 2000, pp. 7 8). Laughlin (1999)
suggests that the business justification for ERP includes both hard dollar savings
(e.g. reductions in procurement cost, inventory, transportation, increased manufacturing
throughput, and productivity improvement) and soft dollar savings (e.g. revenue growth,
margin enhancement, and sales improvements). Yet, as with Mabert et al. (2001),
Laughlin argues that there is no evidence of ERP providing headcount reduction.According to Piturro (1999), when an ERP works well it can speed up business
processes, reduce costs, increase selling opportunities, improve quality and customer
satisfaction, and measure results continuously (p. 48). However, she notes that when it
doesnt work well, it can be a very expensive way to gum up the works.
On the question of the business benefits of ERP, managers mention many productivity
enhancements, including the ability to calculate new prices instantly, more accurate
manufacturing cost comparisons among different facilities, better electronic data
interchange with vendors and suppliers, improved forecasting, and the elimination of
bottlenecks and duplicative procedures (Plotkin, 1999). Additional benefits deal with
eliminating the redundancies associated with legacy systems. In most organizations, vast
amounts of data are stored in hundreds of different computer systems. For
example, at Owens Corning, there were 200 legacy systems, most running in
isolation from one another. Eastman Kodak had 2600 different software applications
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(Palaniswamy and Frank, 2000). Davenport (1998) noted that if the systems are
fragmented in an organization, then the business is fragmented. Integrated systems help
organizations reduce cycle time, reduce inventories, share information across the
organization, and provide management with a more complete perspective on business
operations. Additionally, companies with ERP systems have made improvements in cross-
functional coordination and business performance (Oliver, 1999).Other benefits, such as the impact of better business rules and the effect of access to
better financial information, are difficult to directly measure. Yet, business returns can
come from better customer relationships management (CRM) and eCommerce capabilities
that enable customers to create and to track orders on-line. Both of these capabilities, as
well as many others, must be built upon the foundation of integrated ERP systems. This
foundation must be built before some of these strategic benefits are possible (Oliver,
1999). After examining a number of articles dealing with the benefits of ERP, we have
summarized some of the findings in Table 1.
Markus et al. (2000) echo that the larger value of ERP is measured when the
organization captures actual business results (e.g. reduced inventory costs), but these
results dont occur until the phase in which the systems have already been successfully
implemented and integrated into business operations-in what Markus et al. (2000) call the
onward and upward phasea stage three evolution. Holland and Light (2001) also arguethat the business benefits of ERP occur in a third stage of evolution, during which
innovative business processes are thoroughly implemented.
Based upon the evidence collected in prior studies, ERP systems may not necessarily
directly provide firms with a competitive advantage through the reduction of these firms
costs below or by increasing these firms revenues above what would have been the case if
these systems had not been implemented. Instead, the advantages cited are largely value-
added measures, such as increased information, faster processing, more timely and
accurate transactions, and better decision-making. In sum, therefore, published research
suggests that ERP systems are valuable to the firms that implement them.
3.3. ERP systems distributed across competing firms
The second question posed in the VRIO framework of the resource-based model iswhether ERP systems are heterogeneously distributed across competing firms. If ERP
systems are heterogeneously dispersed, i.e. if ERP systems are unevenly implemented,
then they may provide at least a temporary competitive advantage for those that implement
ERP systems over those who do not. Given the growth of the ERP industry, it may be an
easy question to answer.
The ERP market is one of the fastest growing markets in the software industry.
According to industry reports, at least 30,000 companies worldwide have implemented
ERP systems (Mabert et al., 2001). The ERP market is projected to grow from a current
$15 billion to $50 billion in the next five years and to reach $1 trillion by 2010 ( Bingi
et al., 1999). AMR Research has projected the global ERP market at $180 million by
2003 (as reported in Kalling, 2003). This growth will be reinforced by the estimated
70% of Fortune 1000 firms that have installed or will install ERP systems during this
time frame.
