406 MIS ch3 PDF

Advanced Information System
MANAGEMENT INFORMATION SYSTEM:

Managing the Digital Firm, 12th Edition
(Kenneth C. Laudon, Jane P. Laudon)
Faculty of Information Science

Chapter (3)
Information Systems, Organizations,

and Strategy

Objectives of Chapter
• Which features of organizations do managers need to know about to
build and use information systems successfully?
• What is the impact of information systems on organizations?
• How does Porter’s competitive forces model help companies develop

competitive strategies using information systems?
• How do the value chain and value web models help businesses identify
opportunities for strategic information system applications?
• What are the challenges posed by strategic information systems and how
should they be addressed?

Information System (IS)
&
Information Technology (IT)

Introduction
• Information systems (IS) and information technology (IT) are

often considered synonymous.
– Information technology is a subset of information systems.
– They have distinct characteristics and specific career paths that

require different education and training.

Introduction
– Information technology (IT) - all the hardware and software

that a firm needs to use in order to achieve its business
objectives.
– Information systems (IS) are more complex and can be best be

understood by looking at them from both a technology and a
business perspective.
• The field of information systems bridges business and computer
science.

What is Information System?
• A set of interrelated components collect (or retrieve),

process, store, and distribute information to support decision
making and control in an organization.
• Information systems help managers and analyze problems,

visualize complex subjects, and create new products.
• It contain information about significant people, places, and

things within the organization or in the environment
surrounding it.

Organization and Information System
• Information systems and organizations influence one another.

– Information systems are built by managers to serve the
interests of the business firm.
– At the same time, the organization must be aware of and open
to the influences of information systems to benefit from new
technologies.
• The interaction between information technology and

organizations is complex and is influenced by many mediating
factors (Figure 3-1), including …
– the organization’s structure, business processes, politics,
culture, surrounding environment, and management decisions.

Organization and Information
System
• You will need to understand …
– how information systems can change social and work life in your
firm.
• You will not be able to
– design new systems successfully or understand existing systems
without understanding your own business organization.
FIGURE 3-1 THE TWO-WAY RELATIONSHIP BETWEEN

ORGANIZATIONS AND INFORMATION TECHNOLOGY

Organization and Information
System
• What is an organization?
– Technical definition:
• Stable, formal social structure that takes resources from
environment and processes them to produce outputs.
• A formal legal entity with internal rules and procedures, as
well as a social structure.
– 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
• In the microeconomic definition of organizations,

– capital and labor (the primary production factors provided by the environment)
are transformed by the firm through the production process into products and
services (outputs to the environment).
• The products and services are consumed by the environment, which supplies
additional capital and labor as inputs in the feedback loop.
FIGURE 3-3 THE BEHAVIORAL VIEW OF ORGANIZATIONS

Features of Organization
All modern organizations have certain characteristics.
– They are bureaucracies with clear-cut divisions of labor and
specialization.
– Organizations arrange specialists in a hierarchy of authority in
which everyone is accountable to someone
• authority is limited to specific actions governed by abstract rules or
procedures.
– These rules create a system of impartial and universal decision making.
– Organizations try to hire and promote employees on the basis of
technical qualifications and professionalism.
– The organization is devoted to the principle of efficiency
maximizing output using limited inputs.
– Other features of organizations include their business processes,
organizational culture, and leadership styles.
Other Organizational Features
• Organizations is differed by the tasks they perform and the
technology they use.
– Some organizations perform primarily routine tasks that can be
reduced to formal rules that require little judgment (such as
manufacturing auto parts), whereas
– others (such as consulting firms) work primarily with non

routine tasks.

Routines and Business Processes
• New information system

applications require that
individual routines and business
processes change to achieve
high levels of organizational
performance.
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
o What products the organization should produce
o How and where it should be produced
o For whom the products should be produced
• May be powerful unifying force as well as restraint on

change

Organizational Environments
• Organizations reside in environments from which they draw
resources and to which they supply goods and services.
• Organizations and environments have a reciprocal

relationship.
• On the one hand, organizations are open to, and dependent on,
the social and physical environment.

