Managing the Digital Firm, Seventh Canadian Edition
CHAPTER 3
Information Systems,
Organizations, and Strategy
LEARNING OBJECTIVES
After reading this chapter, you will be able to answer the following questions:
1. 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?
2. How does Porter’s competitive forces model help companies develop competitive
strategies using information systems?
Teaching Suggestions
The opening case “Google and its Strategy: is it Moving to Social Strategy?” illustrates
some of the ways information systems help businesses compete—and also the challenges
of sustaining a competitive advantage. The social networking industry in which both
Google and Facebook operate is very competitive, with social networking companies
vying with video and photograph companies, such as YouTube (now owned by google)
Managing the Digital Firm, Seventh Canadian Edition
40
shows how difficult it is to create and maintain a competitive advantage. Just as
Facebook overtook MySpace and Friendster, who is to say that in a few years’ time,
Section 3.1, “Organizations and Information Systems.”
The chapter begins by dissecting an organization from both a technical and behavioural
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
behavioural 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 while the behavioural definition focuses on
individual firms and an organization’s inner workings.
Section 3.2, “How information Systems Impact Organizations and Business Firms.”
By understanding that information systems impact organizations two ways, economically
and behaviourally, students can understand that technological change is much more than
just updating computer hardware and software. Technology becomes a substitute for
Managing the Digital Firm, Seventh Canadian Edition
From a behavioural 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:
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
Section 3.3, “Using Information Systems to Achieve Competitive Advantage.”
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
Managing the Digital Firm, Seventh Canadian Edition
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
four strategic areas: Traditional competitors, new market entrants, substitute products and
services, customer and supplier intimacy.
WINDOW ON ORGANIZATIONS: TECHNOLOGY HELPS
STARBUCKS FIND NEW WAYS TO COMPETE
Case Study Questions
1. Analyze Starbucks using the competitive forces and value chain models.
Starbucks uses a product differentiation and customer intimacy competitive forces to
set itself apart from others by offering a unique experience of high-end specialty
coffees and beverages, friendly and knowledgeable servers, and customer-friendly
coffee shops.
It uses its information systems and wi-fi networks to enable it to offer new services to
customers like the smartphone apps that allow customers to pay with their phones.
The card is coupled with the Starbucks Card system which allows regular customers
2. What is Starbucks business strategy? Assess the role played by technology in
this business strategy.
Starbucks business strategy is product differentiation. It offers a unique experience
of high-end specialty coffees and beverages, friendly and knowledgeable servers, and
customer-friendly coffee shops. The company revamped its in-store technology and
3. How much has technology helped Starbucks compete? Explain your answer.
Starbucks launched what it calls the “Starbucks Digital Network,” a portal designed
specifically for mobile devices as opposed to traditional Web browsers. The site is
optimized for all major smartphone operating systems and responds to the multi-
touch capability of devices like the iPad.
The site functions as a content portal where customers can receive free Wall Street
Journal access, select free iTunes downloads and other content. The site is integrated
Managing the Digital Firm, Seventh Canadian Edition
WINDOW ON TECHNOLOGY: AUTO MAKERS BECOME
SOFTWARE COMPANIES
Case Study Questions
1. How is software adding value to automakers’ products?
Many auto makers are enhancing their vehicles with on-board software that improves
the customer experience. Some are working on technology that will allow cars to be
managed via the cloud. Software is a way to add more “value” and freshness to new
2. How are the automakers benefiting from software-enhanced cars? How are
customers benefiting?
Cars need to be connected to some kind of central system, which would coordinate
with public transit and other transportation methods. To do that, cars need to be
equipped with software that can monitor and enhance vehicle functions at the most
basic levels. Eventually, cars will feed increasing amounts of information to systems
3. What value chain activities are involved in enhancing cars with software?
Primary activities involved in enhancing cars with software include sales and
4. How much of a competitive advantage is software providing for automakers?
Explain your answer.
Although privacy concerns are key for some vehicle owners, automakers are hoping
that younger customers who have grown up using Facebook are less likely to care
Section 3.4: “Using Systems for Competitive Advantage: Management Issues”.
