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Learning Objectives
3.1 Which features of organizations do managers need to know
about to build and use IS successfully?

3.2 What is the impact of IS on organizations?

Chapter 3
3.3 How do Porter’s competitive forces model and network
Information Systems, economics help companies develop competitive strategies
Organizations, and Strategy using IS?

3.4 What are the challenges posed by strategic information

systems, and how should they be addressed?

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The Relationship Between Organizations Figure 3.1 The Two-Way Relationship

and IS Between Organizations and IT

• Information Systems and organizations influence each other

• IS bring major changes in strategy, work habits, objectives,

business processes, etc.

• At the same time, all the previous organizational features

influence the implementation and the success of IS.

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What is an Organization? Figure 3.2 The Technical Microeconomic

Definition of the Organization
• Technical definition

– Formal social structure that processes resources from environment to

produce outputs

– This definition is not very descriptive of real-world organizations. The

behavioral definition is more realistic

• Behavioral definition

– A collection of rights, privileges, responsibilities and obligations that • It examines how the organization optimally combines inputs to maximize output,
considering factors like technology, production costs, and efficiency.
is balanced over a period of time through conflict and conflict
• Capital and labor are transformed through the production process into products
resolution
and services.
– The technical and behavioral definitions of organizations are not
•The organization is a collection of parts, like a machine. There are no humans in
contradictory. Indeed, they complement each other. this model.
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Figure 3.3 The Behavioral View of Which features of organizations do managers need
Organizations
to know about to build and use IS successfully?

• All modern organizations share certain characteristics like structure,

routines, business processes, politics, culture…

• The variety of IS you find in a business and the nature of problems with
these systems—often reflects these organizational features

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What is the impact of IS on organizations? The Economic Impacts

The Economic Impacts • IS help firms reduce transaction costs—the costs incurred when a firm

• Investments in IS reduce the need for traditional forms of capital : IS buys on the marketplace what it cannot make itself. Using markets has

can substitutes for labor, physical capital, and financial capital. costs such as communicating with distant suppliers, buying insurance,
obtaining information on products, and so forth.
• Human capital substitution: Automation and artificial intelligence can
replace certain manual tasks that were traditionally performed by humans. • Firms can leverage digital marketplaces to efficiently locate suppliers or
buyers, reducing the costs and time associated with traditional
• Financial capital substitution: Digital platforms reduce the need for
procurement processes
extensive financial investments in brick-and-mortar infrastructure.
• Firms can collaborate on projects without the need for extensive physical
• Physical Capital Substitution: Cloud computing reduce the need for
presence, reducing the costs associated with travel and maintaining large
large data centers and associated physical capital. Virtual collaboration
office spaces.
tools can substitute the need for physical office spaces.
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The Economic Impacts The Organizational and Behavioral Impacts

• IS flattens organizations:
• Agents (employees) need constant supervision and management; – IS can reduce the number of levels in an organization by providing
otherwise, they will tend to pursue their own interests rather than those of managers with information to supervise larger numbers of workers
the owners. As firms grow in size and scope, agency costs rise because and by giving lower-level employees more decision-making authority.
owners must expend more and more effort supervising and managing – IS allow managers to handle more functions and widen their span of
employees. control

• IS by reducing the costs of acquiring and analyzing information, allow

firms to reduce agency costs because it becomes easier for managers to
oversee a greater number of employees. IS enables firms to increase
revenues while shrinking the number of middle managers.

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Understanding Organizational Resistance

The Organizational and Behavioral Impacts to Change
• Increasing flexibility of organizations: • IS require changes in routines that can be painful requiring retraining and
additional effort that may not be compensated. IS require also changes in
─ IS increase firms ability to sense and respond to changes in the
organization’s structure, culture, processes, and strategy which would
marketplace and to take advantage of new opportunities. One aspect of
result in considerable resistance.
this phenomenon is mass customization, which is the ability to offer
individually tailored products using the same production resources as • Many IT investments flounder and do not increase productivity not
mass production. because of technology failure, but because of organizational and political
resistance to change.
─ IS can make the production process more flexible so that products can be
tailored to each customer. There are almost no extra production costs • Therefore, as a manger involved in future IT investments, your ability to
because the process does not require additional warehousing, production work with people and organizations is just as important as your technical
overruns, and inventories. knowledge.
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Figure 3.7 Organizational Resistance to Implications for the Design and

Information System Innovations Understanding of Information Systems
• To deliver real benefits, IS must be built with a clear understanding of the
organization. The factors to consider when planning a new IS are:

 The environment in which the organization operate

 The structure of the organization:

 The organization’s culture and politics

 The groups affected and the attitudes of workers who will be using it

 The kinds of tasks, decisions, and processes the IS is designed to assist

Implementing IS has consequences for task arrangements, structures, and
people. According to this model, to implement change, all four components
must be changed simultaneously.
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Porter’s Competitive Forces Model (1 of 3) Porter’s Competitive Forces Model (1 of 3)

• It aims to provide a structured framework for analyzing the competitive
intensity and attractiveness of an industry. 1. Threat of new entrants: How likely is it that new competitors will
come into the industry?
• Michael Porter’s model provides general view of firm, its competitors,
2. Threat of substitutes: How likely is it that other industries’ products
and environment
can be substituted for our industry’s products?
• Five competitive forces shape fate of firm: 3. Bargaining power of buyers: How much bargaining power do
 Threat of new entrants buyers (customers) have?
 Threat of substitutes 4. Bargaining power of suppliers: How much bargaining power do
 Bargaining power of buyers suppliers have?
 Bargaining power of suppliers 5. Current rivalry: How intense is the rivalry among current industry
 Current rivalry competitors?