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Table 1
Business benefits of ERP
Company Business benefits Source
Fujitsu 90% reduction in cycle time
for quotation from 20to 2 days
Jensen and Johnson (1999)
50% reduction in financial
closing times from 10 to
5 days
Boeing Simplification of processes Jensen and Johnson (1999)
Pacific coast feather company Inventory reduction; improved
customer service
Jensen and Johnson (1999)
IBM storage products company Time for checking customer
credit upon receiving an
order was reduced from
15 to 20 min to instantaneously
Jensen and Johnson (1999)
Responses to customer billing
inquiries occurred in real
time (vs. 1520 min)
Entering pricing data into
the system took 5 min where it took
8 days beforehand
Shipping repair and replacement
was done in 3
days, compared to as
many as 44 days
Earthgrains On-time product delivery rate
increased to 99%
Bingi et al. (1999)
Operating margins improved from
2.4 to 3.9%
Par industries Delivery performance improved from
80% on-time to more than 95%;
Bingi et al. (1999)
Lead times to customers
were reduced from 6
to 2 weeks
Repair parts were reducedfrom 2 weeks to
2 days;
Work-in-process inventory
dropped almost 60%
Life of a shop
order dropped from weeks
to hours
Owens corning Inventory levels were reduced
significantly
Palaniswamy and Frank (2000)
Lot sizes and machine
allocations more efficient
Growth in inter-facility coordination
Viskase Reductions in lead time
and inventory
Palaniswamy and Frank (2000)
Reduction in headcount
(continued on next page)
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While there are many war stories dealing with large-scale ERP implementation failures
(cf. Mobil Europe, Dell Computer, Hershey, Dow Chemical, Fox Meyer Drug), there is
increasing evidence of satisfaction with ERP systems. In a Conference Board survey of
117 firms in 17 countries implementing ERP (McNurlin, 2001), 34% of the organizations
were satisfied with ERP, 58% were somewhat satisfied, 7% were somewhat unsatisfied,and only 1% were unsatisfied. Further, the study showed that 78% of the organizations that
were very satisfied made a quantifiable business case for ERP when they first explored
making the transition.
The evidence of ERP implementations within various industries, such as oil, chemicals,
consumer products, and computers, is largely anecdotal. In these industries the cost of
implementing an ERP is simply a cost of doing business and creates a new playing field for
competitors (Davenport, 2000).
[A]n enterprise system, by its very nature, imposes its own logic on a companys
strategy, organization, and cultureit pushes a company toward generic processes
even when customized processes may be the source of competitive advantage
(Davenport, 1998, p. 122).
Table 1 (continued)
Company Business benefits Source
Integration of information
Decision-making times are reduced
significantlyProduction-based decisions are tied
to sales-based decisions in a
timely manner
Diebold Real-time access to data
across the organization
Palaniswamy and Frank (2000)
Better control of manufacturing
processes
Valenite Lower levels of inventory Palaniswamy and Frank (2000)
Improved customer satisfaction
Faster, more accurate order
processing
Accurate and timely financial
information
Leeson Reduction in paperwork related
to order processing
Palaniswamy and Frank (2000)
Ability of end-users to gain access
to information
Improved accuracy of financial
and inventory transactions
Improved currency of manufacturing
databases
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Davenport (2000) suggests that if an entire industry is adopting ERP systems then the
basis for determining competitive advantage shifts from implementing the ERP to
implementing the ERP better than anyone else. Therefore, the evidence seems to point out
that as ERP implementations become more pervasive within various industries, these
systems will not necessarily provide a competitive advantage to firms within these
industries. However, firms may gain a temporary competitive advantage by implementingERP systems more quickly or more economically than their competitors.
3.4. ERP system imitability
The third question in the VRIO framework relates to whether the ERP system is
imperfectly mobile. If firms without an ERP are at no disadvantage in acquiring and
developing an ERP compared with firms that already possess this resource, then ERP
systems will be a source of only a temporary competitive advantage, i.e. the advantage will
exist only as long as it takes competing firms to acquire the resource or replicate the firms
capabilities. Given the number of firms that have initiated or completed ERP
implementations, a temporary competitive advantage seems to be the situation with
ERP systems.
For example, there is evidence that ERP systems projects take considerable time andhave a payback schedule which may not be realized for some time. In the study conducted
by Mabert et al. (2001), several firms reported that it would take over 12 months for them
to get to the point where they could start using their ERP systems effectively. This suggests
that firms that implemented ERP systems first would have a competitive advantage based
upon the ERP system only until the competing firms also completed their ERP
installations.
