Ch3 Information System Organization and Strategy

3.1 © 2010 by Pearson

3Chapter

Information Systems,

Organizations, and Strategy

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3.1Organizations and Information SystemsWhat Is an Organization?, Features of Organizations

3.2How Information Systems Impact Organizations and Business FirmsEconomic Impacts, Organizational and Behavioral ImpactsThe Internet and Organizations, implications for the Design and Understanding of IS

3.3Using Information Systems to Achieve Competitive AdvantagePorter’s Competitive Forces ModelInformation System Strategies for Dealing with Competitive ForcesThe Internet’s Impact on Competitive AdvantageThe Business Value Chain ModelSynergies, Core Competencies, and Network-Based Strategies

3.4 Using Systems For Competitive Advantage: Management IssuesSustaining Competitive AdvantageAligning IT with Business ObjectivesManaging Strategic Transitions

3.5 Hands-On MISManagement Decision ProblemsImproving Decision Making: Using a Database to Clarify Business StrategyImproving Decision Making: Using Web Tools to Configure & Price an Automobile

Chapter Outline

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LEARNING OBJECTIVES

• Identify and describe important features of organizations that managers need to know about in order to build and use information systems successfully.

• Demonstrate how Porter’s competitive forces model helps companies develop competitive strategies using information systems.

• Explain how the value chain and value web models help businesses identify opportunities for strategic information system applications.

• Demonstrate how information systems help businesses use synergies, core competencies, and network-based strategies to achieve competitive advantage.

• Assess the challenges posed by strategic information systems and management solutions.

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EBay Fine-Tunes Its Strategy

• Problem: Losing market share to other online retailers, ultra-competitive and constantly changing marketplace.

• Solutions: Acquire other businesses and adjust its business model to maintain online dominance.

• Purchase of PayPal, deal with Buy.com allowed eBay to grow and diversify its business.

• Demonstrates IT’s role in the development of eBay’s organization as it expands and makes acquisitions.

• Illustrates the challenges of maintaining a competitive advantage in a fast-moving, constantly-changing marketplace.

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Organizations and Information Systems

• Information technology and organizations influence one another• Complex relationship influenced by organization’s

structure, business processes, politics, culture, environment, and management decisions

Management Information SystemsChapter 3 Information Systems, Organizations, and Strategy

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The Two-Way Relationship Between Organizations and Information Technology

This complex two-way relationship is mediated by many factors, not the least of which are the decisions made—or not made—by managers. Other factors mediating

the relationship include the organizational culture, structure, politics, business processes, and environment.


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What is an organization?• Technical definition:

• Stable, formal social structure that takes resources from environment and processes them to produce outputs

• A formal legal entity with internal rules and procedures, as well as a social structure

• Behavioral definition: • A collection of rights, privileges, obligations, and

responsibilities that is delicately balanced over a period of time through conflict and conflict resolution

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The Technical Microeconomic, Definition of the Organization

In the microeconomic definition of organizations, capital and labor (the primary production factors provided by the environment) are transformed by the firm through the production process into products and services (outputs

to the environment). The products and services are consumed by the environment, which supplies additional capital and labor as inputs in the

feedback loop.


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The Behavioral View of Organizations

The behavioral view of organizations emphasizes group relationships, values, and structures.


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• Features of organizations• All modern organizations share some

characteristics, such as:• Use of hierarchical structure• Accountability, authority in system of impartial

decision making• Adherence to principle of efficiency• Other features include: Routines and business

processes and organizational politics, culture, environments and structures

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• Routines and business processes• Routines (standard operating procedures)

• Precise rules, procedures, and practices developed to cope with virtually all expected situations

• Business processes: Collections of routines• Business firm: Collection of business

processes

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Routines, Business Processes, and Firms

All organizations are composed of individual routines and behaviors, a collection of which make up a business process. A collection of business processes make up the business firm. New information system applications require that individual routines and business processes change to achieve high levels of organizational performance.


