BASEMENT
1^*
HD28
.M414
i^^ey
8^
e^-^
•»£P
^w<./
IN FORMATION
TECHNOLOGY AND CORPORATE STRATEGY:
A RESEARCH PERSPECTIVE
John A.Y. Bakopoulos
Michael
Treacy
E.
March 1985
CISR WP
Sloan WP
#
#
124
1639-85
Center for Information Systems Research
Massachusetts
Institute of Technology
Sloan School of Management
77 Massachusetts Avenue
Cambridge, Massachusetts, 02139
24
1985
^Am%A.
^INFORMATION TECHNOLOGY AND CORPORATE STRATEGY:
A RESEARCH PERSPECTIVE
John A.Y. Bakopoulos
Michael
Treacy
E.
March 1985
CISR WP
Sloan WP
©
#
#
124
1639-85
John A.Y. Bakopoulos and Michael E. Treacy
CENTER FOR INFORMATION SYSTEMS RESEARCH
SLOAN SCHOOL OF MANAGEMENT
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
SEP ^ 4
iirii
»
III
I III
Information Technology and Corporate Strategy:
A
Research Perspective
John A.Y. Bakopoulos
Michael E. Treacy
Abstract
The use of information technology (IT) as a competitive weapon has already become a popular
cliche: but there is still a marked lack of understanding of the issues that determine die influence of
IT on a panicular organization and the processes that will allow a smooth coordination of IT and
corporate strategy.
This paper surveys the major efforts to arrive
attempts to integrate diem in a more comprehensive viewpoint
The
at a relevant
research issues in understanding the impact of IT on competitive strategy.
corporate strategy
is
discussed and
its
framework and
focus Uien turns to die major
Relevant dieory from
application in understanding the use of IT
is
illustrated.
Table of Contents
1.
Introduction
1
2.
Information Technology and Corporate Strategy
2
3.
IT and Internal Strategy
4
3.1. Internal
3.2.
4.
Strategy and
MIS
4
Information technology and organizational design
5
8
IT and Competitive Strategy
4.1.
4.2.
The link between IT and Competitive
Four areas of opportunity
4.2.1.
Improve operational
efficiency
8
Strategy
10
and functional effectiveness
10
10
4.2.2. Product innovation with information technology
4.2.3.
4.2.4.
4.3.
4.4.
5.
6.
A
Acquisition of bargaining advantage against customers and suppliers
Cooperative information systems
11
'
11
framework
12
4.3.1.
Bargaining power
12
4.3.2.
Comparative efficiency
14
4.3.3.
Dynamic
14
theoretical
considerations
Theoretical links between information technology and competitive advantage
IT and Business Portfolio Strategy
14
16
5.1.
Structural impacts of information technology
16
5.2.
Exploitation of technology advantage
17
Concluding Remarks
References
19
20
1.
Introduction
There
is little
disagreement between researchers
information systems and organizational theory
in
about the strategic importance of information technology.
competitive weapon has already become a popular cliche.
number of frameworks
As
of research matures, there
this area
is
and describing the impacts of information
models based on relevant
testable
move beyond frameworks
an increasing need to
and toward explanatory models of the underiying phenomena. Only
us to build a cumulative tradition and to
abounds with a
Literature in this area
There has been a notable absence, however, of
technology.
theory.
for categorizing opportunities
Indeed, the potential use of IT as a
this type
make normative statements
of research
will allow
that can correcdy guide
managerial actions.
paper we attempt
In this
by distinguishing three
internal, competitive,
theories
make
to
levels at
a
first
step toward the
which information technology impacts corporate
and business portfolio
and provide a
development of such normative models
We
levels.
link with the disciplines
discuss a
number of
strategy;
the
relevant general
of organizational design and industrial economics.
Furthermore we offer an operationalized definition of information technology, based on the
concept of bounded rationality, which can be used to develop specific theories and models
of the three strategic
In section
following
sections
links
between information technology and corporate
we survey
the
opportunities for information technology.
to
to
literature
The
provide a more comprehensive structure
application of IT.
uncover
levels
It is
results
for
addressing
the
strategy.
In die
of strategic
identification
of these works are synthesized and extended
categorizing opportunities
the
for
strategic
discovered that different methods and analyses are needed in each category
specific opportunities for IT.
which can
each
levels.
two we discuss the
three
at
an organization
assist
We
in
discuss specific actions at die strategic and tactical
capitalizing
on information technology.
Finally, a
how
program of research
is
opportunities
created
by information technology can be identified, and what impact these
opportunities
may have
proposed that can lead to a better understanding of
in the
long term on industrial structure.
specific
Information Technology and Corporate Strategy
2.
Senior executives, strategic planners, and information systems managers are increasingly turning
their
attention
technology (IT),
to
opportunities
in the
for
advantage
competitive
achiieving
information
form of innovative information and communications systems.
several reasons underlying this recent trend, not the least
of which
is
companies that have gained significant advantage through IT[4,
economic conditions of the
the publicity received by a few
As
8, 9].
for information technology
[2],
the unstable
well,
The technology
greater array of capabilities at a lower cost than ever before [20. 28, 33].
increasingly functional technology are also improving.
The
built [20].
