Chapter 3

Information Systems, Organizations, and Strategy

LEARNING OBJECTIVES
After reading this chapter, you will be able to: 1. 2. Identify and describe important features of organizations that managers need to know about in order to build and use information systems successfully. Evaluate the impact of information systems on organizations. 3. Demonstrate how Porters competitive forces model and the value chain model help businesses use information systems for competitive advantage. 4. Demonstrate how information systems help businesses use synergies, core competences, and network-based strategies to achieve competitive advantage. Assess the challenges posed by strategic information systems and management solutions.

5.

CHAPTER OUTLINE
3.1 ORGANIZATIONS AND INFORMATION SYSTEMS What Is an Organization? Features of Organizations HOW INFORMATION SYSTEMS IMPACT ORGANIZATIONS AND BUSINESS FIRMS Economic Impacts Organizational and Behavioral Impacts The Internet and Organizations Implications for the Design and Understanding of Information Systems USING INFORMATION SYSTEMS TO ACHIEVE COMPETITIVE ADVANTAGE Porters Competitive Forces Model Information System Strategies for Dealing with Competitive Forces The Internets Impact on Competitive Advantage The Business Value Chain Model 75

3.2

3.3

Synergies, Core Competencies, and Network-Based Strategies 3.4 USING SYSTEMS FOR COMPETITIVE ADVANTAGE: MANAGEMENT ISSUES Sustaining Competitive Advantage Performing a Strategic Systems Analysis Managing Strategic Transitions HANDS-ON MIS Analyzing Competitive Strategy: Dirt Bikes USA Improving Decision Making: Using a Database to Clarify Business Strategy Improving Decision Making: Using Web Tools to Configure and Price an Automobile

3.5

LEARNING TRACK MODULE The Changing Business Environment for Information Technology Interactive Sessions: 7-Eleven Stores Ask the Customer by Asking the Data Amazon.com: An Internet Giant Fine-Tunes Its Strategy

OPENING CASE: WILL THE NEW US AIRWAYS BE ABLE TO FLY?

The experience of US Airways illustrates the interdependence of business environments, organizational culture, business processes, business strategy, and the development of information systems. US Airways and America West merged in response to competitive pressures from their surrounding environment. The merging companies had different organizational cultures, business processes and information systems, which had to be integrated for the new company to run effectively. The new information systems many taken over from a more modernized America West had to be fine-tuned to support the new US Airways business strategy. US Airways systems effort cant succeed without a significant amount of organizational and management change. The chapter-opening diagram calls attention to important points raised by this case and this chapter. Both US Airways and America West faced intense pressure from airline industry competitors and from rising fuel costs. Management at both companies decided their business strategy needed to change and it should focus on synergies created by merging. The new business strategy required investments in information systems, changes in management and organization. The newly merged company provides value to customers by competing on both price and quality service. To make the merger profitable, US Airways had to revise its business processes so that two formerly separate companies could operate as a single entity, and it also had to eliminate redundant information systems. The case describes the role of information systems in lowering costs and coordinating operations for US Airways after its merger. The case also shows that such changes are not easy to make and that it is still unclear whether the new US Airways has a successful strategy and business model.

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3.1

ORGANIZATIONS AND INFORMATION SYSTEMS

You could say that this chapter relies on the chicken-and-egg theory to develop a relationship between organizations and information systems. You need to design information systems that serve the existing organization. At the same time you must be ready and willing to restructure the organization to take advantage of the improvements an information system can offer. So which one takes precedentthe organization or the information system? Actually neither one. The goal is to adapt one to the other. Chapter 3 describes how organizations and information systems work together, or sometimes against each other. The idea, of course, is to keep them in sync, but thats not always possible. Well look at the nature of organizations and how they relate to information systems.

WHAT IS AN ORGANIZATION?
An organization is very similar to the information system described in Chapter 1. Remember Figure 1.4 from Chapter 1? Compare it to Figure 3.2 from Chapter 3.

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These two figures have many things in common. Both information systems and organizations require inputs and some sort of processing, both have outputs, and both depend on feedback for successful completion of the loop. Information systems use data as their main ingredient and organizations rely on people. However, the similarities are remarkable. Both are a structured method of turning raw products (data/people) into useful entities (information/producers). Think of some of the organizations youve been involved in. Didnt each of them have a structure, even if it wasnt readily apparent? Perhaps the organization seemed chaotic or didnt seem to have any real purpose. Maybe that was due to poor input, broken-down processing, or unclear output. It could very well be that feedback was ignored or missing altogether.

FEATURES OF ORGANIZATIONS
The class youre enrolled in is an organization of sorts, isnt it? Think about it how many of the following characteristics fit your class? How many fit any organization youre in? Clear division of labor Hierarchy Explicit rules and procedures Impartial judgments Technical qualifications for positions Maximum organizational efficiency These characteristics describe organizations that are called bureaucracies. Most of us think of them as slow, cumbersome, and unprogressive. That isnt necessarily so. Many organizations have bureaucratic characteristics and operate very well.

