The case study is on Information Systems. I have attached the book to work on the case study. Please read the instructions below: Read the chapters 12 through 13 in the textbook and select one (1) of

A STRATEGIC APPROACH Sixth Edition

Keri E. Pearlson

KP Partners

Carol S. Saunders

W.A. Franke College of Business

Northern Arizona University

Dr. Theo and Friedl Schoeller Research Center for Business and Society

Dennis F. Galletta

Katz Graduate School of Business

University of Pittsburgh, Pittsburgh, PA

EXECUTIVE EDITOR Lise Johnson

DEVELOPMENT EDITOR Jennifer Manias

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PROJECT MANAGER Gladys Soto

PROJECT SPECIALIST Nichole Urban

PROJECT ASSISTANT Anna Melhorn

EXECUTIVE MARKETING MANAGER Christopher DeJohn

ASSISTANT MARKETING MANAGER Puja Katariwala

ASSOCIATE DIRECTOR Kevin Holm

SENIOR CONTENT SPECIALIST Nicole Repasky

PRODUCTION EDITOR Loganathan Kandan

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ISBN: 978-1-119-24428-8 (BRV)

ISBN: 978-1-119-24807-1 (EVALC) Library of Congress Cataloging-in-Publication Data

Names: Pearlson, Keri E. | Saunders, Carol S. | Galletta, Dennis F.

Title: Managing and using information systems: a strategic approach / Keri

E. Pearlson, Carol S. Saunders, Dennis F. Galletta.

Description: 6th edition. | Hoboken, NJ : John Wiley & Sons, Inc., [2015] |

Includes index.

Identifiers: LCCN 2015041210 (print) | LCCN 2015041579 (ebook) | ISBN 9781119244288 (loose-leaf : alk. paper) | ISBN 9781119255208 (pdf) | ISBN 9781119255246 (epub)

Subjects: LCSH: Knowledge management. | Information technology—Management. | Management information systems. | Electronic commerce.

Classification: LCC HD30.2 .P4 2015 (print) | LCC HD30.2 (ebook) | DDC 658.4/038011—dc23

LC record available at http://lccn.loc.gov/2015041210

Printing identification and country of origin will either be included on this page and/or the end of the book. In addition, if the ISBN on this

page and the back cover do not match, the ISBN on the back cover should be considered the correct ISBN.

Printed in the United States of America 10 9 8 7 6 5 4 3 2 1

To Rusty, Russell, Janel & Kristin

To Carole, Christy, Lauren, Matt, Gracie, and Jacob

Information technology and business are becoming inextricably interwoven. I don ’ t think anybody can talk

meaningfully about one without the talking about the other.

Bill Gates

Microsoft 1

I ’ m not hiring MBA students for the technology you learn while in school, but for your ability to learn about, use

and subsequently manage new technologies when you get out .

IT Executive

Federal Express 2

Give me a sh and I eat for a day; teach me to sh and I eat for a lifetime .

Proverb

Managers do not have the luxury of abdicating participation in decisions regarding information systems (IS).

Managers who choose to do so risk limiting their future business options. IS are at the heart of virtually every

business interaction, process, and decision, especially when the vast penetration of the Web over the last 20 years

is considered. Mobile and social technologies have brought IS to an entirely new level within rms and between

individuals in their personal lives. Managers who let someone else make decisions about their IS are letting

someone else make decisions about the very foundation of their business. This is a textbook about managing and

using information written for current and future managers as a way to introduce the broader implications of the

impact of IS. The goal of this book is to assist managers in becoming knowledgeable participants in IS decisions. Becoming

a knowledgeable participant means learning the basics and feeling comfortable enough to ask questions. It does

not mean having all the answers or having a deep understanding of all the technologies out in the world today. No

text will provide managers everything they need to know to make important IS decisions. Some texts instruct on

the basic technical background of IS. Others discuss applications and their life cycles. Some take a comprehensive

view of the management information systems (MIS) eld and offer readers snapshots of current systems along with

chapters describing how those technologies are designed, used, and integrated into business life. This book takes a different approach. It is intended to provide the reader a foundation of basic concepts relevant

to using and managing information. This text is not intended to provide a comprehensive treatment on any one

aspect of MIS, for certainly each aspect is itself a topic of many books. This text is not intended to provide readers

enough technological knowledge to make them MIS experts. It is not intended to be a source of discussion of any

particular technology. This text is written to help managers begin to form a point of view of how IS will help or

hinder their organizations and create opportunities for them. The idea for this text grew out of discussions with colleagues in the MIS area. Many faculties use a series of

case studies, trade and popular press readings, and Web sites to teach their MIS courses. Others simply rely on one

of the classic texts, which include dozens of pages of diagrams, frameworks, and technologies. The initial idea for

this text emerged from a core MIS course taught at the business school at the University of Texas at Austin. That

course was considered an “appetizer” course—a brief introduction into the world of MIS for MBA students. The

course had two main topics: using information and managing information. At the time, there was no text like this

Preface

Bill Gates, Business @ the Speed of Thought. New York: Warner Books, Inc. 1999.

2 Source: Private conversation with one of the authors.

one; hence, students had to purchase thick reading packets made up of articles and case studies to provide them the

basic concepts. The course was structured to provide general MBA students enough knowledge of the MIS eld so

that they could recognize opportunities to use the rapidly changing technologies available to them. The course was

an appetizer to the menu of specialty courses, each of which went much more deeply into the various topics. But

completion of the appetizer course meant that students were able to feel comfortable listening to, contributing to, and ultimately participating in IS decisions. Today, many students are digital natives—people who have grown up using information technologies (IT) all

of their lives. That means that students come to their courses with signicantly more knowledge about things such

as tablets, apps, personal computers, smartphones, texting, the Web, social networking, le downloading, online

purchasing, and social media than their counterparts in school just a few years ago. This is a signicant trend

that is projected to continue; students will be increasingly knowledgeable the personal use of technologies. That

knowledge has begun to change the corporate environment. Today’s digital natives expect to nd in corporations

IS that provide at least the functionality they have at home. At the same time, these users expect to be able to work

in ways that take advantage of the technologies they have grown to depend on for social interaction, collaboration,

and innovation. We believe that the basic foundation is still needed for managing and using IS, but we understand

that the assumptions and knowledge base of today’s students is signicantly different. Also different today is the vast amount of information amassed by rms, sometimes called the “big data” prob-

lem. Organizations have gured out that there is an enormous amount of data around their processes, their interac-

tions with customers, their products, and their suppliers. These organizations also recognize that with the increase

in communities and social interactions on the Web, there is additional pressure to collect and analyze vast amounts

of unstructured information contained in these conversations to identify trends, needs, and projections. We believe

that today’s managers face an increasing amount of pressure to understand what is being said by those inside and

outside their corporations and to join those conversations reasonably and responsibly. That is signicantly different

from just a few years ago. This book includes an introduction, 13 chapters of text and mini cases, and a set of case studies, supplemental

readings, and teaching support on a community hub at http://pearlsonandsaunders.com. The Hub provides faculty

members who adopt the text additional resources organized by chapter, including recent news items with teaching

suggestions, videos with usage suggestions, blog posts and discussions from the community, class activities, addi-

tional cases, cartoons, and more. Supplemental materials, including longer cases from all over the globe, can be

found on the Web. Please visit http://www.wiley.com/college/pearlson or the Hub for more information. The introduction to this text defends the argument presented in this preface that managers must be knowledge-

able participants in making IS decisions. The rst few chapters build a basic framework of relationships among

business strategy, IS strategy, and organizational strategy and explore the links among them. The strategy chapters

are followed by ones on work design and business processes that discuss the use of IS. General managers also need

some foundation on how IT is managed if they are to successfully discuss their next business needs with IT pro-

fessionals who can help them. Therefore, the remaining chapters describe the basics of information architecture

and infrastructure, IT security, the business of IT, the governance of the IS organization, IS sourcing, project

management, business analytics, and relevant ethical issues. Given the acceleration of security breaches, readers will nd a new chapter on IS security in this sixth edition of

the text. Also, the material on analytics and “big data” has been extensively updated to reect the growing impor-

tance of the topic. Further, the chapter on work design has been reorganized and extensively revised. Each of the

other chapters has been revised with newer concepts added, discussions of more current topics eshed out, and old,

outdated topics removed or at least their discussion shortened. Similar to the fth edition, every chapter begins with a navigation “box” to help the reader understand the ow

and key topics of the chapter. Further, most chapters continue to have a Social Business Lens or a Geographic Lens

feature. The Social Business Lens feature reects on an issue related to the chapter’s main topic but is enabled by or

fundamental to using social technologies in the enterprise. The Geographic Lens feature offers a single idea about

a global issue related to the chapter’s main topic. No text in the eld of MIS is completely current. The process of writing the text coupled with the publication

process makes a book somewhat out‐of‐date prior to delivery to its audience. With that in mind, this text is written

to summarize the “timeless” elements of using and managing information. Although this text is complete in and

of itself, learning is enhanced by combining the chapters with the most current readings and cases. Faculty are

encouraged to read the news items on the faculty Hub before each class in case one might be relevant to the topic of

the day. Students are encouraged to search the Web for examples related to topics and current events and bring them

into the discussions of the issues at hand. The format of each chapter begins with a navigational guide, a short case

study, and the basic language for a set of important management issues. These are followed by a set of managerial

concerns related to the topic. The chapter concludes with a summary, key terms, a set of discussion questions, and case studies. Who should read this book? General managers interested in participating in IS decisions will nd this a good

reference resource for the language and concepts of IS. Managers in the IS eld will nd the book a good resource

for beginning to understand the general manager’s view of how IS affect business decisions. And IS students will

be able to use the book’s readings and concepts as the beginning in their journey to become informed and success-

ful businesspeople. The information revolution is here. Where do you t in?

Keri E. Pearlson, Carol S. Saunders, and Dennis F. Galletta

Books of this nature are written only with the support of many individuals. We would like to personally thank

several individuals who helped with this text. Although we ’ ve made every attempt to include everyone who helped

make this book a reality, there is always the possibility of unintentionally leaving some out. We apologize in

advance if that is the case here. Thank you goes to Dr. William Turner of LeftFour , in Austin, Texas, for help with the infrastructure and

architecture concepts and to Alan Shimel, Editor‐in‐Chief at DevOps.com for initial ideas for the new security

chapter. We also want to acknowledge and thank pbwiki.com. Without its incredible and free wiki, we would have been

relegated to e‐mailing drafts of chapters back and forth, or saving countless les in an external drop box without

any opportunity to include explanations or status messages. For this edition, as with earlier editions, we wanted to

use Web 2.0 tools as we wrote about them. We found that having used the wiki for our previous editions, we were

able to get up and running much faster than if we had to start over without the platform. We have been blessed with the help of our colleagues in this and in previous editions of the book. They

helped us by writing cases and reviewing the text. Our thanks continue to go out to Jonathan Trower, Espen

Andersen, Janis Gogan, Ashok Rho, Yvonne Lederer Antonucci, E. Jose Proenca, Bruce Rollier, Dave Oliver, Celia

Romm, Ed Watson, D. Guiter, S. Vaught, Kala Saravanamuthu, Ron Murch, John Greenwod, Tom Rohleder, Sam

Lubbe, Thomas Kern, Mark Dekker, Anne Rutkowski, Kathy Hurtt, Kay Nelson, Janice Sipior, Craig Tidwell, and

John Butler. Although we cannot thank them by name, we also greatly appreciate the comments of the anonymous

reviewers who have made a mark on this edition. The book would not have been started were it not for the initial suggestion of a wonderful editor in 1999 at John

Wiley & Sons, Beth Lang Golub. Her persistence and patience helped shepherd this book through many previous

editions. We also appreciate the help of our current editor, Lise Johnson. Special thanks go to Jane Miller, Gladys

Soto, Loganathan Kandan, and the conscientious JaNoel Lowe who very patiently helped us through the revision

process. We also appreciate the help of all the staff at Wiley who have made this edition a reality. We would be remiss if we did not also thank Lars Linden for the work he has done on the Pearlson and Saunders

Faculty Hub for this book. Our vision included a Web‐based community for discussing teaching ideas and post-

ing current articles that supplement this text. Lars made that vision into a reality starting with the last edition and

continuing through the present. Thank you, Lars! From Keri: Thank you to my husband, Yale, and my daughter, Hana, a business and computer science student at

Tulane University. Writing a book like this happens in the white space of our lives—the time in between everything

else going on. This edition came due at a particularly frenetic time, but they listened to ideas, made suggestions, and

celebrated the book ’ s completion with us. I know how lucky I am to have this family. I love you guys! From Carol: I would like to thank the Dr. Theo and Friedl Schoeller Research Center of Business and Society for

their generous support of my research. Rusty, thank you for being my compass and my release valve. I couldn ’ t do

it without you. Paraphrasing the words of an Alan Jackson song (“Work in Progress”): I may not be what you want

me to be, but I ’ m trying really hard. Just be patient because I ’ m a work in progress. I love you, Kristin, Russell,

and Janel very much! From Dennis: Thanks to my terri c family: my wife Carole, my daughters Christy and Lauren, and my grand-

daughter Gracie. Also thanks to Matt and Jacob, two lovable guys who take wonderful care of my daughters. Finally,

thanks to our parents and sisters ’ families. We are also blessed with a large number of great, caring neighbors whom

we see quite often. I love you all, and you make it all worthwhile!

Acknowledgments

Dr. Keri E. Pearlson is President of KP Partners , an advisory services rm working with business leaders on issues

related to the strategic use of information systems (IS) and organizational design. She is an entrepreneur, teacher,

researcher, consultant, and thought leader. Dr. Pearlson has held various positions in academia and industry. She

has been a member of the faculty at the Graduate School of Business at the University of Texas at Austin where she

taught management IS courses to MBAs and executives and at Babson College where she helped design the popular

IS course for the Fast Track MBA program. Dr. Pearlson has held positions at the Harvard Business School, CSC, nGenera (formerly the Concours Group), AT&T , and Hughes Aircraft Company . While writing this edition, she was

the Research Director for the Analytics Leadership Consortium at the International Institute of Analytics and was

named the Leader of the Year by the national Society of Information Management (SIM) 2014. Dr. Pearlson is coauthor of Zero Time: Providing Instant Customer Value—Every Time, All the Time (John

Wiley, 2000). Her work has been published in numerous places including Sloan Management Review, Academy

of Management Executive, and Information Resources Management Journal . Many of her case studies have been

published by Harvard Business Publishing and are used all over the world. She currently writes a blog on issues at

the intersection of IT and business strategy. It ’ s available at www.kppartners.com. Dr. Pearlson holds a Doctorate in Business Administration (DBA) in Management Information Systems from

the Harvard Business School and both a Master ’ s Degree in Industrial Engineering Management and a Bachelor ’ s

Degree in Applied Mathematics from Stanford University. Dr. Carol S. Saunders is Research Professor at the W. A. Franke College of Business, Northern Arizona

University in Flagstaff, Arizona, and is a Schoeller Senior Fellow at the Friedrich‐Alexander University of

Erlangen‐Nuremberg, Germany. She served as General Conference Chair of the International Conference on

Information Systems (ICIS) in 1999 and as Program Co‐Chair of the Americas Conference of Information

Systems (AMCIS) in 2015. Dr. Saunders was the Chair of the ICIS Executive Committee in 2000. For three

years, she served as Editor‐in‐Chief of MIS Quarterly . She is currently on the editorial boards of Journal

of Strategic Information Systems and Organization Science and serves on the advisory board of Business &

Information Systems Engineering. Dr. Saunders has been recognized for her lifetime achievements by the

Association of Information Systems (AIS) with a LEO award and by the Organizational Communication and

Information Systems Division of the Academy of Management. She is a Fellow of the AIS. Dr. Saunders ’ current research interests include the impact of IS on power and communication, overload,

virtual teams, time, sourcing, and interorganizational linkages. Her research is published in a number of journals including MIS Quarterly, Information Systems Research, Journal of MIS, Communications of the ACM, Journal

of Strategic Information Systems, Journal of the AIS, Academy of Management Journal, Academy of Management

Review, Communications Research , and Organization Science .

Dr. Dennis F. Galletta is Professor of Business Administration at the Katz Graduate School of Business,

University of Pittsburgh in Pennsylvania. He is also the Director of the Katz School ’ s doctoral program and has

taught IS Management graduate courses in Harvard ’ s summer program each year since 2009. He obtained his

doctorate from the University of Minnesota in 1985 and is a Certi ed Public Accountant. Dr. Galletta served as

President of the Association of Information Systems (AIS) in 2007. Like Dr. Saunders, he is both a Fellow of

the AIS and has won a LEO lifetime achievement award. He was a member of the AIS Council for ve years.

He also served in leadership roles for the International Conference on Information Systems (ICIS): Program

Co‐Chair in 2005 (Las Vegas) and Conference Co‐Chair in 2011 (Shanghai); as Program Co‐Chair for the

About the Authors

Americas Conference on Information Systems (AMCIS) in 2003 (Tampa, Florida) and Inaugural Conference

Chair in 1995 (Pittsburgh). The Pittsburgh conference had several “rsts” for an IS conference, including the rst

on‐line submissions, reviews, conference registration and payment, placement service, and storage of all papers

in advance on a website. Dr. Galletta served as ICIS Treasurer from 1994 to 1998 and Chair of the ICIS Execu-

tive Committee in 2012. He taught IS courses on the Fall 1999 Semester at Sea voyage (Institute for Shipboard

Education) and established the concept of Special Interest Groups in AIS in 2000. In 2014, he won an Emerald

Citation of Excellence for a co‐authored article that reached the top 50 in citations and ratings from the elds of

management, business, and economics. Dr. Galletta’s current research addresses online and mobile usability and behavioral security issues such as

phishing, protection motivation, and antecedents of security‐related decision making. He has published his research in journals such as Management Science; MIS Quarterly; Information Systems Research; Journal of MIS; European

Journal of Information Systems; Journal of the AIS; Communications of the ACM; Accounting, Management, and

Information Technologies; Data Base; and Decision Sciences and in proceedings of conferences such as ICIS,

AMCIS, and the Hawaii International Conference on Systems Sciences . Dr. Galletta’s editorship includes working

as current and founding Coeditor in Chief for AIS Transactions on Human‐Computer Interaction and on editorial

boards at journals such as MIS Quarterly, Information Systems Research, Journal of MIS, and Journal of the AIS.