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Figure 3.8 Porter’s Competitive The Internet’s Impact on Competitive Advantage

Forces Model

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Information System Strategies IS and Cost Leadership Strategy

• How can IS help to deal with competitive forces? – Implementing IS can significantly support or even help create a
cost leadership strategy by streamlining operations, optimizing
• How IS prevent substitutes and restrain new market
processes, and reducing expenses.
entrants?
– For example, ERP Systems provides real-time visibility into
• There are four generic strategies, each of which often is operations which can help reduce operational costs, improve

enabled by using information technology and systems: low- efficiency, eliminate redundant tasks, optimize inventory

cost leadership, product differentiation, focus on market niche, management…

and strengthening customer and supplier intimacy.

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IS and Differentiation Strategy IS and Focus Strategy

– Differentiation creates a competitive advantage as customers view the – A business that focuses on a niche is addressing a need for a product
products as being unique or superior. or service that is not being addressed by mainstream providers.

– IS can support this strategy by enabling companies to deliver unique – IS can help identify and analyze niche markets by collecting and
value propositions to customers and differentiate themselves from analyzing data on customer demographics, preferences, and
competitors behavior.

– IS may be used to offer new products or to customize products. For – By leveraging data analytics tools, companies can identify
example, Nike sells customized sneakers through its Web site. underserved or unmet needs within specific market segments, tailor
Customers could select the type of shoe, colors, material, outsoles, their offerings accordingly and pitch advertising and marketing
logo… It costs only $10 extra and take about three weeks to reach the campaigns to these small target markets.
customer. This ability to offer individually tailored products is called
mass customization.
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Network Economics
Network-Based Strategies
• In a network, the marginal cost of adding one more user or customer is
• The availability of Internet and networking technology have close to zero, but the resulting benefits are huge because each new user
inspired strategies that take advantage of firms’ abilities to can then interact and trade with all the members of the network.

create networks • It is not much more expensive to operate a television station with 1,000
subscribers than with 10 million subscribers. The value of a community of
• Include use of:
people grows with size, whereas the cost of adding new members is minor.
– Network economics
• The value of a community grows with its size. Example: The more people
– Virtual company model offering products on eBay, the more valuable the eBay site is to everyone
because more products are listed, and more competition among suppliers
lowers prices.

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Virtual Company Model Challenges Posed by Strategic IS

1. Sustaining competitive advantage
• A business structure where core functions are outsourced to a network of
external partners, suppliers, and service providers. Example: Li & Fung – The competitive advantages that IS confer do not necessarily last long
time. Competitors can retaliate and replicate successful IS, diminishing
– LI & Fung does not own any fabric, factories, or machines. Instead, it
the advantage enjoyed by early adopters.
controls a network of suppliers, subcontractors, and manufacturers to
fulfill orders on behalf of its clients (major fashion firms). – Competitors can study successful IS implementations and emulate
them to replicate the benefits (benchmarking). Amazon was an e-
– LI & Fung handles product development, raw material sourcing,
commerce leader but now faces competition from other online stores
production planning and shipping.
like AliBaba, eBay...
– Li & Fung to focus on coordination, management, and value-added
– Companies that rely solely on IS for competitive advantage may
services rather than physical production. Customers place orders to Li
become complacent and fail to adapt to changing market dynamics or
& Fung over its private extranet. Li & Fung then sends instructions to
customer needs. Flexibility, agility, and continuous innovation are
appropriate raw material suppliers and factories where the clothing is
essential to competitiveness in the long term.
produced.
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Challenges Posed by Strategic IS Challenges Posed by Strategic IS

2. Aligning IS with business objectives: 3. Limited Understanding of IS by Business Leaders:

– When IS operates in isolation or without a clear alignment with – Another challenge is the limited understanding of IS among business

business strategy it can lead to inefficiencies, missed opportunities, leaders, leading to a perception that IS is a technical issue rather than
and even failures. a strategic asset. This lack of understanding can result in
underinvestment in IS, ineffective governance, and tolerance of IS
– IS should be aligned with broader business objectives and strategic
failures.
goals.
– Solution: Firms should invest in building IS literacy among business
– This involves active involvement of business leaders in IS decision-
leaders through training, workshops, and educational initiatives.
making processes, regular communication between IS and business
Business leaders need to understand the potential of IS to drive
units, and setting IS priorities based on their potential to contribute to
innovation, improve operational efficiency, and create value for
strategic objectives.
shareholders.

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