Without
this base,
many of
also offering a
is
Finally, firms' abilities to
transaction processing
decision support systems already in place in most firms provide a base
compedtive advantage can be
There are
few years have helped to create a challenging business environment
last
and an "economic imperative"
utilize
through
on which systems
these systems
and
for
would not be
possible.
Several authors have identified the underutilization of information technology for compedtive
advantage as a sprious problem, facing both information systems and business managers
The most
[2, 11, 29].
often cited causes of this problem include: (1) senior management's ignorance of
information technology and
its
potential uses, (2)
poor communications between the information
systems group and the rest of the business, (3) resistance to change,
among both
information
systems and business personnel, (4) a lack of focus on opportunities for competitive advantage, and
(5) a lack
Many
of good measures of valuable impacts, which inhibits investment
organizational and managerial remedies for these problems have been suggested, ranging
from the development of better measures of the efficiency and effecdveness of organizational
fiinctions, to
Reisman
[11]
major changes
in the
current structure of organizations. For example, Gerstein and
idenufy a need for the development of measures of ihe impacts of information
systems on specific functions. Keen [20] suggests that important changes in the fundamental nature
of work and the structure of organizations are needed, so that better use of information technology
can be made.
and
predicts that information technology will
diat organizations will develop
McKenney
for
He
its
[26, 25]
successful
around
their
the backbone of corporations,
telecommunication systems.
point out the importance of the proper
deployment
become
McFarlan and
management of information technology
The mission and management of
the information systems
group
should be consistent with the firm's dependency on technology and die opportunity for compedtive
advantage that the technology represents. Similar suggestions are
and expand the information systems function
reposition
management education
in
IT
These recommendations
[2, 11,
made by
21, 42]
others about the need to
and the need
for senior
[2, 11, 18, 20].
for increasing the utilization
deficiencies that have restrained
its
effective use.
Another group of researchers have focused on the
improve
potential for information technology to
of IT focus on correcting organizational
strategic
performance.
They have worked
to
develop tools and methodologies to help the manager find valuable opportunities for IT within his
or her organization. This
is
the perspective in the present paper.
Opportunities arising from information technology can be viewed from three perspectives: (1)
that of an organizational designer trying to
organization, (2) that of an
industr}'
improve the efficiency and effectiveness of the current
insider trying
to
out-maneuver other participants
competitive game, and (3) that of an outsider investigating whether to enter an industry.
in
a
These
three perspectives are consistent with our treatment of corporate strategy in this paper, as having
Lhree major
component
strategies: internal, competitive,
and business
portfolio.
Internal strategy
is
concerned with the development of an efficient and effective organizational structure for achieving
Competitive strategy focuses on competitive moves within the industries in
goals and objectives.
which the organization does business.
industries to
compete
in
and how
Business Portfolio strategy concerns the choice of which
to position the organization in those industries.
These components of corporate strategy are closely related and information technology can
all
three.
For example, a firm
and place terminals
in
in the distribution business
may
affect
build an on-line order entry system,
customer's purchasing departments. This system can improve die efficiency
of the firm's operations, which
is
an element of internal strategy.
The terminal can supply
the
customer with useful information, and by speeding orders can help the customer to reduce
inventories.
These
effects
make
it
more
difficult for
contribute to the competitive strategy of the firm.
The order
asset in other industries, such as mail-order retailing.
the strength of its technology, which
other distribution firms to compete, and
entry system
may
also be an important
Thus, the firm might enter
would impact the business
portfolio strategy.
this
industry on
IT and Internal Strategy
3.
Organizations are designed to carry out their goals and objectives efficiently and effectively. This
is
the subject of internal strategy,
and the primary focus of the organizational design
literature,
which has identified two relevant domains: organizational structure (form) and process (function).
Organizational structure
concerned with the study of alternative organizational forms
is
corporate and work group
is
levels.
at
both the
Organizational process, the dual problem to organizational form,
concerned with systems for getting the work done, or what Perrow defines as organizational
technology
[30].
Improving the efficiency and effectiveness of organizations
Information Systems function.
Rockart and Scott Morton
[33]
the traditional
is
domain of the
have suggested that the impacts of
traditional information systems can have important implications for the competitive position
firm.
They employ
a modifications of Leavitt's organizational
model
[22] to
show
of the
that these systems
can affect competitive performance through their impact on management processes, roles and
people, and organizational structure.
internal strategy,
one can
also affect
Thus, by improving the design of an organization through
compedtive
strategy.
secdon we review a num.ber of
In this
conventional approaches to improve organizational performance through information technology,
and proceed by proposing
framework
a
to link
Informadon Systems
to the theory
of organizational
design.
3.1. Internal
Strategy and
MIS
There are more than two hundred published techniques
management
published
processes
[1, 5, 7,
with
27, 32, 39].
information
technology.
The techniques
differ
in
for identifying
Several
focus,
opportunides to support
detailed
reviews
have
been
emphasis, and applicability to
particular areas of concern.
Traditional approaches to idenufy areas for the application of information technology have
focused on
die firm.
its
The
capability to
first
improve the efficiency and effectiveness of
generation of mediodologies uulized a
strictly
specific functional areas
operational view of the firm, with
an objective to improve the efficiency of requisite business processes.
approach are Business Systems Planning
[16],
of
Representative of this
and Office Automation Methodology
[14, 15, 37, 38].