To provide some additional depth, there is growing support for the view that ERP
systems implementation projects are complex and require a multiple stage approach. In
their analysis, Mabert et al. (2001) break ERP projects into three phases, including (1) the
project phase, during which the ERP software is introduced, (2) the shakedown phase,
during which the company integrates ERP into its operations, and (3) the onward and
upward phase, during which the company captures the benefits of the ERP system. Success
during any phase is directly related to success during subsequent phases. One of thebiggest failures in ERP implementations is the failure to modify business processes to
conform to the requirements of the ERP software.
Several other researchers organize ERP projects into phases. In their analysis, Parr and
Shanks (2000) organize such projects into a planning phase, a re-engineering phase, a
design phase, and configuration and testing. As in the former study, re-engineering
business processes to support the business model which the ERP supports is critical to the
success of the overall project.
Holland and Light (2001) further elaborate upon the stage implementation approach by
proposing a stage maturity model for ERP systems. In their view, at the initial stage
(stage 1), organizations are still managing legacy systems and start to implement ERP
software. In stage 2, they complete their ERP implementation by employing ERP-related
functions across the firm. It is not until stage 3, when ERP systems are integrated
successfully, and the organizations business processes have been realigned to match
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the ERP system, that organizations can leverage the data generated by the ERP system by
using specialized modules supporting advanced capabilities such as customer resource
management.
These theories of the stage evolution of ERP systems indicate that the process of ERP
implementation is relatively complex, and that these systems entail the re-structuring of
business processes, technical implementation, as well as organizational change. Yet, withthe increased experience acquired by individuals and consulting firms implementing these
systems, firms embarking on ERP projects can benefit from these lessons and can move
through these project phases more rapidly and more cost-effectively than their
predecessors, thus shortening the time frame for the temporary competitive advantage.
Therefore, the implementation process, although still daunting, is more easily
accomplished as firms, and their technology consultants, learn from the experiences and
mistakes of others. In sum, ERP systems are more or less easily imitated.
In fact, as previously noted, many ERP systems incorporate a best practices approach
for how the system is configured, requiring the organization to reengineer its processes to
fit the software. As such, firms implementing ERP will probably not be able to maintain
ERP systems as a source of competitive advantage over time.
3.5. Organized to exploit the potential of ERP
The fourth question of the VRIO framework relates to whether the firm is organized
to exploit the full potential of an ERP system. The readiness to exploit these
advantages can be understood by examining the experience of organizations in
implementing ERP systems quickly and effectively. If project implementation is
successfully achieved and the organization has been appropriately reengineered, then
organizations will be able to exploit the full potential of these systems and achieve a
competitive advantage.
In their analysis of difficulties encountered in completing ERP projects on-time and
on-budget, Willcocks and Sykes (2000) note that problems occur because of a lack of
internal skill sets, attempts to customize the ERP, and the complexity of linking legacy
systems and data to the ERP system. They argue that the success of ERP projects
depends upon re-engineering business processes, relationship building with seniorexecutives, effective management of supplier relationships, and the creation of cross-
functional teams. Others also note the critical role of realigning business processes,
often significantly, to ERP software during implementation as one of the critical
success factors (Bingi et al., 1999; Holland and Light, 1999; Markus et al., 2000; Parr
and Shanks, 2000). They argue that implementing an ERP system is not a matter of
changing software; it is a matter of transforming business processes. Instead of
managers trying to maintain old procedures, they must adapt to and learn the
capabilities of the new system.
Successful implementation also requires recruiting and retaining individuals who
understand the capabilities of the new ERP system. In Parr and Shanks (2000) in-depth
study of critical success factors in each phase of ERP project implementation, they argue
that vanilla ERP (i.e. not attempting to modify the software, but rather modifying
business processes to conform with the software) was critical to the success of
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the planning, design, and configuration phases of major ERP projects. Top management
leadership and participation was important to assure the selection of a balanced team and
the re-engineering of business processes.