He is currently on the Pre‐eminent Scholars Board of Data Base. He won a Developmental Associate Editor Award

at the MIS Quarterly in 2006. And during the off‐hours, Dr. Galletta’s fervent hobby and obsession is digital pho-

tography, often squinting through his eyepiece to make portrait, macro, Milky Way, and lightning photos when he should be writing.

Contents

Preface iv Acknowledgments vii

About the Authors viiiIntroduction 1 The Case for Participating in Decisions about Information Systems 2

What If a Manager Doesn’t Participate? 5

Skills Needed to Participate Effectively in Information Technology Decisions 6

Basic Assumptions 8

Economics of Information versus Economics of Things 12

Social Business Lens 14 Summary 15

Key Terms 16

1 The Information Systems Strategy Triangle 17

Brief Overview of Business Strategy Frameworks 19

Business Models versus Business Strategy 21

Brief Overview of Organizational Strategies 25

Brief Overview of Information Systems Strategy 26

Social Business Lens: Building a Social Business Strategy 27Summary 28

Key Terms 29

Discussion Questions 29

Case Study 1‐1 Lego 30Case Study 1‐2 Google 31

2 Strategic Use of Information Resources 33

Evolution of Information Resources 34

Information Resources as Strategic Tools 36

How Can Information Resources Be Used Strategically? 37

Sustaining Competitive Advantage 43

Social Business Lens: Social Capital 47

Strategic Alliances 47Risks 49

Geographic Box: Mobile‐Only Internet Users Dominate Emerging Countries 50

Co‐Creating IT and Business Strategy 50

Summary 51

Key Terms 51

Discussion Questions 51

Case Study 2‐1 Groupon 52

Case Study 2‐2 Zipcar 53

3 Organizational Strategy and Information Systems 55Information Systems and Organizational Design 58

Social Business Lens: Social Networks 63

Information Systems and Management Control Systems 63

Information Systems and Culture 66

Geographic Lens: Does National Culture Affect Firm Investment in IS Training? 70Summary 71

Key Terms 71

Discussion Questions 71

Case Study 3‐1 The Merger of Airtran by Southwest Airlines: Will the Organizational Cultures Merge? 72

Case Study 3‐2 The FBI 73

4 Digital Systems and the Design of Work 75Work Design Framework 77

How Information Technology Changes the Nature of Work 78

Social Business Lens: Activity Streams 84

Where Work Is Done and Who Does It: Mobile and Virtual Work Arrangements 86

Geographic Lens: How Do People Around the World Feel About Working Remotely? 88

Geographic Lens: Who Telecommutes? A Look at Global Telecommuting Habits 89

Gaining Acceptance for IT‐Induced Change 94Summary 96

Key Terms 97

Discussion Questions 97

Case Study 4‐1 Trash and Waste Pickup Services, Inc. 97

Case Study 4‐2 Social Networking: How Does IBM Do It? 98

5 Information Systems and Business Transformation 99Silo Perspective versus Business Process Perspective 100

Building Agile and Dynamic Business Processes 104

Changing Business Processes 105

Workflow and Mapping Processes 107

Integration versus Standardization 109

Enterprise Systems 110

Geographic Lens: Global vs. Local ERPs 113

Social Business Lens: Crowdsourcing Changes Innovation Processes 118Summary 119

Key Terms 120

Discussion Questions 120

Case Study 5‐1 Santa Cruz Bicycles 121

Case Study 5‐2 Boeing 787 Dreamliner 122

6 Architecture and Infrastructure 124From Vision to Implementation 125

The Leap from Strategy to Architecture to Infrastructure 126

From Strategy to Architecture to Infrastructure: An Example 133

Architectural Principles 135

Enterprise Architecture 136

Virtualization and Cloud Computing 137

Other Managerial Considerations 139

Social Business Lens: Building Social Mobile Applications 143Summary 144

Key Terms 144

Discussion Questions 145

Case Study 6‐1 Enterprise Architecture at American Express 145

Case Study 6‐2 The Case of Extreme Scientists 146

7 Security 147IT Security Decision Framework 149

Breaches and How They Occurred 151

The Impossibility of 100% Security 154

What Should Management Do? 155Summary 162

Key Terms 163

Discussion Questions 163

Case Study 7-1 The Aircraft Communications Addressing and Reporting System (ACARS) 163

Case Study 7-2 Sony Pictures: The Criminals Won 164

8 The Business of Information Technology 165Organizing to Respond to Business: A Maturity Model 167

Understanding the IT Organization 168

What a Manager Can Expect from the IT Organization 168

What the IT Organization Does Not Do 170

Chief Information Officer 171

Building a Business Case 173

IT Portfolio Management 175

Valuing IT Investments 176

Monitoring IT Investments 177

Funding IT Resources 182

How Much Does IT Cost? 184Summary 187

Key Terms 188

Discussion Questions 188

Case Study 8‐1 KLM Airlines 189

Case Study 8‐2 Balanced Scorecards at BIOCO 190

9 Governance of the Information Systems Organization 191IT Governance 192

Decision‐Making Mechanisms 199

Governance Frameworks for Control Decisions 200

Social Business Lens: Governing the Content 204Summary 205

Key Terms 205

Discussion Questions 205

Case Study 9‐1 IT Governance at University of the Southeast 205

Case Study 9‐2 The “MyJohnDeere” Platform 207

10 Information Systems Sourcing 208Sourcing Decision Cycle Framework 209

Social Business Lens: Crowdsourcing 214

Geographic Lens: Corporate Social Responsibility 220

Outsourcing in the Broader Context 224Summary 225

Key Terms 225

Discussion Questions 225

Case Study 10‐1 Crowdsourcing at AOL 225

Case Study 10‐2 Altia Business Park 226

11 Managing IT Projects 228What Defines a Project? 230

What Is Project Management? 231

Organizing for Project Management 232

Project Elements 233

IT Projects 239

IT Project Development Methodologies and Approaches 240

Social Business Lens: Mashups 247

Managing IT Project Risk 247Summary 253

Key Terms 254

Discussion Questions 254

Case Study 11‐1 Implementing Enterprise Change Management at Southern Company 254

Case Study 11‐2 Dealing with Traffic Jams in London 255

12 Business Intelligence, Knowledge Management, and Analytics 258Competing with Business Analytics 259

Knowledge Management, Business Intelligence, and Business Analytics 260

Data, Information, and Knowledge 261

Knowledge Management Processes 264

Business Intelligence 264

Components of Business Analytics 265

Big Data 268

Social Media Analytics 269

Social Business Lens: Personalization and Real‐Time Data Streams 271

Geographic Lens: When Two National Views of Intellectual Property Collide 272

Caveats for Managing Knowledge and Business Intelligence 274Summary 274

Key Terms 275

Discussion Questions 275

Case Study 12‐1 Stop & Shop’s Scan It! App 275

Case Study 12‐2 Business Intelligence at CKE Restaurants 276

13 Privacy and Ethical Considerations in Information Management 278

Responsible Computing 280

Corporate Social Responsibility 283

PAPA: Privacy, Accuracy, Property, and Accessibility 284

Social Business Lens: Personal Data 289

Geographic Lens: Should Subcultures Be Taken into Account When Trying to Understand National

Attitudes Toward Information Ethics? 292

Green Computing 292Summary 293

Key Terms 294

Discussion Questions 294

Case Study 13‐1 Ethical Decision Making 295

Case Study 13‐2 Midwest Family Mutual Goes Green 297

Glossary 299

Index

313

Introduction

Why do managers need to understand and participate in the information systems decisions of their

organizations? After all, most corporations maintain entire departments dedicated to the management

of information systems (IS). These departments are staffed with highly skilled professionals devoted

to the eld of technology. Shouldn’t managers rely on experts to analyze all the aspects of IS and

to make the best decisions for the organization? The answer to that question is an emphatic “no.” Managing information is a critical skill for success in today ’ s business environment. All decisions

made by companies involve, at some level, the management and use of IS and the interpretation of

data from the business and its environment. Managers today need to know about their organization ’ s

capabilities and uses of information as much as they need to understand how to obtain and budget nancial resources. The ubiquity of personal devices such as smart phones, laptops, and tablets and

of access to apps within corporations and externally over the Internet, highlights this fact. Today ’ s

technologies form the backbone for virtually all business models. This backbone easily crosses

oceans, adding the need for a global competency to the manager ’ s skill set. Further, the proliferation

of supply chain partnerships and the vast amount of technology available to individuals outside of

the corporation have extended the urgent need for business managers to be involved in information

systems decisions. In addition, the availability of seemingly free (or at least very inexpensive) appli-

cations, collaboration tools, and innovation engines in the consumer arena has put powerful tools in

everyone ’ s hands, increasing the dif culty of ensuring that corporate systems are robust, secure, and

protected. A manager who doesn ’ t understand the basics of managing and using information can ’ t

be successful in this business environment. The majority of U.S. adults own a smart phone and access online apps. According to the Pew

Research Center , in 2014, 90% of U.S. adults had a cell phone of some kind, and 87% of American adults used the Internet. 1

Essentially the use of these types of devices implies that individuals now

manage a “personal IS” and make decisions about usage, data, and applications. Doesn ’ t that give

them insight into managing information systems in corporations? Students often think they are

experts in corporate IS because of their personal experience with technology. Although there is some

truth in that perspective, it ’ s a very dangerous perspective for managers to take. Certainly knowing

about interesting apps, being able to use a variety of technologies for different personal purposes,

and being familiar with the ups and downs of networking for their personal information systems pro-

vide some experience that is useful in the corporate setting. But in a corporate setting, information

systems must be enterprise‐ready. They must be scalable for a large number of employees; they

must be delivered in an appropriate manner for the enterprise; they must be managed with corpo-

rate guidelines and appropriate governmental regulations in mind. Issues like security, privacy, risk,

support, and architecture take on a new meaning within an enterprise, and someone has to manage

them. Enterprise‐level management and use of information systems require a unique perspective and

a different skill set.

1 Internet Use and Cell Phone Demographics, http://www.pewinternet.org/data‐trend/internet‐use/internet‐use‐over‐time (access ed

August 18, 2015).

Consider the now‐historic rise of companies such as Amazon.com, Google, and Zappos. Amazon.com began as

an online bookseller and rapidly outpaced traditional brick‐and‐mortar businesses like Barnes and Noble, Borders,

and Waterstones. Management at the traditional companies responded by having their IS support personnel build

Web sites to compete. But upstart Amazon.com moved ahead, keeping its leadership position on the Web by lever-

aging its business model into other marketplaces, such as music, electronics, health and beauty products, lawn and

garden products, auctions, tools and hardware, and more. It cleared the protability hurdle by achieving a good

mix of IS and business basics: capitalizing on operational efciencies derived from inventory software and smarter

storage, cost cutting, and effectively partnering with such companies as Toys “R” Us Inc. and Target Corporation. 2

More recently, Amazon.com changed the basis of competition in another market, but this time it was the Web ser-

vices business. Amazon.com Web services offers clients the extensive technology platform used for Amazon.com

but in an on‐demand fashion for developing and running the client’s own applications. Shoe retailer Zappos.com

challenged Amazon’s business model, in part by coupling a social business strategy with exemplary service and

sales. It was so successful that Amazon.com bought Zappos. Likewise, Google built a business that is revolutionizing the way information is found. Google began in 1999

as a basic search company but its managers quickly learned that its unique business model could be leveraged

for future success in seemingly unrelated areas. The company changed the way people think about Web content

by making it available in a searchable format with an incredibly fast response time and in a host of languages.

Further, Google’s keyword‐targeted advertising program revolutionized the way companies advertise. Then Google

expanded, offering a suite of Web‐based applications, such as calendaring, ofce tools, e‐mail, collaboration, shopping, and maps and then enhanced the applications further by combining them with social tools to increase

collaboration. Google Drive is one of the most popular le‐sharing tools and Gmail one of the most popular email

apps. In 2015, Google’s mission was to “organize the world’s information and make it universally accessible and

useful.” It is offering its customers very inexpensive ber connections. In so doing, Google further expanded into infrastructure and on‐demand services. 3

These and other online businesses are able to succeed where traditional companies have not, in part because their

management understood the power of information, IS, and the Web. These exemplary online businesses aren’t suc-

ceeding because their managers could build Web pages or assemble an IS network. Rather, the executives in these

new businesses understand the fundamentals of managing and using information and can marry that knowledge

with a sound, unique business vision to dominate their intended market spaces. The goal of this book is to provide the foundation to help the general business manager become a knowledge-

able participant in IS decisions because any IS decision in which the manager doesn’t participate can greatly affect

the organization’s ability to succeed in the future. This introduction outlines the fundamental reasons for taking the

initiative to participate in IS decisions. Moreover, because effective participation requires a unique set of manage-

rial skills, this introduction identies the most important ones. These skills are helpful for making both IS decisions

and all business decisions. We describe how managers should participate in the decision‐making process. Finally,

this introduction presents relevant models for understanding the nature of business and information systems. These

models provide a framework for the discussions that follow in subsequent chapters.

The Case for Participating in Decisions about Information Systems

In today’s business environment, maintaining a back‐ofce view of technology is certain to cost market share and

could ultimately lead to the failure of the organization. Managers who claim ignorance of IS can damage their

reputation. Technology has become entwined with all the classic functions of business—operations, marketing,

accounting, nance—to such an extent that understanding its role is necessary for making intelligent and effec-

tive decisions about any of them. Furthermore, a general understanding of key IS concepts is possible without the

extensive technological knowledge required just a few years ago. Most managers today have personal technology

Robert Hof, “How Amazon Cleared the Profitability Hurdle” (February 4, 2002), http://www.bloomberg.com/bw/stories/2002-02-03/h ow-amazon-

cleared-the-profitability-hurdle (accessed on October 29, 2015).

3 For more information on the latest services by these two companies, see http://aws.amazon.com/ec2 and http://www.google.com/enterprise/cloud/.

such as a smart phone or tablet that is more functional than many corporate‐supported personal computers provided

by enterprises just a few years ago. In fact, the proliferation of personal technologies makes everyone a “pseudo‐

expert.” Each individual must manage applications on smart phones, make decisions about applications to purchase,

and procure technical support when the systems fail. Finally, with the robust number of consumer applications

available on the Web, many decisions historically made by the IS group are increasingly being made by individuals

outside that group, sometimes to the detriment of corporate objectives. Therefore, understanding basic fundamentals about using and managing information is worth the investment of

time. The reasons for this investment are summarized in Figure I-1 and are discussed next.

A Business View of Critical Resources

Information technology (IT) is a critical resource for today’s businesses. It both supports and consumes a signicant

amount of an organization’s resources. Just like the other three major types of business resources—people, money,

and machines—it needs to be managed wisely. IT spending represents a signicant portion of corporate budgets. Worldwide IT spending topped $3.7 trillion in

2014. It is projected to continue to increase. 4

A Gartner study of where this money goes groups spending into ve

categories including devices (e.g., PCs, tablets, and mobile phones), data center systems (e.g., network equipment,

servers, and storage equipment), enterprise software and apps (e.g., companywide software applications), IT ser-

vices (e.g., support and consulting services), and telecommunications (e.g., the expenses paid to vendors for voice and data services). Resources must return value, or they will be invested elsewhere. The business manager, not the IS specialist,

decides which activities receive funding, estimates the risk associated with the investment, and develops metrics

for evaluating the investment’s performance. Therefore, the business manager needs a basic grounding in managing

and using information. On the ip side, IS managers need a business view to be able to explain how technology

impacts the business and what its trade‐offs are.

People and Technology Work Together

In addition to nancial issues, managers must know how to mesh technology and people to create effective work

processes. Collaboration is increasingly common, especially with the rise of social networking. Companies are

reaching out to individual customers using social technologies such as Facebook, Twitter, Reddit, Renren, YouTube,

and numerous other tools. In fact, Web 2.0 describes the use of the World Wide Web applications that incorporate

information sharing, user‐centered design, interoperability, and collaboration among users. Technology facilitates

FIGURE I-1

Reasons why business managers should participate in information systems decisions.

Reasons

IS must be managed as a critical resource since it permeates almost every aspect of business.

IS enable change in the way people work both inside and outside of the enterprise.

IS are at the heart of integrated Internet‐based solutions that are replacing standard business processes.

IS enable or inhibit business opportunities and new strategies.

IS can be used to combat business challenges from competitors.

IS enable customers to have greater pull on businesses and communities by giving them new options for voicing their

concerns and opinions using social media.

IS can support data‐driven decision making.

IS can help ensure the security of key assets.

http://www.gartner.com/newsroom/id/2959717/ (accessed March 5, 2015).

the work that people do and the way they interact with each other. Appropriately incorporating IS into the design

of a business model enables managers to focus their time and resources on issues that bear directly on customer

satisfaction and other revenue‐ and prot‐generating activities. Adding a new IS to an existing organization, however, requires the ability to manage change. Skilled business

managers must balance the benets of introducing new technology with the costs associated with changing the

existing behaviors of people in the workplace. There are many choices of technology solutions, each with a different impact. Managers’ decisions must incorporate a clear understanding of the consequences. Making this assessment

doesn’t require detailed technical knowledge. It does require an understanding of short‐term and long‐term con-

sequences risk mitigation, and why adopting new technology may be more appropriate in some instances than in

others. Understanding these issues also helps managers know when it may prove effective to replace people with technology at certain steps in a process.

Integrating Business with Information Systems

IS are integrated with almost every aspect of business and have been for quite some time. For example, the CTO of

@WalmartLabs, Jeremy King, wrote in a blog,

There used to be a big distinction between tech companies: those that develop enterprise technology for businesses,

and the global companies that depend on those products. But that distinction is now diminishing for this simple reason:

every global company is becoming a tech company. . . . w re seeing technology as a critical component for business success. 5

Walmart built platforms to support all of its ecommerce and digital shopping experiences around the world.

Walmart’s teams created a new search engine to enable engaging and efcient ways for on‐line customers to nd

items in inventory. IS placed information in the hands of Walmart associates so that decisions could be made closer

to the customer. IS simplied organizational activities and processes such as moving goods, stocking shelves, and

communicating with suppliers. For example, handheld scanners provide oor associates with immediate and real‐

time access to inventory in their store and the ability to locate items in surrounding stores, if necessary.