These techniques represent ways of formally modeling die operations of die enterprise so that
potential
improvements
in efficiency
and effectiveness can be analyzed. They are not
easily applied
to poorly structured functions, such
amenable
to
methodology
as senior
management
roles,
because these areas are not
formal modeling. In these types of functional areas, the Critical Suaess Factors (CSF)
[3,
has been used successfully to discover latent structure.
32]
composed of business
functional area
It
This structure,
goals and related causal success factors, substitutes for a formal
model of the
can be analyzed for opportunities to improve operating performance through the
application of information technology.
These
They
traditional
MIS
approaches focus on improving organizational efficiency and efTectiveness.
identify opportunities for using information technology to
organization.
As one moves toward techniques
improve the internal strategy of the
for analyzing
unstructured functional areas,
corporate objectives grow in importance as they provide a starting point for discovering latent
Yet, they
structure.
fall
short of treating strategic considerations as the driving force for the
identification of IT opportunities.
Furthermore, each of these approaches
idiosyncratic theory of organizations that stands apart from the
based on an
leveraged by, the accumulated knowledge of organizational theory.
theories" of organizational design,
embedded
within traditional
implicit,
main body of organizational design
Although some of these theories are inventive, they neither contribute
literature.
3.2.
is
MIS
They
to,
are only
nor are
"private
techniques.
Information technology and organizational design
We
believe that within the organizational design literature, a general theory for studying the
implications of IT for the internal strategy of the firm can be found.
Such a general theory would
provide a framework of models for generating specific, testable hypotheses.
would
It
key, relevant variables and provide a methodological tradition within which to work.
that the construct of
bounded
organizational design.
rationality provides a
Bounded
major
rationality refers to
and communication capacities of an individual
link
We
propose
between information technology and
neurophysiologies limits on the computational
[34, 35].
It
is
demonstrated
complexity and size of problems that can be solved by humans.
directly affect the computational
identify the
and communication
abilities
in
limits
on the
Information technology can
of a decision-maker, thus shifting the
limits to rationality.
Bounded
rationality has
been a key concept
in the
development of organizational dieory.
information processing view of organizations, advanced by March and Simon
March
[6],
Galbraith [10] and others, has asserted that
human
limitations
[24. 36],
The
Cyert and
on information processing
interact with environmental factors such as environmental complexity
From
organizational problems.
this school's perspective, organizations are
complexity and uncertainty inherent
of organizations, Williamson
in the
environment
[40] asserts that constraints
marketplace.
independently and contract to
With unbounded
opportunistic
behavior
in
In a
their
sell
services
To
contracting and transaction costs.
to
have
to
is
one another
in
a
could counteract the effect of other
world of bounded
marketplaces creates inefficiencies
small
the
recent transaction cost view
alternative to organizations
rationality, every participant
participants' deceptive, self-interested behavior.
more
manage
on human information processing are a
An
major reason for the very existence of organizations.
act
In the
to give rise to
designed to marshal
processing and communications capabilities, to be able to
sufficient information
economic agents
and uncertainty
rationality,
in
the
however, such
form of excessive
avoid these costs, individuals form organizations where
interests are pooled.
and the transaction cost schools of organizational theory,
In both the information processing
bounded
rationality plays a pivotal role.
impact of information technology.
processing.
To
It is
also a central construct in our understanding
IT relaxes the constraints on individual and group information
exploit the link between information technology
bounded
to characterize IT in terms that are relevant to
making behavior
indicate two major limitations
interpersonal communications
skills.
A
and organizational design we need
rationality.
Studies of group decision-
on performance are individual cognitive
maps
onto a limitation
directly
in
ability
human performance. Within
It
should be noted that
electronic technology that
each category,
at least
definition of information
affect the ability
technology excludes applications of
of an organization
to process information.
replacing a group of data entry operators with optical character reader devices, would
our
criteria to qualify as
and
taxonomy.
this
do not
is
Each of these
three characteristics of the technology are relevant to performance, namely capacity, quality,
unit cost. Figure 1 illustrates this
and
taxonomy of information-related technologies
natural
created by differentiating communications technology from processing technology.
categories
of the
fail
Thus,
to
meet
information technology. This issue, and similar ones related to the need for
a rigorous definition of information technology, will be addressed in a forthcoming paper.
The major premise of
this discussion
is
that information technology affects the efficiency
effectiveness of the organization primarily by reducing the
group decision making. Research
is
needed
to
bounded
confirm or disprove
rationality
and
of individual and
this causal relationship.
In
Communications
Capacity
Quality
Unit Cost
4.
IT and Competitive Strategy
4.1.
The
link
A number
between IT and Competitive Strategy
of authors have addressed the task of identifying opportunities for the application of
information technology to create competitive advantage. They generally have recognized the
importance of the link between IT and competitive strategy, although
Two
primary focus.
this
has not always been their
general approaches can be identified in this literature, distinguished by their
underlying models: a value-added chain analysis of the firm's operations and Porter's framework
for competitive analysis [31].
Rockart and Scott Morton
[33]
have introduced the use of the value-added chain to describe the
They
potential opportunities arising from IT.
identify three types
of opportunities that can create
competitive advantage: (1) improve each value adding function. (2) link with customers and
and
suppliers to increase their switching costs,
Ives
and Learmonth
model
[17] further this effort
(3) create
new
businesses through service or product
by using a generic, thirteen function resource
to identify competitive opportunities.