Organizational Environments
• Information systems can be an instrument of environmental
scanning, act as a lens.
• (e.g., online banking to mobile banking due to vast amount of
mobile user; online shopping web sites on social network such as
Facebook)
• Environments generally change faster than organizations.
• Most organizations are unable to adapt to a rapidly changing

environment.

FIGURE 3-5 ENVIRONMENTS AND ORGANIZATIONS HAVE A RECIPROCAL
RELATIONSHIP

Organizational Structure
• Organizations all have a structure or shape.
• The kind of information systems you find in a business firm
and the nature of problems with these systems often reflects
the type of organizational structure.
– 5 basic kinds of organizational structure
1. Entrepreneurial (small start-up business)
2. Machine bureaucracy (Midsize manufacturing firm)
3. Divisionalized bureaucracy (Fortune 500 firms)
4. Professional bureaucracy (Law firms, school systems, hospitals)
5. Adhocracy (Consulting firms)

Organizational Structure
• In small entrepreneurial firms,
– you will often find poorly designed systems developed in a rush

that often outgrow their usefulness quickly.
• In huge multidivisional firms operating in hundreds of locations
– you will often find there is not a single integrating information

system, but instead each locale or each division has its set of
information systems.

How Information Systems
impact
Organizations and Business?

ECONOMIC IMPACTS
– IT changes relative costs of capital and the costs of information

– IT is a factor of production, like capital and labor.
– IT affects the cost and quality of information and changes
economics of information.
– IT helps firms to reduce transaction costs (the cost of participating
in markets)
– IT is far less expensive to outsource work to a competitive
marketplace rather than hire employees.

ECONOMIC IMPACTS
• Transaction cost theory
– Firms seek to economize on transaction costs (the costs of
participating in markets)
– IT lowers market transaction costs for a firm, making it

worthwhile for firms to transact with other firms rather than
grow the number of employees.

Figure 3-6 the transaction cost theory of the impact of
information technology on the organization

ECONOMIC IMPACTS
• Agency theory:
– 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

Figure 3-7 the agency cost theory of the impact of
information technology on the organization

ORGANIZATIONAL
AND
BEHAVIORAL IMPACTS
– IT flattens organizations
• Decision making pushed to lower levels
• Fewer managers needed, IT enables…
– faster decision making, and
– increases span of control
– Postindustrial organizations
• Organizations flatten because in postindustrial societies, authority
increasingly relies on knowledge and competence rather than formal
positions
ORGANIZATIONAL
AND
BEHAVIORAL IMPACTS
• Organizational resistance to change
– Information systems become bound up in organizational politics
because they influence access to a key resource – information
– Information systems potentially change an organization’s

structure, culture, politics, and work
Most common reason for failure of large projects is due to

organizational and political resistance to change

FIGURE 3-8
FLATTENING
ORGANIZATIONS
Information systems can reduce the number of levels in an organization

• by providing managers with information to supervise larger numbers of workers and
• by giving lower-level employees more decision-making authority.
Implementing information systems has
consequences for task arrangements,
structures, and people.
According to this model, to implement

change, all four components must be
changed simultaneously.
FIGURE 3-9 ORGANIZATIONAL RESISTANCE AND THE MUTUALLY ADJUSTING

RELATIONSHIP BETWEEN TECHNOLOGY AND THE ORGANIZATION

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 Web site, saving millions of dollars in distribution
costs.

IMPLICATIONS FOR
THE DESIGN AND UNDERSTANDING
OF
INFORMATION SYSTEMS
• Central organizational factors to consider when planning a new

system:
1. Environment
2. Structure (Hierarchy, specialization, routines, business processes)
3. Culture and politics
4. Type of organization and style of leadership
5. Main interest groups affected by system; attitudes of end users
6. Tasks, decisions, and business processes the system will assist

Using Information Systems to Achieve
Competitive Advantage
• 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
1. Traditional competitors
2. New market entrants
3. Substitute products and services
4. Customers
5. Suppliers