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Routines and Business Processes All organizations, including business firms become very efficient over time because individuals in the firm develop routines for producing goods and services. Some of the standard operating procedures (SOPs), politics, and culture are so ingrained in organizations that they actually hinder the success of the group. Think about your experiences in groups. You had a leader (hierarchy), a set of rules by which you operated (explicit rules and procedures), and people appointed to perform certain tasks (clear division of labor). You probably voted on different issues (impartial judgments), and you decided on the best person to fulfill various positions within the group (technical qualifications for positions). Hopefully, the organization was able to fulfill its goals (maximum organizational efficiency), whether winning a softball game or putting on an award-winning play at the local theatre. If your organization wasnt successful, perhaps it was because of the SOPs, the politics, or the culture. Organizational Politics People in organizations occupy different positions with different specialties, concerns, and perspectives. These differences result in political struggle for resources, competition, and conflict within every organization. Political resistance has proven to be one of the greatest difficulties to bringing about organizational change. Organizational Culture Every organization imaginable have bedrock, unassailable, unquestioned assumptions that define their goals and products. Generally, an organizations cultural assumptions are taken for granted and are rarely publicly announced or spoken about. As a rule, the organizations culture has proven to be a powerful restraint on making changes within the organization and its basic procedures and common business practices. This is especially evident when considering technological changes that may threaten these commonly held cultural assumptions. Organizational Environments Organizations differ because their ultimate goals differ. Some organizations are small by nature or small by design. Using the same thought process as you did for recognizing the different structures in organizations around you, think about the unique differences in those organizations. Why are they different: size, goals, environmental factors that restrict their growth? For instance, contrast a real estate company with an insurance company. The real estate company is constantly looking for new customers (buyers and sellers) and new products (houses or commercial properties) to sell. It may choose to stay small or to go with a nationwide conglomerate. The environmental factors that are likely to influence it are the state of the national economy or the nature of the local economy. Many external factors are out of its control. The employees of the company must respond quickly to potential sales or they simply wont

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make any money. This type of organization must be creative in the way it generates business and in the type of systems it uses. On the other hand, the insurance company has relatively stable customers. People sign up with the insurer and pay their premiums on a regular basis. While customers may come and go, the turnover is fairly small. Because most state governments require people to carry insurance, the agent has a stable stream of income from premiums. Although the parent company may suffer large losses from a sudden influx of customer claims, the small agency is not as heavily influenced by environmental factors. This organization doesnt have to devise ways of ingeniously using or generating data and its systems needs are mundane. Both of these businesses are small and entrepreneurial. But they must respond to their employees, customers and potential customers in very different ways. Each of them has different business processes that must be used to meet goals of staying in business. Organizational Structure The point is that every group of people is an organization. The interesting question you could ask yourself would be: How would the world look and function without some kind of organization? Table 3-1 shows some common organizational structures. Think about your own experiences, in your workplace or your daily life, and try to list some organizations that fit into each category. Theyre all around you and affect you in so many ways. Remember, just as organizations affect you in many different ways, so too do you affect the organizations.

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Other Organizational Features Would you consider the same organizational structure for a softball team as you would for a theatre production group? Although there would be some similarities, the two groups would probably have some major differences. An automobile dealership would have some similarities to a department store (both sell products) and yet they would have major structural differences. Organizations that enter into collaborative partnerships tend to seek out companies with similar structures. It is much easier for the employees to work together if they arent required to learn a whole different work structure on top of learning new tasks.

3.2

HOW INFORMATION SYSTEMS IMPACT ORGANIZATIONS AND BUSINESS FIRMS

Change is the only constant in the relationship between information systems and organizations. As technology evolves and changes, its introduction into organizations requires changes in the firms infrastructure and the services it can provide to its employees, customers, and suppliers. Years ago information systems consisted of a huge mainframe computer with a few terminals connected to it. You had to schedule a specific time to use the computer if your company had one at all. All data were kept on one machine, and in some respects the data were available to whoever could access them. When personal computers were introduced in the early 1980s, it became the norm for most people to have individual computing islands on their desks. The computers werent connected to each other and if you wanted to exchange data or information, you had to somehow get the data from your desk to the other persons desk. It wasnt easy. Now it seems weve come full circle in some ways: weve combined the storage and data processing on a central machine with personal computing available on desktops. The data are available to anyone who can use them or has authorized access through a network with links literally all over the world. The changes that have taken place in computing have affected the business environment in a big way. Over 40 percent of the equipment investment in the last decade has been on computing equipment. Organizations are finding more efficient ways to accomplish tasks via networking, either internal networks or by connecting to external networks. Technology has caused many changes in the way businesses connect to their customers and suppliers. Well be examining many of these changes throughout this course. The text discusses two major types of theories about how information systems affect organizations: economic theories and behavioral theories.

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ECONOMIC IMPACTS
Its sometimes cheaper to hire a computer than to hire a person. We may not like the idea that machines can replace human beings, but when you think about it, they have been doing this for thousands of years. To better illustrate this concept, lets take a look at how a company can find it cheaper to use an information system to develop and disseminate a Human Resources policy regarding dress codes for employees. The HR assistant may write the first draft of the policy and give it to the HR director on paper. The director will review it and make changes. The assistant then must incorporate the changes and reprint the document. Wait! If there is an information system, the assistant can submit the draft to the director electronically and the director can make changes to the electronic version of the file and return it to the assistant. Already weve saved part of a tree! Of course others in the organization must review the new dress code policy. The proposed policy can be printed in fifteen copies, a person can manually send the copies out, track who they went to and when, and then track all the changes made to the proposal. Or, the proposed policy can be sent electronically to reviewers who will electronically collaborate on necessary changes. Each of the reviewers can see in real time what the others think and the changes they would like to make. Weve saved another part of the tree in reduced paper use, but weve also saved a lot of time and human effort. Once the policy is set, it has to be sent to each employee. We could do that through the old method of printing hundreds of copies. Or we could send the policy to each person electronically (e-mail). Everyone would have a personal copy stored on computer. There is no need to print it out on paper because it will be stored electronically and can be referenced whenever it is convenient. As employees acknowledge receipt of the policy via e-mail, the HR department knows they received it. So what about the people who dont have their own personal computer? You could post the new policy to the company Intranet, which would be available to all employees whenever they find it convenient. Again, time and resources are cut drastically through the use of an information system. If the policy needs to be revised, the same process can be used to make and send out changes. The revised policy can be posted on the intranet for all to see. This is just one example of how technology is helping organizations reduce their costs of doing business. The transaction cost theory supports the idea that through technology businesses can reduce their costs of processing transactions with the same emphasis and zeal that they try to reduce their production costs. One way that technology in general, and information systems in particular, are saving companies a lot of money is in the reduced number of managers needed to oversee larger numbers of workers. The technological changes support the agency theory, which allows a manager to supervise more employees at less cost. Well look at this a bit closer later in this chapter.