It
analyses, geared toward operadonal efficiency
lifecycle
should be noted that these value-added chain
and functional
effectiveness, are closely related to
internal strategy.
Porter [31] advanced the idea that competition in any industry
economic
structure,
participating firms.
and thus
it is
more than
This approach
dynamics of compeution
in
is
reflected in the
among
substitute products or services, bargaining
An
important implicadon of
competition
suppliers,
in
As Figure
an industry.
underiying competition: rivalry
this
a superficial
is
rooted in
its
underiying
game of moves and countermoves among
framework he proposed
2 illustrates,
it
to explain
the
includes five major forces
existing competitors, threat of
new
entrants, threat
of
power of suppliers, and bargaining power of customers.
framework
is
To understand
the idea of extended rivalry.
an industry, one must look beyond current competitors to include customers,
firms producing subsutute products, and potendal entrants.
manipulate the competitive forces
in their industry, in
Firms generally
idenufied cost leadership and product differentiation as two such strategies.
of niche markets, which
perspective of IT-related opportunity.
is
He
Porter [31] has
identifies a third
similar to product differentiation strategies
Other such
to
order to achieve comparative advantage over
competitors. There are certain generic strategies that can be employed to that end.
strategy, the pursuit
try
strategies
may
from the
include the exploitation of
THREAT OF
NEW ENTRANTS
BARGAINING
POWER OF
BUYERS
BARGAINING
POWER OF
SUPPLIERS
THREAT OF
SUBSTITUTE PRODUCTS
Figure
2:
Porter's
framework
for
competitive forces
potential synergies with a firm's customers or suppliers, or the notion of gaining bargaining
advantage against one's customers and suppliers.
Parsons
[28]
uses Porter's competitive forces framework to identify six generic categories of
opportunities for competitive advantage: (I) increase customer's switching costs through value
adding IT-based information or
of IT
to
service. (2) decrease
own
switching costs against suppliers, (3) use
support product innovation, for purposes of maintaining one's position or detering
potential substitutes, (4) cooperation
among
rivals
through shared IT resources,
information technology for labor, and (6) use information to better segment and
customer base.
(5) substitute
satisfy one's
4.2.
Four areas of opportunity
Rockan and
Parsons.
Scott
Morton, Ives and Learmonth, and others each have different
From
categorizations of competitive opportunities created by information technology.
distilled four areas
may
not be comprehensive;
Nevertheless,
they
These categories
of opportunity for IT to support competitive strategy.
have
new ways of employing IT
represent a useful
opportunities within their firm.
to
support strategy
will
be found.
point for someone trying to identify specific
starting
They can be seen
For
as tactics to support competitive strategies.
example, when a firm employs information systems to improve the efficiency of operations,
making a
The four
efficiency
mov^
tactical
we
these
it is
that can support a cost leadership strategy.
areas of opportunity that have been identified are: (1)
and functional
improvement of operational
effectiveness. (2) product innovation with IT. (3) acquisition of bargaining
advantage against one's customers and suppliers, and (4) exploitation of interorganizational
synergies.
In the next four subsections,
competitive strategies they support, and
4.2.1.
we
briefly discuss each
how one
of these areas of opportunity, which
can begin to identify specific opportunities.
improve operational efficiency and functional effctliveness
Systems to improve operations are the traditional focus of information technology applications
and central
support of the internal strategy of the firm. These systems can also lend support
to the
to the competitive position of the firm to the extent that they are industry innovations that can
turned into competitive advantage.
functional areas of the firm and that
Usually this requires that the system be applied to
it is
a
new
type of application in
its
industry.
be
critical
Simply following
the industry leaders does not lead to any advantage.
As discussed
in
the previous section, opportunities for operational efficiency are found in
supporting organizational structure and management processes.
are well established, but unrelated to the
Techniques
for identifying
them
body of organizational theory. Although opportunities
improve operational efficiency and effectiveness are the best undei"stood, they are
also,
to
quite
possibly, the least important for targeting IT to support competitive strategy.
4.2.2.
Product innovation with information technology
Information technology
many
industries,
is
providing firms with unique opportunities for product innovation.
from automotive to consumer electronics, information technology
into existing products to
enhance
their value.
is
being built
In other industries, such as banking, insurance,
10
In
and
consulting, the technology
products.
providing a development and delivery vehicle for
is
The technology can provide an important means
developing
new and unique
There would appear
methodologies
for
Building IT into products
identifying
such
opportunities
is
to identify opportunities
largely an engineering function.
outside
are
the
Developing and delivering new products using information technology
has received
little
are
two
topics
how
diese opportunities are identified and
important
an area that
they should be identified
of bargaining advantage against customers and suppliers
tactic for
improving one's bargaining position
relative to
unique and valuable information and services that makes switching
Informadon
is
worthy of much further study.
