CHAPTER 3 "Information Systems, Organization, and Strategy"

3.1 Organizations and Information Systems

The interaction between information technology and organizations is complex and is influenced by many mediating factors, including the organization's structure, business processes, politics, culture, surrounding environment, and management decisions. You will need to understand how information systems can change social and work life in your firm. As a manager, you will be the one to decide which systems will be built, what they will do, and how they will be implemented.

What is an Organization?

An organization is a stable, formal social structure that takes resources from the environment and processes them to produce outputs. This technical definition focuses on three elements of an organization. Capital and labor are primary production factors provided by the environment. The organization transforms these inputs into products and services in a production function.

Features of Organizations

The organization is devoted to the principle of efficiency: maximizing output using limited inputs. Other features of organizations include their business processes, organizational culture, organizational politics, surrounding environments, structure, goals, constituencies, and leadership styles.

3.2 How Information Systems Impact Organizations and Business Firms

Economic Impacts

Information systems technology can be viewed as a factor of production that can be substituted for traditional capital and labor. As the cost of information technology decreases, it is substituted for labor, which historically has been a rising cost. As the cost of information technology decreases, it also substitutes for other forms of capital such as buildings and machinery, which remain relatively expensive.

IT also obviously affects the cost and quality of information and changes the economic of information. According to transaction cost theory, firms and individuals seek to economize on transaction costs, much as they do on production costs. Information technology, especially the use of networks, can help firms lower the cost of market participation (transaction costs), making it worthwhile for firms to contract with external suppliers instead of using internal sources.

Information technology also can reduce internal management costs. According to agency theory, the firm is viewed as a "nexus of contracts" among self-interested individuals rather than as a unified, profit-maximizing entity (Jensen and Meckling, 1976).

Organizational and Behavioral Impacts

Theories based in the sociology of complex organizations also provide some understanding about how and why firms change with the implementation of new IT applications.

IT Flattens Organizations
Behavioral researchers have theorized that information technology facilities flattening of hierarchies by broadening the distribution of information to empower lower-level employees and increase management efficiency. IT pushes decision-making rights lower in the organization because lower-level employees receive the information they need to make decisions without supervision.

Postindustrial Organizations
Postindustrial theories based more on history and sociology than economics also support the notion that IT should flatten hierarchies. In postindustrial societies, authority increasingly relies on knowledge and competence, and not merely on formal positions.

Understanding Organizational Resistance to Change
Many new information systems require changes in personal, individual routines that can be painful for those involved and require retraining and additional effort that may or may not be compensated. Because information systems potentially change an organization's structure, culture, business processes, and strategy, there is often considerable resistance to them when they are introduced. Because organizational resistance to change is so powerful, many information technology investments flounder and do not increase productivity.

The Internet and Organizations

The Internet, especially the World Wide Web, has an important impact on the relationships between many firms and external entities, and even on the organization of business processes inside a firm. The Internet increases the accessibility, storage, and distribution of information and knowledge for organizations. Businesses are rapidly rebuilding some of their key business processes based on Internet technology and making this technology a key component of their IT infrastructures.

Implications For The Design and Understanding of Information Systems

The central organizational factors to consider when planning a new system are the following:

• The environment in which the organization must function
• The structure of the organization: hierarchy, specialization, routines, and business processes
• The organization's culture and politics
• The type of organization and its style of leadership
• The principal interest groups affected by the system and the attitudes of workers who will be using the system
• The kinds of tasks, decisions, and business processes that the information system is designed to assist.

3.3 Using Information Systems To Achieve Competitive Advantage

Firms that "do better" than others are said to have a competitive advantage over others: They either have access to special resources than others do not, or they are able to use commonly available resources more efficiently -usually because of superior knowledge and information assets.

