Management Information Systems: Managing The Digital Firm: Fifteenth Edition

Management Information Systems:
Managing the Digital Firm

Fifteenth edition
Chapter 3
Information Systems,
Organizations, and Strategy
Copyright © 2018 Pearson Education Ltd.

Learning Objectives
• 3-1 Which features of organizations do managers need to know about to build and use
information systems successfully?
• 3-2 What is the impact of information systems on organizations?
• 3-3 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?
• 3-4 What are the challenges posed by strategic information systems, and how should they
be addressed?

Video Cases
• Case 1: GE Becomes a Digital Firm: The
Emerging Industrial Internet
• Case 2: National Basketball Association:
Competing on Global Delivery with Akamai OS
Streaming

Tate & Lyle Devise a Global IT Strategy
• Problem
– Intense competition
– Inefficient manual system of reconciliation
• Solutions
– Centralize financial accounting at a single location
– Bring together all general ledger accounts and transactions into a
single system
– Integration of legacy systems into the new single system
– Revise and simplify business processes based on industry best
practices

Tate & Lyle Devise a Global IT Strategy (2
of 2)
• Tate & Lyle uses technology to produce financial
statements with a high degree of accuracy
• Demonstrates IT’s role in helping organizations
achieve business strategic objectives and remain
competitive

The Relationship Between Organizations
and Information Technology
• Information technology and organizations
influence each other
– Relationship influenced by organization’s
▪ Structure
▪ Business processes
▪ Politics
▪ Culture
▪ Environment
▪ Management decisions

Figure 3.1: The Two-Way Relationship
Between Organizations and Information
Technology

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

Figure 3.2: The Technical Microeconomic
Definition of the Organization

Figure 3.3: The Behavioral View of
Organizations

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

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

Figure 3.4: Routines, Business Processes,
and Firms

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

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
Figure 3.5: Environments and
Organizations Have a Reciprocal
Relationship

Disruptive Technologies
• Substitute products that perform as well as or
better than existing product
• Technology that brings 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
Organizational Structure
• Five basic kinds of organizational structure
(Mintzberg)
– Entrepreneurial
– Machine bureaucracy
– Divisionalized bureaucracy
– Professional bureaucracy
– Adhocracy
• Information system often reflects organizational

structure

Other Organizational Features
• Goals
– Coercive, utilitarian, normative, and so on
• Constituencies
• Leadership styles
• Types of tasks

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

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, 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

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

Figure 3.6: Flattening Organizations

Interactive Session: Management: Can
Technology Replace Managers?
• Class discussion
– How do flat organizations differ from traditional bureaucratic
hierarchies?
– How has information technology made it possible to eliminate
middle manager positions?
– What management, organization, and technology issues would
you consider if you wanted to move from a traditional bureaucracy
to a flatter organization?
– Can technology replace managers? Explain your answer.

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
• Four factors
– Nature of the innovation
– Structure of organization
– Culture of organization
– Tasks affected by innovation

Figure 3.7: Organizational Resistance to
Information System Innovations

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 website, saving millions of dollars in distribution costs

Implications for the Design and
Understanding of Information Systems
• 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

Porter’s Competitive Forces Model (1 of 3)
• 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:

– Traditional competitors
– New market entrants
– Substitute products and services
– Customers
– Suppliers

• 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

Figure 3.8: Porter’s Competitive Forces
Model

Information System Strategies for Dealing
with Competitive Forces (1 of 3)
• 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

• 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
– Examples: Chrysler, Amazon, Starbucks

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

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

Interactive Session: Technology: Smart
Products, Smart Companies
• Class discussion
– What competitive strategies are the companies discussed in this
case pursuing?
– How are information technology and smart products related to
these strategies? Describe the role of information technology in
these products.
– Are there any ethical issues raised by these smart products such
as their impact on consumer privacy? Explain your answer.

The Business 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
Figure 3.9: The Value Chain Model

Extending the Value Chain: The Value Web
• Firm’s value chain is linked to value chains of
suppliers, distributors, customers
• Industry value chain
• 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

Figure 3.10: The Value Web

Synergies
• When output of some units are 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

Network-Based Strategies (1 of 3)
• Take advantage of firm’s abilities to network with
one another
• Include use of:
– Network economics
– Virtual company model
– Business ecosystems

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
• Compare to traditional economics and law of
diminishing returns

Virtual Company Model
• Virtual company
– Uses networks to ally with other companies
– Creates and distributes products without being limited by
traditional organizational boundaries or physical locations
• Example: Li & Fung

– Manages production, shipment of garments for major fashion
companies
– Outsources all work to thousands of suppliers

