Chapter 3 Information Systems, Organizations, Management, and Strategy

Teaching Objectives
Identify the salient characteristics of organizations that managers need to know in order to successfully build and use information systems. Evaluate the impact of information systems on organizations. Determine how information systems support the activities of managers in organizations. Analyze how businesses use information systems for competitive advantage. Identify the difficulties in building successful information systems, including systems that promote competitive advantage.

Key Terms
The following alphabetical list identifies the key terms discussed in this chapter. The page number for each key term is provided.
Agency theory, 13 Behavioral models, 16 Bureaucracy, 6 Bureaucratic model of decision making, 20 Chief information officer (CIO), 11 Choice, 18 Classical model of management, 15 Cognitive style, 19 Competitive forces model, 29 Core competency, 29 Decisional roles, 17 Design, 18 Efficient customer response system, 27 End users, 11 Focused differentiation, 25 Garbage can model, 204 Implementation, 18 Information partnership, 29 Information systems department, 10 Information systems managers, 10 Informational roles, 17 Intelligence, 18 Interpersonal roles, 16 Intuitive decision makers, 20 Managerial roles, 16 Network economics, 31 Operational control, 17 Organization, 5 Organizational culture, 7 Organizational models of decision making, 20 Political models of decision making, 20 Primary activities, 22 Product differentiation, 24 Programmers, 10 Rational model, 19 Standard operating procedures (SOPs), 7 Strategic decision making, 17 Strategic information system, 21 Strategic transitions, 31 Structured decisions, 18 Support activities, 22 Switching costs, 27 Systematic decision makers, 19 Systems analysts, 10 Transaction cost theory, 12 Unstructured decisions, 17 Value chain model, 22 Value web, 22

Knowledge-level decision making, 17 Management control, 17

Virtual organization, 14

The opening vignette, Flextronics' Strategic Supply Chain, tells the story of how the company's supply chain management system helped the company become a multibillion-dollar global company by enabling it to maximize efficiency and profits by standardizing and coordinating work. This vignette shows how the company is using its information systems to realize a strategic advantage. This vignette illustrates how every function can contribute to a companys profitability and also how important it is to think of the company and its business as an enterprise. You should stress that the article also demonstrates how information openness and sharing are a positive rather than a way that might reveal company secrets. Also, students should note that the company wants to expand by moving into closely related functions, such as design work for the products it produces. Finally, relate the diagram at the beginning of the chapter to the Flextronics article. This is an excellent way for students to see the roles of management, technology, and organization. To facilitate class discussion, ask your students to discuss the following questions as they relate to the opening vignette. 1. How does Flextronics use its supply chain information? What information does it use? 2. What are the advantages to using standardized campuses and enterprise resource planning software? 3. What are the advantages of the global information system? 4. What is Flextronics's new strategy? How can its supply chain management system help it achieve its strategy? 5. Do you consider Flextronics's information systems to be strategic information systems? The first section, Organizations and Information Systems, introduces students to both the technical and behavioral definitions of an organization, suggests that information technology and organizations have a complex two-way relationship, discusses common features to all organizations, and identifies the unique features of organizations. It is critical for the rest of the course that students understand what an organization is. Moreover, students need to recognize from this section that the relationship between information systems and organizations is very complex. As an example, you can take a well-known organization in your area, such as a bank, and discuss the organization from both a technical and behavioral standpoint. By using an example, you can illustrate to students that the technical and behavioral definitions are indeed complementary. Ask students for examples of situations where the mediating factors have influenced both the organization and the information technology it uses. The Windows on Organization: E-commerce, South Korean, and Middle Eastern Style, is an excellent article to discuss in class. This article beautifully illustrates how environments, culture, and organizational characteristics influence the success of e-commerce.

