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Chapter 3
Information Systems, Organizations, and Strategy
Student Learning Objectives
1. Which features of organizations do managers need to know about to build and use
information systems successfully?
2. What is the impact of information systems on organizations?
3. How do Porter’s competitive forces model, the value chain model, synergies, core
competencies, and network economics help companies develop competitive strategies
using information systems?
4. What are the challenges posed by strategic information systems and how should they
be addressed?
Learning Catalytics is a “bring your own device” student engagement, assessment, and
classroom intelligence system. It allows instructors to engage students in class with real-
Key Terms
The following alphabetical list identifies the key terms discussed in this chapter. The
page number for each key term is provided.
Agency theory, 90
Primary activities, 104
Benchmarking, 105
Product differentiation, 95
Best practices, 105
Routines, 84
Business ecosystem, 109
Strategic transitions, 112
Competitive forces model, 94
Support activities, 104
Core competency, 107
Switching costs, 100
Disruptive technologies, 87
Transaction cost theory, 89
Efficient customer response system, 97
Value chain model, 103
Mass customization, 97
Value web, 106
Network economics, 107
Virtual company, 108
Organization, 82
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Teaching Suggestions
The opening case, “Should T.J. Maxx Sell Online?” illustrates some of the ways that
information systems help businesses compete and also the challenges of sustaining a
competitive advantage. T.J. Maxx resisted developing an online presence for years even
though almost all of its competitors had made the leap. Because of the nature of T.J.
Maxx’s product inventory, one that varies from week–to-week, it risks alienating
customers if they find too many out-of-stock items or they don’t find what they are
looking for.
The retailer also risks alienating its suppliers who do not want to see their merchandise
Section 3.1, “Which features of organizations do managers need to know about to
build and use information systems successfully?” The chapter begins by dissecting an
organization from both a technical and behavioral point of view. The technical definition
focuses on three elements: capital and labor; inputs from the environment; and outputs to
the environment. See Figure 3.2. The behavioral view emphasizes group relationships,
values, and structures as shown in Figure 3.3. These two definitions are not contradictory.
The technical definition focuses on thousands of firms in competitive markets whereas
the behavioral definition focuses on individual firms and an organization’s inner
workings.
All organizations have certain characteristics: routines and business process, politics,
culture, reciprocal relationship with environments, and structure. Table 3.2 defines the
five organizational structures.
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Section 3.2, “What is the impact of information systems on organizations?” By
understanding that information systems impact organizations in two ways, economically
and behaviorally, students can understand that technological change is much more than
just updating computer hardware and software. Technology becomes a substitute for
traditional capital such as labor, buildings, and machinery. The transaction cost theory
From a behavioral standpoint, information technology flattens or reduces the levels of
hierarchy in an organization because information flows more freely and more widely
through the firm. Decision making is pushed to lower levels of the hierarchy. Managers
make decisions faster and better because more information is available more quickly and
accurately, thanks to information technology. Professional workers become more self-
managing. Decision making becomes more decentralized. Workers rotate from team to
team depending on the tasks at hand.
Now, ask your students these questions from the text:
• Who makes sure that self-managed teams do not head off in the wrong direction?
• Who decides which person works on which team and for how long?
• How can managers evaluate the performance of someone who is constantly
rotating from team to team?
• How do people know where their careers are headed?
It’s very important for students to understand that the most common reason large IT
projects fail is not the failure of technology, but because of organizational and political
resistance to change. People simply don’t like change and will resist it in a variety of
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Section 3.3, “How do Porter’s competitive forces model, the value chain model,
synergies, core competencies, and network economics help companies develop
competitive strategies using information systems?” This section is one of the most
critical sections in the text. Understanding business strategy and how information systems
can aid employees in making far-reaching and deep-rooted decisions is critical to the
long-range success of any corporation. At this point, students need to focus on business-
level strategies and the various ways firms achieve an advantage over other firms. They
will learn how to use these strategies in order to address a key question: How can we
compete effectively in a particular market?
The firm-level and industry-level strategies are analyzed in this section, and a key
analytical tool, Porter’s competitive forces model, is introduced. The model focuses on
Ask your working students to describe the strategies pursued by their organizations.
Interactive Session: Technology: Nike becomes a technology company
Case Study Questions
1. Evaluate Nike using the competitive forces and value chain models.
Nike has traditional competitors in other clothing and shoe manufacturers but it has a
deep reputation for continuously devising new products and services that make it hard for
2. What competitive strategies is Nike pursuing? How is information technology
related to these strategies?