Opportunities and New Strategies Derived from Rapid Changes in Technology

The proliferation of new technologies creates a business environment lled with opportunities. The rate of adop-

tion of these new technologies has increased due in part to the changing demographics of the workforce and the

integration of “ digital natives,” individuals whose entire lives have been lived in an era with Internet availability.

Therefore digital natives are completely uent in the use of personal technologies and the Web. Even today, inno-

vative uses of the Internet produce new types of online businesses that keep every manager and executive on alert.

New business opportunities spring up with little advance warning. The manager’s role is to frame these oppor-

tunities so that others can understand them, evaluate them against existing business needs and choices, and then

pursue those that t with an articulated business strategy. The quality of the information at hand affects the quality

of both decisions and their implementation. Managers must develop an understanding of what information is cru-

cial to the decisions, how to get it, and how to use it. They must lead the changes driven by IS.

Competitive Challenges

Competitors come from both expected and unexpected places. General managers are in the best position to see the

emerging threats and utilize IS effectively to combat ever‐changing competitive challenges. Further, general man-

agers are often called on to demonstrate a clear understanding of how their own technology programs and products

5 Jeremy King, “Why Every Company Is a Tech Company” (November 21, 2013), http://www.walmartlabs.com/2013/11/21/why‐every‐compan y‐is‐a‐

tech‐company‐by‐jeremy‐king‐cto‐of‐walmartlabs (accessed August 18, 2015).

compare with those of their competitors. A deep understanding of the capabilities of the organization coupled with

existing IS can create competitive advantages and change the competitive landscape for the entire industry. Customer Pull

With the emergence of social networks like Facebook, microblogs like Twitter, and other Web applications like

Yelp, businesses have had to redesign their existing business models to account for the change in power now

wielded by customers and others in their communities. Social media and other web apps have given powerful

voices to customers and communities, and businesses must listen. Redesigning the customer experience when inter-

acting with a company is paramount for many managers and the key driver is IS. Social IT enables new and often

deeper relationships with a large number of customers, and companies are learning how to integrate and leverage

this capability into existing and new business models.

Data‐Driven Decision Making

Managers are increasingly using evidence‐based management to make decisions based on data gathered from

experiments, internal les, and other relevant sources. Data‐driven decision making, based on new techniques for

analytics, data management, and business intelligence, has taken on increased importance. Social media have cre-

ated a rich stream of real‐time data that gives managers increased insights to the impact of decisions much faster

than traditional systems. Mid‐course corrections are much easier to make. Predictive and prescriptive analytics give

suggestions that are eerily close to what happens. Big data stores can be mined for insights that were unavailable

with traditional IS, creating competitive advantage for companies with the right tools and techniques. Securing Key Assets

As the use of the Internet grows, so does the opportunity for new and unforeseen threats to company assets. Taking measures to ensure the security of these assets is increasingly important. But decisions about security measures

also impact the way IS can be used. It’s possible to put so much security around IT assets that they are locked down

in a manner that gets in the way of business. At the same time, too little security opens up the possibility of theft,

hacking, phishing, and other Web‐based mischief that can disrupt business. Managers must be involved in decisions

about risk and security to ensure that business operations are in sync with the resulting security measures.

What If a Manager Doesn’t Participate?

Decisions about IS directly affect the prots of a business. The basic formula Prot = Revenue − Expenses can

be used to evaluate the impact of these decisions. Adopting the wrong technologies can cause a company to miss

business opportunities and any revenues those opportunities would generate. For example, inadequate IS can cause

a breakdown in servicing customers, which hurts sales. Poorly deployed social IT resources can badly damage

the reputation of a strong brand. On the expense side, a miscalculated investment in technology can lead to over-

spending and excess capacity or underspending and restricted opportunity. Inefcient business processes sustained

by ill‐tting IS also increase expenses. Lags in implementation or poor process adaptation reduces prots and there-

fore growth. IS decisions can dramatically affect the bottom line. Failure to consider IS strategy when planning business strategy and organizational strategy leads to one of three

business consequences: (1) IS that fail to support business goals, (2) IS that fail to support organizational systems,

and (3) a misalignment between business goals and organizational capabilities. These consequences are discussed

briey in the following section and in more detail in later chapters. The driving questions to consider are the poten-

tial effects on an organization’s ability to achieve its business goals. How will the consequences impact the way

people work? Will the organization still be able to implement its business strategy?

Information Systems Must Support Business Goals

IS represent a major investment for any rm in today’s business environment. Yet poorly chosen IS can actually

become an obstacle to achieving business goals. The results can be disastrous if the systems do not allow the orga-

nization to realize its goals. When IS lack the capacity needed to collect, store, and transfer critical information for

the business, decisions can be impacted and options limited. Customers will be dissatised or even lost. Production

costs may be excessive. Worst of all, management may not be able to pursue desired business directions that are

blocked by inappropriate IS. Victoria’s Secret experienced this problem when a Superbowl ad promoting an online

fashion show generated so many inquiries to its Web site that the Web site crashed. Spending large amounts of

money on the advertisement was wasted when potential customers could not access the site. Likewise, Toys “R”

Us experienced a similar calamity when its well‐publicized Web site was unable to process and fulll orders fast

enough one holiday season. It not only lost those customers, but it also had a major customer‐relations issue to manage as a result. Information Systems Must Support Organizational Systems

Organizational systems represent the fundamental elements of a business—its people, work processes, tasks, struc-

ture, and control systems—and the plan that enables them to work efciently to achieve business goals. If the

company’s IS fail to support its organizational systems, the result is a misalignment of the resources needed to

achieve its goals. For example, it seems odd to think that a manager might add functionality to a corporate Web

site without providing the training the employees need to use the tool effectively. Yet, this mistake—and many

more costly ones—occurs in businesses every day. Managers make major IS decisions without informing all the

staff of resulting changes in their daily work. For example, an enterprise resource planning (ERP) system often

dictates how many business processes are executed and the organizational systems must change to reect the new

processes. Deploying technology without thinking through how it actually will be used in the organization—who

will use it, how they will use it, and how to make sure the applications chosen will actually accomplish what is

intended—results in signicant expense. In another example, a company may decide to block access to the Internet,

thinking that it is prohibiting employees from accessing offensive or unsecure sites. But that decision also means

that employees can’t access social networking sites that may be useful for collaboration or other Web‐based appli-

cations that may offer functionality to make the business more efcient. The general manager, who, after all, is charged with ensuring that company resources are used effectively,

must guarantee that the company’s IS support its organizational systems and that changes made in one system are

reected in the other. For example, a company that plans to allow employees to work remotely needs an information

system strategy compatible with its organizational strategy. Desktop PCs located within the corporate ofce aren’t

the right solution for a telecommuting organization. Instead, laptop computers or tablets with applications that are

accessible online anywhere and anytime and networks that facilitate information sharing are needed. Employees

may want to use tablets or smart phones remotely, too, and those entail a different set of IS processes. If the orga-

nization allows the purchase of only desktop PCs and builds systems accessible from desks within the ofce, the

telecommuting program is doomed to failure.

Skills Needed to Participate Effectively in Information

Technology Decisions

Participating in IT decisions means bringing a clear set of skills to the table. All managers are asked to take on

tasks that require different skills at different times. Those tasks can be divided into three types: visionary tasks, or

those that provide leadership and direction for the group; informational/interpersonal tasks, or those that provide

information and knowledge the group needs to be successful; and structural tasks, those that organize the group.

Figure I-2 lists basic skills required of managers who wish to participate successfully in key IT decisions. Not only

does this list emphasize understanding, organizing, planning, and solving the business needs of the organization,

but also it is an excellent checklist for all managers’ professional growth.

These skills may not look much different from those required of any successful manager, which is the main

point of this book: General managers can be successful participants in IS decisions without an extensive technical

background. General managers who understand a basic set of IS concepts and who have outstanding managerial

skills, such as those listed in Figure I-2, are ready for the digital economy.

How to Participate in Information Systems Decisions

Technical wizardry isn’t required to become a knowledgeable participant in the IS decisions of a business. Man-

agers need curiosity, creativity, and the condence to ask questions in order to learn and understand. A solid frame-

work that identies key management issues and relates them to aspects of IS provides the background needed to

participate in business IS decisions. The goal of this book is to provide that framework. The way in which managers use and manage information is

directly linked to business goals and the business strategy driving both organizational and IS decisions. Aligning

business and IS decisions is critical. Business, organizational, and information strategies are fundamentally linked in what is called the Information Systems Strategy Triangle, discussed in the next chapter. Failing to understand this

relationship is detrimental to a business. Failing to plan for the consequences in all three areas can cost a manager

his or her job. This book provides a foundation for understanding business issues related to IS from a managerial

perspective. Organization of the Book

To be knowledgeable participants, managers must know about both using and managing information. The rst

ve chapters offer basic frameworks to make this understanding easier. Chapter 1 uses the Information Systems

Strategy Triangle framework to discuss alignment of IS and the business. This chapter also provides a brief over-

view of relevant frameworks for business strategy and organizational strategy. It is provided as background for

those who have not formally studied organization theory or business strategy. For those who have studied these areas, this chapter is a brief refresher of major concepts used throughout the remaining chapters of the book.

FIGURE I-2

Skills for successful IT use by managerial role.

Managerial Role Skills

Visionary Creativity

Curiosity Condence

Focus on business solutions

Flexibility

Informational and Interpersonal Communication

ListeningInformation gathering

Interpersonal skills

Structural Project management

Analytical

OrganizationalPlanningLeading

Controlling

Subsequent chapters provide frameworks and sets of examples for understanding the links between IS and business

strategy (Chapter 2), links between IS and organizational strategy (Chapter 3), collaboration and individual work

(Chapter 4), and business processes (Chapter 5). The rest of the text covers issues related to the business manager’s role in managing IS itself. These chapters

are the building blocks of an IS strategy. Chapter 6 provides a framework for understanding the four components

of IS architecture: hardware, software, networks, and data. Chapter 7 discusses how managers might participate in

decisions about IS security. Chapter 8 focuses on the business of IT with a look at IS organization, funding models,

portfolios, and monitoring options. Chapter 9 describes the governance of IS resources. Chapter 10 explores sourc-

ing and how companies provision IS resources. Chapter 11 focuses on project and change management. Chapter 12

concerns business intelligence, knowledge management, and analytics and provides an overview of how companies

manage knowledge and create a competitive advantage using business analytics. And nally, Chapter 13 discusses

the ethical use of information and privacy. Basic Assumptions

Every book is based on certain assumptions, and understanding those assumptions makes a difference in interpret-

ing the text. The rst assumption made by this text is that managers must be knowledgeable participants in the IS

decisions made within and affecting their organizations. That means that the general manager must develop a basic

understanding of the business and technology issues related to IS. Because technology changes rapidly, this text

also assumes that today’s technology is different from yesterday’s technology. In fact, the technology available

to readers of this text today might even differ signicantly from that available when the text was being written.

Therefore, this text focuses on generic concepts that are, to the extent possible, technology independent. It provides

frameworks on which to hang more up‐to‐the‐minute technological evolutions and revolutions, such as new uses of

the Web, new social tools, or new cloud‐based services. We assume that the reader will supplement the discussions

of this text with current case studies and up‐to‐date information about the latest technology. A second, perhaps controversial, assumption is that the roles of a general manager and of an IS manager require

different skill sets and levels of technical competency. General managers must have a basic understanding of IS in

order to be a knowledgeable participant in business decisions. Without that level of understanding, their decisions

may have serious negative implications for the business. On the other hand, IS managers must have more in‐depth

knowledge of technology so they can partner with general managers who will use the IS. As digital natives take on increasingly more managerial roles in corporations, this second assumption may change—all managers may need

deeper technical understanding. But for this text, we assume a different, more technical skill set for the IS manager

and we do not attempt to provide that here. Assumptions about Management

Although many books have been written describing the activities of managers, organizational theorist Henry

Mintzberg offers a view that works especially well with a perspective relevant to IS management. Mintzberg’s

model describes management in behavioral terms by categorizing the three major roles a manager lls: interper-

sonal, informational, and decisional (see Figure I-3). This model is useful because it considers the chaotic nature of

the environment in which managers actually work. Managers rarely have time to be reective in their approaches

to problems. They work at an unrelenting pace, and their activities are brief and often interrupted. Thus, quality

information becomes even more crucial to effective decision making. The classic view is often seen as a tactical

approach to management, whereas some describe Mintzberg’s view as more strategic. Assumptions about Business

Everyone has an internal understanding of what constitutes a business, which is based on readings and experi-

ences with different rms. This understanding forms a model that provides the basis for comprehending actions,

interpreting decisions, and communicating ideas. Managers use their internal model to make sense of otherwise

FIGURE I-3 Managers’ roles.

Source: Adapted from H. Mintzberg,

The Nature of Managerial Work (New York: Harper & Row, 1973).

Type of Roles Manager’s Roles IS Examples

Interpersonal Figurehead CIO greets touring dignitaries. Leader IS manager puts in long hours to help motivate project team to complete project on schedule in an environment of heavy budget cuts.

Liaison CIO works with the marketing and human resource vice presidents to make sure that the reward and compensation system is changed to

encourage use of the new IS supporting sales.

Informational Monitor Division manager compares progress on IS project for the division with milestones developed during the projec s initiation and feasibility phase.

Disseminator CIO conveys organizatio s business strategy to IS department and demonstrates how IS strategy supports the business strategy.

Spokesperson IS manager represents IS department at organizatio s recruiting fair.

Decisional Entrepreneur IS division manager suggests an application of a new technology that improves the divisio s operational efciency.

Disturbance handler IS division manager, as project team leader, helps resolve design disagreements between division personnel who will be using the system

and systems analysts who are designing it.

Resource allocator CIO allocates additional personnel positions to various departments based upon the business strategy.

Negotiator IS manager negotiates for additional personnel needed to respond to recent user requests for enhanced functionality in a system that is being

implemented.

chaotic and random activities. This book uses several conceptual models of business. Some take a functional view

and others take a process view. Functional View

The classical view of a business is based on the functions that people perform, such as accounting, nance,

marketing, operations, and human resources. The business organizes around these functions to coordinate them and

to gain economies of scale within specialized sets of tasks. Information rst ows vertically up and down between

line positions and management; after analysis, it may be transmitted across other functions for use elsewhere in the

company (see Figure I-4).

Process View

Michael Porter of Harvard Business School describes a business in terms of the primary and support activities that

are performed to create, deliver, and support a product or service. The primary activities are not limited to specic

functions, but rather are cross‐functional processes (see Figure I-5). For example, an accounts payable process

Operations Accounting Sales

Executive Management

Marketing Support

Information flows

FIGURE I-4

Hierarchical view of the rm.

might involve steps taken by other departments that generate obligations, which the accounting department pays.

Likewise, the product creation process might begin with an idea from R&D, which is transferred to an operations

organization that builds the actual product and involves marketing to get the word out, sales to sell and deliver the

product, and support to provide customer assistance as needed. This view takes into account the activities in each

functional area that are needed to complete a process, and any organization can be described by the processes it

performs. Improving coordination among activities increases business prot. Organizations that effectively manage

core processes across functional boundaries are often the industry leaders because they have made efciencies that

are not visible from the functional viewpoint. IS are often the key to process improvement and cross‐functional coordination. Both the process and functional views are important to understanding IS. The functional view is useful when sim-

ilar activities must be explained, coordinated, executed, or communicated. For example, understanding a marketing

information system means understanding the functional approach to business in general and the marketing function

in particular. The process view, on the other hand, is useful when examining the ow of information throughout a

business. For example, understanding the information associated with order fulllment, product development, or

customer service means taking a process view of the business. This text assumes that both views are important for participating in IS decisions. Assumptions about Information Systems

Consider the components of an information system from the manager’s viewpoint rather than from the technolo-

gist’s viewpoint. Both the nature of information (hierarchy and economics) and the context of an information

system must be examined to understand the basic assumptions of this text.

Information Hierarchy The terms data, information , and knowledge are often used interchangeably, but have signicant and discrete mean-

ings within the knowledge management domain (and are more fully explored in Chapter 12). Tom Davenport, in his book Information Ecology , pointed out that getting everyone in any given organization to agree on common de-

nitions is difcult. However, his work (summarized in Figure I-6) provides a nice starting point for understanding

the subtle but important differences. The information hierarchy begins with data, or simple observations; data are sets of specic, objective facts or

observations, such as “inventory contains 45 units.” Standing alone, such facts have no intrinsic meaning but can be

easily captured, transmitted, and stored electronically.

Accounting

Operations

Marketing Sales

Support

Executive Management

Accounts Payable Process

Product Development Process Order Fulfillment Process

Information Flows

FIGURE I-5 Process view of the rm: Cross‐functional processes.

Information is data endowed with relevance and purpose. 6

People turn data into information by organizing data

into some unit of analysis (e.g., dollars, dates, or customers). For example, a mashup of location data and housing

prices adds something beyond what the data provide individually, and that makes it information. A mashup is the

term used for applications that combine data from different sources to create a new application on the Web. To be relevant and have a purpose, information must be considered within the context in which it is received

and used. Because of differences in context, information needs vary across functions and hierarchical levels. For

example, when considering functional differences related to a sales transaction, a marketing department manager

may be interested in the demographic characteristics of buyers, such as their age, gender, and home address. A man-

ager in the accounting department probably won’t be interested in any of these details, but instead wants to know details about the transaction itself, such as method of payment and date of payment. Similarly, information needs may vary across hierarchical levels. These needs are summarized in Figure I-7

and reect the different activities performed at each level. At the supervisory level, activities are narrow in scope

and focused on the production or the execution of the business’s basic transactions. At this level, information is

focused on day‐to‐day activities that are internally oriented and accurately dened in a detailed manner. The activ-ities of senior management are much broader in scope. Senior management performs long‐term planning and needs FIGURE I-6

Comparison of data, information, and knowledge.

Source: Adapted from Thomas Davenport,

Information Ecology (New York: Oxford University Press, 1997).