Section two, The Changing Role of Information Systems in Organizations, discusses information technology infrastructure and information technology services, how information systems affect organizations, and the Internet and organizations. Students should realize that organizations make important decisions about the technical and organizational configurations of systems, as well as who will design, build, and maintain the organization's IT infrastructure. When describing how information systems affect organizations, you should spend a few minutes discussing the economic and behavioral theories. Have students apply these theories to a familiar company, such as Dell or Chrysler. This text focuses on the management aspects of information systems, and section three, Managers, Decision Making, and Information Systems, introduces students to managerial roles, the process of decision making, stages of decision making, and models of decision making. Students will easily understand the classical description of management and may even think of management that way. However, students need to understand what managers actually do, including how they make decisions, and what their roles are. Section four, Information Systems and Business Strategy, is one of the most critical sections in the text because it actually defines strategy when it defines strategic information systems. Understanding business strategy and how information systems can aid employees in making far-reaching and deep-rooted decisions is critical to the long range success of any corporation. As the text says, and as students need to focus on, At the business level of strategy, the key question is, How can we compete effectively in this particular market? Within this discussion, the text defines value chain and its critical role in the success of a company, including its relationship to how companies think about and relate to their customers. Ask your students to apply the value chain model to your university to see where technology is applied. Note the emphasis on tying together the customers, manufacturers, and suppliers. Retailers such as Wal-Mart also apply value chain and supply chain management. Wal-Mart's systems allow it to track in-store sales down to the department and item level, thus one can see why Wal-Mart is such a strong competitor. Note that ERP systems, such as SAP, are usually part of the core of such supply chain management. You should spend time with your students on these issues because corporate success can depend on understanding what is discussed here. The firm-level and industry-level strategies are analyzed in this section, and a key analytical tool, the competitive forces model, is also introduced here. The competitive forces model and the basic strategies of product differentiation, focused differentiation, developing tight linkages, and cost leadership are easy to understand. Ask your working students to describe the strategies pursued by their organizations. Also, ask your students to describe the strategy pursued by your university. A high SAT or ACT school is using a product differentiation strategy. Students must understand these concepts and learn how to apply these ideas, if they wish to be successful within a successful company. Strategic transition means we have to change how the organization works, behaves, and is organized. Students may bristle at this idea. Downsizing may be a concomitant of such transitions. Insurance firms were notorious for using information systems to manage insurance policies in the same way they did before information systems were introduced, and using computers may have resulted in the loss of jobs.

Window On Boxes
Window on Organizations: E-Commerce, South Korean and Middle Eastern Style
What organizational factors describe why South Korea and the Arab Middle East have had such different experiences in adopting e-commerce? The answer to this question can be found in the differences that exist between the economic and cultural environments of the two countries. The South Koreans have easy, affordable access to the Internet, and are quite comfortable using the Internet. The South Korean government is working to advance the use of technology. Although, the South Koreans primarily use the Internet for communication and information, the government is taking steps to develop a highly secure digital signature system. This should encourage individuals to shop online more. Additionally, the government is encouraging the use of electronic money and credit cards. The Middle East's use of e-commerce sharply contrasts that of the South Koreans. Few ecommerce sites exist, and those that do only have about 1,000 visitors a day. The cost and availability of technology, high tariffs, and few credit cards are all reasons why e-commerce is not as successful in the Middle East. How would a company's management, organization, and technology have to change to either purchase or sell goods in South Korea or the Middle East? Students should recognize the influence of government on business. Most of the problems are larger than any one company can solve. Its management would first have to realize the problems and opportunities, decide how they would proceed, and develop the organization and technology to proceed. It would certainly need to hire or train a staff that has the technological skills needed to operate in South Korea and the Middle East. The organization would need to understand the legal environments in both countries, so that the company can decide how to operate, what it can purchase, what it can import, what it can sell, and what it can export. The company could not change the legal environment, but it needs to determine how it can protect itself and its assets in both countries. In the Middle East, the company should find customers who use credit cards or who are willing to be taught how to use them. The management, organization, and technology must be well coordinated to respond to the current situation so it can operate successfully.

In the Middle East, organizational factors include the lack of computers at many companies and the concomitant lack of computer skills by many employees. The organizations will need to train their employees and the employees of their suppliers and customers. Such companies also need employees who can develop the needed software, or modify it, for use in South Korea and the Middle East.

Window on Management: Dueling Travel Sites

Describe the problems traditional and online travel agents face, and then describe the Cendant and Expedia strategies?