Nike is using product differentiation, focus on market niches, and strengthening customer
intimacies to enhance its competitive strategies against its competitors. By embedding so
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3. In what sense is Nike a “technology company”? Explain your answer.
Nike is known for its leading-edge technologies to make its products more appealing and
enhance user performance. It uses advanced technology to support sports superstars. It
4. How much of an edge does Nike have over its competitors? Explain your answer.
Because it has so many useful and popular apps associated with its products, Nike has
quite an edge over its competitors. Athletes like to track their progress and measure one
Interactive Session: Organizations: Identifying Market Niches in the Age of Big
Data
Case Study Questions
1. Describe the kinds of data being analyzed by the companies in this case.
Data about e-book purchases and reading habits are being collected and potentially sold
to book publishers. The data include whether a book is completed, if pages are skimmed
or skipped, and which genres are most often finished.
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2. How is this fine-grained data analysis improving operations and decision making
in the companies described in this case? What business strategies are being
supported?
E-book data: The idea is that writers can use it to better tailor their work to their
readership and book editors can use it to choose which manuscripts to publish. Business
strategy supported—focus on market niche, product differentiation.
3. Are there any disadvantages to mining customer data? Explain your answer.
Companies can mine too much data on customers to the point of upsetting customers and
turning them against the company. Customers have complained that companies are
4. How do you feel about airlines mining your inflight data? Is this any different
from companies mining your credit card purchases or Web surfing?
Student answers will vary.
Section 3.4: “What are the challenges posed by strategic information systems and how
should they be addressed?” This section reinforces the idea that information systems
should be subservient to business objectives. Have students use the information in the
subsection “Management Checklist: Performing a Strategic Systems Analysis” to analyze
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Review Questions
3-1 Which features of organizations do managers need to know about to build and
use information systems successfully?
Define an organization and compare the technical definition of organizations
with the behavioral definition.
Students can make use of Figures 3.2 and Figure 3.3 in answering this question.
The technical definition 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, labor, and
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,
Identify and describe the features of organizations that help explain differences
in organizations’ use of information systems.
Common features for organizations include:
• Routines and business processes: Standard operating procedures have been
developed that allow the organization to become productive and efficient
thereby reducing costs over time.
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products create a powerful restraint on change, especially technological
change.
3-2 What is the impact of information systems on organizations?
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 goods in 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.
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
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Explain why there is 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
Describe the impact of the Internet and disruptive technologies on organizations.
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
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3-3 How do Porter’s competitive forces model, the value chain model, synergies,
core competencies, and network economics help companies develop competitive
strategies using information systems?
Define Porter’s competitive forces model and explain how it works.
This model provides a general view of the firm, its competitors, and the firm’s
environment. Porter’s model is all about the firm’s general business environment. In
this model, five competitive forces shape the fate of the firm:
• Traditional competitors
Describe what the competitive forces model explains about competitive
advantage.
Some firms do better than others because they either have access to special resources
that others do not, or they are able to use commonly available resource more
List and describe four competitive strategies enabled by information systems
that firms can pursue.
The four generic strategies, each of which often is enabled by using information
technology and systems include:
• Low-cost leadership: Lowest operational costs and the lowest prices.
• Product differentiation: Enable new products and services, or greatly change
the customer convenience in using existing products and services.
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Describe how information systems can support each of these competitive
strategies and give examples.
• Low-cost leadership: Use information systems to improve inventory
management, supply management, and create efficient customer response
systems. Example: Walmart.
• Product differentiation: Use information systems to create products and
services that are customized and personalized to fit the precise specifications
of individual customers. Examples: Google, eBay, Apple, Lands’ End.
• Focus on market niche: Use information systems to produce and analyze data
for finely tuned sales and marketing techniques. Analyze customer buying
Explain why aligning IT with business objectives is essential for strategic use of
systems.
The basic principle of IT strategy for a business is to ensure the technology serves the
business and not the other way around. The more successfully a firm can align its IT
with its business goals, the more profitable it will be. Businesspeople must take an
Define and describe the value chain model.
The value chain model highlights specific activities in the business where competitive
strategies can best be applied and where information systems will most likely have a
strategic impact. The model identifies specific, critical leverage points where a firm