4.2.3. Acquisition
An
How
As
context of present
discussions.
study.
and
ones.
for product innovation using IT.
such,
service-based
for differentiating existing products
be two distinct types of methodologies needed
to
new
technology
can
facilitate
unique
unavailable and potentially of very great value to customers.
offerings, the higiier die switching cost
Every supplier
is
is
to a competitor
service
The higher
offerings,
to provide
more
costly.
previously
the perceived value of the
imposed on the customer.
a customer of another supplier in an
opportunity to gain
or
information
customers
bargaining advantage can
unbroken value-added chain. Thus, the
be pursued by one's suppliers to the firm's
disadvantage, unless tactics are devised to avoid the problem.
Two
tactics
specific
present
themselves: avoid becoming dependent on supplier-controlled information and service, and create
an efficient "electronic marketplace" between you and your suppliers.
There
Some
is
no methodology
fijndamental research
understand
how and when
switching cost.
We
also
available for idendfying specific IT opportunities within this area
needed before a methodology can be developed.
is
We
must
better
information and service creates sufficient dependency to impose a
need
to
understand
how
potendal opportunides for developing
new
information and innovadve service can be idenufied.
4.2.4.
Cooperative information systems
Competidve
strategies for exploidng synergies with customers or suppliers generally concentrate
upon opportunities
more
efficient
and
for better coordinadon.
diis benefit
Through
better coordinauon,
operadons can be made
can be shared between the two participants.
achieved with information systems that couple flmcdonal areas
11
in
two disunct
Coordinadon can be
firms.
For example,
one might
tightly
couple the production planning system of a firm with the order entry system of
suppliers to lower the
amount of inventory
Interorganizational systems are a
in
process and the turnaround time for
new phenomenon. They allow
redefine the boundaries of entire industries.
cooperative systems
may
orders.
firms to vertically integrate from
an information perspective without disturbing the legal boundaries of the
may
new
Methodologies
Eventually, they
entities.
to identify opportunities for
be quite similar to those used to improve operational efficiency and
main difference being
functional effectiveness, the
in the unit
-two
of analysis
organizations
instead of just one.
4.3.
A
The
theoretical
framework
categorization of opportunities identified above can provide a useful framework for a planner
concerned with taking advantage of information technology, but
we attempt
an underiying general theory. In the rest of this section,
by proposing that future research
start
starts
its
value
is
limited by the lack of
to help in closing this gap.
We
from a simplified theory of competitive advantage,
derived from industrial economics.
Competitive advantage, generally related to the concept of market power, refers to the
firm to create and exploit
md comparative efficiency, as shown in
Figure
3.
Bargaining power
refers to the ability
of a firm to resolve zero-sum bargaining situations, usually against
or suppliers, to
advantage.
product
at a
of a
monopoly or monopsony power. The two major sources of competitive
advantage are bargaining power
its
ability
Comparative efficiency
refers to the ability
its
customers
of a firm to produce a
lower price relative to ones perceived as equivalent These two sources are more or
less
orthogonal.
4.3.1.
In
Bargaining power
most game-theoretic
situations, each side
advantage, by increasing the
the search process, which
of the player
and the
is
in question, as
its
position, that
number of available altemadves. This number
determined by two primary
it
relates to
its
before and after a relation
is
It is
develop competitive
is,
is
limited by the cost of
factors: the information processing capacity
efficiency in exploring the space of feasible alternatives,
characteristics of the underlying search set, in terms of the
available for a given search effort
parties.
can improve
number of
feasible alternatives
important to distinguish between alternatives available
established, as that event
may impose
restrictions
on one or both
Ex-ante alternatives are primarily determined by unique product features, while ex-post
12
Figure
3:
A causal model of competitive advantage
akemaiives are also affected by switching costs arising from the imperfect transferability of
assets
specific to a transaction.
We
have thus derived three primary determinants of bargaining power: the search-related
information processing capacity, unique product features, and switching
illustrated in Figure 3,
its
suppliers.
have symmetric implications for a firm's relationship with
Thus a firm
will increase its
monopoly power by
increasing
of search for alternative suppliers, by incorporating unique features
increasing
its
costs.
customers' cost of switching to alternative suppliers,
13
it
its
in
its
These
factors,
customers and
customers' relative cost
its
products, and by
can increase
its
monopsony
power by reducing
of switching
costs
its
cost of locating alternative suppliers,
to alternative sources
its
dependence on unique
inputs, or
its
of supply.
Comparative efficiency
4.3.2.
We
see
two major aspects of comparative
efficiency: internal (intraorganizational) efficiency,
external (boundary spanning, interorganizational) efficiency.
essentially those
examined
in that section will
technology
in
the section
on
internal strategy,
and
Internal efficiency considerations are
and hence the frameworks developed
be adequate for the categorization and analysis of the impacts on information
Methodologies for opportunity identification
in this area.
adopt a comparative point of view, and focus on
critical
in this area,
however, should
The
organizational functions.
transaction
theory pioneered by Williamson [40] provides a natural device to study the impact of
cost
information technology at the boundaries between organizations.
This worlc
will
be further
discussed in the next section, in the context of industry-level impacts of information technology.
4.3.3.
Dynamic considerations
The above two dimensions
view of the world,
capture
fails to
missing third dimension
create a static picture of the competitive situation, which, like a flat
is
timing,
provide relevant literature.
dynamic richness uf the competitive game
and both
disciplines of game theory
and
as
it
industrial
unfolds.