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ORGANIZATIONAL AND BEHAVIORAL IMPACTS

IT Flattens Organizations Behavioral researchers have theorized that information technology facilitates flattening of hierarchies. Points made in support of this theory include: IT pushes decision-making rights lower in the organization because lower-level employees receive the information they need to make decisions without supervision. Managers now receive so much more accurate information on time, they become much faster at marking decisions, so fewer managers are required. Management costs decline as a percentage of revenues, and the hierarchy becomes much more efficient.

Postindustrial Organizations Postindustrial theories also support the notion that IT should flatten hierarchies. Points made in support of this theory include: Professional workers tend to be self-managing, and decision making should become more decentralized as knowledge and information become more widespread throughout the firm. IT may encourage task force-networked organizations in which groups of professionals come together face to face or electronically for short periods of time to accomplish a specific task; once the task is accomplished, the individuals join other task forces.

Understanding Organizational Resistance to Change Information systems are closely intertwined with an organizations structure, culture, and business processes. New systems disrupt established patterns of work and power relationships, so there is often considerable resistance to them when they are introduced. The complex relationship between information systems, organizational performance, and decision making must be carefully managed. Technology doesnt automatically transform organizations. There is no magic wand companies can wave that will solve all their problems just because they installed the latest information system. People using technology efficiently and effectively, however, can transform organizations. Technology can enhance communications up and down the organization and from one department to another on the same managerial level. As our dress code policy example shows, communications were much faster and better using technology. The lines of communication are shorter, clearer, and more concise.

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Technology makes virtual organizations more feasible, cheaper, and easier to set up and tear down than before. If you had a small group of people from each functional area of the company collaborating on a new production method, you can bring them together, hammer out the new methodology, and then return them to their regularly assigned units. Lets say your company decides to develop a new method of shipping hammers. You would need to draw people from the production department, the shipping department, the packaging department, and the accounting department to help develop the new procedures. Without an information system you would need to have a clerical worker available to record and send out all the information to everyone before and after the meetings. You would have to set up a time and place for team members to meet. Scheduling everyones time is often a nightmare! Because of the political nature of organizations and people, which weve previously discussed, most of those assigned to this team would probably have to be middle managers. If your company had the proper information system, much of the hassle and expense of this scenario could be eliminated. By using technology, most of the collaboration and communication throughout the organization, top-to-bottom, side-to-side, could be accomplished quicker and cheaper. One of the biggest benefits to this method would be the fact that the decision-making process of this committee can be pushed to lower levels and management can check progress electronically. Perhaps the managers wouldnt be as concerned about delegating responsibility because they can keep an eye on the committee throughout the process and monitor its progress easier. Everyone in the entire organization could have access to the work of the committee. What about those people not physically located in the same place? No problem: electronically they have the same access to the process as everyone else. The behavioral theory of the integration of information systems in an organization says that the political structure of an organization changes through access to information. The common status symbol in an organization used to be the corner office. Now the political status symbol is how much information a person has access to.

Bottom Line: Organizations and information systems influence each other. Each organization shares common characteristics that the information system can enhance. On the other hand, each organization has unique characteristics that should be taken into account when incorporating technology. The organization should determine how the technology is incorporated and not let the information system totally dictate the organizational structure.

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THE INTERNET AND ORGANIZATIONS

The example used earlier of posting personnel policies to the company intranet is but one small example of how businesses are using network technologies to reduce costs and enhance their business processes. Business-to-business commerce is growing at a tremendous pace because of the cost savings the Internet allows. The Internet provides an open platform technology that allows transaction processing between businesses at much cheaper costs and provides an easy-touse interface. The innovative ways organizations are using the Internet, intranets, and extranets to improve their business processes and lower costs is simply fascinating. Even government bureaucracies are getting into the act. The U.S. Post Office is facing a severe threat to its core business. More and more businesses and individuals are turning to e-mail and the Web to correspond with each other. As e-mail continues to grow as a substitute for snail mail, the Post Office must find innovative ways of using the Internet to gain new business. Its doing so by selling postage on the Internet, and it now offers electronic bill-paying services. Companies can send bills to their customers electronically and individuals and businesses can pay all their bills over the new Internet-based service. The integration of an information system into an organization naturally causes change for the organization. Sounds simple enough. What isnt so simple to manage is the very fact that many people do not readily accept change. No matter how much technology you employ, it is still the organizations people who will make or break it. Remember the triangle introduced in Chapter 1, when we discussed hardware, software, and persware? Its back! Change can be so traumatic to some organizations that they find it easier to keep doing business the same old way for as long as they can get away with it. Thats why some organizations seem to be stuck doing business the way they did in 1969. Bottom Line: For some jobs, its better to employ technology than to employ a person. Technology can reduce costs and increase the amount of information people have access to. The changes brought about by the introduction of new technology and new methods must be managed carefully. No successful manager can lose sight of the effect change will have on the people of the organization. Companies need to tailor their information systems to the needs of the organization instead of letting the wonders of technology drive the organization.