Travel agents generally earn a fee when they book a reservation. The providers are looking for ways to reduce costs, and an obvious way to reduce costs is to eliminate the reservation fees and commissions. Since more and more people are becoming comfortable with booking reservations online and are saving time and money, the traditional travel agent is likely to face many difficulties in the future. Although there are many of us who make online reservations, there are also individuals who enjoy the personal touch that the traditional travel agent provides. For instance, the traditional travel agent can provide you with ideas about places to go, can assemble the trip for you, and can make all of the arrangements and sometimes rearrangements for you. Cendant's strategy is to use the Galileo system and existing network of travel agents to help airlines better market their tickets and to sell special packaged trips. The Galileo system also assembles special packages that are then broadcast to travel agents. When a reservation is booked, Cendant will receive a transaction fee. In contrast, Barry Diller envisions Expedia as an online emporium where travelers can design their own travel packages or select from an option of travel packages. Essentially, the Expedia cite provides one-stop shopping. Which of the two companies is most likely to succeed? Why? At this point in time, Expedia has a good shot of succeeding. Cendant will probably have a more difficult time. The case mentions that the Galileo system uses out-of-date and expensive technology and will still charge a reservation fee. Additional Comments: If you have the time, ask your students if any of them have used an online travel agency or a traditional travel agency. Ask the students to compare and contrast the services provided by each. Also, ask your students to visit Expedia's Web page and prepare an evaluation.

For Discussion Questions

1. It has been said that there is no such thing as a sustainable strategic advantage. Do you agree? Why or why not? Students will argue both sides, and there is no definite answer to the question. There is little that a company can do that cannot be duplicated over time. For example, Citibank and its ATM machines and American Airlines and its reservation systems are good examples. Think about companies that had strategic advantages in the 1920s or 1940s that no longer exist. In contrast, some companies, such as Wal-Mart, maintain a strategic advantage for a long time. Wal-Mart maintains its lead by striving to advance even further. Gary Hamel, whom some call the leading strategy expert in business today, says there is no such thing as sustainable strategic advantage. Hamel is founder and chairman of Strategos and a research fellow at Harvard Business School. He believes that, in the past, most companies were built to do one thing exceedingly well for an exceedingly long period of time. In todays marketplace, companies built for scale, replication, diligence, and exactitude must learn to change, adapt, and experiment at the speed that you see in the new economy. New economy companies must master some virtues of the old economy. These companies are learning that scale, operational excellence, and global infrastructure are

important. They can constitute hard-to-duplicate competitive advantages that allow them to capture the rents on their innovation. Many have been trained to think that there is such a thing as sustainable competitive advantage. They have been trained to think about innovation in products and technology, not innovation in business models. They assume that being radical is risky and being incremental is safe. We have to rewire people with new thinking skills. 2. It has been said that the advantage that leading-edge retailers such as Dell and WalMart have over their competition isn't technology, it's their management. Do you agree? Why or why not? Students will support both sides of this question. Although both companies have strategic information systems, these strategic systems do not guarantee a long lasting competitive advantage, since systems can be replicated. Technology that was once considered innovative will eventually become commonplace. Within both companies, management understands the important role that information systems can play for the organization. Both companies have forward-thinking management that realizes the right information systems can support the company's strategy and also help the company achieve and maintain a strategic advantage. Dell uses its strategic information systems to pursue its product differentiation strategy, while Wal-Mart uses its strategic information systems to pursue its "everyday low prices" strategy. Both companies use their systems to create very efficient value chains and create strategic links with suppliers, business partners, and in the case of Dell, its customers. In order to achieve and maintain a strategic advantage, both Dell and Wal-Mart management carefully plan and manage their technology. When designing the strategic information systems, management had to examine the required changes in the business goals, customer and supplier relationships, internal operations, and information architecture. Additionally, new business processes for coordinating their activities with their customers, suppliers and other organizations had to be developed. This required excellent management.

Review Questions
1. What is an organization? Compare the technical definition of organizations with the behavioral definition. The technical definition for an organization defines an organization as a stable, formal social structure that takes resources from the environment and processes them to produce outputs. The technical definition of an organization focuses on three elements: capital and labor, production, and products for consumption. The technical definition also implies that organizations are more stable than an informal group, are formal legal entities, and are social structures. The behavioral definition states that an organization is a collection of rights, privileges, obligations, and responsibilities that are delicately balanced over a period of time through conflict and conflict resolution. This definition highlights the people within the organization, their ways of working, and their relationships.

