Chapter 3: Information Systems,
Organizations, and Strategy
Dr. Mohammed Sajedur Rahman
MIS 874
Management
Information Systems
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.
DR. RAHMAN 2
The Technical Microeconomic Definition of
the Organization
• In the technical 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.
DR. RAHMAN 3
The Behavioral View of Organizations
• The behavioral view of organizations
emphasizes group relationships,
values, and structures.
• In this behavioral view, people who
work in organizations develop
customary ways of working; they gain
attachments to existing relationship;
and they make arrangements with
subordinates and superiors about how
work will be done.
DR. RAHMAN 4
Relationship Between Organizations and
Information Technology
• The technical and behavioral definitions are not contradictory and they
complement each other.
• The technical definition tells us how thousands of firms in competitive
markets combine capital, labor, and information technology, whereas the
behavioral model takes us inside the individual firm to see how that
technology affects the organization’s inner workings.
• Technical View of Organization
– A technical view of organizations encourages us to focus on how inputs are
combined to create outputs when technology changes are introduced into the
company.
– In technical view, the firm is seen as infinitely malleable, with capital and labor
substituting for each other quite easily.
DR. RAHMAN 5
Relationship Between Organizations and
Information Technology
• Behavioral View of Organization
– The more realistic behavioral view suggests that building new information systems
or rebuilding old ones involves much more than a technical rearrangement of
machines or workers.
– According to the behavioral view, some information systems change the
organizational balance of rights, privileges, obligations, responsibilities, and
feelings that have been established over a long period of time.
– Changing these elements can take a long time, be very disruptive, and requires
more resources to support training and learning.
– Technological change requires changes in who owns and controls information, who
has the right to access and update that information, and who makes decisions
about whom, when, and how.
– This more complex view forces us to look at the way work is designed and the
procedures used to achieve outputs.
DR. RAHMAN 6
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
DR. RAHMAN 7
Features of Organizations
• Use of hierarchical structure where everyone is accountable to someone.
• Accountability, authority in system of impartial decision making.
• Authority is limited to specific actions governed by abstract rules or
procedures.
• Adherence to principle of efficiency
• Organizational politics, culture,
environments, and structures
• Routines and business processes
– Collection of precise rules, procedures,
and practices developed to cope with
virtually all expected situations
DR. RAHMAN 8
Organizational Politics
• Divergent viewpoints lead to political struggle, competition, and conflict
• Political resistance greatly hampers organizational change
DR. RAHMAN 9
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
DR. RAHMAN 10
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.
DR. RAHMAN 11
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, smartphones, Big Data, artificial
intelligence, the Internet
• First movers and fast followers
– First movers—inventors of disruptive technologies
– Fast followers—firms with the size and resources to capitalize on
that technology
DR. RAHMAN 12
Organizational Structure
• All organizations have a structure or shape.
• Five basic kinds of organizational structure (Mintzberg)
– Entrepreneurial
– Machine bureaucracy
– Divisionalized bureaucracy
– Professional bureaucracy
– Adhocracy
• Information system often reflects organizational structure
DR. RAHMAN 13
Organizational Structure
DR. RAHMAN 14
Economic Impacts of IS on Organizations
• I T changes relative costs of capital and the costs of information
• Information systems technology is a factor of production, like capital
and labor
• I T 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
DR. RAHMAN 15
Transaction Cost Theory
• Traditionally, firms seek to economize on transaction costs (the costs
of participating in markets) by
– Vertical integration, hiring more employees, buying suppliers and
distributors
• I T can help to lower market transaction costs, making it worthwhile for
firms to transact with other firms rather than grow the number of
employees.
• As transaction costs decrease, firm size (the number of employees)
should shrink.
• Using IT, firm size can stay constant or contract even as the company
increases its revenues.
DR. RAHMAN 16
Agency Theory
• Firm is viewed as “nexus of contracts” among self-interested parties
requiring supervision.
• Firms experience agency costs (the cost of managing and supervising)
which rise as firm grows.
• I T can reduce agency costs, making it possible for firms to grow
without adding to the costs of supervising, and without adding
employees.
• IT reduce the costs of acquiring and analysing information, permits
organizations to reduce agency costs.
DR. RAHMAN 17
Organizational and Behavioral Impacts of IT
on Organizations
• I T flattens organizations
– Decision making is pushed to lower levels
– Fewer managers are needed (I T 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
DR. RAHMAN 18
Flattening Organizations
DR. RAHMAN 19
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 that are paramount:
– Nature of the innovation
– Structure of organization
– Culture of organization
– Tasks affected by innovation
DR. RAHMAN 20
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
DR. RAHMAN 21
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.
• Organizational factors in planning a new system:
– Environment in which the organization must function.
– The structure of the organization
 Hierarchy, specialization, routines, business processes
– Organization’s culture and politics.
