THE COPPERBELT UNIVERSITY SCHOOL OF MATHEMATICS AND NATURAL SCIENCES COMPUTER SCIENCE DEPARTMENT MANAGEMENT INFORMATION SYSTEMS-DIT410/BIT 255 Information System, Organizations, Management, and Strategy 3.1 Organizations and Information Systems Information systems must be aligned with the organization to provide information that important groups within the organization need. On the other hand, the organization must be aware of and open itself to the influences of information systems in order to benefit from new technologies. The interaction between information technology and organizations is very complex and is influenced by a great many mediating factors, including the organization’s structure, standard operating procedures, politics, culture, surrounding environment, management decisions and chance (see Figure 3.1). Figure 3.1 The two-way relationship between organizations and information technology. This complex two-way relationship is mediated by many factors, not the least of which are the decisions made—or not made—by managers. Other factors mediating the relationship are the organizational culture, bureaucracy, politics, business processes, and pure chance. The organization's environment, culture, structure, standard operating procedures, politics and management decisions are all mediating factors that influence the interaction between information technology and organizations. There is no singular effect of computers in all organizations. Instead, different organizations in different circumstances experience different effects from the same technology. What is an Organization? The Technical View An organization is a stable, formal, social structure that takes resources from the environment and processes them to produce outputs. Capital and labor are primary production factors provided by the environment. The organization (the firm) transforms these inputs into products and services returned for supply inputs (see Figure 3.2). An organization is more stable than an informal group (such as group of friends that meets every Friday for lunch) in terms of longevity and routineness. Organizations are also social structures, because they are a collection of social elements, much as a machine has a structure—a particular arrangement of valves, cams, shafts, and other parts. Figure 3.2 The technical microeconomic definition of organizations. Capital and labor (the primary production factors provided by the environment) are transformed by the firm through the production process into products and services (outputs to the environment). The products and services are consumed by the environment, which supplies additional capital and labor as inputs in the feedback loop. The Behavioral View A more realistic behavioral definition of an organization is that it is a collection of rights, privileges, obligations, and responsibilities that are delicately balanced over a period of time through conflict and conflict resolution (see Figure 3.3). Figure 3.3 The behavioral view of organizations. The behavioral view of organizations emphasizes group relationships, values, and structures. The technical and behavioral views of organizations complement one another. The technical definition describes how thousands of firms in competitive markets combine capital and labor with information technology, whereas the behavioral model describes how technology affects the organization's inner workings. Common Features of Organizations In some respects, all modern organizations are alike because they share the same characteristics. A German sociologist, Max Weber, was the first to describe these “idealtypical” characteristics of organizations in 1911. He referred to organizations as bureaucracies that have certain “structural” features. A Bureaucracy is a formal organization with a clear-cut division of labor, abstract rules and procedures, and impartial decision making that uses technical qualifications and professionalism as a basis for promoting employees. Standard Operating Procedures Organizations that survive over time become very efficient, producing a limited number of products and services by following standard routines. These standard routines become codified into reasonably precise rules, procedures, and practices called standard operating procedure (SOPs) that are developed to cope with virtually all expected situations. Some of these rules and procedures are written, formal procedures. Most are “rules of thumb” to be followed in selected situations. Organization Politics Differences within the organization matter to both managers and employees, and they result in political struggle, competition, and conflict. Political resistance is one of the greatest difficulties of bringing about organizational change—especially the development of new information systems. Organizational Culture Organizational culture is a set of fundamental assumptions about what products the organization should produce, how it should produce them, where, and for whom. Organization culture is a powerful unifying force that restrains political conflict and promotes common understanding, agreement on procedures, and common practices. If all share the same basic cultural assumptions, then agreement on other matters is more likely. At the same time, organizational culture is a powerful restraint on change, especially technological change. Most organizations will do almost anything to avoid making changes in basic assumptions. Types of Organizations The differences among organizational structures are characterized in many ways. The Mintzberg classification of organizations includes five categories: Entrepreneurial structure: Young, small firm, such as a small startup business, in a fast-changing environment. It has a simple business structure and is managed by an entrepreneur serving as its single chief executive officer. Machine bureaucracy: Large bureaucracy, such as a midsize manufacturing firm, existing in a slowly changing environment, producing standard products. It is dominated by a centralized management team and centralized decision making. Divisionalized bureaucracy: Combination of multiple machine bureaucracies, such as a Fortune 500 firm, each producing a different product or service, all topped by one central headquarters. Professional bureaucracy: Knowledge-based organization (such as law firms, school systems, hospitals) where goods and services depend on the expertise and knowledge of professionals. Dominated by department heads with weak centralized authority. Adhocracy: Task force organization (such as a consulting firm) that must respond to rapidly changing environments. Consists of large groups of specialists organized into short-lived multidisciplinary teams and has weak central management. Other Differences among Organizations Organizations have different shapes or structures for many other reasons also. They differ in their ultimate goals and types of power used to achieve them. Organizations also serve different group or have different constituencies, some primarily benefiting their members, others benefiting clients, stockholders, or the public. 