Chapter 3

Information Systems,
Organizations, and Strategy

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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?

3.3 How do Porter’s competitive forces model and network

economics help companies develop competitive strategies
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
and IS

• 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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Figure 3.1 The Two-Way Relationship
Between Organizations and IT

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 What is an 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

is balanced over a period of time through conflict and conflict
resolution

– The technical and behavioral definitions of organizations are not

contradictory. Indeed, they complement each other.
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 Figure 3.2 The Technical Microeconomic
Definition of the Organization

• It examines how the organization optimally combines inputs to maximize output,

considering factors like technology, production costs, and efficiency.
• Capital and labor are transformed through the production process into products
and services.
•The organization is a collection of parts, like a machine. There are no humans in
this model.
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Figure 3.3 The Behavioral View of
Organizations

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Which features of organizations do managers need
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 we may find in a business and the nature of problems

with these systems—often reflects these organizational features.

• Managers need a deep understanding of their organization's structure,

processes, culture and politics to build and use IS successfully. For
example, organizational culture can influence how IS are perceived and
adopted within the organization.

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 What is the impact of IS on organizations?
The Economic Impacts
• Investments in IS reduce the need for traditional forms of capital : IS
can substitutes for labor, physical capital, and financial capital.

• Human capital substitution: Automation and artificial intelligence can

replace certain manual tasks that were traditionally performed by humans.

• Financial capital substitution: Digital platforms reduce the need for

extensive financial investments in brick-and-mortar infrastructure.

• Physical Capital Substitution: Cloud computing reduce the need for

large data centers and associated physical capital. Virtual collaboration
tools can substitute the need for physical office spaces.
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 The Economic Impacts
• IS help firms reduce transaction costs—the costs incurred when a firm
buys on the marketplace what it cannot make itself. Using markets has
costs such as communicating with distant suppliers, buying insurance,
obtaining information on products, and so forth.

• Firms can leverage digital marketplaces to efficiently locate suppliers or

buyers, reducing the costs and time associated with traditional
procurement processes

• Firms can collaborate on projects without the need for extensive physical
presence, reducing the costs associated with travel and maintaining large
office spaces.

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 The Economic Impacts

• Agents (employees) need constant supervision and management;

otherwise, they will tend to pursue their own interests rather than those of
the owners. As firms grow in size and scope, agency costs rise because
owners must expend more and more effort supervising and managing
employees.

• 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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 The Organizational and Behavioral Impacts
• IS flattens organizations:

– IS 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.

– IS allow managers to handle more functions and widen their span of

control

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 The Organizational and Behavioral Impacts
• Increasing flexibility of organizations:

─ IS increase firms ability to sense and respond to changes in the

marketplace and to take advantage of new opportunities. One aspect of
this phenomenon is mass customization, which is the ability to offer
individually tailored products using the same production resources as
mass production.

─ IS can make the production process more flexible so that products can be
tailored to each customer. There are almost no extra production costs
because the process does not require additional warehousing, production
overruns, and inventories.
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 Understanding Organizational Resistance
to Change
• IS require changes in routines that can be painful requiring retraining and
additional effort that may not be compensated. IS require also changes in
organization’s structure, culture, processes, and strategy which would
result in considerable resistance.

• Many IT investments flounder and do not increase productivity not

because of technology failure, but because of organizational and political
resistance to change.

• Therefore, as a manger involved in future IT investments, your ability to

work with people and organizations is just as important as your technical
knowledge.
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 Figure 3.7 Organizational Resistance to
Information System Innovations

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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 Implications for the Design and
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

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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.

• Michael Porter’s model provides general view of firm, its competitors,

and environment

• Five competitive forces shape fate of firm:

 Threat of new entrants
 Threat of substitutes
 Bargaining power of buyers
 Bargaining power of suppliers
 Current rivalry

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Porter’s Competitive Forces Model (1 of 3)

1. Threat of new entrants: How likely is it that new competitors will

come into the industry?
2. Threat of substitutes: How likely is it that other industries’ products
can be substituted for our industry’s products?
3. Bargaining power of buyers: How much bargaining power do
buyers (customers) have?
4. Bargaining power of suppliers: How much bargaining power do
suppliers have?
5. Current rivalry: How intense is the rivalry among current industry
competitors?