This section reinforces the idea that information systems should be subservient to
business objectives. Have students use the information in the subsection “Management
Review Summary
1. 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?
2. How does Porter’s competitive forces model help companies develop competitive
strategies using information systems?
3. How do the value chain and value web models help businesses identify
opportunities for strategic information system applications?
4. How do information systems help businesses use synergies, core competencies,
and network-based strategies to achieve competitive advantage?
5. What are the challenges posed by strategic information systems and how should
they be addressed?
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 72
Benchmarking 83
Primary activities 82
Product differentiation 77
Review Questions
1. 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?
Define an organization and compare the technical definition of organizations
with the behavioural 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
Managing the Digital Firm, Seventh Canadian Edition
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.
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
Managing the Digital Firm, Seventh Canadian Edition
Describe the major behavioural theories that help explain how information
systems affect organizations.
Behavioural theories, from sociology, psychology, and political science, are useful for
describing the behaviour of individual firms. Behavioural researchers theorize that
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,
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
Managing the Digital Firm, Seventh Canadian Edition
2. How does Porter’s competitive forces model 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:
Describe what the competitive forces model explains about competitive
advantage.
Some firms do better than others because they either have access to special resources
List and describe four competitive strategies enabled by information systems
that firms can pursue.
The four generic strategies, each of which is often enabled by using information
technology and systems include:
Describe how information systems can support each of these competitive
strategies and give examples.
• Low-cost leadership: Use information systems to improve inventory management,
Managing the Digital Firm, Seventh Canadian Edition
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
3. How do the value chain and value web models help businesses identify
opportunities for strategic information system applications?
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
Explain how the value chain model can be used to identify opportunities for
information systems.
Information systems can be used at each stage of the value chain to improve operational
efficiency, lower costs, improve profit margins, and forge a closer relationship with
Managing the Digital Firm, Seventh Canadian Edition
Explain how the value web helps businesses identify opportunities for strategic
information systems.
Information systems enable value webs that are flexible and adaptive to changes in
supply and demand. Relationships can be bundled or unbundled in response to
Describe how the Internet has changed competitive forces and competitive
advantage.
The Internet has nearly destroyed some industries and severely threatened others. The
Internet has also created entirely new markets and formed the basis of thousands of
4. How do information systems help businesses use synergies, core competencies
and network-based strategies to achieve competitive advantage?
Explain how information systems promote synergies and core competencies.
Managing the Digital Firm, Seventh Canadian Edition
Describe how promoting synergies and core competencies enhances competitive
advantages.
The concept of synergy is that when the output of some units can be used as inputs to
Explain how businesses benefit by using network economics.
In a network, the marginal costs of adding another participant are almost zero, whereas
the marginal gain is much larger. The larger the number of participants in a network, the
Define and describe a virtual company and 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
5. What are the challenges posed by strategic information systems and how should
they be addressed?
List and describe the management challenges posed by strategic information
systems.
Information systems are closely intertwined with an organization’s 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.
Managing the Digital Firm, Seventh Canadian Edition
Implementing strategic systems often requires extensive organizational change and a
Explain how to perform a strategic systems analysis.
Managers should ask the following questions to help them identify the types of
systems that may provide them with a strategic advantage.
1. What is the structure of the industry in which the firm is located? Analyze the
2. What are the business, firm, and industry value chains for this particular firm?
3. Have we aligned IT with our business strategy and goals? Articulate the firm’s
Discussion Questions
1. It has been said that there is no such thing as a sustainable competitive
advantage. Do you agree? Why or why not?
Students will argue both sides, and there is no definitive answer to the question. There
Managing the Digital Firm, Seventh Canadian Edition
2. It has been said that the advantage that leading-edge retailers such as The Bay
and Canadian Tire have over their competition isn’t technology; it’s their
management. Do you agree? Why or why not?