Data Information Knowledge

Denition Simple observations of the state of the world Data endowed with

relevance and purposeInformation from the human mind

(includes reection, synthesis,

context)

Characteristics • Easily structured • Easily captured on machines

• Often quantied

• Easily transferred

• Mere facts • Requires unit of analysis

• Data that have been

processed

• Human mediation necessary • Hard to structure

• Difcult to capture on machines

• Often tacit

• Hard to transfer

Example Daily inventory report of all inventory items sent to the

CEO of a large manufacturing company Daily inventory report

of items that are below

economic order quantity

levels sent to inventory

managerInventory manage s knowledge of

which items need to be reordered

in light of daily inventory report,

anticipated labor strikes, and

a ood in Brazil that affects the supply of a major component

Peter F. Drucker, “The Coming of the New Organization,” Harvard Business Review (January–February 1988), 45–53.

Top Management Middle Management Supervisory and Lower‐Level Management

Time Horizon Long: years Medium: weeks, months, years Short: day to day

Level of Detail Highly aggregated Less accurate

More predictive Summarized

IntegratedOften nancial Very detailed

Very accurateOften nonnancial

Source Primarily external Primarily internal with limited externalInternal

Decision Extremely judgmental Uses creativity and analytical skills Relatively judgmental Heavily reliant on rules

FIGURE I-7 Information characteristics across hierarchical levels.

Source: G. Adapted from Anthony Gorry and Michael S. Scott Morton, “A Framework for Management Information Systems,”

Sloan Management Review 13, no. 1, 55–70.

information that is aggregated, externally oriented, and more subjective than supervisors require. The information

needs of middle managers in terms of these characteristics fall between the needs of supervisors and of senior

management. Because information needs vary across levels, a daily inventory report of a large manufacturing rm

may serve as information for a low‐level inventory manager whereas the CEO would consider such a report to be

merely data. The context in which the report is used must be considered in determining whether it is information. Knowledge is information that is synthesized and contextualized to provide value. It is information with the

most value. Knowledge consists of a mix of contextual information, values, experiences, and rules. For example,

the mashup of locations and housing prices means one thing to a real estate agent, another thing to a potential buyer,

and yet something else to an economist. It is richer and deeper than information and more valuable because someone

thought deeply about that information and added his or her own unique experience and judgment. Knowledge also

involves the synthesis of multiple sources of information over time. 7

The amount of human contribution increases

along the continuum from data to information to knowledge. Computers work well for managing data but are less

efcient at managing information and knowledge. Some people think there is a fourth level in the information hierarchy: wisdom. Wisdom is knowledge fused

with intuition and judgment that facilitates the ability to make decisions. Wisdom is that level of the information

hierarchy used by subject matter experts, gurus, and individuals with a high degree of experience who seem to “just

know” what to do and how to apply the knowledge they gain. This is consistent with Aristotle’s view of wisdom as

the ability to balance different and conicting elements together in ways that are only learned through experience.

Economics of Information versus Economics of Things In their groundbreaking book, Blown to Bits, Evans and Wurster argued that every business is in the information

business. 8

Even those businesses not typically considered information businesses have business strategies in which

information plays a critical role. The physical world of manufacturing is shaped by information that dominates

products as well as processes. For example, an automobile contains as much computing power as a personal com-

puter. Information‐intensive processes in the manufacturing and marketing of the automobile include design,

market research, logistics, advertising, and inventory management. The automobile itself, with its millions of lines

of code, has become a computer on wheels with specialized computers and sensors alerting the driver of its health

and road conditions. When taken in for service, maintenance crews simply plug an electronic monitor into the auto-

mobile to analyze and identify worn parts or other areas in need of upgrades and repair. As our world is reshaped by information‐intensive industries, it becomes even more important for business strat-

egies to differentiate the timeworn economics of things from the evolving economics of information. Things wear

out; things can be replicated at the expense of the manufacturer; things exist in a tangible location. When sold, the

seller no longer owns the thing. The price of a thing is typically based on production costs. In contrast, information

never wears out, although it can become obsolete or untrue. Information can be replicated at virtually no cost

without limit; information exists in the ether. When sold, the seller still retains the information, but this ownership

provides little value if the ability of others to copy it is not limited. Finally, information is often costly to produce

but cheap to reproduce. Rather than pricing it to recover the sunk cost of its initial production, its price is typically

based on its value to the consumer. Figure I-8 summarizes the major differences between the economics of goods and the economics of information. Evans and Wurster suggest that traditionally the economics of information has been bundled with the economics

of things. However, in this Information Age, rms are vulnerable if they do not separate the two. The Encyclopedia

Britannica story serves as an example. Bundling the economics of things with the economics of information made

it difcult for Encyclopedia Britannica to gauge two serious threats. The rst threat was posed by Encarta, an entire

encyclopedia on a CD‐ROM that was given away to promote the sale of computers and peripherals. The second

was Wikipedia, which is freely available to all and updated on a nearly real‐time basis continuously by thousands of

7 Thomas H. Davenport, Information Ecology (New York: Oxford University Press, 1997), 9–10.

8 Philip Evans and Thomas Wurster, Blown to Bits (Boston: Harvard Business School Press, 2000).

volunteers; currently Wikipedia reports that it holds over 4.9 million articles, receives 10 edits per second globally,

and boasts 750 new pages added each day. 9

In contrast, Encyclopedia Britannica published volumes every several

years and the price was between $1,500 and $2,200, covering printing and binding ($250) and sales commissions ($500 to $600). 10

Britannica focused on its centuries‐old tradition of providing information in richly bound tomes sold to the public

through a well‐trained sales force. Only when it was threatened with its very survival did Encyclopedia Britannica grasp the need to separate the economics of information from economics of things and sell bits of information

online. Clearly, Encyclopedia Britannica’s business strategy, like that of many other companies, needed to reect

the difference between the economics of things from the economics of information.

Internet of Things

More recently, a new concept has emerged to describe the explosive growth in the data generated by sensors

traveling over the Web. The Internet of things (IoT) is the term used to refer to machines and sensors talking to

each other over the network, taking Evans and Wurster’s concepts even further. Although the term IoT was coined in1999, 11

it was not widely discussed until the current decade. The earliest example of its functions was reported

before the Internet even existed—in a Coke machine at Carnegie Mellon University in the mid‐1970s. Staff mem-

bers and students in the Computer Science Department were able to use a network connecting a minicomputer

and sensors in the machine to monitor not only the machine’s inventory but even which button to push for the coldest bottles. 12

A more broadly used early application of IoT was provided by Otis Elevator in the late 1980s and later copied

by most other elevator companies. 13

Sensors in elevators send alerts over a network to a service center’s computer

when parts need replacing, and service technicians arrive without the builder owner knowing about the potential

problem. Extending IoT even further, today’s elevator systems alert handheld devices of nearby repair technicians

who then visit the elevator to make the repair. Devices may connect to the Internet over a wireless connection or through a hard‐wired connection. Many say that we are on the brink of a new revolution that will be as impactful as the popularization of the

World‐Wide Web. The IoT has already been applied to large number of “things”—extending to home appliances,

automobiles, thermostats, lighting, pets, and even people. 14

Many people can already perform futuristic functions

using smartphone apps. They can remotely check the status of their heart monitor, tire pressure, or subway train’s

location. They can locate a lost pet or valuable object. They can reset their thermostat, turn off lights, and record a

program on their DVR even after having left for vacation.

9 Wikipedia Statistics, http://en.wikipedia.org/wiki/Wikipedia:Statistics (accessed August 18, 2015).

10 Evans and Wurster, Blown to Bits.

11 K. Ashton, “That ‘Internet of Things’ Thing,” RFID Journal (June 22, 2009), http://www.rfidjournal.com/articles/view?4986 (accessed May 26, 2015).

12 Attributed to The Carnegie Mellon University Computer Science Department Coke Machine, “The ‘Only’ Coke Machine on the Internet,” https://www.

cs.cmu.edu/~coke/history_long.txt (accessed May 26, 2015). 13 D. Freedman, “The Myth of Strategic IS,” CIO Magazine (July 1991), 42–48.

14 Internet of Things, Whatis.com, http://whatis.techtarget.com/definition/Internet‐of‐Things (accessed May 26, 2015).

FIGURE I-8

Comparison of the economics of things with the economics of information.

Things Information

Wear out Does t wear out but can become obsolete or untrue

Are replicated at the expense of the manufacturer Is replicated at almost zero cost without limit

Exist in a tangible location Does not physically exist

When sold, possession changes hands When sold, seller may still possess and sell again

Price based on production costs Price based on value to consumer

Information Systems

People Technology Process

FIGURE I-9 System hierarchy.

Social Business Lens

The explosion of consumer‐based technologies, coupled with applications such as Facebook, Renren, Sina

Weibo, Twitter, LinkedIn, YouTube, Foursquare, Skype, Pinterest, and more have brought into focus the concept of

a social business. Some call this trend the

consumerization of technology

. Consumerization

means that technol-

ogies such as social tools, mobile phones, and Web applications targeted at individual, personal users are cre-

ating pressures for companies in new and unexpected ways. At the same time, technologies initially intended for

the corporation, like cloud computing, are being retooled and “consumerized” to appeal to individuals outside

the corporation.

In this text, we use the term

social business to refer to an enterprise using social IT for business applications,

activities and processes. We sometimes say that a social business has infused social capabilities into business

processes.

Social business is permeating every facet of business. There are new business models based on a social IT

platform that offer new ways of connecting with stakeholders in functions such as governing, collaborating, doing

work, and measuring results. In this book, we are particular about the terminology we use.

Social IT

is the term we

use for all technologies in this space. We de ne

social IT as the technologies used for people to collaborate, net-

work, and interact over the Web. These include social networks and other applications that provide for interaction

between people.

Many use the term

social media as an overarching term for this space, but increasingly, social media

refers to

the marketing and sales applications of social IT, and we use it that way. Social networks are a speci c type of tool,

like Facebook, Ning, and similar tools.

Social networking

is the use of these types of social IT tools in a community.

As of the writing of this text, the social space is still like the Wild West; there are no widely accepted conventions

about the terms and their meanings or the uses and their impacts. But we have enough experience with social

IT that we know it s a major force bursting on to the enterprise scene and it must be addressed in discussions of

managing and using information systems.

Look in chapters for the feature “Social Business Lens” where we explore one topic related to that chapter from

a social business perspective.

The reader might already be using the IoT with one or more of these apps. However, vendors tell us we “ain ’ t

seen nothing yet.” The potential impact of IoT is limited by the number of objects connected and apps available to

monitor and control them. As the number of devices directly connected to the Internet increases, researchers and IT

professionals expect an exponential increase in IoT functionality and usage. 15

In the coming years, Internet trafc

will dramatically increase along with an explosion in the amount of information generated by these devices.

System Hierarchy

Information systems are composed of three main elements: technology, people, and process (see Figure I-9). When most people use the term information system, they actually refer only to the technology element as dened by the

organization’s infrastructure. In this text, the term infrastructure refers to everything that supports the ow and

processing of information in an organization, including hardware, software, data, and network components whereas

architecture refers to the blueprint that reects strategy implicit in combining these components. Information sys-

tems (IS) are dened more broadly as the combination of technology (the “what”), people (the “who”), and process

(the “how”) that an organization uses to produce and manage information. In contrast, information technology (IT)

focuses only on the technical devices and tools used in the system. We dene information technology as all forms

of technology used to create, store, exchange, and use information. Many people use the terms IS and IT inter-

changeably. In recent years, “IT” has been more fashionable, but that changes as fashions change.

SUMMARY

Aligning information systems and business decisions is no longer an option; it’s an imperative for business. Every business ope r-

ates as an information‐based enterprise. In addition, the explosive growth of smart phones, tablets, social tools, and Web‐base d

businesses provides all managers with some experience in information systems and some idea of the complexity involved in

providing enterprise‐level systems. This highlights the need for all managers to be skilled in managing and using IS. It is no longer acceptable to delegate IS decisions to the management information systems (MIS) department alone. The

general manager must be involved to both execute business plans and protect options for future business vision. IS and business

maturity must be aligned to provide the right level of information resources to the business. This chapter makes the case for general managers’ full participation in strategic business decisions concerning IS. It out-

lines the skills required for such participation, and it makes explicit certain key assumptions about the nature of business,

management, and IS that will underlie the remaining discussions. Subsequent chapters are designed to build on these concepts

by addressing the following questions.

Frameworks and Foundations

• How should information strategy be aligned with business and organizational strategies? (Chapter 1)

• How can a business achieve competitive advantages using its IS? (Chapter 2)

• How do organizational decisions impact IS decisions? (Chapter 3)

• How is the work of the individual in an organization affected by decisions concerning IS? (Chapter 4)

• How are information systems integrated with business processes? (Chapter 5)

IS Management Issues • What are the components of an IS architecture? (Chapter 6)

• How are IS kept secure? (Chapter 7)

• How is the IT organization managed and funded? (Chapter 8)

• How are IS decisions made? (Chapter 9)

• What source should provide IS services and how and where should they be provided? (Chapter 10)

Jared Newman, “Right Now, the Internet of Things Is Like the Internet of the 1990s,” Fast Company (March 27, 2015I, http://www.fastcompany.

com/3044375/sector‐forecasting/the‐future‐of‐the‐internet‐of‐things‐is‐like‐the‐internet‐of‐the‐1990s (last accessed May 26, 2015).

• How are IS projects managed and risks from change management mitigated? (Chapter 11)

• How is business intelligence managed within an organization? (Chapter 12)

• What ethical and moral considerations bind the uses of information in business? (Chapter 13)

KEY TERMS architecture (p. 14) data (p. 10)

digital natives (p. 4)information (p. 11)information system (p. 14)information technology (p. 14) infrastructure (p. 14)internet of things (p. 13)

knowledge (p. 12)mashup (p. 11)

social business (p. 15)social IT (p. 15)social media (p. 15)

social networking (p. 15)

Web 2.0 (p. 3)wisdom (p. 12)

chapter

The Information Systems

Strategy Triangle

In February 2015, 1

health care giant Kaiser Permanente named Dick Daniels to the CIO position and

the leadership team for the next stage of the company ’ s business strategy: to provide better health care

at lower costs. To achieve those goals, Kaiser Permanente, one of the nation ’ s largest not‐for‐pro t

health care systems with over 9.5 million members and 2014 operating revenue of $56.4 billion,

invested in numerous information systems projects aimed at streamlining operations, offering new

services, and meeting government obligations. For example, in 2014, 13% of all the medical appoint-

ments were ful lled digitally—through e‐mail—to the delight of patients who did not have to make

a trip to the doctor ’ s of ce and to the delight of doctors who were able to check in on their patients,

particularly those with chronic conditions, more frequently. Doctors particularly liked this because

their annual bonuses were based, in part, on improvements in patient health metrics such as lower

blood pressure, reduced blood sugar levels if at risk for diabetes, and improvement in cholesterol

scores rather than on the number of tests they ordered or the total billing they brought in. The organi-

zation invested heavily in video conferencing technology, mobile apps, and analytics as they nished

implementing a $4 billion electronic health records system, KP HealthConnect. KP HealthConnect began in 2003, but by 2008, all members had online access to their health

records; by 2010, all system services were available at all medical of ces and hospitals in the system;

and by 2012, all members had access to their health records on mobile devices. Kaiser Permanente

has been a regular innovator in the use of technologies, being one of the rst health care organiza-

tions to experiment with chat rooms, secure messaging, and private e‐mail correspondence between

patients, physicians, and care providers. The new system connects each member to all caregivers and

services available at Kaiser Permanente. Further, it enabled patients to participate in the health care

they received at a new level and access information directly from the system. The organizational design supported the business strategy of better health care at lower costs. 2

At the core of this strategy was a shift from a “ x‐me system” with which patients seek health care

when something is broken and needs repair to a system that was truly proactive and focused on pro-

moting health. Under the “ x‐me system,” health care was expensive and often sought too late to

The Information Systems Strategy Triangle highlights the alignment necessary between

decisions regarding business strategy, information systems, and organizational design.

This chapter reviews models of business strategy, organizational strategy and design, and

information systems strategy. It concludes with a simple framework for creating a social

business strategy.

http://blogs.wsj.com/cio/2015/02/09/kaiser‐permanente‐names‐richard‐dick‐daniels‐cio/; http://fortune.com/2015/04/29/kaiser ‐

ceo‐on‐healthcare/; http://fortune.com/2014/07/24/a‐health‐care‐model‐thats‐working/; Paul Gray , Omar Sawy , Guillermo Asper ,

and Magnus Thordarson , “ Realizing Strategic Value Through Center‐Edge Digital Transformation in Consumer‐Centric Industr ies ,”

MIS Quarterly Executive 12 , no. 1 ( March 2013 ) .

2 Note that the organizational design puts the organizational strategy into practice. For instance, rewarding billings, shari ng little

information, and late involvement with patients are organizational design elements of a “fix‐me” organizational strategy.

x the problem. Instead, the Kaiser Permanente strategy focused on promoting health, enabling identication of

problems before they became serious issues. For example, those in need of more exercise may receive a prescription

to take a walk and an e‐mail reminder from health care providers to reinforce the new behavior. Staff incentive

systems were aligned with this behavior, too. Physicians were all paid a at salary and end‐of‐year bonuses if their

patients achieved better health. All caregivers were rewarded for guiding people into making behavioral choices

that were likely to keep them well. The success at Kaiser Permanente was achieved in part because of the alignment between its business strategy, its

information systems strategy, and its organization design. Physicians were part of the decision‐making processes.

Managers were involved in the design and implementation of the information systems. The decision to move from

a “x‐me system” to a “proactive health system” was not made in isolation from the organization or the information systems. The information systems (IS) department is not an island within a rm. Rather, IS manages an infrastructure

that is essential to the rm’s functioning. Further, the Kaiser Permanente case illustrates that a rm’s IS must be

aligned with the way it manages its employees and processes. For Kaiser Permanente, it was clear that not only did

the physicians need a fast, inexpensive, and useful way to communicate with patients outside of regular in‐person

appointments but also incentive systems and patient service processes had to be updated. Information systems

provided a solution in conjunction with new operational and control processes. This chapter introduces a simple framework for describing the alignment necessary with business systems and

for understanding the impact of IS on organizations. This framework is called the Information Systems Strategy

Triangle because it relates business strategy with IS strategy and organizational strategy. This chapter also presents

key frameworks from organization theory that describe the context in which IS operates as well as the business

imperatives that IS support. The Information Systems Strategy Triangle presented in Figure 1.1 suggests three key

points about strategy.