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IMPLICATIONS FOR THE DESIGN AND UNDERSTANDING OF INFORMATION SYSTEMS

To deliver genuine benefits, information systems must be built with a clear understanding of the organization in which they will be used. Central organizational factors to consider when planning a new information system include: The environment in which the organization must function The structure of the organization: hierarchy, specialization, routines, and business processes The organizations 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 that others do not, or they are able to use commonly available resources more efficiently usually because of superior knowledge and information assets. In any event, they do better in terms of revenue growth, profitability, or productivity growth (efficiency), all of which ultimately in the long run translate into higher stock market valuations than their competitors.

PORTERS COMPETITIVE FORCES MODEL

Michael Porters framework called the competitive forces model has long been accepted as a useful tool for business people to use when thinking about business strategy and the impact of IT.

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Traditional Competitors Efficient business processes can give companies the edge they need to place themselves in the lead. The rivalry among existing competitors in the Competitive Forces Model is high when competition is fierce in a market, and low when competition is more complacent. New Markets Extranets Upstarts can give you fits when you least expect it Amazon.com is a good example. The threat of new entrants in the Competitive Forces Model is high when it is easy for new competitors to enter a market, and low when there are significant entry barriers to entering a market. Substitute Products and Services Even if they arent better than your product, substitutes may be cheaper and the customer will be enticed by the lower price. The threat of substitute products or services in the Competitive Forces Model is high when there are many alternatives to a product or service, and low when there are few alternatives from which to choose. Customers The Internet offers customers the opportunity to quickly and easily compare prices. The Internet also makes it easy for customers to switch to a competitors product or service where there is little product differentiation and all prices are known instantly. Customer power in the

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Competitive Forces Model is high when customers have many choices from whom to buy, and low when their choices are few. Suppliers New technology offers suppliers the chance to integrate information systems that tie them closer to their customers. Supplier power in the Competitive Forces Model is high when buyers have few choices from whom to buy; and low when their choices are many.

INFORMATION SYSTEM STRATEGIES FOR DEALING WITH COMPETITVE FORCES

How can firms use information systems to counteract some of the forces outlined in Porters competitive forces model? Four generic strategies are outlined in Table 3-3.

Low-Cost Leadership Use information systems to achieve the lowest operational costs and the lowest prices. Firms such as Wal-Mart have utilized IT to develop an efficient customer response system that directly links customer behavior back to distribution, production, and supply chains.

Product Differentiation Use information systems to enable new products and services, or greatly change the customer convenience in using your existing products and services. Through mass customization, organizations are able to offer individually tailored products or services by using mass production resources.

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Focus on Market Niche Use information systems to enable a specific market focus, and serve this narrow target market better than competitors. Information systems support this strategy by producing and analyzing data for finely tuned sales and marketing techniques. Information systems enable companies to analyze customer buying patterns, tastes, and preferences closely so that they efficiently pitch advertising and marketing campaigns to smaller and smaller target markets.

INTERACTIVE SESSION: TECHNOLOGY 7-ELEVEN STORES ASK THE CUSTOMER BY ASKING THE DATA
7-Eleven Stores improved its competitive position by wringing more value out of its customers data. This companys early growth and strategy had been based on face-to-face relationships with its customers and intimate knowledge of exactly what they wanted to purchase. As the company grew over time, it was no longer able to discern customer preference through personal face-to-face relationships. A new information system helped it obtain intimate knowledge of its customers once again by gathering and analyzing customer purchase transactions.

CASE STUDY QUESTIONS

1. Why is knowing about the customer so important to a company such as 7-Eleven? 2. What are the benefits of 7-Elevens Retail Information System? 3. In terms of Porters model, what strategic forces does the Retail Information System seek to address? 4. Which of the strategies described in the chapter does the Retail Information System support?

Strengthen Customer and Supplier Intimacy Use information systems to tighten linkages with suppliers and develop intimacy with customers. Amazon and Chrysler Corporation are both excellent examples that are quoted in the text of how these firms used information systems to strengthen their customer and supplier relationships. Strong linkages to customers and suppliers increase switching costs (expense a customer or company incurs in lost time and expenditure of resources when changing from one supplier or system to a competing supplier or system).

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THE INTERNETS IMPACT ON COMPETITIVE ADVANTAGE

More companies are incorporating the Internet in their business strategies. Because of the Internet, the traditional competitive forces are still at work, but competitive rivalry has become much more intense (Porter 2001). 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. Table 34 summarizes some of the potentially negative impacts of the Internet on business firms identified by Porter.

THE BUSINESS VALUE CHAIN MODEL

Be better than the competition. Thats the mantra of most companies that are serious about winning the game. Areas of the organization most affected by leveraging technology are in producing the product, getting it to the stores, and making the customer happy. Remember the WorldWide Candy Corporation from Chapter 2? Think of all the activities that go into getting the Cybernuts candy bar made, from procuring raw materials to actual production. Then consider how the candy bar gets from the factory to the store shelves. And what about all those commercials you see? These are primary activities. Just as important are support activities: human resources, accounting, and finance. These functions support the primary functions of production, shipping, and sales and marketing. The value chain model that Laudon and Laudon discuss in the text will help an organization focus on these activities and determine which are critical to its success. By effectively using an information system in a strategic role at any, or preferably all, levels of the organization, a digital firm can provide more value in their products than the competition. If they cant provide more value, then the strategic information system should help them provide the same value but at a lower price. Using the business value chain model will cause you to consider benchmarking your business processes against your competitors or others in related industries, and identifying industry best practices. Benchmarking involves comparing the efficiency and effectiveness of your business

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processes against strict standards and then measuring performance against those standards. Industry best practices are usually identified by consulting companies, research organizations, government agencies, and industry associations as the most successful solutions or problemsolving methods for consistently and effectively achieving a business objective.