Business Ecosystems and Platforms
• Industry sets of firms providing related services
and products
• Platforms
– Microsoft, Facebook
• Keystone firms
• Niche firms
• Individual firms can consider how IT will help them
become profitable niche players in larger
ecosystems
Figure 3.11: An Ecosystem Strategic Model

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

CHI TIẾT FIVE FORCES
• Ngành hấp dẫn – lợi nhuận cao
– Nhiều rào cản gia nhập
– Nhà cung cấp có quyền lực thương lượng thấp
– Khách hàng có quyền lực thương lượng thấp
– Ít sản phẩm thay thế
– Cạnh tranh thấp
• Ngành không hấp dẫn – lợi nhuận thấp
– Ít rào cản gia nhập
– Nhà cung cấp có quyền lực thương lượng cao
– Khách hàng có quyền lực thương lượng cao
– Nhiều sản phẩm thay thế
– Cạnh tranh khóc liệt
Threats
• Lượng vốn thấp để tham gia vào một thị trường
• Các công ty hiện tại ít có hành động tấn công để ngăn cản gia
nhập
• Các công ty hiện tại không có bằng sáng chế, nhãn hiệu hoặc
không tạo được uy tín thương hiệu
• Qui định chính phủ chưa có
• Chi phí chuyển đổi thấp
• Lòng trung thành của khách hàng thấp
• Sản phẩm kinh doanh gần như giống nhau
• Kinh tế vi mô có thể dễ dàng đạt được
Suppliers
• Có ít nhà cung cấp nhưng nhiều người mua
• Nhà cung cấp có qui mô lớn và đe dọa liên kết
chiều dọc
• Rất ít nguồn nguyên liệu thay thế
• Nhà cung cấp nắm giữ tài nguyên khan hiếm
• Chi phí chuyển đổi mô hình kinh doanh và sản
xuất cao

Customers
• Mua với số lượng lớn hoặc sở hữa nhiều điểm
bán hàng
• Thị trường có một vài người mua nhưng nhiều
người bán
• Chi phí thấp để chuyển đổi qua nhà cung cấp
khác
• Đe dọa liên kết chiều ngang
• Thị trường có nhiều sản phẩm thay thế
• Khách hàng rất nhạy cảm về giá (tăng và giảm)
Substitute
• Giá thấp hơn
• Chất lượng tốt hơn
• Chi phí thấp khi chuyển đổi sản phẩm

Competitors
• Có nhiều đối thủ cạnh tranh
• Rào cản cao để ra khỏi ngành
• Tốc độ tăng trưởng của ngành chậm hoặc âm
• Không có khác biệt sản phẩm và dễ dàng có sản
phẩm thay thế
• Đối thủ cạnh tranh có qui mô như nhau
• Khách hàng có lòng trung thành thấp

Cách thực hiện
• Thu thập thông tin từng năng lực
• Phân tích kết quả: mỗi ngành khác nhau
• Xây dựng chiến lược dựa vào kết quả phân tích

Case study
• Select a popular product or company that you are
familiar with, such as Apple's iPad. Apply Porter's
competitive forces model to that product and/or
company. Which of the four generic strategies is the
company using?

Case study
• You are advising the owner of ABC
Computers, a small local computer shop
that repairs and also builds custom
computers to order. What competitive
strategies could ABC Computers employ?
Which ones may it have difficulty
executing?

Answer
• Low-cost leadership: ABC Computers may have difficulty
competing against the computer sales and warranty services
of major national computer manufacturers, such as Dell, but
may be able to implement low-cost leadership in comparison
to any other local computer stores.
• Product differentiation: Although many national computer
manufacturers sell customized computers for individuals,
ABC Computers may be able to differentiate its product by
using superior components and adding more services to its
product

• Focus on market niche: ABC Computers could focus
on a being a local store with in-store technology support
and assistance as a market niche.
• Customer and supplier intimacy: ABC Computers has
an advantage in customer intimacy, in that it can develop
relationships with local customers on a face-to-face
basis. This advantage could be augmented to offset the
low-cost leadership of national manufacturers, such as
Dell. Because of much smaller production scales, ABC
Computers will probably not be able to exercise as much
control over suppliers as does Dell or other
manufacturers.

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Management Information Systems:

Managing the Digital Firm

Copyright © 2018 Pearson Education Ltd.

• 3-2 What is the impact of information systems on organizations?

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• Business processes: Collections of routines

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• May be powerful unifying force as well as restraint

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• Information system often reflects organizational

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• IT lowers market transaction costs, making it

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• Five competitive forces shape fate of firm:

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• New market entrants

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• Strengthen customer and supplier intimacy

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• Competitive forces still at work, but rivalry more

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• Expand product differentiation opportunities

• Raise switching costs

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– At each stage, determine how information

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