1. Successful rms have an overriding business strategy that drives both organizational strategy and IS strat-

egy. The decisions made regarding the structure, hiring practices, vendor policies, and other components of

the organizational design, as well as decisions regarding applications, hardware, and other IS components,

are all driven by the rm’s business objectives, strategies, and tactics. Successful rms carefully balance

these three strategies—they purposely design their organization and their IS strategies to complement their

business strategy.

2. IS strategy can itself affect and is affected by changes in a rm’s business and organizational design. To

perpetuate the balance needed for successful operation, changes in the IS strategy must be accompanied by

changes in the organizational strategy and must accommodate the overall business strategy. If a rm designs

its business strategy to use IS to gain strategic advantage, the leadership position in IS can be sustained only

by constant innovation. The business, IS, and organizational strategies must constantly be adjusted.

3. IS strategy always involves consequences—intended or not—within business and organizational strategies.

Avoiding harmful unintended consequences means remembering to consider business and organizational

strategies when designing IS implementation. For example, deploying tablets to employees without an

accompanying set of changes to job expectations, process design, compensation plans, and business tac-

tics will fail to achieve expected productivity improvements. Success can be achieved only by specically

designing all three components of the strategy triangle so they properly complement each other.

Business Strategy

Organizational Strategy Information Strategy

FIGURE 1.1 The Information Systems Strategy Triangle.

Before the changes at Kaiser Permanente, incentives for doctors were misaligned with the goals of better health

care. Its IS Strategy Triangle was out of alignment at that time. Its organizational strategy (e.g., a “x‐me” system)

was not supported by the IS strategy (e.g., tracking and reporting billable procedures). Neither the organizational

strategy nor the IS strategy adequately supported their purported business strategy (helping patients at lower cost).

For Kaiser Permanente, success could be achieved only by specically designing all three components of the

strategy triangle to work together. Of course, once a rm is out of alignment, it does not mean that it has to stay that way. To correct the misalign-

ment described earlier, Kaiser Permanente used on‐line services to enable quick communications between patients,

physicians, and care providers. Further, it changed its bonus structure to focus on health rather than billing amounts.

The new systems realign people, process, and technology to provide better service, save time, and save money. What does alignment mean? The book Winning the 3‐Legged Race denes alignment as the situation in which a

company’s current and emerging business strategy is enabled and supported yet unconstrained by technology. The

authors suggest that although alignment is good, there are higher states, namely synchronization and convergence,

toward which companies should strive. With synchronization, technology not only enables current business strategy

but also anticipates and shapes future business strategy. Convergence goes one step further by exhibiting a state in

which business strategy and technology strategy are intertwined and the leadership team members operate almost

interchangeably. Although we appreciate the distinction and agree that rms should strive for synchronization and

convergence, alignment in this text means any of these states, and it pertains to the balance between organizational

strategy, IS strategy, and business strategy. 3

A word of explanation is needed here. Studying IS alone does not provide general managers with the appropriate

perspective. This chapter and subsequent chapters address questions of IS strategy squarely within the context of

business strategy. Although this is not a textbook of business strategy, a foundation for IS discussions is built on

some basic business strategy frameworks and organizational theories presented in this and the next chapter. To be

effective, managers need a solid sense of how IS are used and managed within the organization. Studying details

of technologies is also outside the scope of this text. Details of the technologies are relevant, of course, and it is

important that any organization maintain a sufcient knowledge base to plan for and adequately align with business

priorities. However, because technologies change so rapidly, keeping a textbook current is impossible. Instead, this

text takes the perspective that understanding what questions to ask and having a framework for interpreting the

answers are skills more fundamental to the general manager than understanding any particular technology. That

understanding must be constantly refreshed using the most current articles and information from experts. This text

provides readers with an appreciation of the need to ask questions, a framework from which to derive the ques-

tions to ask, and a foundation sufcient to understand the answers received. The remaining chapters build on the

foundation provided in the Information Systems Strategy Triangle.

Brief Overview of Business Strategy Frameworks A strategy is a coordinated set of actions to fulll objectives, purposes, and goals. The essence of a strategy is

setting limits on what the business will seek to accomplish. Strategy starts with a mission. A mission is a clear and

compelling statement that unies an organization’s effort and describes what the rm is all about (i.e., its purpose).

Mark Zuckerberg’s reection on the mission of Facebook provides an interesting example. Originally conceived as

a product rather than a service, the CEO of Facebook commented, “after we started hiring more people and building

out the team, I began to get an appreciation that a company is a great way to get a lot of people involved in a mission

you’re trying to push forward. Our mission is getting people to connect.” 4

In a few words, the mission statement sums up what is unique about the rm. The information in Figure 1.2 indi-

cates that even though Zappos, Amazon, and L.L. Bean are all in the retail industry, they view their missions quite

differently. For example, Zappos’ focus is on customer service, Amazon is about customer sets, and L.L. Bean is

3 F. Hogue, V. Sambamurthy, R. Zmud, T. Trainer, and C. Wilson, Winning the 3‐Legged Race (Upper Saddle River, NJ: Prentice Hall, 2005).

4 Shayndi Raice, “Is Facebook Ready for the Big Time?” The Wall Street Journal (January 14–15, 2012), B1.

about the merchandise and treating people the right way. It’s interesting to note that although Amazon purchased

Zappos in 2009, the acquisition agreement specied that Zappos would continue to run independently of its new

parent. Today, Zappos continues to remain both culturally and physically separate from Amazon. Zappos is located

near Las Vegas, Nevada, and Amazon is in Seattle, Washington. A business strategy is a plan articulating where a business seeks to go and how it expects to get there. It is

the means by which a business communicates its goals. Management constructs this plan in response to market

forces, customer demands, and organizational capabilities. Market forces create the competitive context for the

business. Some markets, such as those faced by package delivery rms, laptop computer manufacturers, and credit

card issuers, face many competitors and a high level of competition, such that product differentiation becomes

increasingly difcult. Other markets, such as those for airlines and automobiles, are similarly characterized by

high competition, but product differentiation is better established. Customer demands comprise the wants and

needs of the individuals and companies who purchase the products and services available in the marketplace.

Organizational capabilities include the skills and experience that give the corporation a currency that can add value

in the marketplace. Consider Dell, originally a personal computer company. Initially Dell’s business strategy was to sell personal

computers directly to the customer without going through an intermediary. Reaching customers in this way was

less expensive and more responsive than selling the computers in retail stores. The Internet, combined with Dell’s

well‐designed IS infrastructure, allowed customers to electronically contact Dell, which then designed a PC for a

customer’s specic needs. Dell’s ordering system was integrated with its production system and shared information

automatically with each supplier of PC components. This IS enabled the assembly of the most current computers

without the expense of storing large inventories, and inventory uncertainties were pushed back to the vendors. Cost

savings were passed on to the customer, and the direct‐to‐customer model allowed Dell to focus its production

capacity on building only the most current products. With small prot margins and new products quickly able to

replace existing products, IS aligned with Dell’s business strategy to provide low‐cost PCs. The cost savings from

the IS was reected in the price of systems. In addition, Dell executives achieved a strategic advantage in reducing

response time, building custom computers that had one of the industry’s lowest costs, and eliminating inventories

that could become obsolete before they are sold. Thus, this business strategy was consistent with Dell’s mission of

delivering the best customer experience in the markets it serves. But things aren’t always as they seem. If the direct‐to‐customer strategy was so effective, why is Dell now

also selling its computers at major retail outlets such as Walmart, Staples, and Best Buy? It is likely that the sales

gures and prot margins were not measuring up to Dell’s stated objectives and performance targets. And Dell

has branched out to other hardware, such as printers and servers, and more recently, providing IT services. Con-

sequently, Dell adjusted its business strategy, and we can expect to see changes in its organizational design and information systems to reect its altered direction. Now consider your favorite dot‐com company. Every dot‐com company has a business strategy of delivering

its products or services over the Internet. To do so, the dot‐coms need organizations lled with individuals and

processes that support this business strategy. Their employees must be Internet savvy; that is, they must have

FIGURE 1.2

Mission statements of three retail businesses.

Company Mission Statement

Zappos To provide the best customer service possible. Internally we call this our WOW philosophy. a

Amazon We seek to be Eart s most customer‐centric company for three primary customer sets: consumer customers, seller customers and developer customers. b

L.L. Bean Sell good merchandise at a reasonable prot, treat your customers like human beings and they will always come back for more. c

a http://about.zappos.com (accessed March 19, 2015).

b http://www.amazon.com Mission Statement on Amazon Investor Relations page (accessed March 19, 2015).

c http://www.llbean.com/customerService/aboutLLBean/company_values.html (accessed March 19, 2015).

Business Models versus Business Strategy

Some new managers confuse the concept of a business model with the concept of a business strategy. The

business strategy , as discussed in this chapter, is the coordinated set of actions used to meet the business goals

and objectives. It s the path a company takes to achieve its goals. One of the components of the business strategy

is the business model, the design of how the business will make money and how customers will get value from its

products and services. Some might argue that a business model is the outcome of strategy. * Some examples of business models commonly seen in the digital world include †

•

Subscription: Customers pay a recurring fee for the product or service.

•

Advertising:

Customers access the product or service for “free,” and sponsors or vendors pay fees for

advertising that goes with the product or service.

•

Cost plus: Somewhat like a traditional retailer, customers purchase the product or service for a specific price

that is usually the cost plus some markup for profit.

•

Renting/Licensing: Customers pay a fee to use the product or service for a specified period of time.

•

All‐you‐can‐Eat:

Customers pay one fee for access to as much of the product or service as they want to

consume, usually over a specific period of time.

•

Freemium: Customers get something for “free,” and the company makes money from selling customers

something after they get the giveaway. This is similar to a business model used in brick‐and‐mortar busi-

nesses that give away something or sell something for a very low price, but the customer has to pay for

refills or upgrades such as giving razors away but making money from selling razor blades.

For a more detailed treatment of the concepts of business models, strategy, and tactics, see Ramon Casadesus Masanell and Joan

Ricart, “From Strategy to Business Models and to Tactics,” Harvard Business School working paper 10 036, http://www.hbs.edu/

faculty/Publication%20Files/10 036.pdf (accessed August 21, 2015). †

For a list of 15 different business models, see http://www.digitalbusinessmodelguru.com/2012/12/15 business models complete

list.html (accessed August 21, 2015).

skills and knowledge that are relevant to the dot‐com business. Their processes must support the dot‐com strategy.

Imagine what would happen if the order process for their services was not Internet based. It seems silly to even

consider a dot‐com that would insist that orders be placed in person or even by telephone. The dot‐com processes

are aligned with companies ’ on‐line‐based business strategy. Further, their IS strategy must also be aligned with

their processes. It would be equally silly to expect information to be based on paper les rather than electronic les.

A classic, widely used model developed by Michael Porter still frames most discussions of business strategy. In

the next section, we review Porter ’ s generic strategies framework as well as dynamic environment strategies. 5

W e

then share questions that a general manager must answer to understand the business ’ strategy.

The Generic Strategies Framework

Companies sell their products and services in a marketplace populated with competitors. Michael Porter ’ s frame-

work helps managers understand the strategies they may choose to build a competitive advantage. In his book

Competitive Advantage , Porter claims that the “fundamental basis of above‐average performance in the long run is

sustainable competitive advantage.” 6

Porter identi ed three primary strategies for achieving competitive advantage:

(1) cost leadership, (2) differentiation, and (3) focus. These advantages derive from the company ’ s relative position

5 Another popular model by Michael Porter, the value chain, provides a useful model for discussing internal operations of an organization. Some find it a

useful model for understanding how to link two firms. This framework is used in Chapter 5 to examine business process design. For further information,

see M. Porter , Competitive Advantage

, 1st ed. ( New York : The Free Press , 1985 ) .

6 M. Porter , Competitive Advantage: Creating and Sustaining Superior Performance , 2nd ed. ( New York : The Free Press , 1998 ) .

in the marketplace, and they depend on the strategies and tactics used by competitors. See Figure 1.3 for a summary

of these three strategies for achieving competitive advantage. Cost leadership results when the organization aims to be the lowest‐cost producer in the marketplace. The

organization enjoys above‐average performance by minimizing costs. The product or service offered must be

comparable in quality to those offered by others in the industry so that customers perceive its relative value. Typ-

ically, only one cost leader exists within an industry. If more than one organization seeks an advantage with this

strategy, a price war ensues, which eventually may drive the organization with the higher cost structure out of the

marketplace. Through mass distribution, economies of scale, and IS to generate operating efciencies, Walmart

epitomizes the cost‐leadership strategy. Through differentiation , the organization offers its product or service in a way that appears unique in the mar-

ketplace. The organization identies which qualitative dimensions are most important to its customers and then

nds ways to add value along one or more of those dimensions. For this strategy to work, the price charged cus-

tomers for the differentiator must seem fair relative to the price charged by competitors. Typically, multiple rms

in any given market employ this strategy. Progressive Insurance is able to differentiate itself from other automobile insurance companies. In its earlier days, Progressive Insurance’s service was unique. Representatives responded to accident claims

24‐7, arriving at the scene of the accident with powerful laptops and software that enabled them to settle claims and

cut a check on the spot. More recently, Progressive was the rst to offer a usage‐based insurance product, called

Snapshot, that bases insurance rates on the miles driven by customers. These innovations enabled a strategy that

spurred Progressive’s growth and widened its prot margins. Apple Inc. is another example of a company that com-

petes in its markets on its ability to differentiate its products. Apple’s various innovations in its operating system,

laptop design, iPads, iPhones, iPods, iTunes and iWatches have created a strategy based on the uniqueness of its products and services. Focus allows an organization to limit its scope to a narrower segment of the market and tailor its offerings

to that group of customers. This strategy has two variants: (1) cost focus, in which the organization seeks a cost

advantage within its segment and (2) differentiation focus, in which it seeks to distinguish its products or services

within the segment. This strategy allows the organization to achieve a local competitive advantage even if it does

not achieve competitive advantage in the marketplace overall. Porter explains how the focuser can achieve compet-

itive advantage by focusing exclusively on certain market segments:

Breadth of target is clearly a matter of degree, but the essence of focus is the exploitation of a narrow targe s differ-

ences from the balance of the industry. Narrow focus in and of itself is not sufcient for above‐average performance. 7

Marriott International demonstrates both types of focus with two of its hotel chains: Marriott has a cost focus,

and Ritz‐Carlton has a differentiation focus. To better serve its business travelers and cut operational expenses,

Marriott properties have check‐in kiosks that interface with their Marriott Rewards loyalty program. A guest can

swipe a credit card or Marriott Rewards card at the kiosk in the lobby and receive a room assignment and keycard

Strategic Advantage

Strategic Target

Uniqueness perceived by customer Low-cost position

Industrywide Differentiation Cost leadership

Particular segment only Focus

Source: Adapted from M. Porter,

Competitive Advantage , 1st ed. (New York: The Free Press, 1985) and Competitive Advantage:

Creating and Sustaining Superior Performance , 2nd ed. (New York: The Free Press, 1998).

FIGURE 1.3

Three strategies for achieving competitive advantage.

Porter, Competitive Advantage: Creating and Sustaining .

from the machine. She can also print airline boarding passes at the kiosks. Further, the kiosks help the Marriott

chain implement its cost focus by cutting down on the personnel needed in at the front desk. The kiosk system is

integrated with other systems such as billing and customer relationship management (CRM) to generate operating efciencies and enhanced corporate standardization. In contrast, stand‐alone kiosks in the lobby would destroy the feeling that the Ritz‐Carlton chain, acquired by

Marriott in 1995, creates. To the Ritz‐Carlton chain, CRM means capturing and using information about guests,

such as their preference for wines, a hometown newspaper, or a sunny room. Each Ritz‐Carlton employee is

expected to promote personalized service by identifying and recording individual guest preferences. To demon-

strate how this rule could be implemented, a waiter, after hearing a guest exclaim that she loves tulips, could log the

guest’s comments into the Ritz‐Carlton CRM system called “Class.” On her next visit to a Ritz‐Carlton hotel, tulips

could be placed in the guest’s room after querying Class to learn more about her as her visit approaches. The CRM

is instrumental in implementing the differentiation‐focus strategy of the Ritz‐Carlton chain. 8

Its strategy allows the

Ritz‐Carlton chain to live up to its unique motto which emphasizes that its staff members are distinguished people with distinguished customers. Airline JetBlue adopted a differentiation strategy based on low costs coupled with unique customer experience.

It might be called a “value‐based strategy.” It is not the lowest cost carrier in the airline industry; at 12.3 cents per

passenger seat mile, JetBlue has one of the lowest costs, but Virgin America, Spirit, and Allegiant had even lower

per seat mile costs in 2013. But JetBlue manages its operational costs carefully, making decisions that keep its per

passenger costs among the lowest in the business, such as a limited number of airplane models in its eet, gates at

less congested airports, paperless cockpit and many other operations, and snacks instead of meals on ights. Jet-

Blue has one of the longest stage length averages (the length of the average ight) in the industry, and the longer

the ight, the lower the unit costs. Competing network carriers, who are more well known and established, may

have different pay scales because they’ve been in the business longer and have a different composition of staff.

These carriers also have higher maintenance costs for their older, more diverse eets. If it could realize its plans for

growth while maintaining its low cost structure, JetBlue could move from its cost focus based on serving a limited,

but growing, number of market segments to a cost leadership strategy. 9

While sustaining a cost focus, JetBlue’s chairman believes that JetBlue can compete on more than price, which

is part of its unique differentiation strategy. It is why the airline continually strives to keep customers satised with

frills such as extra leg room, leather seats, prompt baggage delivery, DirectTV, and movies. It has been recognized

with many awards for customer satisfaction in the North American airline industry.