Extending the Value Chain: The Value Web More companies are incorporating the Internet in their business strategy through the use of value webs. Ford Motor Company is forming many partnerships and alliances via their Web site to offer services and products that otherwise would be too difficult, costly, or time-consuming. The Ford Motor Company recognized that their value chain was linked to the value chains of its suppliers, distributors, and customers. In simple terms, 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. 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.

INTERACTIVE SESSION: ORGANIZATIONS AMAZON.COM: AN INTERNET GIANT FINE-TUNES ITS STRATEGY

Amazon.com has become one of the Webs most satisfying online retail shopping site. Their success is attributed to their ability to use Internet technology as a way to develop and execute a value web strategy to link up more efficiently with their suppliers, strategic partners, and customers. The continuous efforts by Amazon to be innovative in their business strategy and use of information systems have been the main ingredient for Amazons success. The case demonstrates the vital importance of information technology to the success of Amazon.com.

CASE STUDY QUESTIONS

1. Analyze Amazon.com using the competitive forces and value chain models. How has it responded to pressures from its competitive environment? How does it provide value to its customers? 2. Describe Amazons evolving business strategy. 3. 4. Why did the company change its strategy?

Do you think Amazon can continue to be successful? Explain your answer.

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SYNERGIES, CORE COMPETENCIES, AND NETWORK-BASED STRATEGIES

A large corporation is typically made up of a collection of multiple business units. Information systems achieve additional efficiencies or enhanced services by tying together the operation of these disparate business units. In essence, information systems can improve the overall performance of the organizations business units by promoting synergies and core competencies. Synergies AOL is an Internet Service Provider and Time Warner produces entertainment products such as movies and music. So why did America Online and Time Warner merge their companies? Because these two companies see a lot of synergy between their products and services. As we continue to demand more content and entertainment through the Internet, AOL is well positioned to deliver the content. On the other hand, Time Warner has the content but not an efficient, lowcost method of delivering it through the Internet. By merging a delivery-based company with a content-based company, they can beat their competition through synergy. Unfortunately, the merger has not succeeded because of the political and organizational clashes with the corporate hierarchy. Enhancing Core Competencies Why did Ford Motor Company form an alliance with UPS instead of continuing its long-time practice of delivering vehicles to dealers itself? The answer is simple Ford wanted to concentrate on its core competency of manufacturing vehicles and let UPS concentrate on its core competency of delivering products. A core competency is an activity for which a firm is a world-class leader. Any information system that encourages the sharking of knowledge across business units enhances competency. UPS Logistics Web site says By shaving four days off the delivery cycle and reengineering the network, Ford is realizing a $1 billion dollar reduction in vehicle inventory and more than $125 million in inventory carrying-cost reductions on an annualized basis. The savings will continue to grow as our precision, Web-enabled system reaches maturity and we surface and eliminate more nonvalue-added activities, said Taylor. Ford and UPS Logistics Group launched the alliance a year ago to reengineer Fords vehicle delivery system amid rising consumer demand for on-time vehicle delivery. UPS Logistics Group created UPS Autogistics as a business unit to manage the project. With a single network manager in place to analyze any potential problems before they occur, weve managed to avoid bottlenecks, reduce the amount of assets in the supply chain and cut inventory carrying costs, said Tom Kolakowski, manager of Ford North American Vehicle Logistics.

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Networked-Based Strategies The availability of Internet and networking technology has inspired strategies that take advantage of firms abilities to create networks or network with each other. Network-based strategies include the use of network economics, virtual company strategy and business ecosystems. Network Economics Network Economics model of strategic systems at the industry level based on the concept of a network where adding another participant entails zero marginal costs but can create much larger marginal gains. Virtual Company Strategy A Virtual Company is an organization that uses networks to link people, assets, and ideas to create and distribute products and services without being limited to traditional organizational boundaries or physical locations. Business Ecosystems: Keystone and Niche Firms Business Ecosystem is another term for loosely coupled but interdependent networks of suppliers, distributors, outsourcing firms, transportation service firms, and technology manufacturers. Ford Motor Company, General Motors, and DaimlerChrysler rocked the automotive industry when they announced their joint venture Covisint. The three leading competitors in this industry were joining forces to create a single Internet source for all the suppliers that served the three corporations. The idea is to drive down the cost of supplies and make the entire industry more efficient. Although things havent gone as smoothly as originally hoped for, the idea has been planted and is now spreading to other industries. Figure 3-13 shows how the traditional competitive forces model changes when the concept of industry sets is introduced.

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3.4

USING SYSTEMS FOR COMPETITIVE ADVANTAGE: MANAGEMENT ISSUES

Strategic information systems often change the organization as well as its products, services, and operating procedures, driving the organization into new behavioral patterns. Successfully using information systems to achieve a competitive advantage is challenging and requires precise coordination of technology, organizations, and management.