3.2 The Changing Role of Information Systems in Organizations Information Technology Infrastructure and Information Technology Services One way that organization can influence how information technology will be used is through decisions about the technical and organizational configuration of systems. Today’s new IT infrastructure is designed to make information flow across the enterprise and includes link to customers, vendors, and public infrastructures, including the Internet. Each organization determines how its infrastructure will be configured. The formal organization unit or function responsible for technology services is called the information systems department. It is responsible for maintaining the hardware, software, data storage, and networks that comprise the firm’s IT infrastructure. The information system department consists of specialists such as programmers, system analysts, project leaders, and information systems managers. In many companies, the information systems department is headed by a chief information officer (CIO). CIO is senior manager in charge of the information systems function in the firm. End users are representatives of departments outside the information systems group for whom applications are developed. How Information Systems Affect Organizations Economic Theories Microeconomic model of the firm: It views information technology as a factor of production that can be freely substituted for capital and labor. Transaction Cost Theory Information technology also helps firms contract in size, because it can reduce transaction costs—the costs incurred when a firm buys on the marketplace what it cannot make itself. According to transaction cost theory, firms and individuals seek to economize on transaction costs, much as they do on production cost. Using markets is expensive because of costs such as locating and communicating with distant suppliers monitoring contract compliance, buying insurance, obtaining information on products and so forth. By lowering the cost of market participation (transaction costs) information technology allows firms to obtain goods and services more cheaply from outside sources than through internal means. Information systems can thus help firms increase revenue while shrinking in size. Figure 3.4 The Transaction Cost theory of the impact of information technology on the organization. Firms traditionally grew in size to reduce transaction costs. IT potentially reduces the costs for a given size, shifting the transaction cost curve inward, opening up the possibility of revenue growth without increasing size, or even revenue growth accompanied by shrinking size. Agency Theory Information technology can also reduce internal management costs. According to agency theory, the firm is viewed as a “nexus (connected series or group) of contracts” among self-interested individuals rather than as a unified, profitmaximizing entity. A principle (owner) employs “agents” (employees) to perform work on his or her behalf. However agents need constant supervision and management, because they otherwise will tend to pursue their own interests rather than those of the owners. As firms grow in size and scope, agency costs or coordination cost rise, because owners must expend more and more effort supervising and managing employee. Figure 3.5 The Agency Cost Theory of the impact of information technology on the organization. As firms grow in size and complexity, traditionally they experience rising agency costs. IT shifts the agency cost curve down and to the right, enabling firms to increase size while lowering agency costs. Behavioral Theories Behavioral researchers have theorized that information technology could change the hierarchy of decision making in organizations by lowering the costs of information acquisition and broadening the distribution of information. Information technology could bring information directly from operating units to senior managers, thereby eliminating middle managers and their clerical support workers. Alternatively, information technology could distribute information directly to lower- level workers, who could then make their own decisions based on their own knowledge and information without any management intervention. Figure 3.6 Flattening Organizations. Information systems can reduce the number of levels in an organization by providing managers with information to supervise larger numbers of workers and by giving lower-level employees more decision-making authority. Figure 3.7 Organizational resistance and the mutually adjusting relationship between technology and the organization. Implementing information systems has consequences for task arrangements, structures, and people. According to this model, to implement change, all four components must be changed simultaneously. Source: Leavitt (1965). The Internet and Organization Businesses are rapidly rebuilding some of their key business processes based on Internet Technology by making this technology a key component of their IT infrastructures. If prior networking is any guide, one result will be simpler businesses, fewer employees, and much flatter organizations than in the past. Implications for the Design and Understanding of Information Systems The central organizational factors to consider when planning a new system are these: The environment in which the organization must function. The structure of the organization: hierarchy, specialization, standard operating procedures. The organization’s culture and politics. The type of organization. The nature and style of leadership. The extent of top management’s support and understanding. The principal interest groups affected by the system. The kinds of tasks, decisions, and business processes that the information system is designed to assist. The history of the organization: past investments in information technology, existing skills, important programs, and human resources. 