Chapter Information Systems,

2 Organizations,
Management and Strategy
Organizations and Information Systems
• IS and organizations influence one another.
• The organization must be aware of and open to the
influences of information systems to benefit from new
technologies.
• You will not be able to design new systems successfully
or understand existing systems without understanding
your own business organization.
• IS are built by managers to serve the interests of the
business firm.
• At the same time, it’s managers who decide what
systems to build, what they will do and how they will be
implemented.
Organizations and IS… Cont’d
• What is an organization?
 An organization is a stable, formal social structure that
takes resources from the environment and process them
to produce output.
 An organization is more stable than an informal group
 Organizations are formal legal entities with internal
rules and procedures that must abide by laws
 Capital and labor are primary production factors provided
by the environment
 The organization (the firm) transforms these inputs into
products and services in a production function.
 The products and services are consumed by
environments
Organizations and IS… Cont’d
Organizations and IS… Cont’d
• Organizations have the following features
 Organizations are bureaucracies with clear-cut
divisions of labor and specialization
 Overtime develop routines and business
processes which bring efficiency
 Are places in which people struggle for resource,
power (organizational politics)
 People in organizations occupy different positions with
different specialties, concerns, and perspectives
resulting in divergent viewpoints
 Significant changes in strategy, business processes are
results of politically charged arguments and conflicts
Organizations and IS… Cont’d
 Have culture
 Assumptions about what products the organization
should produce, how it should produce them, where,
and for whom
 Business processes are usually ensconced in the
organization’s culture.
 Reside in environments from which they draw
resources and to which they supply goods and
services.
 Organizations and environments have a reciprocal
relationship.
 Information systems are key instruments for
environmental scanning
Organizations and IS… Cont’d
Organizations and IS… Cont’d
 Have structure
 Organizations have goals and use different means to
achieve them.
How Information System Impact Organizations
and Business Firms?
• Economic impacts
 IT changes relative costs of capital and costs of
information.
 As the cost of information technology decreases, it is
substituted for labor, which historically has been a
rising cost.
 Reduce number and replace the function of more
middle managers, reduce the need for other forms
of capital (buildings, machinery).
Economic impacts… Cont’d
 IS technology is a factor of production, like capital &
labor
 IT helps firms contract in size: it can reduce
transaction costs (the cost of participating in
markets)
Economic impacts… Cont’d
Transaction cost theory
 Is the costs incurred when a firm buys on the
marketplace what it cannot make itself.
 Firms seek to economize on cost of participating in
market (transaction costs).
 Production vs. transaction cost
 IT lowers market transaction costs for firm, making it
worthwhile for firms to transact with other firms rather
than grow the number of employees.
 With the Internet, firms mind it more cost effective to
use the marketplace and contract for work in a market,
rather than hire employees.
Economic impacts… Cont’d
 Transaction costs include
 locating and communicating with distant suppliers,
 monitoring contract compliance,
 buying insurance,
 obtaining information on products

• Firms have tried to reduce transaction costs through

vertical integration
 by getting bigger, hiring more employees, and buying
their own suppliers and distributors
Economic impacts… Cont’d
Agency theory
 Firm is nexus of contracts among self-interested parties
requiring supervision
 A principal (owner) employs “agents” (employees)
 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
Organizational and Behavioral Impacts
• IT flattens organizations
 Decision making pushed to lower levels (this is
due to the fact that employees are more informed
and better educated than before)
 Fewer managers needed (IT enables faster decision
making and increases span of control)
Flattening Organizations

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.
Organizational and Behavioral Impacts
• Postindustrial organizations
 Organizations flatten because in postindustrial
societies, authority increasingly relies on knowledge
and competence rather than formal positions.
 The shape of organizations flattens because
professional workers tend to be self-managing.
Information Systems and Business Strategy
• Why do some firms become leaders within their
industry?
 In almost every industry you examine, you will find
that some firms do better than most others: think
Toyota, Amazon, Walmart, and Google.
 Firms that “do better” than others are said to have a
competitive advantage over others. It comes from:
 access to special resources that others do not
 superior knowledge and information
Information Systems and Business Strategy
• Michael Porter’s competitive forces model
 The most widely used model for understanding
competitive advantage is 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
Porter’s Model… Cont’d
Porter’s Competitive Forces Model