SUSTAINNG COMPETITIVE ADVANTAGE

Using information systems to beat the competition and increase the value of a product is not easy. Because competitors can quickly copy strategic systems, competitive advantage is not always sustainable. Sustaining a competitive advantage constantly requires changing processes and methods of conducting business. Managers simply cannot rest on their laurels with todays fast paced, fast changing technological advances. Technology changes much faster than organizations can adapt. As soon as employees and managers become comfortable with a particular system, its almost time to make some more changes.

PERFORMING A STRATEGIC SYSTEMS ANALYSIS

Completing a strategic systems analysis is one of the first steps managers should take to help determine how they can use information systems to gain a competitive advantage. Ask yourself these questions about your own firm:

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1. What is the structure of the industry in which your firm is located? What are some of the competitive forces at work in the industry: Are there new entrants to the industry? What is the relative power of suppliers, customers, and substitute products and services over prices? Is the basis of competition quality, price, or brand? What are the direction and nature of change within the industry? From where are the momentum and change coming? How is the industry currently using information technology? Is the organization behind or ahead of the industry in its application of information systems? 2. What are the business, firm, and industry value chains for your firm? How is the company creating value for the customer through lower prices and transaction costs or higher quality? Are there any places in the value chain where the business could create more value for the customer and additional profit for the company? Does the firm understand and manage its business processes using the best practices available? Is it taking maximum advantage of supply chain management, customer relationship management, and enterprise systems? Does the firm leverage its core competencies? Is the industry supply chain and customer base changing in ways that benefit or harm the firm? Can the firm benefit from strategic partnerships and value webs? Where in the value chain will information systems provide the greatest value to the firm?

MANAGING STRATEGIC TRANSITIONS

A vital attribute of any managers success is the ability to adapt to change. The pace of technological change is at its highest level ever. With each advance, the organization must use strategic transitions, a movement between levels of sociotechnical systems, to its advantage. Making changes in the information systems should trigger a review of associated processes to make sure they are in sync. Teaming up with competitors may seem at odds with wanting to beat the competition, but in fact may be the smartest thing to do. Technological changes allow you to do both without sacrificing too much. Of course the Internet has turned many traditional management practices to dust. Customers have access to much more information and data than they ever did before. They can compare product prices across hundreds of companies with a few clicks. Before the Internet, customers may have had access to a limited number of retailers. Through the Internet, they now have access to hundreds of retailers open 24 hours a day. Once retailers had only local competition; now they have to compete with other retailers located halfway around the world. As we continue through the book, you should keep in mind how organizations are structured, how information needs vary from one organization to another, and how information systems can

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enhance or detract the characteristics of an organization. The most important thing you should remember is that at the core of every organization are people. Bottom Line: A well-developed strategic information system that is integrated throughout the company can be used to lower overall costs and provide greater value to the company, the supplier, and the customer.

Summary
1. Identify and describe important features of organizations that managers need to know about in order to build and use information systems successfully. Managers need to understand certain essential features of organizations to build and use information systems successfully. All modern organizations are hierarchical, specialized, and impartial, using explicit routines to maximize efficiency. All organizations have their own cultures and politics arising from differences in interest groups, and they are affected by their surrounding environment. Organizations differ in goals, groups served, social roles, leadership styles, incentives, types of tasks performed, and type of structure. These features help explain differences in organizations use of information systems. 2. Evaluate the impact of information systems on organizations. Information systems and the organizations in which they are used interact with and influence each other. The introduction of a new information system will affect organizational structure goals, work design, values, competition between interest groups, decision making, and dayto-day behavior. At the same time, information systems must be designed to serve the needs of important organizational groups and will be shaped by the organizations structure, task, goals, culture, politics, and management. Information technology can reduce transaction and agency costs, and such changes have been accentuated in organizations using the Internet. Information systems are closely intertwined with an organizations structure, culture, and business processes. New systems disrupt established patterns of work and power relationships, so there is often considerable resistance to them when they are introduced. The complex relationship between information systems, organizational performance, and decision making must be carefully managed. 3. Demonstrate how Porters competitive forces model and the value chain model help businesses use information systems for competitive advantage. In Porters competitive forces model, the strategic position of the firm and its strategies are determined by competition with its traditional direct competitors but also they are also greatly affected by new market entrants, substitute products and services, suppliers, and customers. Information systems help companies compete by maintaining low costs, 96

differentiating products or services, focusing on market niche, strengthening ties with customer and suppliers, and increasing barriers to market entry with high levels of operational excellence. The value chain model highlights specific activities in the business where competitive strategies and information systems will have the greatest impact. The model views the firm as a series of primary and support activities that add value to the firms products or services. Primary activities are directly related to production and distribution, whereas support activities make the delivery of primary activities possible. A firms value chain can be linked to the value chains of its suppliers, distributors, and customers. A value web consists of information systems that enhance competitiveness at the industry level by promoting the use of standards and industry-wide consortia and by enabling businesses to work more efficiently with their value partners. 4. Demonstrate how information systems help businesses use synergies, core competences, and network-based strategies to achieve competitive advantage. Because firms consist of multiple business units, information systems achieve additional efficiencies or enhanced services by tying together the operations of disparate business units. Information systems help businesses leverage their core competencies by promoting the sharing of knowledge across business units. Information systems facilitate business models based on large networks of users or subscribers that take advantage of network economics. A virtual company strategy uses networks to link to other firms so that a company can use the capabilities of other companies to build, market, and distribute products and services. In business ecosystems, multiple industries work together to deliver value to the customer. Information systems support a dense network of interactions among the participating firms. 5. Assess the challenges posed by strategic information systems and management solutions. Implementing strategic systems often requires extensive organizational change and a transition from one sociotechnical level to another. Such changes are called strategic transitions and are often difficult and painful to achieve. Moreover, not all strategic systems are profitable, and they can be expensive to build. Many strategic information systems are easily copied by other firms so that strategic advantage is not always sustainable. A strategic systems analysis is helpful.