3.3 Managers, Decision Making, and Information Systems The Role of Managers in Organizations Classical Descriptions of Management The classical model of management traditionally described management that focused on its formal functions of planning, organizing, coordinating, deciding, and controlling. Behavioral Models Behavioral Model descriptions of management are based on behavioral scientists’ observations of what managers actually do in their jobs. It state that the actual behavior of managers appears to be less systematic, more informal, less reflective, more reactive, less well organized, and much more frivolous than students of information systems and decision making generally expect it to be. First, managers perform a great deal of work at an unrelenting pace. Second, managerial activities are fragmented; most activities last for less than nine minutes; only 10 percent of the activities exceed one hour in duration. Third, managers prefer speculation, hearsay, gossip—they want current, specific, and ad hoc information. Fourth, they prefer oral forms of communication to written forms because oral media provide greater flexibility, require less effort, and bring a faster response. Fifth, managers give high priority to maintaining a diverse and complex web of contacts that acts as an informal information system. Interpersonal roles: Mintzberg’s classification for managerial roles where managers act as figureheads and leaders for the organization. Information roles: Mintzberg’s classification for managerial roles where managers act as the nerve centers of their organizations, receiving and disseminating critical information. Decision roles: Mintzberg’s classification for managerial roles where managers initiate activities, handle disturbances, allocate resources and negotiate conflicts. The Process of Decision Making Decision Making can be classified by organizational level, corresponding to the strategic, management, knowledge, and operational levels of the organization. Strategic decision making determines the objectives, resources, and policies of the organization. Decision making for management control is principally concern with how to carry out specific tasks specified by upper and middle management and establishing criteria for completion and resource allocation. Operation control decision making determines how to carry out the specific task set forth by strategic and middle-management decision maker. Knowledge - level decision making deal with evaluating new ideas for product and services, ways to communicate new knowledge, and ways to distribute information throughout the organization. Unstructured decisions are those in which the decision maker must provide judgment, evaluation, and insights into the problem definition. Structure decisions, by contrast, are repetitive and routine and involve a definite procedure for handling them so that they do not have to be treated each time as if they were new. Some decisions are semi-structured; in such cases, only part of the problem has a clear-cut answer provided by an accepted procedure. Figure 3.8 Different kinds of information systems at the various organization levels support different types of decisions. Stages of Decision Making Intelligence the first of Simon’s four stages of decision making, when the individual collects information to identify problems occurring in the organization. Design Simon’s second stage of decision making, when the individual conceives possible alternative solutions to a problem. Choice Simon’s third stage of decision making, when the individual selects among the various solution alternatives. Implementation Simon’s final stage of decision making, when the individual puts the decision into effect and reports on the progress of the solution. Individual Models of Decision Making The basic assumption behind individual models of decision making is that human beings are in some sense rational. The rational model is a model of human behavior based on the belief that people, organizations, and nations engage in basically consistent, value maximizing calculations or adaptations within certain constraints. Modern psychology has further qualified the rational model by research that finds that humans differ in how they maximize their values and in the frames of reference they use to interpret information and make choices. Cognitive style describes underlying personality dispositions toward the treatment of information, selection of alternatives, and evaluation of consequences. Systematic decision-makers approach a problem by structuring it in terms of some formal method. They evaluate and gather information in terms of their structured method. Intuitive decision-makers approach a problem with multiple methods, using trial and error to find a solution. They tend not to structure information gathering or evaluation. Organizational Models of Decision Making An organizational model of decision making is a model of decision making that takes into account the structural and political characteristics of an organization. Bureaucratic, political, and even “garbage can” models have been proposed to describe how decision making takes place in organizations. Consider each of these models. Bureaucracy Model: It is a model of decision making where decisions are shaped by the organization’s standard operating procedures (SOPs). Organizations rarely change these SOPs, because they may have to change personnel and incur risks. Although senior management and leaders are hired to coordinate and lead the organization, they are effectively trapped by the organization’s standard solutions. Political Model: In political models of decision making, what an organization does is a result of political bargains struck among key leaders and interest groups. “Garbage Can” Model: Is a model of decision making that states that organizations are not rational and that decisions are solutions that become attached to problems for accidental reasons. 