Chapter 3:
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.
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, 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. ●
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.
Organizational politics: Divergent viewpoints about how resources, rewards, and punishments should
be distributed bring about political resistance to organization change.
Organizational culture: Assumptions that define the organizational goals and products create a
powerful restraint on change, especially technological change.
Organizational environments: Reciprocal relationships exist between an organization and
environments; information systems provide organizations a way to identify external changes that
might require an organizational response.
Organizational structure: Information systems reflect the type of organizational structure -
entrepreneurial, machine bureaucracy, divisionalized bureaucracy, professional bureaucracy, or adhocracy.
Other Organizational Features: Organizations differ in goals, groups served, constituencies, leadership
styles, incentives, and types of tasks performed. These differences create varying types of
organizational structures, and they also help explain differences in organizations’ use of information systems.
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. 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 self-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. ●
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.
This flattening may also be accentuated by changes in authority in our post-industrial world, which
sees authority increasingly related to knowledge rather than formal position. Because information
systems move knowledge into lower levels of the organization, organizations will flatten as a result.
Information systems may also encourage a move toward project-based (or task-force-networked)
organizations in which groups of workers come together for short periods to accomplish specific tasks.
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. ●
Explain why there is considerable organizational resistance to the introduction of information systems.
Many IT investments require changes in personal, individual routines that can be painful for those
involved and require additional efforts on the part of the employee who may or may not be
compensated. Another approach views information systems as the outcome of political competition,
between organization subgroups for influence over the organization's policies, procedures and
resources. Information systems influence access to a key resource - information - and these systems
can affect who does what to whom, when, where and how. Information systems also potentially can
change an organization's structure, culture, and politics, this is the root cause of resistance to them when they are introduced. ●
Describe the impact of the Internet and disruptive technologies on organizations.
The Internet, especially the World Wide Web, has an important impact on the relationships between
many firms and external entities and even on the organization of business processes inside a firm. The
Internet increases the accessibility, storage, and distribution of information and knowledge for
organizations. In essence, the Internet is capable of dramatically lowering the transaction and agency
costs facing most organizations. For instance, a global sales force can receive nearly instant product
price information updates using the web or instructions from management sent by e-mail or text
messaging on smartphones or mobile laptops.
Disruptive technologies bring about sweeping change to business, industry, and market. They are
substitute products that perform as well as or better (often much better) than anything currently
produced. In some cases, entire industries were put out of business. In other cases, disruptive
technologies simply extend the market, usually with less functionality and much less cost than
existing products. Eventually they turn into low-cost competitors for whatever was sold before. Some
firms are able to create these technologies and ride the wave to profits; others learn quickly and adapt
their business; still others are obliterated because their products, services, and business models become obsolete.
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.
Michael Porter's competitive forces model is arguably the most widely used model for understanding
competitive advantage. This model provides a general view of the firm, its competitors, and the firm's
general business environment. There are five competitive forces that shape the fate of the firm:
Traditional Competitors: Those who the firm shares market space with. These competitors are
continuously devising new, more efficient ways to produce by introducing new products and
services, and attempting to attract customers by developing their brands and imposing
switching costs on their customers.
New Market Entrants: Since we have a free economy, there are new companies always entering the marketplace.
Substitute Products and Services: In almost all industries, there are substitutes that your
customers might use if your prices become too high. As technology grows, more substitutes are created.
Customers: Companies depend largely on their ability to attract and retain customers.
Suppliers: The more different suppliers a firm has, the greater control it can exercise over
suppliers in terms of price, quality, and delivery schedules. ●
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 resources more efficiently. It could be because of
superior knowledge and information assets. Regardless, they excel in revenue growth, profitability, or
productivity growth, ultimately increasing their stock market valuations compared to their competitors. ●
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:
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.
Focus on market niche: Enable a specific market focus and serve this narrow target market better than competitors.
Strengthen customer and suppliers: Tighten linkages with suppliers and develop intimacy with customers. ●
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, therefore, lower operating costs. Example: Wal-Mart.
Product differentiation: Use information systems to create new and enhance existing products and
services that are customized and personalized to fit the precise specifications of individual customers.
Example: 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 patterns, tastes, and preferences closely to
efficiently pitch advertising and marketing campaigns to smaller target markets. Example: Hilton Hotels, Harrah’s.