In an analysis of ERP implementations in smaller firms in Ireland, Adam and
ODoherty (2000) argue that the same lessons apply for ERP projects that are smaller in
size and scope. Even in projects of smaller size and reduced scope, there are constanttrade-offs between the implementers wanting zero modification and the client wanting
100% functionality, or custom modifications. Due to the political and managerial
challenges of reconciling these trade-offs, Adam and ODoherty (2000) recommend that
collaborative teams work together to resolve these issues so that projects are kept on track.
The question of what risk factors are associated with ERP projects, as compared with
traditional MIS projects, has been addressed in a study of seven Fortune 500 companies
implementing large-scale ERP systems (Sumner, 2000). Built upon multiple case studies,
Sumner finds that the unique risk factors associated with ERP projects include the danger
of customization, the challenge of reskilling technology professionals and business
analysts who are knowledgeable in ERP software, and the coordination required in
effectively using external consultants.
Based upon these studies, the challenges of managing ERP projects are quite complex
and are complicated by organizational and political factors. As such, top managementleadership is needed to assure that changes in organizational structures and business
processes are made. This combination of mastering organizational, managerial, technical,
and political factors may create a basis for competitive advantage in those firms who can
address these challenges successfully.
4. Research summary and significance
The overall question being addressed in this study was whether ERP systems can
provide organizations with a competitive advantage. There is some anecdotal research
dealing with this question, but most of the results are inconclusive. We decided to apply
the VRIO framework, a representation of the resource-based model, to this analysis of
ERP systems in order to analyze the question in further detail. In the VRIO framework ofthe resource-based model proposed by Mata et al. (1995) and Barney (1999), an ERP
system (i.e. a resource or capability) can provide a competitive advantage when it is
valuable, when the system is heterogeneously distributed across competing firms, when
the system is imperfectly mobile, and when the firm is organized to exploit the full
competitive potential of the system.
We used a review of studies related to ERP to obtain evidence of each of these tenets.
On the first question, we did not find evidence that an ERP system reduces a firms costs
below what would have been the case if the ERP system was not implemented. Most of the
benefits of ERP derive from value-added criteria, such as improved or leveraged
information, more efficient customer service, or building a foundation for e-commerce.
With further, longitudinal studies, evidence of long-term cost-reduction may occur, but the
current literature does not provide clear evidence of a competitive advantage gained
through ERP-based cost-reduction.
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On the second question, there was some anecdotal evidence derived from industry case
studies that ERP systems have been heterogeneously distributed within industries, but
there is growing evidence that ERP implementations within certain industries (e.g. oil,
chemicals, computers) are becoming standard due to the common systems approach.
This implies that the cost of doing business in such industries requires an investment in
ERP systems just to retain parity with the competition. As noted by Mabert et al. (2001),some 30,000 companies worldwide have implemented ERP indicating a widespread use of
the technology. Therefore, the implementation of an ERP system would not assure a
competitive advantage, but rather assures competitive parity. In contrast, in these
industries, companies without an ERP may find themselves at a competitive disadvantage.
On the third question, there is ample evidence of the significant challenges associated
with acquiring and implementing ERP systems, but the lessons learned may have been
learned primarily by the pioneers of ERP implementations (e.g. the war stories), and new
implementers can benefit from these experiences by taking note of the critical success
factors associated with ERP implementations. As such, firms just acquiring ERP
capabilities do not necessarily face a competitive disadvantage in implementing ERP
systems and may benefit from the experience of their predecessors, consultants, and other
models of successful implementation. Stated another way, the benefits of being a first
mover are receding. Consequently, it appears that ERP systems are increasingly imitable,yielding only a temporary competitive advantage at best.
Therefore, using the resource-based model of competitive advantage, an examination
of existing research suggests that ERP systems may not provide a competitive advantage
based upon the premises of system value, distribution, and imitability. ERP systems are
increasingly less heterogeneously distributed. The implementation process can be imitated
in that firms can learn from the experiences and mistakes of others. Instead, an opportunity
to achieve a competitive advantage may exist in how a firm exploits the ERP system. We
propose that effectively exploiting an ERP system depends upon successful project
planning, implementation, alignment, and utilization. As such, the source of competitive
advantage may lie in the actual management of ERP projects and their subsequent
operations. This echoes the conclusion of Mata et al. (1995) that the management of IT,
not the IT itself, may be the only consistent source of competitive advantage.