The technical definition shows us how a firm combines capital, labor, and information technology. The behavioral definition examines how information technology impacts the inner workings of the organization. The behavioral definition is the more realistic of the two. 2. What features do all organizations have in common? In what ways can organizations differ? Table 3-3 summarizes the common and unique features of organizations. Common features for organizations include formal structure, standard operating procedures, politics, and culture. Organizations can differ in their organizational type, environment, goals, power, constituencies, function, leadership, tasks, technology, and business processes. 3. How are information technology services delivered in organizations? Describe the role played by programmers, systems analysts, information systems managers, and the chief information officer (CIO). Information services are usually designed, built, and operated through information systems departments which are assigned the responsibilities of maintaining the hardware, software, data storage, and networks that comprise the firms information technology infrastructure. Depending on the size of the organization, and thus its information systems department, the department includes programmers, systems analysts, telecommunications and network specialists, and operations staff. Programmers are the people who actually write or create the computer instructions. Systems analysts are the liaison between the users of an information system and the people who create it. The information systems managers are the leaders of various specialists in the information systems department. The chief information officer (CIO) is the overall manager of the information systems department who sets policies and the direction for the information systems department. The CIO is at the same level as the chief operating officer (COO) and the chief financial officer (CFO) in the organization. Each of these officers is responsible for part of the organization's operation. The CEO, CFO, and CIO help to set policy for the firm. 4. Describe the major economic theories that help explain how information systems affect organizations. The two economic theories discussed in the book are transaction cost theory and agency theory. The transaction cost theory is based on the notion that a firm incurs transaction costs when it buys on the marketplace rather than making products for itself. Traditionally, firms sought to reduce transaction costs by getting bigger, hiring more employees, vertical and horizontal integration, and small-company takeovers. Information technology helps firms lower the cost of market participation (transaction costs) and helps firms shrink in size while producing the same or greater amount of output. The agency theory views the firm as a nexus of contracts among interested individuals. The owner employs agents (employees) to perform work on his or her behalf and delegates some decision-making authority to the agents. Agents need constant supervision and management, which introduces management costs. As firms grow, management costs rise. Information technology reduces agency costs by providing

information more easily so that managers can supervise a larger number of people with fewer resources. 5. Describe the major behavioral theories that help explain how information systems affect organizations. Behavioral theories, from sociology, psychology, and political science, are useful for describing the behavior of individual firms. Behavioral researchers theorize that information technology could change the decision-making hierarchy by lowering the costs of information acquisition and distribution. IT could eliminate middle managers and their clerical support by sending information from operating units directly to senior management and by enabling information to be sent directly to lower-level operating units. It even enables some organizations to act as virtual organizations because they are no longer limited by geographic locations. One behavioral approach views information systems as the outcome of political competition between organizational subgroups. IT becomes very involved with this competition because it controls who has access to what information, and information systems can control who does what, when, where, and how. 6. Why is there considerable organizational resistance to the introduction of information systems? There is considerable organizational resistance to new information systems because they change many important organizational dimensions, such as culture, structure, politics, and work. Leavitt puts forth a model that says that changes in technology are absorbed, deflected, and defeated by organizational task arrangements, structures, and people. In this model the only way to bring about change is to change the technology, tasks, structure, and people simultaneously. In a second model, the authors speak of the need to "unfreeze" organizations before introducing an innovation, quickly implementing the new system, and then "refreezing" or institutionalizing the change. 7. Compare the descriptions of managerial behavior in the classical and behavioral models. The classical model suggests that managers perform five classical functions. These functions are planning, organizing, coordinating, deciding, and controlling. Although the classical model describes formal managerial functions, it does not provide a description of what managers actually do. The behavioral models suggest that managerial behavior is less systematic, more informal, less reflective, more reactive, less well-organized, and somewhat frivolous. The behavioral models differ from the classical model in that managers perform a great deal of work at an unrelenting pace, managerial activities are fragmented, managers prefer speculation, managers prefer oral forms of communication, and managers give the highest priority to maintaining a diverse and complex web of contacts. 8. What specific managerial roles can information systems support? Where are information systems particularly strong in supporting managers, and where are they weak? Table 3-4 compares managerial roles with the support systems. Information systems