Strengthen customer and supplier intimacies: Use information systems to facilitate direct access from
suppliers to information within the company. Increase switching costs and loyalty to the company. Example: IBM, Amazon.com ●
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. Information technology takes on a life of its own and does not serve
management and shareholder interests very well. Business people must take an active role in shaping
IT for the enterprise. They cannot ignore IT issues. They cannot tolerate failure in the IT area as just a
nuisance to work around. They must understand what IT can do, how it works, and measure its impact on revenues and profits. ●
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 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
firm’s 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 firm’s products and
services, which create value for the customer. Support activities make the delivery of primary
activities possible and consist of organization infrastructure. ●
Explain how the value chain model can be used to identify opportunities for information systems.
The value chain model categorizes activities based on the level of value each activity has within the
firm. This model can also reveal where information systems are most likely to have the most strategic
impact on the efficiency of the firm. 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 customers and suppliers.
By linking primary and support activities, a value chain model user can identify how information
systems might increase the level of efficiency between the two categories of activities. Organizations
can use information systems to help examine how value-adding activities are performed at each stage
of the value chain. Information systems can improve the relationship with customers (customer
relationship management systems) and with suppliers (supply chain management systems) who may
be outside the value chain but belong to an extended value chain.
Information systems can also help businesses track benchmarks in the organization and identify best
practices of their particular industries. After analyzing various stages in the value chain, an
organization can devise a list of candidate applications for information systems. ●
Define the value web and show how it is related to the value chain.
A value web is a collection of independent firms that use information technology to coordinate their
value chains to collectively produce a product or service for a market by synchronizing the business
processes of customers, suppliers, and trading partners among different companies in an industry. 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. ●
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 changing market conditions. Firms
can accelerate their 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. Information systems make it possible for companies to establish and operate value webs. ●
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 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 information is available to everyone, the
Internet raises the bargaining power of customers, who can quickly find the lowest cost provider on the Web. ●
Explain how information systems promote synergies and core competencies.
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. ●
Describe how promoting synergies and core competencies enhances competitive advantage.
The idea of synergies is that when the output of some units can be used as inputs to other units, or 2
organizations pool markets and expertise, these relationships lower costs and generate profits.
Information systems would help the merged companies consolidate operations, lower retailing costs,
and increase cross- marketing of financial products.
On the other hand, core competency is an activity for which a firm is a world-class leader. Any
information system that encourages the sharing of knowledge across business units enhances
competency. Such systems might encourage or enhance existing competencies and help employees
become aware of new external knowledge; such systems might also help a business leverage existing
competencies to related markets ●
Explain how businesses benefit by using network economics and ecosystems.
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 greater the value to all
participants because each user can interact with more people.
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,
suppliers, and business partners. ●
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 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.
Case Study: Grocery Wars ●
Analyze Amazon.com and Walmart using the value chain and competitive forces models. Amazon: *Value chain: - Primary activities: ●
Inbound and outbound logistics: Amazon stores its products at a chain of fulfillment
warehouses or centers. As acting as a technological middleman for 3rd party vendors,
Amazon would use these houses to keep products waiting for delivery, returning online
orders of all kinds. Amazon could also use them to cut delivery times for online orders.
Besides, through Amazon Prime, for instance, customers are able to receive shipments
cheaply and within 1-2 business days. ●
Sales and Marketing: Amazon had been expanding into groceries and physical locations,
including bookstores, two Seattle drive-through grocery stores where customers can pick up
online orders, and a convenience store called Amazon Go that uses sensors and software to let
shoppers pay for purchases without waiting in line to check out. Amazon has also acquired
experience with online grocery sales through its Amazon Fresh program and Whole Foods. - Support activities: ●
Technology: Amazon uses sensors and software to let shoppers pay for purchases. *Competitive model: ●
Substitute: Most of Amazon’s customers are also Walmart customers. They buy the same
products with nearly the same price between these two businesses. Hence, Walmart and
Amazon are creating substitute services by offering an alternative to their competitor for their customers. ●
Supplier power: Amazon is a big customer for every supplier in every industry. Therefore, it
can also manage the supply price to adjust for attracting customers. ●
Positioning and rivalry among competitors: Amazon is a giant in the e-commerce industry.