The
economics can
Nevertheless, translating the static impacts of information technology
dynamic competitive moves,
into
tlie
is
an aspect of strategy formulation that has been
left
outside the
scope of this paper.
4.4.
Theoretical links between information technology and competitive advantage
We
shall
have used industrial economics as die source of theories
now propose two
theoretical
links
between
to
study competitive advantage.
information
technology
We
and competitive
advantage, that can serve as the basis for specific dieories examining the impact of information
technology on competitive strategy.
Bounded
rationality can serve
once again as a major theoretical
impacts of information technology.
link in studying the competitive
Improving the bounds of organizational
implicadons for both bargaining power and comparative efficiency.
rationality has direct
In particular
it
affects the cost
of search (by improving the generation and evaluauon of alternatives), as well as transaction costs
in
organizational interfaces. According to Williamson [40], transaction costs arise from environmental
constraints, opportunism,
and small numbers exchange
14
situations, coupled with
bounded
rationality.
Information technology can have a direct impact on these variables through
rationality, for
example by reducing contracting and monitoring
its
effect
on bounded
costs (thus mitigating the effect
of
opportunism), improving the generation and evaluation of alternatives (thus mitigating the effect of
environmental
and
uncertainty
complexity),
and
either
decrease
or
increase
information
asymmetries (which are related to Williamson's notion of information impactedness).
The second
comes from
technology
the effects of IT
is
between information technology and industrial economics theory
theoretical link
on producdon processes.
It is
generally accepted that information
an inherently flexible technology, improving the adaptability of products, and
allowing the realization of scale economies from smaller production runs.
will thus affect asset specificity,
small
numbers
understanding
its
situations.
it
This
view
of information
technology
will
be
instrumental
eariier,
in
product
costs.
should be noted that the four categories of opportunities identified eariier
based on our review of the
particular,
and, in Williamson's transaction cost franiework, have an impact on
impact on two determinants of bargaining advantage identified
uniqueness and switching
Finally
Informadon technology
literature,
improvement of operadng
in this section
can be explained by our competitive framework.
efficiency
In
and functional effectiveness would primarily
address internally focused efficiency; exploitation of interorganizadonal synergies would primarily
address externally focused efficiency; product innovation with information technology might
attempt to improve comparative efficiency by reducing production
uniqueness and customer switching
and suppliers would
affect
all
costs; acquisition
or increase product
of bargaining advantage against customers
aspects of bargaining power.
15
costs,
IT and Business Portfolio Strategy
5.
In the previous sections
within an industo' and
more macroscopic
its
we have focused our
boundaries.
attention
It is likely,
on the impact of information technology
however, that information technology
effects as well, affecting the structure
will
have
of marketplaces. Infonnation systems, for
example, can help markets be more efficient by increasing the amount of available information, or
lower certain barriers to entry while raising information-related ones.
Thus, they can cause the
restructuring of entire industries.
Industry-level impacts of information technology have important strategic implications for the
portfolio of industries in which a firm
is
competing. Specifically, a firm
portfolio by taking advantage of structural changes catalyzed by the
a firm can actively seek opportunities to exploit
Our understanding of the
industries.
link
its
may
new technology.
technology-related
skills
this
Alternatively,
and resources
in
new
between information technology and corporate strategy
this level is
currently limited, as demonstrated by the scarcity of existing
this section
we
will discuss a
be able to improve
number of relevant
issues, that will
work on the
at
In
subject.
point us toward the identification
of appropriate frameworks and models.
5.1.
Structural impacts of information technology
Williamson's "efficient boundaries" hypothesis
[41] suggests that as asset specificity increases, at
some point
the
advantage
production efficiency, thus driving some exchange relations out of the market and
in
transaction
cost
superiority
of internal organization outweighs the market's
leading to internalization of the corresponding transactions.
certain point of asset specificity,
internal organization,
APC,
As Figure 4
declines and
is
overshadowed by the lower transaction
technology can affect asset specificity by increasing the
economies of
scale,
and
impact on transaction
it
Porter's
ATC.
of internal
Information
of the production processes,
it
can
can affect the transaction cost advantage of markets through an
Information technology
organization, affecting the economics of
new markets and causing
fiexibility
cost
vs
advantage of markets by changing production economics, such as
finally
costs.
beyond a
AS, the production cost advantage of market mechanisms
organization, denoted by a negative transaction cost advantage of markets,
affect the production cost
illustrates,
make
vs
will therefore shift the efficient
buy
decisions,
and
in the
boundaries of
process creating
some
others to disappear.
framework of competitive forces
[31],
derived from industrial economics, suggests a point
16
cost
advantage
of
markets
APC
asset
^
specificity
= A(TC + PC)
cost
advantage
of
hierarchies
Figure
4:
Williamson's efficient boundaries model
of view based on the dynamics of an economic game where participants include industry
compeutors. customers, suppliers, and potential entrants.
In
that framework,
the structural
implications of information technology for a particular industry will be determined by
rivalry within the industry,
its
impacts on the industry's relations with
its
its
5.2.
Exploitation of technology advantage
The impacts of information technology on
improve
its
business portfolio.
effect
on
customers and suppliers,
implications for prospective entrants and the threat of substitute products
and
its
[28],
industry structure create opportunities for a firm to
Exploitation of these opportunities requires a strategy formulation
process sophisticated enough to identify them, as well as the capability for successful deployment of
the appropriate technology.