Student answers will vary but here are some points their answers should include:
a. How well has each company, The Bay and Canadian Tire, used information
systems to reduce transaction costs and agency costs?
b. How well has each company used information systems to take advantage of
Porter’s Competitive Forces model:
o Keeping new market entrants out
o Either preventing substitute products and services that may compete with their
3. What are some of the issues to consider in determining whether the Internet
would provide your business with a competitive advantage?
The Internet increases accessibility and distribution of information and knowledge
while decreasing storage and transmission costs. Transaction and agency costs are
Managing the Digital Firm, Seventh Canadian Edition
Hands-On MIS Projects
Management Decision Problems
1. HBC Inc.: Wants to tailor merchandise more to local tastes based on sales patterns in
each individual store. How could information systems help management implement
this new strategy? What pieces of data should these systems collect to help
management make merchandising decisions that support this strategy?
By collecting small pieces of sales data such as size, style, price, and even the time of
purchases, each individual store can analyze local sales. Demographic information
2. T-Mobile: Despite aggressive campaigns to attract customers with lower mobile
phone prices, the company has been losing large numbers of its most lucrative two-
year contract subscribers. Management wants to know why so many customers are
leaving and what can be done to entice them back. Are customers deserting because
of poor customer service, uneven network coverage, wireless service charges, or
competition from carriers with Apple iPhone service? How can the company use
information systems to help find the answer? What management decisions could be
made using information from these systems?
Using the Strategic Systems Analysis in Section 3.4, management should consider
these organizational features:
• What are the competitive forces at work in the industry, specifically the relative
Managing the Digital Firm, Seventh Canadian Edition
• How is the company creating value for the customer?
• What are the organization’s core competencies?
Management should make these decisions to ensure the strategy works:
• Has senior management correctly articulated an appropriate business strategy and
goals for the organization?
• Is the company using the right metrics to measure progress toward those goals?
Improving Decision Making: Using a Database to Clarify Business Strategy
Software skills: Database querying and reporting; database design.
Business skills: Reservation systems; customer analysis
This exercise encourages students to develop queries and reports to help them make
better use of transaction data to understand their business. From analyzing these data,
the hotel owners should be able to find ways of generating more revenue. The solutions
provided here were created using the query wizard and report wizard capabilities of
Access. Students can, of course, create more sophisticated reports if they wish, but
valuable information can be obtained from simple query and reporting functions.
Improving Decision Making: Using Web Tools to Configure and Price an Automobile
Software skills: Internet-based software
Business skills: Researching product information and pricing
Answers will vary a great deal, and with the option of choosing a car other than the Ford
Managing the Digital Firm, Seventh Canadian Edition
CASE STUDY: YOUTUBE, THE INTERNET, AND THE FUTURE
OF MOVIES
1. What competitive forces have challenged the movie industry? What problems
have these forces created? What changes have these problems caused the movie
and television studios to make?
New market entrants and substitute products are the two main competitive forces
challenging the movie industry. The traditional outlets for viewing movies – theatres,
cable television, and movie rental businesses – are all challenged by new ways for
customers to obtain products. The traditional outlets were very easy to control and ensured
that the movie producers received compensation for their products. The distribution
2. Describe the impact of disruptive technology on the companies discussed in this case.
YouTube is a conduit to new processes that are more customer-driven than the old
ones. YouTube has become the most popular video-sharing Web site because it gives
3. How have the movie studios responded to YouTube? What is the goal of the
response? What can the movie studios learn from music industry’s dealings with
online digital music and copyright infringement?
Originally the movie industry tried to fight the thousands of illegal uses of their
copyrighted material—much as the music industry tried to fight their battle years ago.
4. Should motion picture companies continue to use YouTube to promote their new
films? Why or why not?
The answers obviously will vary. It’s important to understand that YouTube
continues to be the most popular video sharing Web site. With Google’s clout behind
5. Go to YouTube.com and search for videos from your favourite movie or television
show. What do you find on the site? Do you see any advertisements attached to the
video? Do you feel this way of advertising is effective? Why or why not?
Answers will vary to most of this question but it should provoke some good
classroom discussions or discussions in a chat forum. A key element that students
should understand is that all artists, producers, and distributors deserve some
compensation for their talent, time, investments, and labour. Illegally using