3.

Information Systems,
Organizations, and
Strategy

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 LEARNING OBJECTIVES
 Which features of organizations do
managers need to know about to build
and use information systems
successfully?
 What is the impact of information
systems on organizations?

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 LEARNING OBJECTIVES contd…
 How do Porter’s competitive forces
model, the value chain model,
synergies, core competencies, and
network economics help companies
develop competitive strategies using
information systems?
 What are the challenges posed by
strategic information systems and
how should they be addressed?

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 Information technology and
organizations influence each other
 Complex relationship influenced by
organization’s
Structure
Business processes
Politics
Culture
Environment
Management decisions
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 The Two-Way Relationship Between
Organizations and IT

This complex two-way relationship is mediated by

many factors, not the least of which are the
decisions made—or not made—by managers 5
 What is an organization?
•Technical definition:
•Stable, formal social structure that
takes resources from environment and
processes them to produce outputs
•A formal legal entity with internal rules
and procedures, as well as a social
structure

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•Behavioral definition:
•A collection of rights, privileges,
obligations, and responsibilities
that is delicately balanced over a
period of time through conflict and
conflict resolution

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 The Technical Microeconomic
Definition of the Organization

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 8

capital and labor as inputs in the feedback loop.

 The Behavioral View of Organizations

The behavioral view of organizations emphasizes

group relationships, values, and structures. 9
 Features of organizations
•All modern organizations share some
characteristics, such as:
•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
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 Routines, Business Processes, and Firms

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 12

performance.
• Organizational politics

•Divergent viewpoints lead to political

struggle, competition, and conflict

•Political resistance greatly hampers

organizational change

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• 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
•On one hand organizations are open to, and
dependent on, the social and physical
environment
•On the other hand organizations can
influence their environments
•Environments generally change faster than
organizations
•Information systems can be instrument of
environmental scanning, act as a lens
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 Environments and Organizations
Have a Reciprocal Relationship

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 16

organizations act on their environment.

• Disruptive technologies
•Sometimes technology induced
innovation causes radical change
•Substitute products that perform as
well as or better than existing product
•Technology that brings about sweeping
change to businesses, industries,
markets
•Examples: personal computers, word
processing software, the Internet, the
PageRank algorithm 17
•First movers and fast followers
•First movers – inventors of disruptive
technologies
•Fast followers – firms with the size and
resources to capitalize on that
technology

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• Organizational structure
•Five basic kinds of structure
(Mintzberg)
•Entrepreneurial: Small start-ups
•Machine bureaucracy: Midsize
manufacturing firm
•Divisionalized: Fortune 500 firms
•Professional bureaucracy: Law firms,
school systems, hospitals
•Adhocracy: Consulting firms
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 Organizational Structure
 Entrepreneurial structure – small start-up
business
 Machine bureaucracy – mid-size
manufacturing firm with centralized
management team, and decision-making
 Divisionalized bureaucracy – combination
of multiple machine bureaucracies, each
producing a different product or service;
Fortune 500 firms

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 Professional bureaucracy – knowledge-
based organization, where goods and
services depend on the expertise and
knowledge of professionals; dominated
by department heads with weak
centralized authority; Law firms, schools,
hospitals
 Adhocracy – task force organizations that
must respond to rapidly changing
environments; short-lived
multidisciplinary teams with weak central
management; Consulting firms 21
Other Organizational Features
•Goals – coercive, utilitarian,
normative
•Constituencies – serve diff
stakeholders
•Leadership styles
•Types of Tasks – routine and non-
routine

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 Impact of Info Systems on Organizations
• 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 thro’
outsourcing)

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• Transaction cost theory
•Firms seek to economize on cost of
participating in market (transaction costs)
•Vertical integration, hiring more
employees, buying suppliers and
distributors
•Firms traditionally grew in size to reduce
transaction costs. IT potentially reduces
transaction costs
•IT lowers market transaction costs for
firm, making it worthwhile for firms to
transact with other firms rather than grow
the number of employees 24
• 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
•As firms grow in size and complexity,
traditionally they experience rising
agency costs
•IT can reduce agency costs, making it
possible for firms to grow without adding
to the costs of supervising, and without
adding employees 25
Organizational and behavioral impacts
•IT flattens organizations
•Decision making pushed to lower levels
•Fewer managers 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
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 Flattening Organizations