In other
words,
is
it
necessary to link strategy formulation with
technology development The most important aspect of
direction
for technological
base-building.
An
this link is for the firm's strategy to
alternative course
superiority of the firm into opponunities for successful ventures in
is
to
new
translate
industries.
linking strategy formulation with the development of information technology
17
is
provide
technological
Once
again,
important; the
major aspect of
this link is the ability to take technological potential into consideration
during the
formulation of corporate strategy.
In
both
these
cases,
exploitable
technological base-building,
strategy-literate
development of
advantage
in
likely sources
and the
technology
link
advantage has two important characteristics:
between technology and strategy that can be achieved by
information systems planners and technology-literate strategic planners.
specific theories
and models
for the creation
die context of business portfolio strategy
is
and exploitation of technology
an area yet to be explored.
We
see three
of relevant models: organizational theories of technology assimilation, such
theories, industrial
economic
theories, such as
as stage
economies of scope, and gaming theory, such
importance of timing.
18
The
as the
6.
Concluding Remarks
As Keen notes
of frameworks
in [19], a
major problem with past information systems research
is
the proliferation
expense of explanatory models based on a general theory, and the lack of
at the
reference disciplines that can provide appropriate general theories.
Much
of die current work on
the strategic impacts of information technology, despite dramatic references to "strategic tools"
"competitive weapons." makes
little
or no use of bodies of theory related to either strategy or
competition. As the field matures, the primary focus of academic research should
level
and
move
to a
deeper
of analysis, characterized by specific, explanatory models connected to broader general
theories.
Approaches drawing on appropriate reference
of the strategic use of information systems.
from an accepted point of
overall result
Alternatively,
value.
Two
is
disciplines can avoid idiosyncratic, private theories
Assertions and conclusions that are plausibly argued
origin, are seen as part
The
a contribution to both fields of information systems and corporate strategy.
frameworks based on private theories lacking
bodies of literature that
come
to
mind
disciplines.
Works on bounded
extraction of
monopoly
rents,
rationality,
this
kind of foundation are of limited
as closely related to this area
we have proposed them
organization theory and industrial economics, and
entry,
of the larger fabric of corporate strategy.
human
fijnctioning of markets
decision
of study are
as appropriate reference
making, value of information,
under imperfect information, barriers
to
and Williamson's work on transaction costs and organizational boundaries, seem of particular
relevance.
Finally,
we have suggested
internal, competitive,
three perspectives of the strategic impact of information systems:
and business
portfolio.
We
believe this
is
a valuable distinction because each
perspective identifies different issues of importance, suggests different theoretical frameworks as
amenable
the basis for research,
and
These perspectives are
also likely to differ in die appropriate
which we believe
is
is
to different
methodologies for opportunity identification.
the sine qua non of valuable research.
19
methods
for the validation of theories,
References
1.
Banff.
L
M.
Information Requirements Analysis:
76-08-02. Decision Sciences Department.
January, 1977. Revised
2.
Benjamin. R.
1..
December
Rockart.
Strategic Opportunity.
F..
J.
A
Methodological Review. Working Paper
The Wharton School, University of Pennsylvania,
1977.
Scott Morton.
CISR Working Paper
M.
S.,
and Wyman.
108. Massachusetts
J.
Information Technology:
Institute
A
Technology, Center for
Information Systems Research, Cambridge. Mass., December, 1983.
3.
Bullen. Christine V. and John F. Rockart.
Paper
69.
A
Primer on
Critical Success Factors.
CISR Working
Massachusetts Institute of Technology. Center for Information Systems Research,
Cambridge, Mass., June, 1981.
4.
Business Week. Foremost-McKesson:
December
5.
7,
distribution to center stage.
1981, pp. 115-122.
Cooper, R.
B.
State of the Art".
6.
The computer moves
and Swanson,
Data Base
E. B.
"Management Information Requirements Assessment: The
I J, 2 (1979), pp. 5-16.
A Behavioral Theory of the Firm
Cyert, Robert and March. James.
Prentice-Hall,
Englewood
Cliffs, N.J., 1963.
7.
Davis,
G.B.
"Strategies for Information Requirements Determination".
IBM Systems Journal
27, 1 (1982), pp. 4-30.
8.
Fortune. Merill Lynch Quacks Like a Bank. October 20, 1980, pp. 134-144.
9.
Fortune.
10.
The Hard-Selling Supplier
Galbraith, Jay. Designing
Complex
to the Sick. July 26, 1982, pp. 56-61.
Organizations. Addison-Wesley, Reading, Mass., 1973.
Marc and Reisman, Heather. "Creadng Competinve Advantage with Computer
Technology". Journal of Business Strategy 3, 1 (Summer 1982), pp. 53-60.
11. Gerstein,
12.
Hamilton. Scotland Chervany,
-Part
13.
I:
II:
L.
Comparing Evaluation Approaches".
Hamilton. Scott and Chervany,
-Part
Norman
Norman
L.
Comparing Evaluadon Viewpoints".
"Evaluating Information System Effectiveness
MIS Quarterly 5,
3
(September 1981), pp. 55-69.
"Evaluating Informadon System EfTecUveness
MIS Quarterly 5. 4 (December
1981), pp. 79-86.