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Organizational politics• Divergent viewpoints lead to political

struggle, competition, and conflict• Political resistance greatly hampers

organizational change

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• Organizational culture:• Encompasses set of assumptions that define

goal and product• What products the organization should produce• How and where it should be produced• For whom the products should be produced

• May be powerful unifying force as well as restraint on change

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• Organizational environments:• Organizations and environments have a reciprocal

relationship• Organizations are open to, and dependent on, the

social and physical environment• Organizations can influence their environments• Environments generally change faster than

organizations• Information systems can be instrument of

environmental scanning, act as a lens

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Environments and Organizations Have a Reciprocal Relationship

Environments shape what organizations can do, but organizations can influence their environments and decide to change environments altogether. Information technology plays a

critical role in helping organizations perceive environmental change and in helping organizations act on their environment.


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• Disruptive technologies• Technology that brings about sweeping change to

businesses, industries, markets• Examples: personal computers, word processing

software, the Internet, the Page-Rank algorithm• First movers and fast followers

• First movers – inventors of disruptive technologies• Fast followers – firms with the size and resources to capitalize

on that technology

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Technology Description Winner and loser

Microprocessor chips -1971

Millions of transistors on a silicon chip

Microprocessor firms win (Intel, Texas Instruments), while transistor firms (GE) decline

Personal computer 1975

Small, inexpensive, but fully functional computer

PC manufacturers (HP, Apple, IBM) win, while mainframe (IBM), and mini-computers decline.

PC word processing software 1979

Inexpensive text editing and formatting for PC

PC software manufacturers (MS, HP, Apple) prosper, while typewriter industry disappears.

World Wide Web 1989

A global database of digital files and pages instantly available

Online content benefited, traditional publisher (newspapers, tec. ) lose

Internet music service 1998

Repositories of downloadable music on the web

Online music owners (MP3.com, iTunes) win, music retailers lose

Page Rank Algorithm A method of ranking WebPages, Google is the winner (they own the patent), while traditional key word search engine (Alta Vista) loose

Software as web service

Using the internet to provide remote access to online software

Online software service companies (salesforce.com) win, while traditional boxed software companies (MS, Oracle) lose

Disruptive Technologies: winners and losers


• Organizational structure • Five basic kinds of structure

• Entrepreneurial: Small start-up business• Machine bureaucracy: Midsize manufacturing firm• Divisionalized bureaucracy: Fortune 500 firms• Professional bureaucracy: Law firms, school

systems, hospitals• Adhocracy: Consulting firms

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• Other Organizational Features• Goals• Constituencies• Leadership styles• Tasks• Surrounding environments

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Chapter 3: Part 2

Information Systems, Organizations, and Strategy

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3.2How Information Systems Impact Organizations and Business Firms• Economic Impacts,• Organizational and Behavioral Impacts• The Internet and Organizations,• Implications for the Design and Understanding of IS

Section Outline

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How Information Systems Impact Organizations and Business

Firms

Impact of IS on Firms

• Economic impact • Organizational & Behavioral

impact

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IT changes relative costs of capital and the costs of information

Cost of capital: The required return necessary to make a capital budgeting project, such as building a new factory, worthwhile.

Cost of capital + cost of debt + cost of equity.Cost of dept: The effective rate that a company pays on

its current debt.Cost of equity: The return (often expressed as a rate of

return) a firm theoretically pays to its equity investors, i.e., shareholders, to compensate for the risk they undertake by investing their capital

Economic Impact of IS

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Information systems technology is a factor of production, like capital and labor.

IT should result in decline in the number of middle managers and clerical workers, as IT substitute for their work.

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IT can substitute other forms of capital such as buildings and machinery.

Managers should increase their investment in IT because of its declining cost relative to other capital investments.

IT affects the cost and quality of information and changes economics of information.

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IT helps firms contract in size because it can reduce transaction costs (the cost of participating in markets).

Example: with the help of IS firms can generate and disseminate a report better than human can do. (compare performance of IT with humans).

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Transaction cost theory

Theory that is used to explain the impact of ICT on firms

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What is transaction cost• It is the cost of participating in the market.• Divided into three main categories:

– Search and information costs: are costs such as those incurred in determining that the required good is available on the market, which has the lowest price.

– Bargaining costs: are the costs required to come to an acceptable agreement with the other party to the transaction.