support the liaison, nerve center, disseminator, spokesperson, and resource allocator roles. Currently information systems do not support the figurehead, leader, entrepreneur, disturbance handler, and negotiator roles. Information systems are the strongest at the informational role and the weakest at the interpersonal and decisional roles. 9. What are the four stages of decision making described by Simon? Simon's four stages of decision making include intelligence, design, choice, and implementation. During the intelligence stage, organizational problems are identified and understood. During the design stage, possible alternative solutions to the problem are conceived. During the choice stage, a choice is made from the possible alternatives. During the implementation stage, the decision is put into effect and the solution's progress is reported. 10. Compare individual and organizational models of decision making. Individual models of decision making assume that human beings are in some sense rational, although there are a number of individual models. The rational model assumes that individuals can identify goals, rank all possible alternatives, and then select the alternative that contributes the most. However, some research finds that this process is too complex, that individuals cannot possibly specify all alternatives, much less select the best. Research suggests that systematic decision makers structure the decision based on some formal method. On the other hand, intuitive decision makers use many different approaches and use trial and error to find a solution. Organizational decision making considers the structural and political characteristics of an organization. Organizational models suggest that decisions are not made individually, but are made by groups or the organization. The bureaucratic model of decision making suggests that decisions are shaped by the organization's standard operating procedures. The political models of decision making suggest that decisions result from competition and bargaining among the organization's interest groups and key leaders. The "garbage can" model suggests that organizations are not rational and that decisions are solutions that become attached to problems for accidental reasons. 11. What is the impact of the Internet on organizations and the process of management? The Internet increases the accessibility, storage, and distribution of information and knowledge for organizations, nearly any information can be available anywhere at any time. The Internet increases the scope, depth, and range of information and knowledge storage. It lowers the cost and raises the quality of information and knowledge distribution, that is, it lowers transaction and information acquisition costs. By using the Internet, organizations may reduce several levels of management, enabling closer and quicker communication between upper levels of management and the lower levels. The Internet also lowers agency costs. 12. What is a strategic information system? What is the difference between a strategic information system and a strategic-level system? A strategic information system is a computer system at any organizational level that fundamentally changes the goals, operations, products, services, or environmental

relationships of organizations, in effect changing the very nature of the firms business. In contrast, strategic-level systems provide long-term planning information to senior executives. Strategic information systems are more far-reaching and deeply rooted, and fundamentally transform the organization itself. 13. Describe appropriate models for analyzing strategy at the business level, and the types of strategies and information systems that can be used to compete at this level. Low-cost producer, product differentiation, and focused differentiation are three generic strategies available at the business level. If a business pursues the low-cost producer strategy, it can evaluate its value chain to identify primary and secondary activities where information technology can effectively help the business obtain a competitive advantage. Strategic information systems help a company offer its products and services at a lower cost than its competitors, or strategic information systems enable the company to provide more value at the same cost as its competitors. Strategic information systems enable the company to improve its internal value chain, as well as establish tight, efficient linkages with its suppliers, customers, and business partners. Additionally, a company can participate in a value web. Firms pursuing a product differentiation strategy use information systems to create new products and services. These products and services are not easily duplicated by competitors, and therefore, the company does not need to compete on the basis of cost. A company pursuing a focused differentiation strategy develops new market niches for its specialized products and services. The company competes in this target market by offering its products and services in a superior manner. A company can use strategic information systems to "mine" for information about a particular market or group of customers. The strategic information systems enable the company to analyze customer buying patterns, tastes, and preferences. Companies can use their strategic information systems to establish tight linkages to customers and suppliers. Companies can use their strategic information systems to create efficient customer response systems, switching costs, and in some instances, stockless inventories. 14. Describe appropriate strategies for the firm level, and how information systems can help companies compete at this level. A firm is typically a collection of businesses which are organized financially as a collection of strategic business units. Information systems can enhance the integration of separate units into a whole (synergy). Also, information systems can allow different business units to share information in the organizations core competencies. 15. How can the competitive forces model, information partnerships, and network economics be used to identify strategies at the industry level? These industry-level models help a company answer the key strategic question of How and when should we compete with as opposed to cooperate with others in the industry? Firms can form information partnerships and even link their information systems to achieve

