2 Three questions

1.8 Understand Why Complementary Assets Are Essential

Managers and business firms invest in information technology and systems because they provide real economic value to the business. The decision to build or maintain an information system assumes that the returns on this investment will be superior to other investments in buildings, machines, or other assets. These superior returns will be expressed as increases in productivity, increases in revenues (which will increase the firm’s stock market value), or perhaps as superior long-term strategic positioning of the firm in certain markets (which will produce superior revenues in the future).

We can see that from a business perspective, an information system is an important instrument for creating value for the firm. Information systems enable the firm to increase its revenue or decrease its costs by providing information that helps managers make better decisions or that improves the execution of business processes. For example, the information system for analyzing supermarket checkout data illustrated in

Figure 1.3

can increase firm profitability by helping managers make better decisions as to which products to stock and promote in retail supermarkets.

The business perspective calls attention to the organizational and managerial nature of information systems. An information system represents an organizational and management solution, based on information technology, to a challenge or problem posed by the environment. Every chapter in this book begins with a short case study that illustrates this concept. The Opening Case Study diagram illustrates the relationship between a business challenge and resulting management and organizational decisions to use IT as a solution to challenges generated by the business environment. You can use this diagram as a starting point for analyzing any information system or information system problem you encounter.

Review the Opening Case Study diagram. The diagram shows how ConocoPhillips tackled business challenges created by operations in remote locations and outdated equipment. The diagram also illustrates the management, organization, and technology elements that together helped ConocoPhillips create an information system solution using 3D printing and AI/ML for those challenges.

Complementary Assets: Organizational Capital and the Right Business Model

Awareness of the organizational and managerial dimensions of information systems can help us understand why some firms achieve better results from their information systems than others. Studies of returns from information technology investments show that there is considerable variation in the returns firms receive. Some firms invest a great deal and receive a great deal; others invest an equal amount and receive few returns. Still, other firms invest little and receive much, whereas others invest little and receive little. This suggests that investing in information technology does not by itself guarantee good returns. What accounts for this variation among firms?

The answer lies in the concept of complementary assets. Information technology investments alone cannot make organizations and managers more effective unless they are accompanied by supportive values, structures, and behavior patterns in the organization and other complementary assets. Business firms need to change how they do business before they can really reap the advantages of new information technologies.

 Complementary assets

are those assets required to derive value from a primary investment. For instance, to realize value from automobiles, substantial complementary investments in highways, roads, gasoline stations, repair facilities, and a legal regulatory structure are required to set standards and control drivers.

Research indicates that firms that support their technology investments with investments in complementary assets, such as new business models, new business processes, management behavior, organizational culture, or training, receive superior returns, whereas firms failing to make these complementary investments receive less or no returns on their information technology investments. The desire of firms to reap benefits from new AI technologies has raised renewed interest in this topic (Berg et al., 2023; Brynjolfsson et al., 2020; Laudon, 1974).

Table 1.3 lists the major complementary investments that firms need to make to realize value from their information technology investments. Some of this investment involves tangible assets, such as buildings, machinery, and tools. However, the value of investments in information technology depends to a large extent on complementary investments in management and organization.

Table 1.3

Complementary Organizational, Managerial, and Social Assets Required to Optimize Returns From Information Technology Investments

Organizational assets	Supportive organizational culture that values efficiency and effectiveness Appropriate business model Efficient business processes Decentralized authority Distributed decision-making rights Strong IS development team
Managerial assets	Strong senior management support for technology investment and change Incentives for management innovation Teamwork and collaborative work environments Training programs to enhance management decision skills Management culture that values flexibility and knowledge-based decision making
Social assets	The Internet and telecommunications infrastructure IT-enriched educational programs raising labor force computer literacy Standards (both government and private sector) Laws and regulations creating fair, stable market environments Technology and service firms in adjacent markets to assist implementation

Key organizational complementary investments are a supportive business culture that values efficiency and effectiveness, an appropriate business model, efficient business processes, decentralization of authority, highly distributed decision rights, and a strong information system (IS) development team.

Important managerial complementary assets include strong senior management support for change, incentive systems that monitor and reward individual innovation, an emphasis on teamwork and collaboration, training programs, and a management culture that values flexibility and knowledge.

Important social investments (not made by the firm but by the society at large, other firms, governments, and other key market actors) are the Internet and the supporting Internet culture, educational systems, network and computing standards, regulations and laws, and the presence of technology and service firms.

Throughout the book, we emphasize a framework of analysis that considers technology, management, and organizational assets and their interactions. Perhaps the single most important theme in the book, reflected in case studies and exercises, is that managers need to consider the broader organization and management dimensions of information systems to understand current problems as well as to derive substantial above-average returns from their information technology investments. As you will see throughout the text, firms that can address these related dimensions of the IT investment are, on average, richly rewarded.

Check Your Understanding 1.8

At least 1200 words.

The questions below are based on the following three articles.

The role of information technology in bridging the knowing-doing gap ( http://proxy-ub.researchport.umd.edu/login?url=https://www.proquest.com/abiglobal/scholarly-journals/role-information-technology-bridging-knowing/docview/2227341209/sem-2?accountid=28969Links to an external site. )

· Knowledge management practices in managing projects and project people ( http://proxy-ub.researchport.umd.edu/login?url=https://www.proquest.com/abiglobal/scholarly-journals/knowledge-management-practices-managing-projects/docview/2186184876/sem-2?accountid=28969Links to an external site. )

· Adapting to discontinuous technological change from the perspective of knowledge management ( http://proxy-ub.researchport.umd.edu/login?url=https://www.proquest.com/abiglobal/scholarly-journals/adapting-discontinuous-technological-change/docview/3114259568/sem-2?accountid=28969Links to an external site. )  

1. In terms of the four knowledge processes of creating, storing, transferring, and applying knowledge listed in Section 2.8 of the textbook, which ones seem to have been the focus of knowledge management processes, practices, and/or technologies at the organizations described in each paper? Should they have been any different at any of these organizations?  

2. Discuss which complementary assets described in Section 1.8 of the textbook were evident at the organizations described in each paper, and which ones appeared to be missing. From these papers, do complementary assets seem critical to knowledge management?  

3. Knowledge management at the Indian IT company (the second paper) was said to be facilitated by the use of a capability index. Was the use of any such or similar index evident in the five small- to mid-sized European software development companies (the first paper) or at Woojong and Lijiacheng Electric (the third paper)? Likewise, were any mechanisms for closing knowing-doing gaps (the first paper) apparent in the Indian IT company or at Woojong and Lijiacheng Electric?