– Policing and enforcement costs: are the costs of making sure the other party sticks to the terms of the contract

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The main reason why firms hire people is that it is cheaper for them to hire people, than search the market of talents, contract them, and monitor them in doing the work.

The Internet makes it less expensive to use the marketplace and contract for work than hiring employees.

Transaction Cost Theory

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Transaction Cost theory

• Firms seek to economize (reduce cost) of participating in market (transaction costs)

• IT lowers market transaction costs for firm, making it worthwhile for firms to transact with other firms rather than grow the number of employees.

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Transaction Cost theory

• IT lowers transaction costs. This can result in firms shrinking in size (reduced employment) , but still maintaining or even increasing revenues.

• IS makes it possible for companies to outsource their products, rather than making their products themselves.

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The Transaction Cost Theory of the Impact of Information Technology on the Organization

Firms traditionally grew in size to reduce transaction costs. IT potentially reduces transaction costs for (at) a given size.

How Information Systems Impact Organizations and Business Firms

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Agency theory

Explains what economic impact IS has on organizations

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Agency theory• The principal–agent problem or agency dilemma

concerns the difficulties in motivating one party (the "agent"), to act on behalf of another (the "principal")

• Examples: Agent: corporate managers principal: shareholders Agent: politicians Principal: voters• The deviation from the principal's interest by the

agent is called 'agency costs

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Information Systems and the agency cost

• IT can reduce internal management costs. • Firm is nexus (connection or series of

connections) of contracts among self-interested parties requiring supervision.

• Employees need constant supervision and management; otherwise they tend to pursue their own interests rather than those of the owners.

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Information Systems and the agency cost

• Firms experience agency costs (the cost of managing and supervising) which rise as firm grows.

• IT can reduce agency costs, through acquiring and analyzing information, making it possible for firms to grow without adding to the costs of supervising, and without adding employees, mainly middle managers.

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The Agency Cost Theory of the Impact of Information Technology on the Organization

• T enables firms to economize on managers through better coordination and communication.

• IT enables small companies to act like big companies, and enables large companies to shrink in headcount while expanding revenues

How Information Systems Impact Organizations and Business Firms

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Organizational and behavioral impacts

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Organizational and behavioral impact of IT

1. IT flattens organizations: with sufficient IT, competent workers will be able to accomplish more on their own than they would under a more concrete hierarchy.

2. Decision making pushed to lower levels, since employees know what to do without receiving orders for managers.

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Organizational and behavioral impact of IT

3. Managers now receive so much more accurate information on time, they become much faster at marking decisions, so fewer managers are required.

4. Management costs decline as a percentage of revenues, and the hierarchy becomes much more efficient.

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1. Decision making relies on knowledge and competence rather than formal positions

2. Professional workers tend to be self-managing.

3. Decision making should become more decentralized as knowledge and information become more widespread throughout the firm.

Why IT Flattens Organizations?

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IT facilitates task force networked organization

• Groups of professionals come together – face to face or electronically – for short periods of time to accomplish a specific task;

• Once the task is accomplished, the individuals join other task forces

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Why IT might be resisted in organizations?

• Workers resists every thing that disrupt their routines.

• Technical understanding of IS is not enough, understanding people and organizational structures and customs are also important.

• Information systems should be closely intertwined with an organization’s structure, culture, and business processes.

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Why IT might be resisted in organizations?• New systems disrupt established patterns of work

and power relationships.

• Technology doesn’t automatically transform organizations.

• Information systems become bound up in organizational politics because they influence access to a key resource – information.

• Information systems potentially change an organization’s structure, culture, politics, and work.

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Mutually Adjusting Relationships Between Technology and the Organization should be taken into consideration for the IS to be successful

What happens?Technological changes are

absorbed, deflected, and /or defeated by organizational task, arrangements, structures, and people.

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Models of change management• Model1: Implementing information systems has

consequences for task arrangements, structures, and people. According to this model, to implement change, all four components must be changed simultaneously (Leavitt, 1965).

• Model2: Unfreeze organizations before introducing innovation, quickly implementing it, and refreezing or institutionalizing the change.

(Alter and Ginzberg, 1978, Kolb, 1970).