Further, with the increasing adoption of ERP systems within industries, the sources ofcompetitive advantage that were originally defined in the resource-based model may not
apply, at least not as strongly. For example, the implementation of ERP systems may in
fact diminish the value of many of the very features (i.e. the resources and capabilities) of
the organization that made them difficult to imitate and provided the firm with a
competitive advantage. The recommendation that organizations use the common systems
approach, aligning their business processes with the software instead of trying to
significantly tailor (i.e. align) the software to their own needs (cf. Bingi et al., 1999;
Holland and Light, 1999; Markus et al., 2000; Parr and Shanks, 2000; Sumner, 2000), will
almost certainly lessen, at least temporarily, the impact of an organizations history, the
causal ambiguity of how the organization operates, and the social complexity of the inter-
and intra-organizational environment. The impact of a transition to an ERP system on
these issues is an empirical question that has not yet been explored. Instead, the adoption of
ERP may create a new playing field, i.e. a new dimension of competition. Therefore, in
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many industries, the decision to adopt an ERP may only be sufficient to prevent the
organization from being at a competitive disadvantage.
If ERP systems provide competitive parity among organizations, then the source of
competitive advantage may lie elsewhere (cf. Mata et al., 1995), i.e. not with the ERP
system. As noted above, the literature on ERP implementation suggests that addressing the
significant challenges associated with managing and implementing ERP projects may bethe key to competitive success. Organizations that can address these organizational,
managerial, and technical challenges by implementing ERP systems more quickly and
more economically than their counterparts and those that recover more quickly from the
turmoil of reengineering their business processes to match the ERP structure may be the
ones to ultimately achieve a competitive advantage. These findings have practical
significance because they indicate the critical importance of effective project management
and implementation.
Much of the research in this area is based upon case studies, but some of the
conclusions are useful. In a case analysis devoted to the question of how organizations are
using ERP systems to gain a competitive advantage, Holland et al. (1999) suggest that
while common systems can be used to support core operations, organizations can design
and build custom solutions to support strategic processes. Customization can increase the
risk of ERP implementation delay or failure. However, it is suggested that thecustomization, while only a small percentage of the entire system, can be quite significant
in creating the differences between otherwise similar systems. This would correlate well
with the ideas of both causal ambiguity and social complexity. Organizations that can fine
tune their ERP systems through selected, small-scale customization to match their own
specific strategic and decision-making needs will be more difficult to imitate. In addition,
ERP systems may support a further improvement and understanding of the extended value
chain of the organization, allowing the organization to link and share data with its
suppliers and customers to improve business operations.
In a study of ERP implementations managers reported that they expected the
availability, quality, and standardization of data to provide a strategic advantage (Mabert
et al., 2001). Data quality and the improvement of business processes are fundamental
business drivers for ERP systems. Based upon interviews with executives at RJR Nabisco,
Gullo (1988) also concluded that the IT function needs to move to a view of data that isglobal in order to obtain a competitive advantage. Of course, all ERP implementations
should yield improved data management. Therefore, the benefit, if one occurs, comes from
the opportunity for better strategic, tactical, and operational decision making from
management. This characterization again suggests that the real source of the competitive
advantage is not the ERP system, but resides within those who better refine and use its
capabilities, i.e. management. Once again, the causal ambiguity and social complexity of
the decision-making processes within any specific organization will be almost impossible
to accurately imitate by others, yielding a potential competitive advantage.
Building on this perspective, another view of how ERP systems can provide a
competitive advantage relates to migration strategy. Given the enormous investment in
implementing an ERP system, and the fact that common systems supporting generic
business processes afford little opportunity to differentiate processes from competitors,
Kremers and Van Dissel (2000) point out that one of the ways in which firms can obtain
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a competitive advantage is by their capability to migrate to new versions of the software
more rapidly.
