Chapter 3

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Information Systems,
Organizations, and Strategy
Chapter 3
VIDEO CASES
Case 1: National Basketball Association: Competing on Global Delivery with Akamai OS Streaming
Case 2: IT and Geo‐Mapping Help a Small Business Succeed (2009)
Case 3: Materials Handling Equipment Corp: Enterprise Systems Drive Corporate Strategy for a Small
Business
Instructional Video 1 SAP BusinessOne ERP: From Orders to Final Delivery and Payment
3.2 Copyright © 2014 Pearson Education
Management Information Systems, Global Edition
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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• 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.)
• Problem: Fading brand, powerful
competitors, technology costs
• Solutions:
– Customer data mining to improve customer
intimacy, design sales floors, implement
customer programs and promotions
• Demonstrates IT’s central role in defining
competitive strategy
Will Sears’s Technology Strategy Work This Time?

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• Information technology and organizations
influence each other
– Relationship influenced by organization’s
•Structure
•Business processes
•Politics
•Culture
•Environment
•Management decisions
Organizations and Information Systems
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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• 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
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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THE BEHAVIORAL VIEW OF ORGANIZATIONS
The behavioral view
of organizations
emphasizes group
relationships, values,
and structures.
FIGURE 3-3
• Features of organizations
•Use of hierarchical structure
•Accountability, authority in system of impartial
decision making
•Adherence to principle of efficiency
•Routines and business processes
•Organizational politics, culture, environments,
and structures

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• 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
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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• Organizational politics
•Divergent viewpoints lead to political
struggle, competition, and conflict.
•Political resistance greatly hampers
organizational change.
• 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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• 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.
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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• Disruptive technologies
– Technology that brings about sweeping change
to businesses, industries, markets
– Examples: personal computers, word processing
software, the Internet, the PageRank 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
• 5 basic kinds of organizational 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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• Other organizational features
–Goals
• Coercive, utilitarian, normative, and so
on
–Constituencies
–Leadership styles
–Tasks
–Surrounding environments
• Economic impacts
– IT changes relative costs of capital and the costs of
information
– 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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• Transaction cost theory
– Firms seek to economize on transaction costs
(the costs of participating in markets).
•Vertical integration, 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.
• 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.

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• 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.
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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• 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.
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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• The Internet and organizations
– The Internet increases the accessibility, storage,
and distribution of information and knowledge
for organizations.
– The Internet can greatly lower transaction and
agency costs.
•Example: Large firm delivers internal manuals
to employees via a corporate Web site, saving
millions of dollars in distribution costs
• Organizational factors in planning a new
system:
– Environment
– 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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• 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:
1. Traditional competitors
2. New market entrants
3. Substitute products and services
4. Customers
5. Suppliers
Using Information Systems to Achieve Competitive Advantage
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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• 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.
• Substitute products and services
– Substitutes customers might use if your prices
become too high, for example, iTunes substitutes for
CDs
• 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

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• 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
• 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

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• Focus on market niche
– Use information systems to enable a focused
strategy on a single market niche; specialize
– Example: Hilton Hotels’ OnQ system
• Strengthen customer and supplier intimacy
– Use information systems to develop strong ties and
loyalty with customers and suppliers
– Increase switching costs
– Example: Netflix, Amazon
Read the Interactive Session and discuss the following questions
Interactive Session: Organizations
– Analyze Starbucks using the competitive forces
and value chain models.
– What is Starbucks’ business strategy? Assess the
role played by technology in this business
strategy.
– How much has technology helped Starbucks
compete? Explain your answer.
Technology Helps Starbucks Find New Ways to Compete

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• The Internet’s impact on competitive
advantage
– Transformation or threat to some industries
• Examples: travel agency, printed encyclopedia, media
– Competitive forces still at work, but rivalry more
intense
– Universal standards allow new rivals, entrants to
market
– New opportunities for building brands and loyal
customer bases
• 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 vs. support activities
– At each stage, determine how information systems
can improve operational efficiency and improve
customer and supplier intimacy
– Utilize benchmarking, industry best practices

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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
Read the Interactive Session and discuss the following questions
Interactive Session: Technology
• How is software adding value to automakers’
products?
• How are the automakers benefiting from software‐
enhanced cars? How are customers benefiting?
• What value chain activities are involved in enhancing
cars with software?
• How much of a competitive advantage is software
providing for automakers? Explain your answer.
Automakers Become Software Companies

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• Value web:
–Collection of independent firms using
highly synchronized IT to coordinate value
chains to produce product or service
collectively
–More customer driven, less linear
operation than traditional value chain
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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• 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: merger of Bank of NY and JPMorgan
Chase
• Purchase of YouTube by Google
• Core competencies
– Activity for which firm is world‐class leader
– Relies on knowledge, experience, and
sharing this across business units
– Example: Procter & Gamble’s intranet and
directory of subject matter experts

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

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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
• Sustaining competitive advantage
– Competitors can retaliate and copy strategic systems
– Systems may become tools for survival
• Aligning IT with business objectives
– Performing strategic systems analysis
• Structure of industry
• Firm value chains
• Managing strategic transitions
– Adopting strategic systems requires changes in business goals,
relationships with customers and suppliers, and business processes
Using Information Systems for Competitive Advantage: Management Issues

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