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Organizations and the Internet

The internet has introduced dramatic changes to the organization structures

and the way how they do business

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The impact of Internet on organizations: The Internet has even introduced dramatic changes to organization through the introduction of the concept of global firms

• The internet is an open platform technology that allows any application to be used.

• Internet affects the relation of the firm with its surroundings,

• And the relations with the firms entities themselves.

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Why Internet greatly impacted organizations?

1. The Internet increases the accessibility, storage, and distribution of information and knowledge for organizations

2. The Internet can greatly lower transaction and agency costs Example: Large firm delivers internal manuals to employees via corporate Web site, saving millions of dollars in distribution costs

1. Many businesses are now building their processes around the Internet, as it incurs cost saving.

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Implications for the Design and Understanding of Information

Systems

When designing an IS several issues have to be taken into considerations

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What to consider when introducing IS• People do not accept changes very easily• No matter how much technology you employ,

it is still the organization’s people who will make or break it.

• Change can be so painful to some organizations that they find it easier to keep doing business the same old way for as long as they can get away with it.

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• Environment: in which the organization must function• Structure: Hierarchy, specialization, routines, business

processes• Culture and politics• Type of organization and style of leadership • Main interest groups affected by system; attitudes of end

users• Tasks, decisions, and business processes the system will

assist

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Implications for the Design and Understanding of Information Systems: factors to consider


Conclusions For some jobs, it’s better to employ technology than to employ a person. Technology can reduce costs and increase the amount of information people have access to. The changes brought about by the introduction of new technology and new methods must be managed carefully.No successful manager can lose sight of the effect change will have on the people of the organization. Companies need to tailor their information systems to the needs of the organization instead of letting the wonders of technology drive the organization.

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3Chapter

How information system can be used to achieve competitive advantages

Information system and the competitive advantage

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3.3Using Information Systems to Achieve Competitive Advantage

Porter’s Competitive Forces ModelInformation System Strategies for Dealing with Competitive ForcesThe Internet’s Impact on Competitive AdvantageThe Business Value Chain ModelSynergies, Core Competencies, and Network-Based Strategies

Chapter Outline

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• The use of information systems is one of the most effective tools to keep the competitive advantage

• What do we use to understand competitive advantage? Porter Model

• Why do some firms become leaders within their industry?

• How can they sustain this lead in their market • It is not so difficult to achieve a certain competitive

advantage but rather to keep it.

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What is a competitive advantage?


Who is Porter?

Professor at Harvard Business School. He is a leading authority on company strategy and the competitiveness of nations and regions. Michael Porter’s work is recognized in many governments, corporations and academic circles globally. He chairs Harvard Business School's program dedicated for newly appointed CEOs of very large corporations.

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Porters Model

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In Porter’s competitive forces model, the strategic position of the firm and its strategies are determined not only by competition with its traditional direct competitors but also by four forces in the industry’s environment: new market entrants, substitute products, customers, and suppliers.

Porter’s Competitive Forces Model

Using Information Systems to Achieve Competitive Advantage

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• All firms share market space with competitors who are continuously devising new products (better than what is available), services, efficiencies, switching costs (place barrier to switch to competitors).

Force 1:Traditional competitors

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Force 2: New market entrants

Some industries have high barriers to entry, e.g. computer chip business, but some other companies have low entry barriers, e.g. Web based businesses.

Advantages: New companies have new equipment, less expensive equipment, younger workers (more motivate and innovative) and,

Disadvantages: Depending on outside financing, less experienced workforce (but they can recruit ones) little brand recognition

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Force 3: Substitute products and services

customers may be willing to try substitute products and services if they decide your price is too high or the quality of your products and services is too low.

e.g. iTunes substitutes for CDs, or the quality becomes low.

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Can customers easily switch to competitor’s products? Can they force businesses to compete on price alone in transparent marketplace?

Customers become more powerful, as markets are more open.

Competition on customers is difficult when there is no product differentiation.

Force 4: Customers

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Force 5: Suppliers

• The number of suppliers used may determine how easy or difficult your business will have in controlling your supply chain.

• If there are too few suppliers then you lose a lot of control.