FIGURE 3-10 PORTER’S COMPETITIVE FORCES MODEL
In Porter’s competitive forces model, the strategic position of the firm and its
strategies are determined
• not only by competition with its traditional direct competitors
• but also by four other forces in the industry’s environment: new market entrants,
substitute products, customers, and suppliers.
1. Traditional competitors
– All firms share market space with competitors who are
continuously devising new products, services, efficiencies,
switching costs.
2. New market entrants

– Some industries have high barriers to entry, e.g. computer chip
business
– New companies have new equipment, younger workers, but little

brand recognition
3. Substitute products and services

– Substitutes customers might use if your prices become too high,
e.g. iTunes substitutes for CDs
4. Customers
– Can customers easily switch to competitor’s products?
– Can they force businesses to compete on price alone in
transparent marketplace?
5. Suppliers
– Market power of suppliers can have a significant impact on firm
profits, especially when firm cannot raise prices as fast as
suppliers.

• Four generic strategies for dealing with competitive forces,

enabled by using IT
1. Low-cost leadership
2. Product differentiation
3. Focus on market niche
4. Strengthen customer and supplier intimacy

1. Low-cost leadership
– Produce products and services at a lower price than
competitors while enhancing quality and level of service.

Low-cost leadership (Examples: Wal-Mart)

• By keeping prices low and shelves well stocked using a legendary
inventory replenishment system,
– Walmart became the leading retail business in the United States.
– Walmart’s continuous replenishment system sends orders for new

merchandise directly to suppliers as soon as consumers pay for their
purchases at the cash register.

» Point-of-sale terminals record the bar code of each item passing the
checkout counter and send a purchase transaction directly to a
central computer at Walmart headquarters.
» The computer collects the orders from all Walmart stores and
transmits them to suppliers.

– Suppliers can also access Walmart’s sales and inventory data using
Web technology.
– Because the system replenishes inventory with lightning speed,

Walmart does not need to spend much money on maintaining large
inventories of goods in its own warehouses.
– The system also enables Walmart to adjust purchases of store items

to meet customer demands.

• Walmart’s continuous replenishment system is also an example of
an efficient customer response system.
– An efficient customer response system directly links consumer

behavior to distribution and production and supply chains.

Using Information Systems to
Achieve Competitive Advantage
2. Product differentiation
– Enable new products or services, greatly change customer
convenience and experience
• For instance, Google continuously introduces new and unique
search services on its Web site, such as Google Maps.
• By purchasing PayPal, an electronic payment system, in

2003, eBay made it much easier for customers to pay sellers
and expanded use of its auction marketplace.

3. Focus on market niche

– Use information systems to enable a specific market focus, and
serve this narrow target market better than competitors.
– Information systems enable companies to analyze customer

buying patterns, tastes, and preferences closely
• Advertising and marketing campaigns to smaller and smaller

target markets.

Focus on market niche (Example)
• For example, Hilton Hotels’ OnQ system analyzes detailed data
collected on active guests in all of its properties
– to determine the preferences of each guest and each guest’s
profitability.
• Hilton uses this information …

– to give its most profitable customers additional privileges, such as
late check-outs.

4. Strengthen customer and supplier intimacy
– Use information systems to develop strong ties and loyalty
with customers and suppliers; increase switching costs (the
cost of switching from one product to a competing product)

Strengthen customer and supplier intimacy (Example)
• Chrysler Corporation uses information systems to
– facilitate direct access by suppliers to production schedules, and
– even permits suppliers to decide how and when to ship supplies to

Chrysler factories.
• This allows suppliers more lead time in producing goods.
• On the customer side, Amazon.com
– keeps track of user preferences for book and CD purchases, and
– can recommend titles purchased by others to its customers.