Key Terms
The following alphabetical list identifies the key terms discussed in this chapter. Agency theory economic theory that views the firm as a nexus of contracts among selfinterested individuals who must be supervised and managed. Benchmarking setting strict standards for products, services, or activities and measuring organizational performance against those standards.

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Best practices the most successful solutions or problem-solving methods that have been developed by a specific organization or industry. Business ecosystem loosely coupled but interdependent networks of suppliers, distributors, outsourcing firms, transportation service firms, and technology manufacturers. Competitive forces model model used to describe the interaction of external influences, specifically threats and opportunities that affect an organizations strategy and ability to compete. Core competency activity at which a firm excels as a world-class leader. Efficient customer response systems system that directly links consumers behavior to distribution, production, and supply chains. Mass customization the capacity to offer individually tailored products or services using mass production resources. Network economics model of strategic systems at the industry level based on the concept of a network where adding another participant entails zero marginal costs but can create much larger marginal gains. Organization stable, formal social structure that takes resources from the environment and processes them to product outputs. Primary activities activities most directly related to the production and distributing of a firms products or services. Product differentiation competitive strategy for creating brand loyalty by developing new and unique products and services that are not easily duplicated by competitors. Routines precise rules, procedures and practices that have been developed to cope with expected situations. Strategic transitions a movement from one level of sociotechnical system to another. Often required when adopting strategic systems that demand changes in the social and technical elements of an organization. Support activities activities that make the delivery of a firms primary activities possible. They consist of the organizations infrastructure, human resources, technology, and procurement. Switching costs the expense a customer or company incurs in lost time and expenditure of resources when changing from one supplier or system to a competing supplier or system.

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Transaction cost theory economic theory stating that firms grow larger because they can conduct marketplace transactions internally more cheaply than they can with external firms in the marketplace. Value chain model model that highlights the primary or support activities that add a margin of value to a firms products or services where information systems can be best applied to achieve a competitive advantage. Value web customer-driven network of independent firms that use information technology to coordinate their value to collectively produce a product or service for a market. Virtual company an organization that uses networks to link people, assets, and ideas to create and distribute products and services without being limited to traditional organizational boundaries or physical locations.

Review Questions
1. What is an organization? Compare the technical definition of organization with the behavioral definition. Students can make use of Figures 32 and Figure 33 in answering this question. The technical definition for an organization defines an organization as a stable, formal social structure that takes resources from the environment and processes them to produce outputs. This definition of an organization focuses on three elements: capital and labor, production, and products for consumption. The technical definition also implies that organizations are more stable than an informal group, are formal legal entities, and are social structures. The behavioral definition states that an organization is a collection of rights, privileges, obligations, and responsibilities that are delicately balanced over a period of time through conflict and conflict resolution. This definition highlights the people within the organization, their ways of working, and their relationships. The technical definition shows us how a firm combines capital, labor, and information technology. The behavioral definition examines how information technology impacts the inner workings of the organization. The behavioral definition is the more realistic of the two.
2.

Identify and describe the features of organizations that help explain differences in organizations use of information systems. Common features for organizations include formal structure, standard operating procedures, politics, and culture. Organizations can differ in their organizational type, environment, goals, power, constituencies, function, leadership, tasks, technology, and business processes.

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3.Describe the major economic theories that help explain how information systems affect organizations. The two economic theories discussed in the book are transaction cost theory and agency theory. The transaction cost theory is based on the notion that a firm incurs transaction costs when it buys on the marketplace rather than making products for itself. Traditionally, firms sought to reduce transaction costs by getting bigger, hiring more employees, vertical and horizontal integration, and small-company takeovers. Information technology helps firms lower the cost of market participation (transaction costs) and helps firms shrink in size while producing the same or greater amount of output. The agency theory views the firm as a nexus of contracts among interested individuals. The owner employs agents (employees) to perform work on his or her behalf and delegates some decision-making authority to the agents. Agents need constant supervision and management, which introduces management costs. As firms grow, management costs rise. Information technology reduces agency costs by providing information more easily so that managers can supervise a larger number of people with fewer resources. 4. Describe the major behavioral theories that help explain how information systems affect organizations. Behavioral theories, from sociology, psychology, and political science, are useful for describing the behavior of individual firms. Behavioral researchers theorize that information technology could change the decision-making hierarchy by lowering the costs of information acquisition and distribution. IT could eliminate middle managers and their clerical support by sending information from operating units directly to senior management and by enabling information to be sent directly to lower-level operating units. It even enables some organizations to act as virtual organizations because they are no longer limited by geographic locations. One behavioral approach views information systems as the outcome of political competition between organizational subgroups. IT becomes very involved with this competition because it controls who has access to what information, and information systems can control who does what, when, where, and how. 5.Why is there considerable organizational resistance to the introduction of information systems? There is considerable organizational resistance to new information systems because they change many important organizational dimensions, such as culture, structure, politics, and work. Leavitt puts forth a model that says that changes in technology are absorbed, deflected, and defeated by organizational task arrangements, structures, and people. In this model the only way to bring about change is to change the technology, tasks, structure, and people simultaneously. In a second model, the authors speak of the need to unfreeze organizations before introducing an innovation, quickly implementing the new system, and then refreezing or institutionalizing the change.

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6.