Information systems can reduce the number of levels in an

organization by providing managers with information to supervise
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larger numbers of workers and by giving lower-level employees more
decision-making authority.
• Understanding 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
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 Organizational Resistance and the Mutually
Adjusting Relationship Between Technology and
the Organization

Implementing information systems has consequences for task

arrangements, structures, and people. According to this model, to
implement change, all four components must be changed 29

simultaneously.
• 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 corporate
Web site, saving millions of dollars in
distribution costs
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• Organizational factors to consider when
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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 Using Information Systems to Achieve
Competitive Advantage
• Why do some firms become leaders within
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 32
• Traditional competitors
•All firms share market space with
competitors who are continuously
devising new products, services,
efficiencies, switching costs
• New market entrants
•Some industries have high barriers to
entry, e.g. computer chip business
•New companies have new equipment,
younger workers, but little brand
recognition 33
• Substitute products and services
•Substitutes customers might use if your
prices become too high, e.g. 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 34
Porter’s Competitive Forces Model

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 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.

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• Four generic IS enabled strategies for
dealing with competitive forces
•Low-cost leadership
•Product differentiation
•Focus on market niche
•Strengthen customer and supplier
intimacy

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• Low-cost leadership
•produce products and services at a
lower price than competitors while
enhancing quality and level of service
•Examples: Wal-Mart, Dell
• Product differentiation
•Enable new products or services,
greatly change customer convenience
and experience
•Example: Google, Nike, Apple
•Mass customization 38
• Focus on market niche
•Use information systems to enable a focused
strategy on a single market niche; specialize
•Example: Hilton Hotels
• Strengthen customer and supplier
intimacy
•Use information systems to develop strong
ties and loyalty with customers and suppliers
•Increase switching costs
•Example: Netflix, Amazon, Starbucks

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• The Internet’s impact on competitive
advantage
•Transformation, destruction, threat to
some industries e.g., travel agency,
printed encyclopedia, newspaper
•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
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Impact of Internet on Competitive Forces & Industry Structure
Competitive Force Impact of the Internet
Substitute Products Enable new substitutes to emerge with
new approaches to meet needs
Customers’ bargaining Availability of global price/product info
power increases bargaining power
Suppliers’ bargaining Internet procurement supports firms
power Suppliers benefit from reduced barriers,
and reduction of intermediaries
Threat of new entrants Reduces barriers to entry (sales force,
channels and physical assets reduced)
Positioning and rivalry Widens geographic market, increases
among existing players competitors, difficult to sustain
operational advantages 41
 Smart Products and the Internet of Things
 Internet of Things (IoT)
◦ Growing use of Internet-connected
sensors in products
 Smart products
◦ Fitness equipment, health trackers
 Expand product differentiation
opportunities
◦ Increasing rivalry between competitors
 Raise switching costs
 Inhibit new entrants
 May decrease power of suppliers
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 The Business Value chain model
•Views 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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 The Value Chain Model

This figure provides examples of systems for both primary and

support activities of a firm and of its value partners that can add a44
margin of value to a firm’s products or services.
 Industry value chain

 Firm’s value chain is linked to value chains

of suppliers, distributors, customers

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• The 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

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 The Value Web

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

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• Network economics
•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 51
• Virtual company strategy
•Virtual company uses networks to ally
with other companies
•Creates and distributes products
without being limited by traditional
organizational boundaries or physical
locations
•E.g. Li & Fung manages production,
shipment of garments for major
fashion companies
•Outsources all work to thousands of
suppliers
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• Business ecosystems
•Industry sets of firms providing related
services and products
•Platform – Microsoft, Facebook used
by thousands of firms for their own
products
•Wal-Mart’s order entry and inventory
management system

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•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 enable them to become
profitable niche players in larger
ecosystems

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An Industry Ecosystem Model

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 An Ecosystem Strategic Model
 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.

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 Challenges Posed by Strategic
Information Systems
 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
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