Porter's Competitive Forces Model

The most widely used model for understanding competitive advantage is Michael Porter's competitive forces model. This model provides a general view of the firm, its competitors, and the firm's environment. In this model, five competitive forces shape the fate of the firm:

• Traditional competitors
• New market Entrants
• Substitute products and services
• Customers
• Suppliers

Information System Strategies For Dealing With Competitive Forces

There are four generic strategies, each of which often is enabled by using information technology and systems:

• Low-Cost Leadership; Use information systems to achieve the lowest operational costs and the lowest prices.
• Product Differentiation; Use information systems to enable new products and services, or greatly change the customer convenience in using your existing products and services.
• Focus on Market Niche; Use information systems to enable a specific market focus, and serve this narrow target market better than competitors.
• Strengthen Customer and Supplier Intimacy; Use information systems to tighten linkages with suppliers and develop intimacy with customers.

The Internet's Impact on Competitive Advantage

Internet technology is based on universal standards that any company can use, making it easy for rivals to compete on price alone and for new competitors to enter the market. The Internet has nearly destroyed some industries and has severely threatened more. However, the Internet has also created entirely new markets, formed the basis for thousands of new products, services, and business models, and provided new opportunities for building brands with very large and loyal customer bases.

The Business Value Chain Model

The value chain model highlights specific activities in the business where competitive strategies can best be applied and where information systems are most likely to have a strategic impact. The value chain model views the firm as a series or chain of basic activities that add a margin of value to a firm's products or services. These activities can be categorized as either primary activities or support activities.

Primary activities are most directly related to the production and distribution of the firm's products and services, which create value for the customer. Support activities make the delivery of the primary activities possible and consist of organization infrastructure, human resources, technology, and procurement.

Extending The Value Chain: The Value Web

Internet technology has made it possible to create highly synchronized industry value chains called value webs. A value web is a collection of independent firms that use information technology to coordinate their value chains to produce a product or service for a market collectively.

Synergies, Core Competencies, and Network-Based Strategies

• The idea of synergies is that when the output of some units can be used as inputs to other units, or two organizations pool markets and expertise, these relationships lower costs and generate profits.
• A core competency is an activity for which a firm is a world-class leader. Core competencies may involve being the world's best miniature parts designer, the best package delivery service, or the best thin-film manufacturer.
• Network-based strategies include the use of network economics, a virtual company model, and business ecosystems.
• Network Economics; Business models based on a network may help firms strategically by taking advantage of network economics.
• Virtual Company Model; uses networks to link people, assets, and ideas, enabling it to ally with other companies to create and distribute products and services without being limited by traditional organizational boundaries or physicals locations.
• Business Ecosystem; is another term for these loosely coupled but interdependent networks of supplies, distributors, outsourcing firms, transportation service firms, and technology manufacturers.

3.4 Using Systems For Competitive Advantage: Management Issues

Successfully using information systems to achieve a competitive advantage is challenging and requires precise coordination of technology, organizations, and management.

Sustaining Competitive Advantage

Information systems alone cannot provide an enduring business advantage. Systems originally intended to be strategic frequently become tools for survival, required by every firm to stay in business, or they may inhibit organizations from making the strategic changes essential for future success.

Aligning It With Business Objectives

Successful firms and managers understand what IT can do and how it works, take an active role in shaping its use, and measure its impact on revenues and profits.

Management Checklist: Performing A Strategic Systems Analysis

To identify the types of systems that provide a strategic advantage to their firms, managers should ask the following questions:

• What is the structure of the industry in which the firm is located?
• What are the business, firm, and industry value chains for this particular firm?
• Have we aligned IT with our business strategy and goals?

Managing Strategic Transitions

Adopting the kinds of strategic systems described in this chapter generally requires changes in business goals, relationships with customers and suppliers, and business processes. These sociotechnical changes, affecting both social and technical elements of the organization, can be considered strategic transitions -a movement between levels of sociotechnical systems.

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source: "Management Information System" e-book, 12th edition, written by Kenneth C. Laudon and Jane P. Laudon.