unique synergies. An information partnership enables companies to join forces without actually merging by sharing information. For example, these partnerships can help firms gain access to new customers as can be seen in the partnership between American Airlines and Citibank. The competitive forces model explains the interaction of external influences (threats and opportunities) that affect an organization's strategy and ability to compete. The threats include new entrants into the market, pressure from substitute products and services, bargaining power of customers, and positioning of traditional industry competitors. Information systems are used at this level to develop industry-wide standards for exchanging information or business transactions, create value webs, and create industrywide, IT-supported consortia, symposia, and communications networks for coordinating activities. Traditionally, the more any given resource is applied to production, the lower the marginal gain, until additional inputs do not produce additional outputs (the law of diminishing returns). However, some situations exist where adding additional participants adds almost nothing to costs. One common example is when the telephone company adds another person to its network. The company has almost no additional continuing costs. Finding such opportunities will benefit a company. For example Microsoft Corporation supports a community of software developers around the world who support local companies in making better use of Microsoft products. Adding an additional developer, or many new developers, costs Microsoft almost nothing. The network economics model suggests that in a network the addition of another participant entails zero marginal costs but can create much lager marginal gain. For instance, the Internet can be used to build "communities of users". 16. How have the value chain and competitive forces models changed as a result of the Internet and the emergence of digital firms? Internet technology has enabled a firm to extend the concept of its value chain to include all of the firms suppliers and business partners into a single Web. The main reason for this is that the Internet greatly reduces the cost of connecting online with partners. This enables companies to work directly with companies around the world and with companies too small to build their own international network. The same is true with digital firms because they essentially exist mainly because they can operate over the Net. Similarly, because of the Internet and digital firms, corporations find it cheaper and easier to relate to suppliers and customers, enabling the company to meet the competitive problem identified using the competitive forces model. The competitive forces model has also changed in the Internet era because firms do not just compete with each other within the same industry, they compete as part of industry sets. 17. Why are strategic information systems difficult to build? Strategic information systems are difficult to build because they can entail massive sociotechnical changes within the organization. Organizational boundaries between the firm and its customers and suppliers and between departments within the organization usually must be broken down. New relationships among parts of the company and with customers and suppliers must be redefined. Sometimes entirely new organizational

structures may need to be built (as with the Saturn division of General Motors). Also, resistance to such changes may exist because these changes impact responsibilities and jobs.

Group Project
With a group of three or four students, select a company described in the Wall Street Journal, Fortune, Forbes, or another business publication. Visit the companys Web site to find out additional information about the company and to see how the firm is using the Web. On the basis of this information, analyze the business. Include a description of the organizations features, such as important business processes, culture, structure, and environment, as well as its business strategy. Suggest strategic information systems appropriate for that particular business, including those based on Internet technology, if appropriate. If possible, use electronic presentation software to present your findings to the class. Since students will select different companies, group answers will vary. General comments for facilitating project preparation are provided below. The groups can use the value chain to identify the primary and support activities that most directly create value for the company's customers. The groups can then list and describe the information systems that would support or improve these activities, thus adding value to the chain. The groups can use Figure 3-15 to help identify specific threats and opportunities for their company. The groups can then select one or more of the basic competitive strategies described in the text to deal with these competitive forces, adapting the strategy to their company. Finally, the groups should list and describe the information systems that will contribute to their company's ability to effectively execute the specific strategies.

Case Study What Happened to Kmart?

1. Evaluate Kmart using the value chain and competitive forces models. What was Kmart's business model and business strategy? Kmart has numerous problems with its value chain. This is evident from the suppliers sending items that the suppliers want to sell, shelves remaining unstocked, the "hand shifting" reordering process for popular items, products being allocated by central planners and not based on individual store demand, excess inventory stored in 15,000 truck-trailers behind its stores, shrinkage, and having to choose to either ship toothpaste or Christmas trees. Since its entrance as the first discount store in the 1960s, Kmart has not been able to ward off new entrants into the discount chain business. The new entrants, such as WalMart and Target, have come on strong and surpassed Kmart. Kmart's suppliers seem to be calling the shots with the retailer, since they are promoting the items that they can sell and not helping Kmart address its mounting problems. Kmart's customers are voting with their pocketbooks and shopping at its competitors' stores. Kmart uses a promotions-drive business model. The company uses advertising circulars