Dynamic Environment Strategies

Porter’s generic strategies model is useful for diagnostics, for understanding how a business seeks to prot in

its chosen marketplace, and for prescriptions, or building new opportunities for advantage. It reects a careful

balancing of countervailing competitive forces posed by buyers, suppliers, competitors, new entrants, and substitute

products and services within an industry. As is the case with many models, dynamic environment strategies offer

managers useful tools for thinking about strategy. However, the Porter model was developed at a time when competitive advantage was sustainable because the

rate of change in any given industry was relatively slow and manageable. Since the late 1980s, when this frame-

work was at the height of its popularity, newer models have been developed to take into account the increasing

turbulence and velocity of the marketplace. Organizations need to be able to respond instantly and change rapidly,

which requires dynamic structures and processes. One example of this type of approach is the hypercompetition

framework. Discussions of hypercompetition take a perspective different from that of the previous framework. Por-

ter’s framework focuses on creating competitive advantage in relatively stable markets, whereas hypercompetition

frameworks suggest that the speed and aggressiveness of the moves and countermoves in a highly competitive and

8 Scott Berinato, “Room for Two,” CIO.com (May 15, 2002), http://www.cio.com/archive/051502/two_content.html.

9 http://www.oliverwyman.com/content/dam/oliver‐wyman/global/en/2014/nov/Airline_Economic_Analysis_Screen_OW_Nov_2014.pdf (acces sed

March 23, 2015).

turbulent market create an environment in which advantages are rapidly created and eroded. In a hypercompetitive

market, trying to sustain a specic competitive advantage can be a deadly distraction because the environment and

the marketplace change rapidly. To manage the rapid speed of change, rms value agility and focus on quickly

adjusting their organizational resources to gain competitive advantage. Successful concepts in hypercompetitive

markets include dynamic capabilities, creative destruction, and blue ocean strategy. 10

Dynamic capabilities are means of orchestrating a rm’s resources in the face of turbulent environments. In

particular, the dynamic capabilities framework focuses on the ways a rm can integrate, build, and recongure

internal and external capabilities, or abilities, to address rapidly changing environments. These capabilities are

built rather than bought. They are embedded in rm‐specic routines, processes, and asset positions. Thus,

they are difcult for rivals to imitate. In sum, they help determine the speed and degree to which the rm can

marshal and align its resources and competences to match the opportunities and requirements of the business

environment. 11

Since the 1990s, a competitive practice, called creative destruction, has emerged. First predicted over 60 years

ago by the economist Joseph Schumpeter, it was made popular more recently by Harvard Professor Clay Christensen. Coincidentally (or maybe not), the accelerated competition has occurred concomitantly with sharp increases in the

quality and quantity of information technology (IT) investment. The changes in competitive dynamics are particu-

larly striking in sectors that spend the most on IT. 12

One example of using dynamic models was implemented by leadership guru Jack Welch at General Electric

(GE). Often nicknamed “Neutron Jack” because of the way businesses were radically changed, Welch’s approach

to creative destruction was termed destroy your business (DYB). Welch recognized that GE could sustain its com-

petitive advantage only for a limited time as competitors attempted to outmaneuver the company. He knew that

if GE did not identify its weaknesses, its competitors would relish doing so. DYB is an approach that places GE

employees in the shoes of their competitors. 13

Through the DYB lenses, GE employees develop strategies to destroy

the company’s competitive advantage. Then, in light of their revelations, they apply the grow your business (GYB)

strategy to nd fresh ways to reach new customers and better serve existing ones. This allows GE to protect its

business from its competitors and sustain its position in the marketplace over the long run. A similar strategy of cannibalizing its own products was used by Apple. Steve Jobs, Apple’s founder and former

CEO, felt strongly that if a company was not willing to cannibalize its own products, someone else would come

along and do it for them. That was evident in the way Apple introduced the iPhone while iPod sales were brisk and

the iPad while its Macintosh sales were strong. 14

Apple continues to exhibit this strategy with subsequent releases

of new models of all of its products. Most discussions of strategy focus on gaining competitive advantage in currently existing industries and mar-

ketplaces, which are referred to by Kim and Mauborgne as red ocean strategy. Using a red ocean strategy, rms

ercely compete to earn a larger share of existing demand. Kim and Mauborgne recommend a better approach: Firms adopt a blue ocean strategy in which they create new demand in untapped marketspaces where they have the

“water” to themselves. When applying the blue ocean strategy, the goal is not to beat the competition but to make

it irrelevant. This is what Dell did when it challenged current industry logic by changing the computer purchasing

and delivery experiences of its customers. “With its direct sales to customers, Dell was able to sell its PCs for

40 percent less than IBM dealers while still making money.” 15

Dell also introduced into unchartered seas an unprec-

edented delivery process that allowed buyers to receive their new computers within four days of ordering them as compared to the red ocean process, which typically required 10 weeks.

10 For more information, please see Don Goeltz, “Hypercompetition,” vol. 1 of The Encyclopedia of Management Theory, ed. Eric Kessler (Los Angeles:

Sage, 2013), 359–60. 11 D. J. Teece, G. Pisano, and A. Shuen, “Dynamic Capabilities and Strategic Management,” Strategic Management Journal 18 (1997), 509–33; David

Teece, “Dynamic Capabilities,” vol. 1 of The Encyclopedia of Management Theory, ed. Eric Kessler (Los Angeles: Sage, 2013), 221–24.

12 Andrew McAfee and Erik Brynjolfsson, “Investing in the IT That Makes a Competitive Difference,” Harvard Business Review (July–August 2008),

98–107.13 M. Levinson, “GE Uses the Internet to Grow Business,” CIO (October 15, 2001), http://www.cio.com/article/30624/HOT_TOPIC_E_BUSINESS_

GE_Uses_the_Internet_to_Grow_Business_ (accessed May 5, 2012).14 Walter Isaacson, Steve Jobs (New York: Simon and Shuster, 2011).

15 W. Chan Kim and Renee Mauborgne, Blue Ocean Strategy (Cambridge, MA: Harvard Business School, 2005), 202.

Why Are Strategic Advantage Models Essential to Planning for Information Systems?

A general manager who relies solely on IS personnel to make IS decisions may not only give up any authority over

IS strategy but also hamper crucial future business decisions. In fact, business strategy should drive IS decision

making, and changes in business strategy should entail reassessments of IS. Moreover, changes in IS potential

should trigger reassessments of business strategy—as in the case of the Internet when companies that understood

or even considered its implications for the marketplace quickly outpaced their competitors who failed to do so.

For the purposes of our model, the Information Systems Strategy Triangle, understanding business strategy means

answering the following questions: 1. What is the business goal or objective?

2. What is the plan for achieving it? What is the role of IS in this plan?

3. Who are the crucial competitors and partners, and what is required of a successful player in this

marketplace?

4. What are the industry forces in this marketplace?

Porter’s generic strategies framework and the dynamic frameworks (summarized in Figure 1.4) are revisited in

the next few chapters. They are especially helpful in discussing the role of IS in building and sustaining competitive

advantages (Chapter 2) and for incorporating IS into business strategy. The next section of this chapter establishes

a foundation for understanding organizational strategies.

Brief Overview of Organizational Strategies

Organizational strategy includes the organization’s design as well as the choices it makes to dene, set up, coor-

dinate, and control its work processes. How a manager designs the organization impacts every aspect of opera-

tions from dealing with innovation to relationships with customers, suppliers, and employees. The organizational

strategy is a plan that answers the question: “How will the company organize to achieve its goals and implement

its business strategy?” A useful framework for organizational design can be found in the book Building the Information Age Orga-

nization by Cash, Eccles, Nohria, and Nolan. 16

This framework (Figure 1.5) suggests that the successful execu-

tion of a company’s organizational strategy comprises the best combination of organizational, control, and cultural

variables. Organizational variables include decision rights, business processes, formal reporting relationships, and

informal networks. Control variables include the availability of data, nature and quality of planning, effectiveness

of performance measurement and evaluation systems, and incentives to do good work. Cultural variables comprise

the values of the organization. These organizational, control, and cultural variables are managerial levers used by

decision makers to effect changes in their organizations. These managerial levers are discussed in detail in Chapter 3. FIGURE 1.4

Summary of strategic approaches and IT applications.

Strategic Approach Key Idea Application to Information Systems

Porte s generic strategies Firms achieve competitive advantage through cost leadership, differentiation, or focus. Understanding which strategy is chosen by a rm is critical to choosing IS to

complement the strategy.

Dynamic environment strategies Speed, agility, and aggressive moves and countermoves by a rm create

competitive advantage. The speed of change is too fast for

manual response, making IS critical to

achieving business goals.

James I. Cash, Robert G. Eccles, Nitin Nohria, and Richard L. Nolan, Building the Information Age Organization (Homewood, IL: Richard D. Irwin, 1994).

Our objective is to give the manager a framework to use in evaluating various aspects of organizational design.

In this way, the manager can review the current organization and assess which components may be missing and

what future options are available. Understanding organizational design means answering the following questions:

1. What are the important structures and reporting relationships within the organization?

2. Who holds the decision rights to critical decisions?

3. What are the important people‐based networks (social and informational), and how can we use them to get

work done better?

4. What are the characteristics, experiences, and skill levels of the people within the organization?

5. What are the key business processes?

6. What control systems (management and measurement systems) are in place?

7. What are the culture, values, and beliefs of the organization?

The answers to these questions inform the assessment of the organization’s use of IS. Chapters 3, 4, and 5 use

the Managerial Levers model to assess the impact of information systems (IS) on the rm. Chapters 8 and 9 use this

same list to understand the business and governance of the IS organization.

Brief Overview of Information Systems Strategy IS strategy is the plan an organization uses to provide information services. IS allow a company to implement its

business strategy. JetBlue’s former Vice President for People explains it nicely: “We dene what the business needs

and then go nd the technology to support that.” 17

Business strategy is a function of competition (What does the customer want and what does the competition

do?), positioning (In what way does the rm want to compete?), and capabilities (What can the rm do?). IS help

Organizational effectiveness Strategy Organization Control

Culture

Performance

measurement and

evaluation

Incentives

and rewards

Values

Formal

reporting

relationships Planning

Business

processes Decision

rights

Data

Informal

networks People,

Information, and Technology

Execution

FIGURE 1.5 Managerial Levers model.

Source: J. Cash, R. G. Eccles, N. Nohria, and R. L. Nolan, Building the Information Age Organization (Homewood, IL: Richard D.

Irwin, 1994).

17 Hogue et al., Winning the 3‐Legged Race , 111.

determine the company ’ s capabilities. An entire chapter is devoted to understanding key issues facing general man-

agers concerning IT architecture, but for now a more basic framework is used to understand the decisions related

to IS that an organization must make. The purpose of the matrix in Figure 1.6 is to give the manager a high‐level view of the relation between the

four IS infrastructure components and the other resource considerations that are keys to IS strategy. Infrastructure

FIGURE 1.6

IS strategy matrix.

What Who Where

Hardware The physical devices of the system System users and managers Physical location of devices (cloud, data center, etc.)

Software The programs, applications, and utilities System users and managers The hardware it resides on and

physical location of that hardware

Networking The way hardware is connected to other hardware, to the Internet, and

to other outside networks System users and managers;

company that provides the serviceWhere the nodes, the wires, and

other transport media are located

Data Bits of information stored in the system Owners of data; data

administratorsWhere the information resides

Social Business Lens: Building a Social Business Strategy

Some companies use social IT as point solutions for business opportunities, but others build a social business

strategy that considers the application of social IT tools and capabilities to solve business opportunities holisti-

cally. A

social business strategy is a plan of how the rm will use social IT that is aligned with its organizational strat-

egy and IS strategy. Social business strategy includes a vision of how the business would operate if it seamlessly

and thoroughly incorporated social and collaborative capabilities throughout the business model. It answers the

same type of questions of what, how, and who, as do many other business strategies.

Social businesses infuse social capabilities into their business processes. Most of the social business opportu-

nities fall into one of three categories:

Collaboration —using social IT to extend the reach of stakeholders, both employees and those outside the

enterprise walls. Social IT such as social networks enable individuals to find and connect with each other to

share ideas, information, and expertise.

Engagement —using social IT to involve stakeholders in the traditional business of the enterprise. Social IT such as

communities and blogs provide a platform for individuals to join in conversations, create new conversations,

and offer support to each other and other activities that create a deeper feeling of connection to the company,

brand, or enterprise.

Innovation —using social IT to identify, describe, prioritize, and create new ideas for the enterprise. Social IT offers

community members a “super idea box” where individuals suggest new ideas, comment on other ideas, and

vote for their favorite idea, giving managers a new way to generate and decide on products and services.

National Instruments (ni.com) is an example of a company that has embraced social IT and created a social

business strategy. Managers developed a branded community consisting of a number of social IT tools like Face-

book, Twitter, blogs, forums, and more. By thinking holistically about all the ways that customers and employees

might interact with one another, the branded community has become the hub of collaboration, engagement, and

idea generation.

Source: Adapted from

Keri Pearlson

, “ Killer Apps for a Social Business ” (February 17, 2011 ) , http://instantlyresponsive.wordpress.

com/2011/02/27/killer apps for a social business/ (accessed March 19, 2015). For more information on National Instruments,

see Harvard Business school case study 813001, “National Instruments” by Lynda Applegate, Keri Pearlson, and Natalie Kindred.

includes hardware, such as desktop units and servers. It also includes software, such as the programs used to do

business, to manage the computer itself and to communicate between systems. The third component of IS infra-

structure is the network, which is the physical means by which information is exchanged among hardware com-

ponents. Examples include ber networks such as Google Fiber, cable networks such as those provided by Time

Warner, AT&T, and Comcast, WiFi provided by many local services, and 3G/4G/WiMax technologies (which are

actually Internet communication standards, but some phone companies adopt those terms as the name of networks

they offer). Some communications are conducted through a private digital network, managed by an internal unit).

Finally, the fourth part of the infrastructure is the data. The data include the bits and bytes stored in the system. In current systems, data are not necessarily stored alongside the programs that use them; hence, it is important to

understand what data are in the system and where they are stored. Many more detailed models of IS infrastructure

exist, and interested readers may refer to any of the dozens of books that describe them. For the purposes of this

text, the IS strategy matrix provides sufcient information to allow the general manager to assess the critical issues in information management. Because of the advanced state of technology, many managers are more familiar with the use of platforms and

applications, or apps. Platforms are technically any set of technologies upon which other technologies or appli-

cations run. Often they are a combination of hardware and operating system software. Microsoft Windows and

Apple’s Macintosh with its latest operating system are two examples of platforms. Also common are mobile plat-

forms such as the iPhone and Samsung/Android phone. Applications or apps, on the other hand, are self‐contained

software programs that fulll a specic purpose and run on a platform. The term “apps” became popular from the

smart phone industry, beginning when Apple offered an online marketplace for customers to download small pro-

grams to run on their devices. But more recently, because all platforms have applications that run on them, the term apps has taken on a broader meaning.

SUMMARY

The Information Systems Strategy Triangle represents a simple framework for understanding the impact of IS on businesses. It

relates business strategy with IS strategy and organizational strategy and implies the balance that must be maintained in busin ess

planning. The Information Systems Strategy Triangle suggests the following management principles.

Business Strategy

Business strategy drives organizational strategy and IS strategy. The organization and its IS should clearly support dened

business goals and objectives.

• Denition: A well‐articulated vision of where a business seeks to go and how it expects to get there

• Example Models: Porter’s generic strategies model; dynamic environment models

Organizational Strategy

Organizational strategy must complement business strategy. The way a business is organized either supports the implementation

of its business strategy or it gets in the way. • Denition: The organization’s design, as well as the choices it makes to dene, set up, coordinate, and control its work processes

• Example Model: managerial levers

IS Strategy

IS strategy must complement business strategy. When IS support business goals, the business appears to be working well. IS

strategy can itself affect and is affected by changes in a rm’s business and organizational strategies. Moreover, IS strategy

always has consequences—intended or not—on business and organizational strategies.

• Denition: The plan the organization uses in providing information systems and services

• Models: A basic framework for understanding IS decisions for platform, applications, network and data‐relating architecture (the “what”), and the other resource considerations (“who” and “where”) that represent important planning constraints

Strategic Relationships

Organizational strategy and information strategy must complement each other. They must be designed so that they support,

rather than hinder, each other. If a decision is made to change one corner of the triangle, it is necessary to evaluate the other two

corners to ensure that balance is preserved. Changing business strategy without thinking through the effects on the organizatio n

and IS strategies will cause the business to struggle until balance is restored. Likewise, changing IS or the organization alon e

will cause an imbalance.

DISCUSSION QUESTIONS 1. Why is it important for business strategy to drive organizational strategy and IS strategy? What might happen if the business

strategy was not the driver?

2. In 2015, the NFL decided to hand out Microsoft Surface tablets to all coaches for use during games, and there are reports

that in the future, they will add HoloLens devices to provide augmented reality. 18

A HoloLens device is a high‐definition,

head‐mounted display that allows coaches to see the plays with text and animation superimposed right on the live images. If

the NFL simply handed them out without making any other formal changes in organizational strategy or business strategy,

what might be the outcome? What unintended consequences might occur?

3. Consider a traditional manufacturing company that wants to build a social business strategy. What might be a reasonable

business strategy, and how would organization and IS strategy need to change? How would this differ for a restaurant chain?

A consumer products company? A nonprofit?

4. This chapter describes key components of an IS strategy. Describe the IS strategy of a consulting firm using the matrix

framework.

5. What does this tip from Fast Company mean: “The job of the CIO is to provide organizational and strategic flexibility”? 19

KEY TERMS apps (p. 27)

blue ocean strategy (p. 24)

business model (p. 20)

business strategy (p. 21)collaboration (p. 28)cost leadership (p. 22)

creative destruction (p. 24)

differentiation (p. 22)

dynamic capabilities (p. 24)engagement (p. 28)focus (p. 22)hypercompetition (p. 23)

Information Systems Strategy

Triangle (p. 18)

innovation (p. 28)

IS strategy (p. 26) managerial levers (p. 25)mission (p. 19)

organizational strategy (p. 25)

red ocean strategy (p. 24)

social business strategy (p. 27)

strategy (p. 19)

Sean Michael, “NFL Teams Will Use Surface Pro 3s in 2015 and May Use HoloLens in the Future,” WinBeta (August 7, 2015), http:/ /www.winbeta.

org/news/nfl‐teams‐will‐use‐surface‐pro‐3s‐2015‐and‐may‐use‐hololens‐future (accessed August 21, 2015). 19 “Technology: How much? How fast? How revolutionary? How expensive?” Fast Company (March 2002), http://www.fastcompany.com/44651/

technology‐how‐much‐how‐fast‐how‐revolutionary‐how‐expensive (accessed August 21, 2015).