3.4 Information Systems and Business Strategy What is a Strategic Information System? Strategic information systems are computer systems at any level of the organization that change goals, operations, products, services, or environmental relationships to help the organization gain a competitive advantage. Strategic information systems should be distinguished from strategic-level systems for senior managers that focus on long-term, decision-making problems. Strategic information systems can be used at all organization levels and are more far-reaching and deep rooted than the other kinds of systems we have described. Business-Level Strategy and the Value Chain Model The most common generic strategies at this level are (1) to become the low cost producer (2) to differentiate your product or service, and (3) to change the scope of competition by either enlarging the market to include global markets or narrowing the market by focusing on small niches not well served by competitors. Digital firms provide new capabilities for supporting business level strategy by managing the supply chain, building efficient customer “sense and respond” system and participating in “value webs” to deliver new products and services to the market. Leveraging Technology in the Value Chain At the business level the most common analytical tool is value chain analysis. The value chain model highlights specific activities in the business where competitive strategies can be best applied and where information systems are most likely to have a strategic impact. Primary activities are activities most directly related to the production and distribution of a firm’s products or services. It includes inbound logistics, operations, outbound logistics, sales and marketing, and service. Supporting activities make the delivery of a firm’s primary activities possible. They consist of the organization’s infrastructure, human resources, technology, and procurement. Information System Products and Services Firm can use information systems to create unique new products and services that can be easily distinguished from those of competitors. Strategic information system for product differentiation can prevent the competition from responding in kind so that firms with these differentiated products and services no longer have to compete on the basis of cost. Systems to Focus on Market Niche Businesses can create new market niches by identifying a specific target for a product or service that it can serve in a superior manner. Through focused differentiation, the firm can provide a specialized product or service for this narrow target market better than competitors. Supply Chain Management and Efficient Customer Response Systems A powerful business-level strategy available to digital firms involves linking the value chains of vendors and suppliers to the firms through linking the customer’s value chain to the firm’s value chain in an “efficient customer response system.” Firms using systems to link with customers and suppliers can reduce their inventory costs while responding rapidly to customer demands. Supply chain management systems can not only lower inventory costs but can also deliver the product or service more rapidly to the customer. Supply chain management can thus be used to create efficient customer response systems that respond to customer demands more efficiently. An efficient customer response system directly links consumer. Firm-level Strategy and Information Technology A business firm is typically a collection of businesses. Often the firm is organized financially as a collection of strategic business units, and the returns to the firm are directly tied to strategic business unit performance. The question are “How can the overall performance of these business units be achieved?” and “How can information technology contribute?” There are two answers in the literature to these questions: synergy and core competency. The idea driving synergies is that when some units can be used as inputs to other units, or two organizations can pool markets and expertise, these relationships can lower costs and generate profits. How can IT be used strategically here? One use of information technology in these synergy situations is to tie together the operations of separate business units so that they can act as a whole. Enhancing Core Competencies A core competency is an activity at which a firm is a world-class leader. Core competencies may involve being the world’s best fiber-optic manufacturer, the best miniature parts designer, the best package delivery service, or the best thin film manufacturer. Industry-level Strategy and Information Systems: Competitive Forces and Network Economics Firms together comprise an industry, such as the automotive industry, telephone, television broadcasting, and forest products industries, to name a few. The key strategic question at this level of analysis is, “how and when should we compete as opposed to cooperate with each other in the industry?” whereas most strategic analyses emphasize competition, a great deal of money can be made by cooperating with other firms in the same industry or firms in related industries. Information Partnership Information Partnership is cooperative alliance formed between two or more corporations for the purpose of sharing information to gain strategic advantage. The Competitive Forces Model It is a model used to describe the interaction of external influences, specifically threats and opportunities, which affect an organization’s strategy and ability to compete. Network Economics It is a model of strategic systems at the industry level based on the concept of a network where adding another participant entails zero marginal costs but can create much larger marginal gain. Using Systems for Competitive Advantage: Management Issues Management Strategic Transitions Strategic Transition is a movement from one level of sociotechnical system to another. This is often required when adopting strategic systems that demand changes in the social and technical elements of an organization. What Managers Can Do Managers must take the initiative to identify the types of systems that would provide a strategic advantage to the firm. Some of the important questions managers should ask themselves are as follows: What are some of the forces at work in the industry? What strategies are being used by industry leaders? How is the industry currently using information and communication technology? Which the organizations are the industry leaders in the application of information systems technology? What kinds of systems are applicable to the industry? What are the direction and nature of change within the industry? From where are the momentum and changes coming? Once the nature of information systems technology in the industry is understood, managers should turn to their organization and ask other important questions: Is the organization behind or ahead of the industry in its application of information systems? What is the current business strategic plan, and how does that plan mesh with the current strategy for information services? Does the firm have sufficient technology and capital to develop a strategic information systems initiative? Where would new information systems provide the greatest value to the firm? Are there strategic benefits from using Internet technology in operations, marketing, or customer service for this specific firm?