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Figure 3.8 Porter’s Competitive
Forces Model

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The Internet’s Impact on Competitive Advantage

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 Information System Strategies

• How can IS help to deal with competitive forces?

• How IS prevent substitutes and restrain new market

entrants?

• There are 3 generic strategies, each of which often is enabled

by using information technology and systems: low-cost
leadership, product differentiation and focus on market niche.

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 IS and Cost Leadership Strategy

– Implementing IS can significantly support or even help create a

cost leadership strategy by streamlining operations, optimizing
processes, and reducing expenses.

– For example, ERP Systems provides real-time visibility into

operations which can help reduce operational costs, improve
efficiency, eliminate redundant tasks, optimize inventory
management…

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 IS and Differentiation Strategy
– Differentiation creates a competitive advantage as customers view the
products as being unique or superior.

– IS can support this strategy by enabling companies to deliver unique

value propositions to customers and differentiate themselves from
competitors

– IS may be used to offer new products or to customize products. For

example, Nike sells customized sneakers through its Web site.
Customers could select the type of shoe, colors, material, outsoles,
logo… It costs only $10 extra and take about three weeks to reach the
customer. This ability to offer individually tailored products is called
mass customization.
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 IS and Focus Strategy
– A business that focuses on a niche is addressing a need for a
product or service that is not being addressed by mainstream
providers.

– IS can help identify and analyze niche markets by collecting and

analyzing data on customer demographics, preferences, and
behavior.

– By leveraging data analytics tools, companies can identify

underserved or unmet needs within specific market segments, tailor
their offerings accordingly and pitch advertising and marketing
campaigns to these small target markets.

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Network-Based Strategies
• The availability of Internet and networking technology have
inspired strategies that take advantage of firms’ abilities to
create networks

• Include use of:

– Network economics

– Virtual company model

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 Network Economics
• In a network, the marginal cost of adding one more user or customer is
close to zero, but the resulting benefits are huge because each new user
can then interact and trade with all the members of the network.

• 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
people grows with size, whereas the cost of adding new members is minor.

• The value of a community grows with its size. Example: The more people
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
• A business structure where core functions are outsourced to a network of
external partners, suppliers, and service providers. Example: Li & Fung

– LI & Fung does not own any fabric, factories, or machines. Instead, it
controls a network of suppliers, subcontractors, and manufacturers to
fulfill orders on behalf of its clients (major fashion firms).

– LI & Fung handles product development, raw material sourcing,

production planning and shipping.

– Li & Fung to focus on coordination, management, and value-added

services rather than physical production. Customers place orders to Li
& Fung over its private extranet. Li & Fung then sends instructions to
appropriate raw material suppliers and factories where the clothing is
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 Challenges Posed by Strategic IS
1. Sustaining competitive advantage

– The competitive advantages that IS confer do not necessarily last long

time. Competitors can retaliate and replicate successful IS, diminishing
the advantage enjoyed by early adopters.

– Competitors can study successful IS implementations and emulate

them to replicate the benefits (benchmarking). Amazon was an e-
commerce leader but now faces competition from other online stores
like AliBaba, eBay...

– Companies that rely solely on IS for competitive advantage may

become complacent and fail to adapt to changing market dynamics or
customer needs. Flexibility, agility, and continuous innovation are
essential to competitiveness in the long term.
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 Challenges Posed by Strategic IS
2. Aligning I S with business objectives:

– When IS operates in isolation or without a clear alignment with

business strategy it can lead to inefficiencies, missed opportunities,
and even failures.

– IS should be aligned with broader business objectives and strategic

goals.

– This involves active involvement of business leaders in IS decision-

making processes, regular communication between IS and business
units, and setting IS priorities based on their potential to contribute to
strategic objectives.

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 Challenges Posed by Strategic IS
3. Limited Understanding of IS by Business Leaders:

– Another challenge is the limited understanding of IS among business

leaders, leading to a perception that IS is a technical issue rather than
a strategic asset. This lack of understanding can result in
underinvestment in IS, ineffective governance, and tolerance of IS
failures.

– Solution: Firms should invest in building IS literacy among business

leaders through training, workshops, and educational initiatives.
Business leaders need to understand the potential of IS to drive
innovation, improve operational efficiency, and create value for
shareholders.

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