Lego has long been an industry leader in children ’ s toys with its simple yet unique building block‐style products. A Danish

carpenter whose family still owns Lego today founded the privately held company in 1932. But by 2004, the company found

itself close to extinction, losing $1 million a day. A new CEO was brought in, and within ve years sales were strong, pro ts

were up, and naysayers who felt the new strategy was going to fail were proved wrong. In fact, sales, revenues and pro ts

continued to be strong. Revenues grew from 16 billion Danish krone (DKK) in 2010 to over 28 billion DKK in 2014, and in

the same period, pro t almost doubled from 3.7 billion DKK to 7 billion DKK.

With the advent of high‐tech forms of entertainment, such as the iPod and PlayStation, Lego found itself more antique

than cutting edge in the toy world. When new CEO Jorgen Vig Knudstorp, a father and former McKinsey consultant, took

over, the company was struggling with poor performance, missed deadlines, long development times, and a poor delivery

record. The most popular toys frequently would be out of stock, and the company was unable to ship enough products or manage the production of its more complicated sets. Retail stores were frustrated, and that translated into reduced shelf

space and ultimately to business losses. Knudstorp changed all of that. He reached out to top retailers, cut costs, and added missing links to the supply chain. For

example, prior to the new strategy, 90% of the components were used in just one design. Designers were encouraged to reuse

components in their new products, which resulted in a reduction from about 13,000 different Lego components to 7,000.

Because each component ’ s mold could cost up to 50,000 euros on average to create, this reduction saved signi cant expense.

Lego was known for its traditional blocks and components that would allow children to build just about anything their

imagination could create. The new strategy broadened the products, targeting new customer segments. Lego managers cre-

ated products based on themes of popular movies, such as Star Wars and the Indiana Jones series. The company moved

into video games, which featured animated Lego characters sometimes based on movies. The company created a product

strategy for adults and engaged the communities who had already set up thousands of Web sites and blogs featuring Lego

creations. It embraced the community who thought of Lego as a way to create art rather than simply as a building toy. And

the company designed a line of Legos aimed at girls because the majority of its products had primarily targeted boys.

The culture of Lego changed to one that refused to accept nonperformance. The company ’ s past showed a tendency to

focus on innovation and creativity, often at the expense of pro ts. But that changed. “Knudstorp . . . made it clear that results,

not simply feeling good about making the best toys, would be essential if Lego was to succeed. . . . Its business may still be

fun and games, but working here isn ’ t,” 20

describes the current culture at Lego .

Some of the most drastic changes came from within the Lego organization structure. After its massive losses in 2004,

Lego switched its employee pay structure, offering incentives for appropriate product innovation and sales. Key performance

indicators encourage product innovation that catalyzes sales while decreasing costs. Development time dropped by 50%, and

some manufacturing and distribution functions were moved to less expensive locations, but the focus on quality remained.

The creation of reusable parts alleviated some of the strain on Lego ’ s supply chain, which in turn helped its bottom line.

Lego also expanded into the virtual world, extending into video gaming and virtual‐interaction games on the Internet.

Thinking outside the company ’ s previous product concepts cut costs while encouraging real‐time feedback from customers

across a global market. Additionally, Lego created brand ambassadors who organized conventions across the world to dis-

cuss product innovation and to build communities of fellow customers. With increased revenue, Lego managers considered

entering the movie‐making business—a risky proposition for a toy company. However, Lego ’ s success with Hollywood‐type

action gures fueled its interest in a movie‐making endeavor.

The growth put strains on the IS supporting the business. Order management and ful llment were particularly affected,

resulting in the inability to meet customer demand. Employee management systems were stretched as new employees were

added to support the growth and additional locations. Product design and development, especially the virtual and video

games, required new technology, too. To solve some of these problems, Lego managers used the same approach they used for their blocks. They created a

modularized and standardized architecture for their IS, making it possible to expand more quickly and add capacity and

functionality as it was needed. They implemented an integrated enterprise system that gave them new applications for

human capital management, operations support, product life cycle management, and data management. The new systems

and services, purchased from vendors such as SAP and IBM , simpli ed the IT architecture and the management processes

needed to oversee the IS.

■

CASE STUDY 1‐1

Lego

Nelson D. Schwartz , “ Turning to Tie‐Ins, Lego Thinks Beyond the Brick ,” The New York Times

, September 5, 2009 , http://www.nytimes.

com/2009/09/06/business/global/06lego.html?pagewanted=all&_r=0 (accessed August 21, 2015) .

One manager at Lego summed it up nicely, “The toy world moves onwards constantly, and Lego needs to re‐invent itself

continuously. Signi cant corporate re‐shaping introduced new energy to the company.” 21

He went on to say that simplifying

Lego ’ s IT systems and implementing an ef cient product development process that was able to maintain quality and cost

favorably positioned Lego to respond to the fast changing pace of the toy industry.

Discussion Questions

1. How did the information systems and the organization design changes implemented by Knudstorp align with the changes

in business strategy?

2. Which of the generic strategies does Lego appear to be using based on this case? Provide support for your choice.

3. Are the changes implemented by Knudstorp an indication of hypercompetition? Defend your position.

4. What advice would you give Knudstorp to keep Lego competitive, growing, and relevant?

Sources: Adapted from http://www.nytimes.com/2009/09/06/business/global/06lego.html (accessed August 21, 2015) ; Brad Wieners ,

“ Lego Is for Girls ” (December 19, 2011 ), 68 – 73 ; information from Lego s 2012 annual report, http://www.lego.com/en‐us/aboutus/news‐

room/2013/february/annual‐result‐2012 (accessed March 29, 2015); and “Lego Case Study,” http://thelegocasestudy.com (accessed

March 29, 2015).

Started in the late 1990s, Google grew rapidly to become one of the leading companies in the world. Its mission is “to

organize the world ’ s information and make it universally accessible and useful.” It is operating on a simple but innovative

business model of attracting Internet users to its free search services and earning revenue from targeted advertising. In the

winner‐takes‐all business of Internet search, Google has captured considerably more market share than its next highest rival,

Yahoo . This has turned Google ’ s Web pages into the Web ’ s most valuable real (virtual) estate. Through its two agship pro-

grams, AdWords and AdSense, Google has capitalized on this leadership position in searching to capture the lion ’ s share in

advertisement spending. AdWords enables businesses to place ads on Google and its network of publishing partners using

an auction‐engine algorithm to decide which ad will appear on a given page. On the other hand, Google uses AdSense to

push advertisements on publishing partners ’ Web sites targeting a speci c audience and share ad revenue with the publishing

partner. This creates a win–win situation for both advertisers and publishers; Google makes more than 90% of its revenue from ads. Even as a large company, Google continues to take risks and expand into new markets. Innovation is at the core of their

enterprise. Sergey Brin and Larry Page, the founders, declared in Google ’ s IPO prospectus, “We would fund projects that

have a 10% chance of earning a billion dollars over the long term. . . We place smaller bets in areas that seem very specula-

tive or even strange. As the ratio of reward to risk increases, we will accept projects further outside our normal areas.” They

add that they are especially likely to fund new types of projects when the initial investment is small.

Google promotes a culture of creativity and innovation in a number of ways. It encourages innovation in all employees

by allowing them to spend 20% of their time on a project of their own choosing. In addition, the company offers bene ts

such as free meals, on‐site gym, on‐site dentist, and even washing machines at the company for busy employees.

Despite an open and free work culture, a rigid and procedure‐ lled structure is imposed for making timely decisions and

executing plans. For example, when designing new features, the team and senior managers meet in a large conference room.

They use the right side of the conference room walls to digitally project new features and the left side to project any tran-

scribed critique with a timer clock giving everyone 10 minutes to lay out ideas and nalize features. Thus, Google utilizes

rigorous, data‐driven procedures for evaluating new ideas in the midst of a chaotic innovation process. Nine notions of innovations are embedded in the organizational culture, processes, and structure of Google: 22

1. “Innovation Comes from Anywhere”: All Google employees can innovate.

2. “Focus on the User”: When focus is on the user, the money and all else will follow.

■

CASE STUDY 1‐2

Google

https://www.vmware.com/files/pdf/partners/sap/sap‐vmware‐lego‐cs‐en.pdf (accessed September 11, 2015).

22 Kathy Chin Long , “ Google Reveals its Nine Principles of Innovations ,” Fast Company

, http://www.fastcompany.com/3021956/how‐to‐be‐a‐success‐

at‐everything/googles‐nine‐principles‐of‐innovation (accessed March 30, 2015 ) .

3. “Aim to be Ten Times Better”: To get radical and revolutionary innovation, think 10 times improvement to force out‐of‐the‐box thinking.

4. “Bet on Technical Insights”: Trust your organization ’ s unique insights and bet on them for major innovation.

5. “Ship and Iterate”: Do not wait for perfection; let users help you to “iterate.”

6. “Give Employees 20 Percent Time”: Employees will delight you with their creative thinking. Give them 20 percent of their work time to pursue projects they are passionate about.

7. “Default to Open Processes”: Make processes open to all to tap into the collective energy of the user base to find great ideas.

8. “Fail Well”: Do not attach stigma to failure. If you do not fail often, you are not trying hard enough. Let people and projects fail with pride.

9. “Have a Mission That Matters”: Google believes that its work has a positive impact on millions of people and that this is motivating its people every day.

Keeping up with the organizational strategy of Google , its IT department provides free and open access to IT for all

employees. Rather than keeping tight control, Google allows employees to choose from several options for computer and

operating systems, download software themselves, and maintain of cial and unof cial blog sites. Google ’ s intranet provides

employees information about every piece of work at any part of the company. In this way, employees can nd and join hands

with others working on similar technologies or features. In building the necessary IT infrastructure, Google ’ s IT department balances buying and making its own software depend-

ing on its needs and off‐the‐shelf availability. Google thinks of every IT decision “at Web Scale” to make sure its technology

works well for its customers. Given the nature of business, security of information resources is critical for Google . For

instance, its master search algorithm is considered a more valuable secret formula than Coca‐Cola ’ s. However, rather than

improving IT security by sti ing freedom through preventive policy controls, Google puts security in the infrastructure and

focuses more on detective and corrective controls. Its network management software tools combined with a team of security

engineers constantly look for viruses and spyware as well as strange network traf c patterns associated with intrusion.

Discussion Questions

1. How is Google ’ s mission statement related to its business strategy?

2. How does Google ’ s information systems strategy support its business strategy?

3. How does Google ’ s organizational strategy support its business strategy?

4. Which of Porter ’ s three generic strategies does Google appear to be using based on this case? Provide a rationale for

your response.

5. Analyze Google ’ s strategy and the type of market disruption it has created using a dynamic environment perspective.

Sources: Adapted from Michelle Colin , “ Champions of Innovation ,”

Businessweek

3989 (June 1 8 , 2006 ), 18–26 , http://www.bloomberg.

com/bw/stories/2006‐06‐18/champions‐of‐innovation; Vauhini Va r a

, “ Pleasing Google s Tech‐Savvy Staff ” (March 18, 2008 ) , B6; Jason

Bloomberg , “ Google s Three‐Pronged Enterprise Strategy ,” Forbes Online (December 12, 2014 ) ; and Connor Forrest , “ Four Ways

Google Makes Money ,”

TechRepublic

(January 16, 2015 ) , http://www.techrepublic.com/article/four‐ways‐google‐makes‐money‐

outside‐of‐advertising/ (accessed August 21, 2015 ).

chapter

This chapter introduces the concept of building competitive advantage using information

systems‐based applications. It begins with a discussion of a set of eras that describe the use

of information resources historically. It then presents information resources as strategic tools,

discussing information technology (

) assets and IT capabilities. Michael Porter s Five Com-

petitive Forces model then provides a framework for discussing strategic advantage, and

his Value Chain model addresses tactical ways organizations link their business processes

to create strategic partnerships. We then introduce the Piccoli and Ive s model to show how

strategic advantage may be sustained in light of competitive barriers while the Resource‐

Based View focuses on gaining and maintaining strategic advantage through information

and other resources of the rm. The chapter concludes with a brief discussion of strategic

alliances, co‐opetition, risks of strategic use of IT, and cocreating IT and business strategy. Just as a note: this chapter uses the terms

competitive advantage and strategic advantage

interchangeably.

Inditex Web site, http://www.inditex.com/en/who_we_are/concepts/zara (accessed February 20, 2012); http://www.marinabaysand s.

com/shopping/zara.html (accessed May 2, 2015).

Strategic Use of

Information Resources

Zara , a global retail and apparel manufacturer based in Arteixo, Spain, needed a dynamic business

model to keep up with the ever‐changing demands of its customers and industry. At the heart of its

model was a set of business processes and an information system that linked demand to manufactur-

ing and manufacturing to distribution. The strategy at Zara stores was simply to have a continuous ow of new products that were typically in limited supply. As a result, regular customers visited

their stores often—an average of 17 times a year whereas many retail stores averaged only four

times a year. When customers saw something they liked, they bought it on the spot because they

knew it would probably be gone the next time they visited the store. The result was a very loyal and

satis ed customer base and a wildly pro table business model. How did Zara do it? It was possible in part because the company aligned its information system

strategy with its business strategy. Its corporate Web site gave some insight:

Zara

s approach to design is closely linked to our customers. A non‐stop ow of information from

stores conveys shoppers desires and demands, inspiring our 200‐person strong creative team. 1

The entire process from factory to shop oor is coordinated from Zara ’ s headquarters by using

information systems. The point‐of‐sale (POS) system on the shop oor records the information from

each sale, and the information is transmitted to headquarters at the end of each business day. Using

a handheld device, the Zara shop managers also report daily to the designers at headquarters to let

them know what has sold and what the customers wanted but couldn ’ t nd. The information is used

to determine which product lines and colors should be kept and which should be altered or dropped.

The designers communicate directly with the production staff to plan for the incredible number of designs—more

than 30,000—that will be manufactured every year. 2

The shop managers have the option to order new designs twice a week using handheld computers. Before order-

ing, they can use these devices to check out the new designs. Once an order is received at the manufacturing plant at

headquarters, a large computer‐controlled piece of equipment calculates how to position patterns to minimize scrap

and cut up to 100 layers of fabric at a time. The cut fabric is then sent from Zara factories to external workshops for

sewing. The completed products are sent to distribution centers where miles of automated conveyor belts are used

to sort the garments and recombine them into shipments for each store. Zara’s Information Systems (IS) department

wrote the applications controlling the conveyors, often in collaboration with vendors of the conveyor equipment. As the Zara example illustrates, innovative use of a rm’s information resources can provide it substantial

and sustainable advantages over competitors. Every business depends on IS, making its use a necessary resource

every manager must consider. IS also can create a strategic advantage for rms who bring creativity, vision, and

innovation to their IS use. The Zara case is an example. This chapter uses the business strategy foundation from

Chapter 1 to help general managers visualize how to use information resources for competitive advantage. This

chapter highlights the difference between simply using IS and using IS strategically. It also explores the use of

information resources to support the strategic goals of an organization. The material in this chapter can enable a general manager to understand the linkages between business strategy

and information strategy on the Information Systems Strategy Triangle. General managers want to nd answers to

questions such as: Does using information resources provide a sustainable and defendable competitive advantage?

What tools are available to help shape strategic use of information? What are the risks of using information resources

to gain strategic advantage?

Evolution of Information Resources

The Eras model (Figure 2.1) summarizes the evolution of information resources over the past six decades. To think

strategically about how to use information resources now and in the future within the rm, a manager must under-

stand how the company arrived at where it is today. This model provides a good overview of trends and uses that

have gotten the company from simple automation of tasks to extending relationships and managing their business

ecosystems to where it is today. IS strategy from the 1960s to the 1990s was driven by internal organizational needs. First came the need to

lower existing transaction costs. Next was the need to provide support for managers by collecting and distributing

information followed by the need to redesign business processes. As competitors built similar systems, organi-

zations lost any advantages they had derived from their IS, and competition within a given industry once again

was driven by forces that existed prior to the new technology. Most recently, enterprises have found that social IT

platforms and capabilities drive a new evolution of applications, processes, and strategic opportunities that often

involve an ecosystems of partners rather than a list of suppliers. Business ecosystems are collections of interacting

participants, including vendors, customers, and other related parties, acting in concert to do business. 3

In Eras I through III, the value of information was tied to physical delivery mechanisms. In these eras, value was

derived from scarcity reected in the cost to produce the information. Information, like diamonds, gold, and MBA

degrees, was more valuable because it was found in limited quantities. However, the networked economy beginning

in Era IV drove a new model of value—value from plenitude. Network effects offered a reason for value derived

from plenitude; the value of a network node to a person or organization in the network increased when others joined

the network. For example, an e‐mail account has no value without at least one other e‐mail account with which to

communicate. As e‐mail accounts become relatively ubiquitous, the value of having an e‐mail account increases

as its potential for use increases. Further, copying additional people on an e‐mail is done at a very low cost (virtu-

ally zero), and the information does not wear out (although it can become obsolete). As the cost of producing an

2 Shenay Kentish, Zara (October 18, 2011), http://unilifemagazine.com.au/special‐interest/zara/ (accessed April 10, 2012).

3 For further discussion of business ecosystems, please refer to Nicholas Vitalari and Hayden Shaughnessy, The Elastic Enterprise (Longboat Key, FL:

Telemachus Press, 2012).

additional copy of an information product within a network becomes trivial, the value of that network increases. Therefore, rather than using production costs to guide the determination of price, information products might be

priced to reect their value to the buyer. 4

As each era begins, organizations adopt a strategic role for IS to address not only the rm’s internal circum-

stances but also its external circumstances. Thus, in the value‐creation era (Era V), companies seek those appli-

cations that again provide them an advantage over their competition and keep them from being outgunned by

start‐ups with innovative business models or traditional companies entering new markets. For example, companies

like Microsoft, Google, Apple, and Facebook have created and maintained a competitive advantage by building

technical platforms and organizational competencies that allow them to bring in partners as necessary to create

new products and services for their customers. Their business ecosystems give them agility as well as access to

talent and knowledge, extending the capabilities of their internal staff. Other rms simply try to solve all customer

requests themselves. Era VI has brought another paradigm shift in the use of information with an era of hyperplenitude: seem-

ingly unlimited availability of information resources such as the Internet and processing and storage through

FIGURE 2.1

Eras of information usage in organizations.