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 forces in the industry’s environment: new market entrants, substitute products,
customers, and suppliers.
Porter’s Model… Cont’d
• Traditional competitors (number of)
 All firms share market space with competitors who
are continuously devising new products, services,
efficiencies, switching costs
• New market entrants
 In some industries, there are very low barriers to
entry, e.g. pizza or small retail business
 Some industries, however, have high barriers to
entry, e.g. computer chip business
 New companies have new equipment, younger
workers, but little brand recognition
Porter’s Model… Cont’d
• Substitute products and services
 Substitutes customers might use if your prices
become too high, e.g. iTunes and Spotify substitutes
for CDs
 The more substitute products and services in your
industry, the less you can control pricing and the
lower your profit margins.
Porter’s Model… Cont’d
• Customers (bargaining power of)
 Can customers easily switch to competitor’s
products? Can they force businesses to compete on
price alone in transparent marketplace?
 The power of customers grows if they can easily
switch to a competitor’s products and services
• Suppliers (bargaining power of)
 Market power of suppliers when firm cannot raise
prices as fast as suppliers
 The more different suppliers a firm has, the greater
control it can exercise over suppliers in terms of
price, quality, and delivery schedules
Porter’s Model… Cont’d
• What is a firm to do when it is faced with all these
competitive forces?
• 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
Porter’s Model… Cont’d
• Low-cost leadership
 Produce products and services at a lower price than
competitors while enhancing quality and level of
service.
 Walmart became the leading retail business in the US
through continuous replenishment system
 E.g. Wal-Mart
– Its inventory replenishment system sends orders
for new merchandise directly to suppliers as
soon as consumers pay for their purchases at
the cash register which allowed Walmart not
hold large inventories in its warehouses.
Porter’s Model… Cont’d
• Product differentiation
 Enable new products or services, greatly change
customer convenience, experience and customization
 E.g. Google (like assistant), Apple iPhone, Nike
 Nikesells customized sneakers through its NIKE
BY YOU program on its website. Customers are
able to select the type of shoe, colors, material,
and personalized text.
Porter’s Model… Cont’d
• Focus on market niche
 Use information systems to enable a focused strategy
on a single market niche; specialize.
 IS enable companies to analyze customer buying
patterns, tastes, and preferences allowing them to
focus
 E.g. Hilton Hotels uses OnQ system give its most
profitable customers additional privileges, such as late
checkouts
Porter’s Model… Cont’d
• Strengthen customer and supplier intimacy
 Use information systems to develop strong ties and
loyalty with customers and suppliers; increase
switching costs
 Strong linkages to customers and suppliers increase
switching costs (the cost of switching from one
product to a competing product)
 E.g. Toyota, Amazon
Challenges of Strategic IS
• Sustaining Competitive Advantage
 The competitive advantages do not necessarily last long
enough to ensure long-term profitability.
 Because competitors can retaliate and copy strategic
systems, competitive advantage is not always sustainable.
 Markets, customer expectations, and technology change;
globalization has made these changes even more rapid
and unpredictable.
 The Internet can make competitive advantage disappear
very quickly because virtually all companies can use this
technology.
 Classic strategic systems, such as American Airlines’s SABRE
computerized reservation system, Barclay’s ATM system, and
FedEx’s package tracking system, benefited by being the first in
their industries. Then rival systems emerged.
Challenges… Cont’d
• Aligning IT with Business Objectives
 The more successfully a firm can align information
technology with its business goals, the more profitable it
will be
 About half of a business firm’s profits can be explained by
alignment of IT with business ( Luftman, 2003 ).
 Only one-quarter of firms achieve alignment of IT with the
business.
 End of Chapter

Copyright © 2004 Prentice Hall, Inc. All rights reserved. 1–30