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MIS- Handout 3

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
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
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
bureaucracy: Combination
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
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
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
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
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
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
Political Model: In political models of decision making, what an organization
does is a result of political bargains struck among key leaders and interest
“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
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
Industry-level Strategy and Information Systems: Competitive Forces and Network
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
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?
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