Being used by millions of users around the world, this website is having a sturdily leading
position that other competitors beware of. Walmart *Value chain: - Primary activities: ●
Inbound and outbound logistics: Walmart is the largest seller of groceries in the United
States, accounting for about 18 percent of the grocery market. offers customers instant
gratification and the lowest prices by way of the scale of their supplies and the availability of
all their products in many physical stores. ●
Sales and Marketing: No one can deny the popularity of Walmart and its “everyday-low-
price” selling strategy. To adapt to digital transformation, Walmart is also investing more in
technology and starting to build up its own ecommerce ecosystem. Thus, Walmart’s
customers can easily purchase groceries in larger quantities but with more discounts and less
time-consuming (compared with physical stores). Competitive model: ●
Substitute: As has been mentioned before, Amazon provides substitute services and products
that can replace Walmart ones. ●
Supplier power: Walmart also has the ability to affect its suppliers’ prices. ●
Positioning and rivalry among competitors: Online retail is a new market with Walmart
that requires this business to contribute remarkable effort. This special market only becomes a
big concern when Amazon steps into it. Then, Walmart should reduce the gap with Amazon
faster. Or else, their market share of groceries may be reduced. ●
Compare the role of grocery sales in Amazon and Walmart’s business strategies. Amazon:
Amazon is already well known for its electronics store on its online platform, and now it is eyeing
another potential market, groceries, which account for nearly $800 billion in sales in the US.
According to recent reports from the Food Marketing Institute, the grocery market is likely to grow
dramatically, possibly fivefold over the next decade. That's exactly what Amazon is aiming for.
Amazon wants to dominate the grocery market, thereby dominating the retail market. They bought
Whole Foods to expand their reach to customers. In addition, the merger of Whole Foods also helps
Amazon improve delivery, thereby providing better service to customers. In short, Amazon's ambition
when entering the grocery market is to become a place where customers can find everything there,
even the smallest things like groceries. Walmart:
Unlike Amazon, Walmart from the beginning considered the retail market to be the main business.
They have been selling a lot of products, including groceries, in their store. Groceries make up nearly
56% of Walmart's total sales. And the fact that they now focus more on groceries is also to develop
their scope of activities on the online platform, which they did not pay too much attention to before.
In short, grocery helps Amazon expand its market (from online to offline) and thereby achieve its
ambition of "life bundle", while Walmart considers groceries as its main business and is trying to keep
its position by expanding to online platforms. ●
What role does information technology play in these strategies? Amazon:
Amazon has extensive experience in using information technology to trade through its e-commerce
platform. By applying information technology, Amazon has offered customers a lot of utilities and
thereby increasing the user experience. -
For example, with Amazon Lockers, through managing customer information through orders
on Amazon.com, the system will search and suggest the closest physical store to the
customer's location, deliver to the location and guarantee to take care of customers' products until they come to pick up. -
For delivery services, through the information system, Amazon will also find the nearest
Whole Foods store location compared to customers, thereby dispatching shippers to deliver
goods quickly within 2 hours, instead of having to deliver goods from the warehouse as
before. This is a huge plus for Amazon for fresh products. -
Amazon also collects and analyzes user data through its online platform to optimize store
shelves at physical stores. Low-interest products will be taken down and replaced with
staples. In addition, from customer information, Amazon will rearrange their goods to attract customers to buy. Walmart:
As for Walmart, they also apply information technology to their physical stores. Technologies such as
paying by scanning, click-and-collect programs or stand-alone grocery pick up sites have also greatly
enhanced their customer experience. In addition, they also use information technology in delivery, by
connecting with Uber drivers or other third parties to deliver goods quickly without building a delivery system. like Amazon. ●
Which company is more likely to dominate grocery retailing? Explain your answer
Personally, I think Amazon will soon dominate the grocery retail market. Because of:
Firstly, Amazon has been so successful in the e-commerce market, and their products are often much
more accessible to customers, especially when the trend of online shopping is growing in society.
Second, the most difficult thing in the process of expanding into the offline market was effectively
solved by Amazon by acquiring Whole Foods. They do not need to spend too much money and time
to find space and build physical stores anymore because they can inherit the available things of Whole
Foods. Amazon can also make good use of these stores to make warehouses and reduce shipping
costs. In addition, when merging Whole Foods, it means that Amazon will also own the existing
customer base of Whole Foods, making Amazon's expansion much more favorable.
Finally, Amazon applies information technology quite well and in line with its expansion strategy.
With its existing databases through e-commerce, Amazon easily rebuilds offline sales strategies to
match the preferences and desires of customers.
Making good use of the information technology factor, combined with the physical store and available
customers from Whole Foods, and the available users of Amazon.com, Amazon has a very high
potential for growth in the near future.
Walmart is still doing very well with its strategies, but expanding through the online market is not as
favorable as Amazon's when jumping into the offline market. In addition, Walmart's low-cost strategy
is also at risk of being competed by Amazon and many other competitors, who also offer a very
competitive price. Therefore, it would be difficult for Walmart to dominate the grocery retail market like Amazon.