to promote its "blue-light" specials. 2. What was the relationship of information systems to Kmart's business processes and business strategy? How well did its systems support its strategy? Kmart's information systems and its business processes and business strategy were not in alignment. As an example, the information systems could collect data, but the data were not available for analysis and decision-making purposes. As the case mentions, forecasting decisions were based on management's judgment, not on the data. Kmart's systems did not support its strategy. One of the problems mentioned in the case is that its supply chain management system could not easily accommodate the sharp increases and decreases in demand. The distribution center's outdated technology led to supplies sitting on pallets for 24 hours until they were recorded in the central tracking system. When reordering popular products, the employees would hand sift through previous purchasing receipts. 3. What management, organization, and technology factors contributed to Kmart's problems? From the case, it appears that Kmart management is inconsistent with its implementation of the company's strategy. Management is unable to use data to forecast demand; it has lost sight of its core competencies, and is unable to change Kmart's image. Although management wanted to restructure its supply chain, it continued to expand its product offerings, as opposed to focusing on the fastest selling items. Mr. Conaway's plan to restructure Kmart has obviously not worked out. Although Mr. Conaway wanted the local stores to make their own stocking decisions, the stocking decisions were still being made by the central planners. When the new system was installed, Mr. Buzek made the comment that "the information would be useless because management just didn't believe in the system." Although the company uses a promotions-driven strategy, the company reduced its advertising circulars. As the case points out, no other alternative for achieving the strategy was provided. Although Kmart wanted to reinvent its supply chain, management was unwilling to unify the distribution system's two computers because the project was too expensive. From an organizational perspective, the suppliers, central planners, business processes, individual stores, warehouses, and distribution center have definite communication problems and are not sharing data as efficiently as possible. One could argue that very little data sharing is going on. Central planners are making the stocking decisions for the individual stores, but what needs to be stocked at each store is not being effectively communicated. From a technology perspective, outdated technology and incompatible systems were in place. The new i2 project did not succeed for a variety of reasons, including the need for more hardware, the inability of the project to connect the point-of-sale systems and inventory systems to the distribution systems, and not being robust enough to handle a large number of SKUs.

4. How important was supply chain management in contributing to Kmart's problems? Evaluate Conaway's decision to use i2 software to improve Kmart's supply chain management. Supply chain management was very important to Kmart. Kmart has been unable to successfully manage its inbound logistics, operations, sales and marketing, service, and outbound logistics. Unfortunately, the company's inability to effectively manage its supply chain led to ineffective advertising, lots of items being overstocked, popular items being understocked, a large product offering, poor communication with suppliers and its business units, items sitting on pallets waiting to be entered into the central tracking system, and shipping problems. The goals for the i2 project were commendable, since the project was supposed to improve Kmart's sales forecasting, inventory sourcing, logistics, and reporting. The project was supposed to facilitate micromarketing, supplier product tracking, order execution, shipment scheduling, and delivery tracking. It is interesting that Mr. Conaway chose i2 Technologies for the new supply chain management project, since i2 Technologies had "only recent and limited experience in the retail sector." The decision to use i2 Technologies was not a good decision, since the system was not designed to work with the large number of SKUs, Kmart (according to some) wrote off and abandoned some of its i2 software, the project fell behind schedule, and the inability to connect the point-of-sale systems and inventory systems to the distribution systems. 5. Were those blaming software for the collapse of Kmart correct? Explain your answer. Actually, there is enough blame to go around. i2 Technologies did a very poor job analyzing and designing the system for Kmart. It also appears that Kmart's management did not get behind the project and was also unwilling to transform its core business processes. 6. It has been said that "Wal-Mart uses their IT strategically, and they fully integrate it into their operating model." Does this statement apply to Kmart? Explain your response. This statement does not apply to Kmart. Kmart is using an outdated business model and has been unwilling to change its model. Its unwillingness to change is one of the reasons why Wal-Mart and Target have been able to successfully compete against Kmart and why Kmart is in bankruptcy. 7. List the problems Conaway faced when he took over Kmart, and then describe the short- and long-range policies you would have followed had you been in his place. When Mr. Conaway took over Kmart, he faced several problems, including stiff competition from Wal-Mart and Target. The company was using an outdated business model, spending more money than the competition to get its goods into its stores, its information systems were collecting data but not using it effectively, it had significant problems with its entire value chain, it had a frumpy reputation, its shelves were often empty, it offered a wide range of products, it provided poor customer service, and it did not

care about the competition. Students will provide a variety of short- and long-range policy recommendations.