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Information Systems, Organizations, and Strategy

Chapter 3

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

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.

Learning Objectives

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

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.

Learning Objectives (cont.)

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Information technology and organizations influence each other
Relationship influenced by organization’s
Structure
Business processes
Politics
Culture
Environment
Management decisions

Organizations and Information Systems

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

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.

FIGURE 3-1

THE TWO-WAY RELATIONSHIP BETWEEN ORGANIZATIONS AND INFORMATION TECHNOLOGY

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

What is an organization?
Technical definition:
Formal social structure that processes resources from environment 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

Organizations and Information Systems

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

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.

FIGURE 3-2

THE TECHNICAL MICROECONOMIC DEFINITION OF THE ORGANIZATION

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

THE BEHAVIORAL VIEW OF ORGANIZATIONS

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

FIGURE 3-3

how inputs are combined to create outputs when technology changes are introduced into the company.

building new information systems, or rebuilding old ones, involves much more than a technical rearrangement of machines or workers

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Routines and business processes

Routines (standard operating procedures)

Precise rules, procedures, and practices developed to cope with virtually all expected situations
As employees learn these routines, they become highly productive and efficient, and the firm is able to reduce its costs over time as efficiency increases.

Business processes: Collections of routines

Business firm: Collection of business processes

Organizations and Information Systems

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

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.

FIGURE 3-4

ROUTINES, BUSINESS PROCESSES, AND FIRMS

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Organizational politics

Divergent viewpoints lead to political struggle, competition, and conflict.

Political resistance greatly hampers organizational change.

Organizations and Information Systems

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

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
rarely publicly announced or discussed.

A powerful unifying force that restrains political conflict and promotes common understanding, agreement on procedures, and common practices.

May be powerful unifying force as well as restraint on change

Organizations and Information Systems

Any technological change that threatens commonly held cultural assumptions usually meets a great deal of resistance.

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

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.

Organizations and Information Systems

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

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.

FIGURE 3-5

ENVIRONMENTS AND ORGANIZATIONS HAVE A RECIPROCAL RELATIONSHIP

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Disruptive technologies
Technology that brings about sweeping change to businesses, industries, markets usually with less functionality and much less cost, than existing products.
substitute products that perform as well as or better (often much better) than anything currently produced.
Examples: personal computers, word processing software, the Internet
First movers and fast followers
First movers—inventors of disruptive technologies
Fast followers—firms with the size and resources to capitalize on that technology

Organizations and Information Systems

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

5 basic kinds of organizational structure
Entrepreneurial:
Small start-up business
Machine bureaucracy (require little judgment):
Midsize manufacturing firm.
Professional bureaucracy:
Law firms, school systems, hospitals
nonroutine tasks:
Consulting firms

Organizations and Information Systems

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Economic impacts
IT changes relative costs of capital and the costs of information: it is substituted for labor, which historically has been a rising cost.
Information systems technology is a factor of production, like capital and labor
IT affects the cost and quality of information and changes economics of information
Information technology helps firms contract in size because it can reduce transaction costs (the cost of participating in markets)
Outsourcing

How Information Systems Impact Organizations and Business Firms

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Transaction cost theory
Firms seek to economize on transaction costs (the costs of participating in markets).
Using markets is expensive because of costs such as locating and communicating with distant suppliers, monitoring contract compliance, buying insurance.
hiring more employees, buying suppliers and distributors
IT lowers market transaction costs for firm, making it worthwhile for firms to transact with other firms rather than grow the number of employees.

How Information Systems Impact Organizations and Business Firms

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Information technology also can reduce internal management costs.
Agency theory:
Firm is nexus of contracts among self-interested parties requiring supervision.
Firms experience agency costs (the cost of managing and supervising) which rise as firm grows.
IT can reduce agency costs, making it possible for firms to grow without adding to the costs of supervising, and without adding employees.

How Information Systems Impact Organizations and Business Firms

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Organizational and behavioral impacts
IT flattens organizations
Decision making is pushed to lower levels.
Fewer managers are needed (IT enables faster decision making and increases span of control).
Postindustrial organizations
Organizations flatten because in postindustrial societies, authority increasingly relies on knowledge and competence rather than formal positions.
Ex. The global consulting service

How Information Systems Impact Organizations and Business Firms

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Information systems can reduce the number of levels in an organization by providing managers with information to supervise larger numbers of workers and by giving lower-level employees more decision-making authority.

FIGURE 3-6

FLATTENING ORGANIZATIONS

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Organizational resistance to change
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.
Most common reason for failure of large projects is due to organizational and political resistance to change.

How Information Systems Impact Organizations and Business Firms

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

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.

FIGURE 3-7

ORGANIZATIONAL RESISTANCE AND THE MUTUALLY ADJUSTING RELATIONSHIP BETWEEN TECHNOLOGY AND THE ORGANIZATION

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Why do some firms become leaders in their industry?
Michael Porter’s competitive forces model
Provides general view of firm, its competitors, and environment
Five competitive forces shape fate of firm:

Traditional competitors

New market entrants

Substitute products and services

Customers

Suppliers

Using Information Systems to Achieve Competitive Advantage

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

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 other forces in the industry’s environment: new market entrants, substitute products, customers, and suppliers.