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Assignment Use Porters model to analyze the Palestinian

mobile market, by trying to answer the following questions:

• What is the biggest competitive advantage that Jawwal has over Wataniya

• What is the biggest competitive advantage that Wataniya has over Jawwal.

• Describe how Jawwal is trying to block Wataniya from having a wide customer base, and the reaction of Wataniya to that.

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Information System Strategies for Dealing with Competitive

Forces

Many companies have found that effective and efficient information systems allow them to

deal with external forces

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Low-cost leadership: Firms can retain leadership at low cost using IS.

Product differentiation: make the firm product different from what is in the market

Focus on market slot: Specific market focus Strengthen customer and supplier intimacy:

tighten linkage with suppliers and customers

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Four generic strategies for dealing with competitive forces, enabled by using IT

• produce products and services at a lower price than competitors while enhancing quality and level of service

• Efficient customer response system • Processes such as supply replenishment are

automated between companies and suppliers

Examples: Wal-Mart, Dell

1- Low-cost leadership

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2- Product differentiation

• Enable new products or services, greatly change customer convenience and experience.

• Create barrier to competitors.• Offer customers exactly what they want,

when they want it, and how they want it

– Examples: Google, Apple iPhone

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3- Focus on one market segment

• Use information systems to enable a focused strategy on a single market segment; specialize

• focus on a very narrow segment of the market rather than a broad general audience.

• creates a focused differentiation business strategy

• Example: Hilton Hotels

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• Use information systems to develop strong ties and loyalty with customers and suppliers; increase switching costs

• Example: Chrysler, Amazon

4- Strengthen customer and supplier intimacy

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Transformation, destruction, threat to some industries Created entirely new markets and formed the basis for

thousands of new businesses. Internet transformed the business world of books, music, and

air travel. Is transforming; telephony, movies, television, real estate,

hotels, bill payments, and software. Competitive forces still at work, but rivalry more intense

(Porter 2001). Since information is available to everyone, internet raises the

bargaining power of customers. New opportunities for building brands and loyal customer

bases

The Internet’s impact on competitive advantage

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Impact of the Internet on competitive forces

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Creation of new opportunities

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• The Internet has also created opportunities for building new brands and building very large and loyal customers bases. Examples are Google, Yahoo, eBay, Amazon, etc.


The Business Value Chain Model

Areas of the organization most affected by leveraging technology are in producing the

product, getting it to the stores, and making the customer happy

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• Porter’s model does not say how a firm can be more competitive, the value chain model (VCM) can.

• VCM views firm as series of activities that add value to products or services

• Highlights activities where competitive strategies can best be applied

• Can be either primary activities or support activities

Why Business value chain model is important

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Two ways to impact value chain• Primary: most related to the production and distribution of the

product or service, e.g. inbound and outbound logistics, sales, marketing,

• Support: support the delivery of the primary activities, such as administration, human resources, technology, and procurement.

• At each stage, determine how information systems can improve operational efficiency and improve customer and supplier intimacy

• Utilize benchmarking, industry best practices.• The value chain of a firm is linked with the value chain of its

suppliers, distributors, and customers.

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The Value Chain Model

This figure provides examples of systems for both primary and support activities of a firm and of its value partners that can add a margin of value to a firm’s products or services. 80


Extending the value chain: the value WEB

More and more companies are incorporating the Internet in their business strategies

through the use of value webs

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Value WEB example: Ford Corporation

• Ford Motor Company is forming many partnerships and alliances via the Web to offer services and products that otherwise would be too difficult, costly, or time-consuming

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Suppliers are an integral part of our business, and our success is interdependent with theirs. We rely on more than 2,000 production suppliers to provide many of the parts that are assembled into Ford vehicles. Another 9,000 suppliers provide a wide range of nonproduction goods and services, from production equipment to computers to advertising.” (Ford.com Web site)

• Collection of independent firms can use highly synchronized IT to coordinate value chains to produce product or service collectively, and force all market participants to subscribe to such a standards.

• Increase efficiency, making product substitution less costly, and raise entry cost.

• Internet can be used to build Web-based consortia to coordinate activities .