Hammer. Michael M. and Kunin Jay S. Design Principles of an Office Specification Language.
AFIPS Conference Proceedings, 1980 National Computer Conference, Arlington, Va, May, 1980,
14.
pp. 541-547.
Hammer, Michael and Michael Zisman. Design and Implementation of Office Information
Systems. Proc. NYU Symposium on Automated Office Systems, New York University Graduate
15.
School of Business Administration, May, 1979, pp. 13-24.
20
16.
Systems Planning Guide.
17.
Ives.
Third Edition, July 1981.
ACM 27,
12
P.
"The Information System
(December
as a
Competitive Weapon".
1984), pp. 1193-1201.
Kantrow, Alan M. "The Strategy /Technology Connection". Harvard Business Review
August 1980), pp.
19.
.
Blake and Learmonth, Gerard
Communications of the
18.
Machines Corporation. Business Systems Planning: Information
International Business
{My
6-21.
MIS
Keen, Peter G. W.
Research: Reference Disciplines and a Cumulative Tradition.
Proceedings of the First International Conference on Information Systems, December 8-10, 1980,
pp. 9-18.
20.
Keen. Peter G. W. "Information Systems and Organizational Change". Communications of the
ACM 24. 1 (January 1981).
21.
Keen, Peter G. W. Telecommunications and Business Policy: The Coming Impacts of
Communication on Management CISR Working Paper
81,
Massachusetts Institute Technology,
Center for Information Systems Research, Cambridge, Mass., September, 1981.
22.
Leavitt, H.
J.,
"Applied organizational change
Rand-McNally, Chicago,
23. Lucas,
Henry C.
Jr.
II.,
in industry".
In
Handbook of Organizations.
1965.
"Performance and the use of an information system". Management
Science 21, 8 (April 1975), pp. 908-919.
24.
March, James and Simon, Herbert. Organizations. John Wiley and Sons,
New
York, N.Y.,
1958.
25.
McFarlan, Warren and McKenney, James. Corporate Information Systems Management.
Richard D. Irwin
26.
McFarlan,
F.
Inc.,
Homewood,
Illinois,
1983.
W. and McKenney. James
L
Information Systems Planning: a Contingent
Focus. Harvard Business School Case #181-128,
HBS
Case Services, Boston, Mass. 02163,
September 1981.
Munroe, M. C. and Davis. G. B. "Determining Management Information Needs:
Comparison of Methods". MIS Quarterly (June 1977), pp. 55-67.
27.
28. Parsons.
Gregory
Management Review
29.
Parsons. Gregory
L.
"Information Technology:
A New
A
Competitive Weapon". Sloan
25. 1 (Fall 1983), pp. 3-14.
L
Fitting Information
Systems Technology
to the
Corporate Needs: The
Linking Strategy. Harvard Business School Teaching Note (1983).
30. Perrow, Charles.
"A Framework
for the
Comparative Analysis of Organizations". American
Sociological Review 32 (1967), pp. 194-208.
21
31. Porter, Michael.
John
32. Rockarl,
F.
Competitive Strategy. Free Press,
"Chief Executives Define Their
New
Own
York, N.Y., 1980.
Data Needs". Harvard Business Review
(March-April 1979), pp. 81-93.
John
33. Rockart,
Technology
34.
for
F.
and Scott Morton, Michael
Corporate Strategy". Interfaces
S.
"Implications of Changes
in
Information
14, 1 (Jan-Feb. 1984), pp. 84-95.
Simon, H. A. "A behavioral model of rational choice". Quarterly Journal of Economics 69
(1955), pp. 99-118.
35.
Simon, H. A. "Rational choice and the structure of the environment". Psychological Review 63
(1956), pp. 129-138.
36.
Simon, Herbert. The Shape of Automation for
Men and Management. Harper and Row, New
York, N.Y., 1965.
37. Sirbu,
Jr. Programming Organizational Design. Proceedings of the Fifth
Computer Communications Conference, AFIPS, Atlanta GA, October, 1980.
Marvin A.
International
38. Sirbu. Marvin,
An
Sandor Schoichet, Jay Kunin. Michael Hammer, and
Office Analysis Methodology.
Memo OAM-016, MIT
Juliet Sutherland.
0AM:
Laboratory for Computer Science, Office
Automation Group, Cambridge, Mass., October, 1980. Revised Jan. 1981.
39. Taggert,
W. M. and Tharp, M. 0. "A Survey of Intbrmation Requirements
Techniques".
Analysis
ACM Computing Surveys 9, 4 (1977), pp. 273-290.
40. Williamson, Oliver.
Markets and Hierarchies. Free
41. Williamson, Oliver E.
Press,
New
York, N.Y., 1975.
The Economics of Governance: Framework and
Implications.
Discussion Paper 153, Yale University, July, 1983.
The Renewal Process and Obstacles to Innovation.
MIT Sloan School of Management, Cambridge, Mass., June, 1983.
42. Zannetos,
1445,
Zenon
S.
8254 078
22
SSM Working Paper
Mir LlBRflRlEi
3
TDflD
DD3 DbS Mb D
APR 1
S> -
J
3
^7
\m
'8^
j^^glMtJiL
MY
01
^ov 30
B8:
07
Lib-26-67