The complexity of ERP implementations, which involve making a transition from
legacy systems and re-engineering business processes, has caused a number of researchers
to develop stage implementation models (cf. Holland and Light, 2001; Markus et al., 2000;
Parr and Shanks, 2000). These models are similar to the more general IS stage models (cf.Bhabuta, 1988; Galliers and Sutherland, 1991; Hirscheim et al., 1988; Nolan, 1979, 1984 )
that depict an increasing level of sophistication, integration, and maturity in IS/IT
management as an organization evolves from one stage to the next. Depending on the
specific model, different benefits are associated with each of the stages of ERP evolution.
In a stage model proposed by Holland and Light (2001), they argue that the strategic
potential of an ERP implementation will probably not be realized until stage three
evolution, during which ERP transactions data can be leveraged by high-value processes
such as customer relationship management. In their view, the third stage involves the
strategic exploitation of the core ERP system using innovative business processes and IT
initiatives that extend the ERP transaction data into high value processes that are often
supported by satellite systems to support new functionality and capabilities (Holland and
Light, 2001, pp. 3445).
5. Strategic implications and future research
Many of the strategic implications for ERP have already been suggested by Porter
(2001) in his discussion of Strategy and the Internet. Although not directed at ERP
efforts, there is a surprising parallel between the Internet-related issues firms face and the
issues currently faced by firms electing to implement ERP systems. For example, Porter
(2001) notes that there are two primary ways to gain cost and price advantages in a
marketplaceyou can improve your operational effectiveness or you can work toward
better strategic positioning. Operational effectiveness can include advantages such as
developing people through better training and education, the acquisition and application of
better technologies, or a more efficient and effective management structure, among others.
ERP systems are an obvious fit with efforts to improve operational effectiveness, and muchof the ERP literature presented above suggests that ERP systems are generally aimed at
this type of effort. However, according to Porter, the Internet tends to alter industry
structures in ways that dampen overall profitability, and it has a leveling effect on business
practices, reducing the ability of any company to establish an operational advantage that
can be sustained (Porter, 2001, p. 64). Due to the common systems approach, ERP
systems have a similar impact. From this view, ERP would yield only a temporary
competitive advantage, at best. Further, as companies become more alike, rivalry tends to
increase (Hitt et al., 2003; Porter, 2001), creating additional competitive pressure on the
firm.
Strategic position is a more challenging endeavor. Porter (2001) describes strategic
positioning as doing things differently from competitors, in a way that delivers a unique
type of value to customers (p. 70). Creating this unique value requires creating a different
set of features, services, or logistical structures. These can then be used to assist
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the organization in better developing its business-level strategies (e.g. cost-leadership,
differentiation, focused, and/or integrated strategies), corporate-level strategies, and
cooperative strategies. The challenge for firms implementing ERP systems is to develop
new strategies that leverage the full capabilities of ERP. These might include selective
customization of the ERP system, additional attention to aligning the firm with the ERP
system, or focusing on more rapid recovery of the firm following reengineering. Theyinclude both the formulation and implementation of an organizations strategic initiatives.
The ERP stage models offer some general guidance on direction, but are less useful in
elaborating the process for achieving the more advanced stages (Galliers and Sutherland,
1991; Kalling, 2003) or maturity. Kalling (2003) may have suggested the most accurate
representation of the true dynamic that occurs in ERP efforts (as well as with more general
IT projects) with the concept of bricolage. As described by Kalling, bricolage is
learning through trial and error and local tinkering. This learning ultimately leads to
improved individual work practices, new capabilities for the firm, and, finally, strategic
advantages. It is an organizational learning process that is similar to the concept of double-
loop learning (Argyris and Schon, 1978). Double-loop learning is where organizations first
unlearn previous knowledge, then move beyond the old knowledge as they envision and
develop new ways of doing things that were not possible or had not been imagined before.
Double-loop learning is a revolutionary change instead of an evolutionary one. Due to thecomplexity of the ERP systems, plus the complexity (e.g. history, causal ambiguity, and
social complexity) of an organization embarking on a reengineering effort, the full
development and tuning of an ERP system is an emergent process. The discussion below
suggests several avenues of research toward exploring these options.
As a follow-up to this study, it would be useful to pose the same questions related to the
resource-based model of competitive advantage through a comparative study of firms
within a specific industry. A comparison across industry groups would also be useful.