• More customer driven, less linear operation than traditional value chain

Value WEB: Internet has made it possible to create highly synchronized industry value chains, called value Webs

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A schematic Diagram of Value Web

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Synergies, Core Competencies, and Network-Based Strategies

Very seldom will you find a business that provides all of its own services, supplies, and processes throughout the

entire chain. It isn’t practical or efficient to do so. Almost every business relies on partnerships with other

companies to produce goods and services.

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What is the role of IS in these

• Information systems can improve overall performance of business units by promoting synergies and core competencies

• The most successful companies will determine the best synergies, core competencies and network-based strategies to reduce costs, improve products and services, and increase profits.

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1- Synergy• Synergies: The interaction or cooperation of two or

more organizations, substances, or other agents to produce a combined effect greater than the sum of their separate effects.

• When output of some units used as inputs to others, or organizations pool markets and expertise.

• These relationships may lower costs or generate profits, e.g. cooperation among banks.

• IT can be very helpful in creating synergies, through linking different disparate businesses.

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Examples on synergies• AOL has provided dial-up Internet access for consumers and

businesses since the early 1990s. In addition to providing Internet access it also creates specific content that is available only to its customers. The last few years has seen a huge increase in the demand for broadband access by customers across the U.S. AOL simply doesn’t have the necessary infrastructure to provide what its customers want. But other telecommunications companies such as BellSouth and Verizon can help AOL answer the demand through their networks. AOL, in synergy with the other companies can now provide the services customers want

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• Activity for which firm is world-class leader, which relies on knowledge, experience that are accumulated over many years

• IS help sharing knowledge across business units, and hence enhances competencies.

• IS encourages employees to become aware of new external knowledge and hence create more competencies.

2- Core Competencies

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Example of IS enhancing core competencies

Procter & Gamble’s intranet and directory of subject matter experts

•Help people work on similar problem share ideas and expertise

•Connects those working in R&D, engineering, purchasing, marketing, around the world using a portal.

• includes a directory of subject matter on problem solving and product development.

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3- Network-based strategies

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Network Externality Effect:

In a network, the marginal costs of adding another participant are almost zero, whereas the marginal gain is much larger. The larger the number of participants in a network, the greater the value to all participants, because each user can interact with more people.


What makes this model possible?• The availability of the Internet and Networks

makes this model of business possible.• IS facilitate business models based on large

networks of users or subscribers that take advantage of network economies.

• Internet can be used to build communities of users that result in building customer loyalty and enjoyment and build unique ties to customers, suppliers, and business partners.

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Three approaches to networked business strategies

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• Network economics• Virtual company model• Business ecosystems

• Traditional economics: Law of 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

• Network economics:• Marginal cost of adding new participant almost zero,

with much greater marginal gain• Value of community grows with size• Value of software grows as installed customer base

grows

1- Network Economics

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• Virtual company uses networks to ally with other companies to create and distribute products without being limited by traditional organizational boundaries or physical locations

• E.g. Li & Fung manages production, shipment of garments for major fashion companies, outsourcing all work to over 7,500 suppliers

2- Virtual company strategy

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• Industry sets of firms providing related services and products• Microsoft platform used by thousands of firms for their

own products• Wal-Mart’s order entry and inventory management

system• Keystone firms: Dominate ecosystem and create

platform used by other firms• Slot firms: Rely on platform developed by keystone firm• Individual firms can consider how IT will enable them to

become profitable niche players in larger ecosystems

3- Business Ecosystems

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An Ecosystem Strategic Model

The digital firm era requires a more dynamic view of the boundaries among industries, firms, customers, and suppliers, with competition occurring among industry sets in a business ecosystem. In the ecosystem model, multiple industries work together to deliver value to the customer. IT plays animportant role in enabling a dense network of interactions among the participating firms.

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• Sustaining competitive advantage• Because competitors can retaliate and copy strategic systems,

competitive advantage is not always sustainable; systems may become tools for survival

• Performing strategic systems analysis• What is structure of industry?• What are value chains for this firm?

• Managing strategic transitions• Adopting strategic systems requires changes in business goals,

relationships with customers and suppliers, and business processes

Using Systems for Competitive Advantage: Management Issues

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Ch3 Information System Organization and Strategy

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Transcript of Ch3 Information System Organization and Strategy