FIGURE 3-8

PORTER’S COMPETITIVE FORCES MODEL

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Traditional competitors
All firms share market space with competitors who are continuously devising new products, services, efficiencies, and switching costs.
New market entrants
Some industries have high barriers to entry, for example, computer chip business.
New companies have new equipment, younger workers, but little brand recognition.

Using Information Systems to Achieve Competitive Advantage

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Substitute products and services
Substitutes customers might use if your prices become too high, for example, iTunes substitutes for CDs
The more substitute products and services in your industry, the less you can control pricing and the lower your profit margins.
Customers
A profitable company depends on its ability to attract and retain customers
Can customers easily switch to competitor’s products? Can they force businesses to compete on price alone in transparent marketplace?
Suppliers
Market power of suppliers when firm cannot raise prices as fast as suppliers

Using Information Systems to Achieve Competitive Advantage

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Four generic strategies for dealing with competitive forces, enabled by using IT:
Low-cost leadership
Product differentiation
Focus on market niche
Strengthen customer and supplier intimacy

Using Information Systems to Achieve Competitive Advantage

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Low-cost leadership
Produce products and services at a lower price than competitors
Example: Walmart’s efficient customer response system;

Product Differentiation

Enable new products or services, greatly change customer convenience and experience
Example: Google, Nike, Apple
Mass customization: offer individually tailored products or services using the same production resources as mass production

Using Information Systems to Achieve Competitive Advantage

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Focus on market niche
Use information systems to enable a focused strategy on a single market niche; specialize
Example: Hilton Hotels’ OnQ system, Credit card companies
Strengthen customer and supplier intimacy
Use information systems to develop strong ties and loyalty with customers and suppliers
Increase switching costs
Example: Netflix, Amazon

Using Information Systems to Achieve Competitive Advantage

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

THE BUSINESS VALUE CHAIN MODEL

Firm as series of activities that add value to products or services

Highlights activities where competitive strategies can best be applied
Primary activities: are most directly related to the production and distribution of the firm’s products and services
support activities: make the delivery of the primary activities possible ex. employee recruiting, hiring, and training
At each stage, determine how information systems can improve operational efficiency and improve customer and supplier intimacy
Utilize benchmarking: involves comparing the efficiency and effectiveness of your business processes, industry best practices the most successful solutions or problem-solving methods for consistently and effectively achieving a business objective.

Using Information Systems to Achieve Competitive Advantage

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

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.

FIGURE 3-9

THE VALUE CHAIN MODEL

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Value web:
Collection of independent firms using highly synchronized IT to coordinate value chains to produce product or service collectively
Firms will accelerate time to market and to customers by optimizing their value web relationships to make quick decisions on who can deliver the required products or services at the right price and location.

Using Information Systems to Achieve Competitive Advantage

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

The value web is a networked system that can synchronize the value chains of business partners within an industry to respond rapidly to changes in supply and demand.

FIGURE 3-10

THE VALUE WEB

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Information systems can improve overall performance of business units by promoting synergies and core competencies
Synergies
When output of some units used as inputs to others, or organizations pool markets and expertise
Example: Purchase of YouTube by Google

Using Information Systems to Achieve Competitive Advantage

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Core competencies
Activity for which firm is world-class leader
Relies on knowledge, experience, and sharing this across business units
Example: directory of subject matter experts

Using Information Systems to Achieve Competitive Advantage

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Network-based strategies
Take advantage of firm’s abilities to network with each other
Include use of:
Network economics
Virtual company model
Business ecosystems

Using Information Systems to Achieve Competitive Advantage

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

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
Business models based on a network may help firms strategically by taking advantage of network economics
Network economics:
Marginal cost of adding new participant almost zero, with much greater marginal gain
Value of community grows with size
No. of subscribers in the Internet, the greater the value to all participants
Value of software grows as installed customer base grows

Using Information Systems to Achieve Competitive Advantage

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

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
Example: Li & Fung manages production, shipment of garments for major fashion companies, outsourcing all work to more than 7,500 suppliers

Using Information Systems to Achieve Competitive Advantage

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

Business ecosystems
Industry sets of firms providing related services and products
Microsoft platform used by thousands of firms
Walmart’s order entry and inventory management
Keystone firms: Dominate ecosystem and create platform used by other firms
Niche firms: Rely on platform developed by keystone firm
Individual firms can consider how IT will help them become profitable niche players in larger ecosystems

Using Information Systems to Achieve Competitive Advantage

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy

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.

FIGURE 3-11

AN ECOSYSTEM STRATEGIC MODEL

Emphasize how important IT is in bringing disparate industries together to deliver value to the customer. What are the challenges of coordinating the flow of information across, for example, four different industries, as shown in the figure?

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Management Information Systems

Chapter 3: Information Systems, Organizations, and Strategy