What is the impact of the Internet on organizations and the process of management? The Internet increases the accessibility, storage, and distribution of information and knowledge for organizations; nearly any information can be available anywhere at any time. The Internet increases the scope, depth, and range of information and knowledge storage. It lowers the cost and raises the quality of information and knowledge distribution, that is, it lowers transaction and information acquisition costs. By using the Internet, organizations may reduce several levels of management, enabling closer and quicker communication between upper levels of management and the lower levels. The Internet also lowers agency costs.

7.

What is Porters competitive forces model? How does it work? What does it explain about competitive advantage? This model provides a general view of the firm, its competitors, and the firms environment. Porters model is all about the firms general business environment. In this model, five competitive forces shape the fate of the firm: traditional competitors new market entrants substitute products and services customers suppliers Michael Porters competitive forces model helps determine whether your business can attain any of these competitive advantages: barriers to entry demand control economies of scale process efficiency

8.What are four competitive strategies enabled by information systems that firms can pursue? How can information systems support each of these competitive strategies? Give examples. Table 33 can be used to help answer this question. The four generic strategies, each of which often is enabled by using information technology and systems include: Low-cost leadership: use information systems to produce products and services at a lower price than competitors while enhancing quality and level of service. Example: Wal-Mart. Product differentiating: use information systems to differentiate products and enable new services and products. Example: Google, eBay, Apple, Lands End. Focus on market niche: use information systems to enable a focused strategy on a single market niche; specialize. Example: Hilton Hotels Harrahs.

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 Strengthen customer and suppliers: use information systems to develop strong ties and loyalty with customers and suppliers. Example: Chrysler Corporation, Amazon.com. 9.What is the value chain model? How can it be used to identify opportunities for strategic information systems? 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 model identifies specific, critical leverage points where a firm can use information technology most effectively to enhance its competitive position. The value chain model views the firm as a series of basic activities that add a margin of value to a firms products or services. The activities are categorized as either primary or support activities. Primary activities are most directly related to production and distribution of the firms products and services, which create value for the customer. Support activities make the delivery of primary activities possible and consist of organization infrastructure. A firms value chain can be linked to the value chains of its suppliers, distributors, and customers. Information systems can be used at each stage of the value chain to improve operational efficiency, lower costs, improve profit margins, and forging a closer relationship with customers and suppliers. 10. What is the value web? How is it related to the value chain? How does it help identify opportunities for strategic information systems? 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. It is more customer driven and operates in a less linear fashion than the traditional value chain. The value web is a networked system that can synchronize the business processes of customers, suppliers, and trading partners among different companies in an industry or in related industries. These value webs are flexible and adaptive to changes in supply and demand. Relationships can be bundled or unbundled in response to changing market conditions. Firms will accelerate time to market and to customers by optimizing their value web relationships to make quick decisions on who can deliver the required products or services at the right price and location. 11. How has the Internet changed competitive forces and competitive advantage? The Internet has nearly destroyed some industries and has severely threatened more. The Internet has also created entirely new markets and formed the basis of thousands of new businesses. The Internet has enabled new products and services, new business models, and new industries to rapidly develop. Because of the Internet, competitive rivalry has become much more intense. 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. Because

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information is available to everyone, the Internet raises the bargaining power of customers, who can quickly find the lowest-cost provider on the Web. 12. How do information systems promote synergies and core competencies? How does this enhance competitive advantage? A large corporation is typically a collection of businesses that are organized as a collection of strategic business units. Information systems can improve the overall performance of these business units by promoting synergies and core competencies. The concept of synergy is that when the output of some units can be used as inputs to other units, or two organizations can pool markets and expertise, these relationships lower costs and generate profits. In applying synergy to situations, information systems are used to tie together the operations of disparate business units so that they can act as a whole. A core competency is an activity for which a firm is a world-class leader. In general, a core competency relies on knowledge that is gained over many years of experience and a firstclass research organization or simply key people who follow the literature and stay abreast of new external knowledge. Any information system that encourages the sharing of knowledge across business units enhances competency. 13. How can businesses benefit by using network economics? The availability of Internet and networking technology has inspired strategies that take advantage of the abilities of the firm to create networks or network with each other. In a network economy, information systems facilitate business models based on large networks of users or subscribers that take advantage of network economies. Internet sites can be used by firms to build communities of users that can result in building customer loyalty and enjoyment and build unique ties to customers. 14. What is a virtual company? What are the benefits of pursuing a virtual company strategy? A virtual company 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 physical locations. One company can use the capabilities of another company without being physically tied to that company. The virtual company model is useful when a company finds it cheaper to acquire products, services, or capabilities from an external vendor or when it needs to move quickly to exploit new market opportunities and lacks the time and resources to respond on its own. 15. Describe the management challenges posed by strategic information systems in organizations and suggest some ways of dealing with them.

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Information systems are closely intertwined with an organizations structure, culture, and business processes. New systems disrupt established patterns of work and power relationships, so there is often considerable resistance to them when they are introduced. Implementing strategic systems often requires extensive organizational change and a transition from one sociotechnical level to another. Such changes are called strategic transitions and are often difficult and painful to achieve. Moreover, not all strategic systems are profitable, and they can be expensive and difficult to build because they can entail massive sociotechnical changes within the organization. Many strategic information systems are easily copied by other firms so that strategic advantage is not always sustainable. The complex relationship between information systems, organizational performance, and decision making must be carefully managed. In suggesting solutions, students should make reference to page 114 Performing a Strategic Systems Analysis. Listed on this page they will find questions that managers should be asking.

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