– Type of organization and style of leadership.
– Main interest groups affected by system; attitudes of end users.
– Kind of tasks, decisions, and business processes the system will
assist.
DR. RAHMAN 22
Competitive Forces
• Some firms do better than others and there is almost always a
standout firm.
• Firms that “do better” than others are said to have a competitive
advantage over others.
 Why do some firms become leaders in their industry?
 How do they achieve competitive advantage?
 How can you analyze a business and identify its strategic advantages?
 How can you develop a strategic advantage for the organization?
 How do IS contribute to strategic advantages?
• Michael Porter’s competitive forces model helps to answer the above
questions by understanding competitive advantages.
DR. RAHMAN 23
Porter’s Competitive Forces Model
• Michael Porter’s competitive forces model
– Is intended to explain why some firms do better than others.
– Provides general view of firm, its competitors, and environment.
– 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.
• Five competitive forces shape fate of firm:
– Traditional competitors
– New market entrants
– Substitute products and services
– Customers
– Suppliers
DR. RAHMAN 24
Porter’s Competitive Forces Model
• 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 C Ds.
– New technologies create new substitutes all the time.
DR. RAHMAN 25
Porter’s Competitive Forces Model
• Customers
– Can customers easily switch to competitor’s products? Can they force
businesses to compete on price alone in transparent marketplace?
– A profitable company depends in large measure on its ability to attract
and retain customers and charge high prices.
– The power of customers grows if they can easily switch to a competitor’s
products or services.
• Suppliers
– Market power of suppliers when firm cannot raise prices as fast as
suppliers
– The more different suppliers a firm has, the greater control it can exercise
over suppliers in terms of price, quality, and delivery schedules.
DR. RAHMAN 26
IS Strategies for Dealing with Competitive
Forces
• Four generic strategies for dealing with competitive forces,
enabled by using I T:
– Low-cost leadership
– Product differentiation
– Focus on market niche
– Strengthen customer and supplier intimacy
DR. RAHMAN 27
IS Strategies for Dealing with Competitive
Forces
• Low-cost leadership
– Produce products and services at a lower price than competitors.
– Use IS to achieve the lowest operational costs and the lowest prices.
– Example: Walmart’s efficient customer response system.
• Product differentiation
– Enable new products or services, greatly change customer convenience
and experience.
– Example: Google Nike
– Mass customization; customer experience management
DR. RAHMAN 28
IS Strategies for Dealing with Competitive
Forces
• Focus on market niche
– Use information systems to enable a focused strategy on a single market
niche; specialize.
– IS support this strategy by producing and analyzing data for finely tuned
sales and marketing techniques.
– IS enable companies to analyze customer buying patterns, tastes, and
preferences closely to efficiently advertise and market products.
– Example: Hilton Hotels’ O n Q system
• Strengthen customer and supplier intimacy
– Use information systems to develop strong ties and loyalty with customers
and suppliers
– Increase switching costs. Examples: Toyota, Amazon
DR. RAHMAN 29
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
DR. RAHMAN 30
The Business Value Chain Model
• Although the Porter’s model is very helpful for identifying competitive
forces and suggesting generic strategies, it has problems:
– It is not very specific about what exactly to do.
– It does not provide a methodology to follow for achieving competitive
advantages.
• The value chain model
– Set of activities through which a product or service is created and
delivered to customers.
– Highlights specific activities in the business where competitive strategies
can best be applied and where information systems are most likely to
have strategic impact.
DR. RAHMAN 31
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
DR. RAHMAN 32
The Business Value Chain Model
• Primary Activities:
– Most directly related to the production and distribution of the firm’s
products and services.
– Create value for the customer.
– Examples: inbound/outbound logistics, operations, sales & marketing
• Support activities:
– Make the delivery of the primary activities possible.
– Consist of organization infrastructure (administration and management),
human resources (employee recruiting, hiring, and training), technology
(improving products and the production process), and procurement
(purchasing).
DR. RAHMAN 33
Extending the Value Chain: The Value Web
• Performance of most firms depends not only on what goes on inside of a firm
but also on how well the firm coordinates with outside entities.
• Firm’s value chain is linked to value chains of suppliers, distributors, customers.
• Internet technology has made it possible to create highly synchronized industry
value chains called value webs.
• Value web
– Collection of independent firms using highly synchronized I T to coordinate value
chains to produce product or service collectively
– More customer driven, less linear operation than traditional value chain
DR. RAHMAN 34
Extending the Value Chain: The Value Web
• Value web like Amazon and Ebay,
– Making it easy for suppliers to display
goods and open stores on the their site.
– Making it easy for customers to search for
goods.
– Making it easy for customers to order and
pay for goods.
– By tracking and coordinating the shipment
of goods to customers.
DR. RAHMAN 35