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Chapter 3 Information Systems, Organizations, and Strategy 137

One use of information technology in these synergy situations is to tie
together the operations of disparate business units so that they can act as a
whole. For example, acquiring Countrywide Financial enabled Bank of America
to extend its mortgage lending business and to tap into a large pool of new
customers who might be interested in its credit card, consumer banking, and
other financial products. Information systems would help the merged compa-
nies consolidate operations, lower retailing costs, and increase cross-marketing
of financial products.

Enhancing Core Competencies
Yet another way to use information systems for competitive advantage is
to think about ways that systems can enhance core competencies. The
argument is that the performance of all business units will increase insofar
as these business units develop, or create, a central core of competencies. A
core competency is an activity for which a firm is a world-class leader. Core
competencies may involve being the world’s best miniature parts designer,
the best package delivery service, or the best thin-film manufacturer. In gen-
eral, a core competency relies on knowledge that is gained over many years
of practical field experience with a technology. This practical knowledge
is typically supplemented with a long-term research effort and committed
employees.
Any information system that encourages the sharing of knowledge across
business units enhances competency. Such systems might encourage or
enhance existing competencies and help employees become aware of new
external knowledge; such systems might also help a business leverage existing
competencies to related markets.
For example, Procter & Gamble, a world leader in brand management and
consumer product innovation, uses a series of systems to enhance its core
competencies. An intranet called InnovationNet helps people working on similar
problems share ideas and expertise. InnovationNet connects those working in
research and development (R&D), engineering, purchasing, marketing, legal
affairs, and business information systems around the world, using a portal to
provide browser-based access to documents, reports, charts, videos, and other
data from various sources. It includes a directory of subject matter experts who
can be tapped to give advice or collaborate on problem solving and product
development, and links to outside research scientists and entrepreneurs who
are searching for new, innovative products worldwide.

Network-Based Strategies
The availability of Internet and networking technology have inspired strategies
that take advantage of firms’ abilities to create networks or network with each
other. Network-based strategies include the use of network economics, a virtual
company model, and business ecosystems.
Network Economics. Business models based on a network may help firms
strategically by taking advantage of network economics. In traditional
economics—the economics of factories and agriculture—production experiences
diminishing returns. The more any given resource is applied to production, the
lower the marginal gain in output, until a point is reached where the additional
inputs produce no additional outputs. This is the law of diminishing returns,
and it is the foundation for most of modern economics.
In some situations, the law of diminishing returns does not work. For
instance, in a network, the marginal costs of adding another participant are
about zero, whereas the marginal gain is much larger. The larger the number

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