Chapter 3

Information
Systems,
Organizations, and
Strategy
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Chapter Outline
3.1Organizations and Information Systems
What Is an Organization?, Features of Organizations
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
3.3Using Information Systems to Achieve Competitive Advantage
Porters Competitive Forces Model
Information System Strategies for Dealing with Competitive Forces
The Internets Impact on Competitive Advantage
The Business Value Chain Model
Synergies, Core Competencies, and Network-Based Strategies
3.4 Using Systems For Competitive Advantage: Management Issues
Sustaining Competitive Advantage
Aligning IT with Business Objectives
Managing Strategic Transitions
3.5 Hands-On MIS
Management Decision Problems
Improving Decision Making: Using a Database to Clarify Business Strategy
Improving Decision Making: Using Web Tools to Configure & Price an Automobile
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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 Porters 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.

EBay Fine-Tunes Its Strategy

Problem: Losing market share to other online retailers, ultracompetitive 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 ITs role in the development of eBays

organization as it expands and makes acquisitions.
Illustrates the challenges of maintaining a competitive
advantage in a fast-moving, constantly-changing marketplace.

Management Information Systems

Chapter 3 Information Systems, Organizations, and Strategy

Organizations and Information Systems

Information technology and organizations

influence one another
Complex relationship influenced by organizations
structure, business processes, politics, culture,
environment, and management decisions

Organizations and Information Systems

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 madeor not madeby managers. Other factors mediating
the relationship include the organizational culture, structure, politics, business
processes, and environment.
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Organizations and Information Systems

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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Organizations and Information Systems

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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Organizations and Information Systems

The Behavioral View of Organizations

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

structures.
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Organizations and Information Systems

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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Organizations and Information Systems

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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Organizations and Information Systems

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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Organizations and Information Systems

Organizational politics
Divergent viewpoints lead to political
struggle, competition, and conflict
Political resistance greatly hampers
organizational change

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Organizations and Information Systems

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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Organizations and Information Systems

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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Organizations and Information Systems

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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Organizations and Information Systems

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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Disruptive Technologies: winners and losers

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 18

Organizations and Information Systems

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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Organizations and Information Systems

Other Organizational Features

Goals
Constituencies

Leadership styles
Tasks
Surrounding environments

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Chapter 3: Part 2
Information Systems, Organizations, and
Strategy

21

Section Outline

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

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How Information Systems Impact

Organizations and Business
Firms

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Impact of IS on Firms

Economic impact
Organizational & Behavioral
impact

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Economic Impact of IS
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
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Economic Impact of IS
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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Economic Impact of IS
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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Economic Impact of IS
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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Transaction Cost Theory

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.

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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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How Information Systems Impact Organizations and Business Firms

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.
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Agency theory
Explains what economic impact IS
has on organizations

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Agency theory
The principalagent 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 selfinterested 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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How Information Systems Impact Organizations and Business Firms

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
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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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Why IT Flattens Organizations?

1. Decision making relies on
knowledge and competence rather
than formal positions
2. Professional workers tend to be selfmanaging.

3. Decision making should become

more decentralized as knowledge
and information become more
widespread throughout the firm.

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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 organizations 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 doesnt 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
organizations 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 organizations 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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Implications for the Design and

Understanding of Information Systems:
factors to consider
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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Conclusions
For some jobs, its 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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Chapter 3

Information system and the

competitive advantage
How information system can be used to
achieve competitive advantages

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Chapter Outline

3.3
Using Information Systems to Achieve Competitive
Advantage
Porters Competitive Forces Model
Information System Strategies for Dealing with
Competitive Forces
The Internets Impact on Competitive Advantage
The Business Value Chain Model
Synergies, Core Competencies, and Network-Based
Strategies

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What is a competitive advantage?

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.
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
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Who is Porter?
Professor at Harvard Business School. He is a leading authority on
company strategy and the competitiveness of nations and regions.
Michael Porters 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
In Porters 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 industrys environment: new
market entrants, substitute products,
customers, and suppliers.

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Using Information Systems to Achieve Competitive Advantage

Porters Competitive Forces Model

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Force 1:Traditional competitors

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).

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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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Force 4: Customers
Can customers easily switch to competitors
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.

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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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Four generic strategies for dealing with

competitive forces, enabled by using IT
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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1- Low-cost leadership
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

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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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4- Strengthen customer and supplier intimacy

Use information systems to develop strong
ties and loyalty with customers and
suppliers; increase switching costs
Example: Chrysler, Amazon

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The Internets impact on competitive advantage

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
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Impact of the Internet on competitive forces

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Creation of new opportunities

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.

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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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Why Business value chain model is important

Porters 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
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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 firms products or services.
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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
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)

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Value WEB: Internet has made it possible to

create highly synchronized industry value
chains, called value Webs
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
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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 isnt 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 doesnt 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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2- Core Competencies
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.

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Example of IS enhancing core

competencies
Procter & Gambles 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
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.
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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
Network economics
Virtual company model
Business ecosystems

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1- Network Economics
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
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2- Virtual company strategy

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

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3- Business Ecosystems
Industry sets of firms providing related services and
products

Microsoft platform used by thousands of firms for their

own products
Wal-Marts 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
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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 an
important role in enabling a dense network of interactions among the participating
firms.
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Using Systems for Competitive Advantage:

Management Issues
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

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