Business value chain model
– Views firm as series of activities that add value to products or
services
– Highlights activities where competitive strategies can best be

applied
• Primary activities vs. support activities

• Primary activities are most directly related to the production and

distribution of the firm’s products and services, which create value for
the customer.
– Include:
1. Inbound logistics (receiving and storing materials for distribution to
production)
2. Operations (transforms inputs into finished products)
3. Outbound logistics (storing and distributing finished products)
4. Sales and marketing (promoting and selling the firm’s products)
5. The service activity (maintenance and repair of the firm’s goods and
service)
• Support activities make the delivery of the primary activities
possible and consist of:
1. Organization infrastructure (administration and
management)
2. Human resources (employee recruiting, hiring, and training)
3. Technology (improving products and the production process)
4. Procurement (purchasing input)

– At each stage, determine how information systems can …

• improve operational efficiency and
• improve customer and supplier intimacy

FIGURE 3-11 THE VALUE CHAIN MODEL

Extending the Value Chain:
The Value Web
– The value web is
• A networked system that can synchronize the value chains of
business partners within an industry to respond rapidly to
changes in supply and demand.
(or)
• 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

Extending the Value Chain:
The Value Web
FIGURE 3-12 THE VALUE WEB

Using Information Systems for Competitive
Advantage: Management Issues
1. Sustaining competitive advantage
– Competitors can retaliate and copy strategic systems, competitive
advantage is not always sustainable;
– Markets, customer expectations, and technology change;
globalization has made these changes even more rapid and
unpredictable.
– The Internet can make competitive advantage disappear very quickly
because virtually all companies can use this technology.
– Example:
• Amazon.com was an e-commerce leader but now faces competition
from eBay, Yahoo, and Google.
2. Aligning IT with business objectives

– About half of a business firm’s profits can be explained by
alignment of IT with business
– 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.

3. Managing strategic transitions

– Adopting strategic systems requires
• changes in business goals,
• relationships with customers and suppliers, and business

processes

Group Assignment - I
Discuss each other within group and write your opinions for the
following:
• In this organization, credit card company, which competitive
strategies applied for their better products or services? Explain
why?
• How to apply information system for that company?
• What are the benefits of applying Information system?
• Do you think what type of information is essential for credit
card company?
• Does the company violate the privacy.

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Advanced Information System

MANAGEMENT INFORMATION SYSTEM:

Faculty of Information Science

Information Systems, Organizations,

Faculty of Information Science

• What is the impact of information systems on organizations?

• How does Porter’s competitive forces model help companies develop

Faculty of Information Science

Information Technology (IT)

Faculty of Information Science

• Information systems (IS) and information technology (IT) are

– They have distinct characteristics and specific career paths that

Faculty of Information Science

– Information technology (IT) - all the hardware and software

– Information systems (IS) are more complex and can be best be

Faculty of Information Science

• A set of interrelated components collect (or retrieve),

• Information systems help managers and analyze problems,

• It contain information about significant people, places, and

Faculty of Information Science

• Information systems and organizations influence one another.

• The interaction between information technology and

Faculty of Information Science

FIGURE 3-1 THE TWO-WAY RELATIONSHIP BETWEEN

Faculty of Information Science

Faculty of Information Science

• In the microeconomic definition of organizations,

Faculty of Information Science

– others (such as consulting firms) work primarily with non

Faculty of Information Science

• New information system

FIGURE 3-4 ROUTINES, BUSINESS PROCESSES, AND FIRMS

• Divergent viewpoints lead to political struggle, competition,

• Political resistance greatly hampers organizational change

Faculty of Information Science

• Encompasses set of assumptions that define goal and product

o What products the organization should produce

o How and where it should be produced

o For whom the products should be produced

• May be powerful unifying force as well as restraint on

Faculty of Information Science

• Organizations and environments have a reciprocal

Faculty of Information Science

• Environments generally change faster than organizations.

• Most organizations are unable to adapt to a rapidly changing

Faculty of Information Science

Faculty of Information Science

Faculty of Information Science

– you will often find poorly designed systems developed in a rush

• In huge multidivisional firms operating in hundreds of locations

– you will often find there is not a single integrating information

Faculty of Information Science

Faculty of Information Science

– IT changes relative costs of capital and the costs of information

Faculty of Information Science

– IT lowers market transaction costs for a firm, making it

Faculty of Information Science

Faculty of Information Science

– IT can reduce agency costs, making it possible for firms to

Faculty of Information Science

Faculty of Information Science

• Fewer managers needed, IT enables…

– faster decision making, and