Using additional case study material would provide further insight into the value,
distribution, and imitability of ERP systems within industries and would help to determine
the importance of the management of ERP projects in achieving a competitive advantage.
In addition, it would be useful to examine in some detail the features and capabilities that
are added to the ERP systems due to customization that appear to yield a competitive
advantage. Can different business-related outcomes be attributed to these customizedfeatures? Further, it might be useful to explore how much the timing of the adoption of
ERP in comparison to competitors yields a competitive advantage. For example, Rogers
(1995) has described five broad categories of adopters of an innovation, such as
innovators, early adopters, early majority, late majority, and laggards. What are the
competitive implications for ERP systems in relation to when they are actually installed in
a firm? Further, what are the implications to when they are perceived as having achieved a
fully operational status?
It was noted above that the implementation of ERP systems may disrupt the very
resources or capabilities (i.e. history, causal ambiguity, and social complexity, among
others) that make them difficult to imitate. Alternatively, the history, causal ambiguity, and
social complexity may in some instances have lead to the development and creation of an
organization that is uniquely able to leverage or quickly adapt to the capabilities of an ERP
system. The organizations culture may be particularly adaptable to change, such
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as the business process reengineering typically required with an ERP installation.
Management may be especially astute at discerning market trends in the more detailed
organization-wide data being provided by the ERP. The value chain, consisting of the
organization, its suppliers and suppliers suppliers, and customers, may become more
tightly coordinated due to the improved flow of accurate data. In this type of situation, an
ERP system may enhance the organizations competitiveness. While uncommon, in thisenvironment the ERP may be an important component in the firm being organized to fully
leverage the capabilities of an ERP system. But the research is equivocal on these issues at
this point in time. Table 2 provides a summary of the implications of ERP research on both
practice and research.
In sum, ERP systems are an increasingly popular IT platform that are being installed to
assist organizations in better capturing, managing, and distributing organization-wide
operational data to decision makers throughout the organization. The importance of ERP
Table 2
Strategic Implications of ERP for Practice and Research
Implications for Practice Implications for Research
Careful project planning is important
to successful ERP installation
How do you create a sustainable competitive advantage with an ERP
system? More specifically, what are the important characteristics
of ERP systems that will create a sustained competitive advantage?
Organizations that have been
reengineered to fit the common
systems model of a specific ERP
have the best chance of successful
implementation
Can you reengineer the organization without disrupting or destroying
the characteristics that gave it a competitive advantage?
Imperfect imitability, one of the
characteristics of a sustained
competitive advantage, can be
developed through ERP customization.
This does increase the cost and the risk
of project failure
How can you continue to leverage the benefits of history, causal
ambiguity, and social complexity that already exist in the
organization? How can these characteristics be used to improve
ERP systems adoption and implementation in an organization?
Careful consideration should be made
about the implications of reengineering
the organization and that impact on the
strategic direction of the firm.
What are the implications of the stage models for ERP systems in
organizations? How do you progress from one stage to the next?
What is/are the process(es) in advancing to each of the stages?
ERP systems should be aligned with
the strategic direction of the
organization
How do you speed the organizational learning process in order to
more quickly move beyond the basic operational features of
ERP systems to take greater advantage of the opportunities that
now exist?
How do you align the ERP system with the strategic initiatives
of the organization? Alternatively, how
do you alter the strategic direction of the organization to take
advantage of the opportunities offered by the ERP system?
How have ERP systems altered industry structures and the basis
of competition within an industry?
Do the stages of innovation predict relative levels of successful
ERP adoption? Do the stages of innovation predict levels and
duration of competitive advantage?
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systems may have been enhanced by Y2K and the Internet boom, as well as the growing
recognition of the need and opportunity for leveraging the capabilities of IT. In spite of the
clamor for ERP technology, the literature is equivocal on the strategic impact, at least in
terms of competitive advantage, of this type of system. It appears that ERP systems are
increasingly a requirement for organizations just to stay competitive. Additionally, the
research suggests that an ERP system can yield at most a temporary competitive advantageas others are also installing these enterprise-wide systems. Yet, many questions and
opportunities remain to be explored.
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