Era I 1960s Era II 1970s Era III 1980s Era IV 1990s Era V 2000s Era VI 2010+

Primary Role of IT Efciency Effectiveness Strategy Strategy Value

creationValue extension

Automate

existing paper‐based

processes Solve

problems

and create opportunities Increase individual and

group

effectiveness Transform industry/

organization

Create

collaborative

partnershipsCreate community and social businessConnecting

intelligent

devices

Justify IT

Expenditures Return on

investment Increase in

productivity and better decision quality Competitive position

Competitive positionAdded value Creation of

relationshipsAutomated information

exchange

Target of Systems Organization Organization/

Group Individual

manager/

Group Business

processes

Customer/ Supplier

relationshipsCustomer/

Employee/supplier ecosystemIntelligent

devices

Information Models Application specic Data driven User driven Business

drivenKnowledge

drivenPeople

driven (or

relationship

driven)Data

exchange

driven

Dominant

Technology Mainframe,

“centralized

intelligence” Minicomputer, mostly

“centralized

intelligence” Microcomputer,

“decentralized

intelligence”

Client server, “distributed

intelligence”Internet, global “ubiquitous

intelligence”Social

platforms, social

networks, mobile

, cloud Intelligent

devices,

sensors,

electronics

Basis of

Value Scarcity Scarcity Scarcity Plenitude Plenitude Hyperplenitude

Underlying Economics Economics of information bundled with economics of things Economics of information bundled with economics of things Economics of information bundled with economics of things Economics of information

separated

from economics of thingsEconomics of information

separated

from economics of thingsEconomics of

relationships bundled with economics of information

Economics of

informa tion bundled with economics of things

Adapted from M. Broadbent, P. Weill, and D. Clair. “The Implications of Information Technology Infrastructure for Business Process Redesign,” MIS

Quarterly 23, no. 2 (1999), 163.

cloud computing sparked new value sources such as community and social business and the Internet of Things

(connecting intelligent devices, sensors, and other electronics). The Information System Strategy Triangle introduced in Chapter 1 reects the linkages between a rm’s IS strat-

egy, organizational strategy, and business strategy. A link between IS strategy and business strategy focuses on the

rm’s external requirements whereas a link between IS strategy and organizational strategy fullls and enhances

internal requirements of the rm. Maximizing the effectiveness of the rm’s business strategy requires that the

general manager be able both to identify and use information resources. This chapter describes how information

resources can be used strategically by general managers.

Information Resources as Strategic Tools

Crafting a strategic advantage requires the general manager to cleverly combine all the rm’s resources, includ-

ing nancial, production, human, and information, and to consider external resources such as the Internet and

opportunities in the global arena. Information resources are more than just the infrastructure. This generic term,

information resources , is dened as the available data, technology, people, and processes within an organization

to be used by the manager to perform business processes and tasks. Information resources can either be assets or capabilities. An IT asset is any thing, tangible or intangible, that can be used by a rm to create, produce, and/or

offer its products (goods or services). Examples of IT assets include a rm’s Web site, data les, or computer equip-ment. An IT capability is something that is learned or developed over time for the rm to create, produce, or offer

its products. An IT capability makes it possible for a rm to use its IT assets effectively. 5

The ability and knowledge

to create a Web site, work with data les, and take advantage of IT equipment are examples of capabilities. An IS infrastructure (a concept that is discussed in detail in Chapter 6) is an IT asset. It includes each of an

information resource’s constituent components (i.e., data, technology, people, and processes). The infrastructure

provides the foundation for the delivery of a rm’s products or services. Another IT asset is an information repos-

itory , which is logically related data captured, organized, and retrieved by the rm. Some information repositories

are lled with internally oriented information designed to improve the rm’s efciency. Other repositories tap the

external environment and contain signicant knowledge about the industry, the competitors, and the customers.

Although most rms have these types of information repositories, not all rms use them effectively. In the continually expanding Web space, the view of IT assets is broadening to include potential resources that

are available to the rm but that are not necessarily owned by it. These additional information resources are often

available as a service rather than as a system to be procured and implemented internally. For example, Internet‐

based software (also called software as a service, or SAAS ), such as SalesForce.com, offers managers the opportu-

nity to nd new ways to manage their customer information with an externally based IT resource. Social networking

systems such as Facebook and LinkedIn offer managers the opportunity to nd expertise or an entire network of

individuals ready to participate in the corporate innovation processes using relatively little capital or expense. The three major categories of IT capabilities are technical skills, IT management skills, and relationship skills.

Technical skills are applied to designing, developing, and implementing information systems. IT management skills

are critical for managing the IS department and IS projects. They include an understanding of business processes,

the ability to oversee the development and maintenance of systems to support these processes effectively, and the

ability to plan and work with the business units in undertaking change. Relationship skills can be focused either

externally or internally. An externally focused relationship skill includes the ability to respond to the rm’s market

and to work with customers and suppliers. The internal relationship between a rm’s IS managers and its business

managers is a spanning relationship skill and includes the ability of IS to manage partnerships with the business

units. Even though it focuses on relationships in the rm, it requires spanning beyond the IS department. Rela-

tionship skills develop over time and require mutual respect and trust. They, like the other information resources,

can create a unique advantage for a rm. Figure 2.2 summarizes the different types of information resources and

provides examples of each.

5 G. Piccoli and B. Ives, “IT‐Dependent Strategic Initiatives and Sustained Competitive Advantage: A Review and Synthesis of the Literature,” MIS

Quarterly 29, no. 4 (2003), 747–76.

Information resources exist in a company alongside other resources. The general manager is responsible for

organizing all resources so that business goals are met. Understanding the nature of the resources at hand is a pre-

requisite to using them effectively. By aligning IS strategy with business strategy, the general manager maximizes

the company’s prot potential. To ensure that information resources being deployed for strategic advantage are used

wisely, the general manager must identify what makes the information resource valuable (and the Eras model may

provide some direction) and sustainable. Meanwhile, the rm’s competitors are working to do the same. In this

competitive environment, how should the information resources be organized and applied to enable the organiza-

tion to compete most effectively?

How Can Information Resources Be Used Strategically?

The general manager confronts many elements that inuence the competitive environment of his or her enterprise.

Overlooking a single element can bring about disastrous results for the rm. This slim tolerance for error requires

the manager to take multiple views of the strategic landscape. Three such views can help a general manager align

IS strategy with business strategy. The rst view uses the ve competitive forces model by Michael Porter to look

at the major inuences on a rm’s competitive environment. Information resources should be directed strategically

to alter the competitive forces to benet the rm’s position in the industry. The second view uses Porter’s value

chain model to assess the internal operations of the organization and partners in its supply chain. Information

resources should be directed at altering the value‐creating or value‐supporting activities of the rm. We extend this

view further to consider the value chain of an entire industry to identify opportunities for the organization to gain

competitive advantage. The third view specically focuses on the types of IS resources needed to gain and sustain

competitive advantage. These three views provide a general manager with varied perspectives from which to iden-

tify strategic opportunities to apply the rm’s information resources.

Using Information Resources to In uence Competitive Forces

Porter provides the general manager a classic view of the major forces that shape the competitive environment of an

industry, which affects rms within the industry. These ve competitive forces are shown in Figure 2.3 along with

some examples of how information resources can be applied to inuence each force. This view reminds the general

FIGURE 2.2

Information resources.

Source: Adapted from G. Piccoli and B. Ives, “IT‐Dependent Strategic Initiatives and Sustained Competitive Advantage: A Review

and Synthesis of the Literature,”

MIS Quarterly 29, no. 4 (2005), 755.

IT Assets IT Capabilities

IT Infrastructure • Hardware

• Software and company apps

• Network• Data

• Web site

Information Repository • Customer information

• Employee information

• Marketplace information

• Vendor information Technical Skills

• Prociency in systems analysis

• Programming and Web design skills

• Data analysis/data scientist skills

• Network design and implementation skills

IT Management Skills • Business process knowledge

• Ability to evaluate technology options

• Project management skills

• Envisioning innovative IT solutions

Relationship Skills • Spanning skills such as business‐IT relationship management

• External skills such as vendor management

manager that competitive forces result from more than just the actions of direct competitors. We explore each force

in detail from an IS perspective.

Potential Threat of New Entrants

Existing rms within an industry often try to reduce the threat of new entrants to the marketplace by erecting bar-

riers to entry. New entrants seem to come out of nowhere; established rms can diversify their business models and

begin to compete in the space occupied by existing rms, or an enterprising entrepreneur can create a new business

that changes the game for existing rms. Barriers to entry— including a rm’s controlled access to limited distribu-

tion channels, public image of a rm, unique relationships with customers, and an understanding of their industry’s

government regulations—help the rm create a stronghold by offering products or services that are difcult to dis-

place in the eyes of customers based on apparently unique features. Information resources also can be used to build

barriers that discourage competitors from entering an industry. For example, Google’s search algorithm is a source

of competitive advantage for the search company, and it’s a barrier of entry for new entrants that would have to cre-

ate something better to compete against Google. New entrants have failed to erode Google’s market share, which

holds fast at 65% in the United States and at over 90% in Europe. 6

Walmart, another example, effectively blocks

competition with its inventory control system, which helps it drive down expenses and ultimately offer lower costs

to customers. Any company entering Walmart’s marketplace would have to spend millions of dollars to build the

inventory control system and IS required to provide its operations with the same capabilities. Therefore, the system

at Walmart may be a barrier to entry for new companies. Search engine optimization (actions that a rm can take to improve its prominence in search results) has served

as a barrier to entry for some businesses. Consider the Web site that has the number one position in a user’s search.

There is only one number one position, making it an advantage for the company enjoying that position and a barrier

for all other Web sites seeking that position.

Bargaining Power of Suppliers

Bargaining Power of Buyers

Strategic use• Cost effectiveness

• Market access

• Differentiation of

product or service Strategic use

• Switching costs

• Access to distribution channels

• Economies of scale

Strategic use • Selection of supplier

• Threat of backward

integration Strategic use

• Buyer selection

• Switching costs

• Differentiation

Strategic use • Redefine products and

services

• Improve price/performance

Potential Threat of New Entrants

Threat of Substitute Products

Industry Competitors

FIGURE 2.3 Five competitive forces with potential strategic use of information resources.

Sources: Adapted from M. Porter, Competitive Strategy (New York: The Free Press, 1998); and Lynda M. Applegate, F. Warren

McFarlan, and James L. McKenney, Corporate Information Systems Management : The Issues Facing Senior Executives , 4th ed.

(Homewood, IL: Irwin, 1996).

6 “Viewed as a Monopoly in Europe, Google Takes on Role as a Wireless Trust‐Buster in U.S.,” New York Times (May 8, 2015), B1, B6.

Bargaining Power of Buyers

Customers often have substantial power to affect the competitive environment. This power can take the form of

easy consumer access to several retail outlets to purchase the same product or the opportunity to purchase in large

volumes at superstores like Walmart. Information resources can be used to build switching costs that make it less

attractive for customers to purchase from competitors. Switching costs can be any aspect of a buyer’s purchas-

ing decision that decreases the likelihood of “switching” his or her purchase to a competitor. Such an approach

requires a deep understanding of how a customer obtains the product or service. For example, Amazon.com’s

patented One Click option encourages return purchases by making buying easier. Amazon.com stores buyer

information, including a default credit card number, shipping method, and “ship‐to” address so that purchases

can be made with one click, saving consumers the effort of data reentry and further repetitive choices. Similarly,

Apple’s iTunes simple‐to‐use interface and proprietary software for downloading and listening to music makes

it difcult for customers to use other formats and technologies, effectively reducing the power of the buyers, the customers.

Bargaining Power of Suppliers

Suppliers’ bargaining power can reduce a rm’s options and ultimately its protability. Suppliers often strive to

“lock in” customers through the use of systems (and other mechanisms). For example, there are many options for

individuals to back up their laptop data, including many “cloud” options. The power of any one supplier is low

because there are a number of options. But Apple’s operating system enables easy creation of backups and increases

Apple’s bargaining power. Millions of customers nd it easy to use the iCloud, and they do. The force of bargaining power is strongest when a rm has few suppliers from which to choose, the quality of

supplier inputs is crucial to the nished product, or the volume of purchases is insignicant to the supplier. For

example, steel rms lost some of their bargaining power over the automobile industry because car manufacturers

developed technologically advanced quality control systems for evaluating the steel they purchase. Manufacturers

can now reject steel from suppliers when it does not meet the required quality levels. Through the Internet, rms continue to provide information for free as they attempt to increase their share of

visitors to their Web sites and gather information about them. This decision reduces the power of information sup-

pliers and necessitates nding new ways for content providers to develop and distribute information. Many Internet

rms are integrating backward or sideways within the industry, that is, creating their own information supply and

reselling it to other Internet sites. Well‐funded rms simply acquire these content providers, which is often quicker

than building the capability from scratch. One example of this was Amazon.com’s purchase of Zappos, the shoe

retailer. More recently, in 2015 LinkedIn acquired online learning company Lynda.com to add a capability to offer

professional development to the company’s business of networking, recruitment, and advertising.

Threat of Substitute Products

The potential of a substitute product in the marketplace depends on the buyers’ willingness to substitute, the

relative price‐to‐performance ratio of the substitute, and the level of switching costs a buyer faces. Information

resources can create advantages by reducing the threat of substitution. Substitutes that cause a threat come from

many sources. Internal innovations can cannibalize existing revenue streams for a rm. For example, new iPhones

motivate current customers to upgrade, essentially cannibalizing the older product line revenue. Of course, this is

also a preemptive move to keep customers in the iPhone product family rather than to switch to another competi-

tor’s product. The threat might come from potentially new innovations that make the previous product obsolete.

Tablets have reduced the market for laptops and personal computers. GPS systems have become substitutes for

paper maps, digital cameras have made lm and lm cameras obsolete, and MP3 music has sharply reduced the

market for vinyl records, record players, CDs, and CD players. Free Web‐based applications are a threat to soft-

ware vendors who charge for their products and who do not have Web‐based delivery. Revolutions of many kinds

and levels of maturity seem to be lurking everywhere. Cloud services are a substitute for data centers. Uber offers a

substitute for taxicabs. Managers must watch for potential substitutes from many different sources to fully manage

this competitive threat.

Industry Competitors

Rivalry among the rms competing within an industry is high when it is expensive for a rm to leave the industry,

the growth rate of the industry is declining, or products have lost differentiation. Under these circumstances, the

rm must focus on the competitive actions of rivals to protect its own market share. Intense rivalry in an industry

ensures that competitors respond quickly to any strategic actions. Facebook enjoys a competitive advantage in the

social networking industry. Other sites have tried to compete with Facebook by offering a different focus, either a

different type of interface or additional ways to network. Competition is erce and many start‐ups hope to “be the

next Facebook.” However, Facebook continues to lead the industry, in part by continued innovation and in part by its huge customer base, which continues to raise the bar for competitors. The processes that rms use to manage their operations and to lower costs or increase efciencies can provide

an advantage for cost‐focus rms. However, as rms within an industry begin to implement standard business

processes and technologies—often using enterprisewide systems such as those of SAP and Oracle—the industry

becomes more attractive to consolidation through acquisition. Standardizing IS lowers the coordination costs of

merging two enterprises and can result in a less competitive environment in the industry. One way competitors differentiate themselves with an otherwise undifferentiated product is through creative use

of IS. Information provides advantages in such competition when added to an existing product. For example, the

iPod, iPhone, iPad, and iWatch are differentiated in part because of the iTunes store and the applications available

only to users of these devices. Competitors offer some of the same information services, but Apple was able to take

an early lead by using information systems to differentiate their products. Credit card companies normally compete

on nancial services such as interest rate, fees, and payment period. But Capital One differentiated its credit cards

by adding information to its services; it provided customers their credit scores. Each of the competitive forces identied by Porter’s model is acting on rms at all times, but perhaps to a greater

or lesser degree. There are forces from potential new entrants, buyers, sellers, substitutes, and competitors at all

times, but their threat varies. Consider Zara, the case discussed in at the beginning of this chapter. See Figure 2.4

for a summary of these ve forces working simultaneously at the retailer and manufacturer. General managers can use the ve competitive forces model to identify the key forces currently affecting compe-

tition, to recognize uses of information resources to inuence forces, and to consider likely changes in these forces FIGURE 2.4 Application of ve competitive forces model for Zara.

Competitive Force IT Inuence on Competitive Force

Threat of New Entrant Zar s IT supports its tightly knit group of designers, market specialists, production managers, and production planners. New entrants are unlikely to

be able to provide IT to support such relationships that have been built over

time at Zara. Further, it has a rich information repository about customers that

would be hard to replicate.

Bargaining Power of Buyers Recently, Zara has employed laser technology to measure 10,000 women volunteers so that it can add the measurements of “real” customers into its

information repositories. This means that the new products will be more likely

to t Zara customers.

Bargaining Power of Suppliers Its computer‐controlled cutting machine cuts up to 1,000 layers at a time. A large number of sellers are available for the simple task of sewing the

pieces together. Zara has great exibility in choosing the sewing companies.

Industry Competitors Zara tracks breaking trends and focuses on meeting customer preferences for trendy, low‐cost fashion. The result is the highest sales per square foot in its

industry, virtually no advertising, only 10% of stock remaining unsold, very low

inventory levels, new products offered in 15 days from idea to shelves, and

extremely efcient manufacturing and distribution operations.

Threat of Substitute Products IT helps Zara offer extremely fashionable lines that are expected to last for approximately 10 wears. IT enables Zara to offer trendy, appealing apparel at

hard‐to‐beat prices, making substitutes difcult.

over time. The changing forces drive both the business strategy and IS strategy, and this model provides a way to

think about how information resources can create competitive advantage for a business unit and, even more broadly,

for the rm. The forces also can reshape an entire industry—compelling general managers to take actions to help

their rm gain or sustain competitive advantage.

Using Information Resources to Alter the Value Chain

A second lens for describing the strategic use of information systems is Porter’s value chain. The value chain model

addresses the activities that create, deliver, and support a company’s product or service. Porter divided these activ-

ities into two broad categories (Figure 2.5): support and primary activities. Primary activities relate directly to the

value created in a product or service whereas support activities make it possible for the primary activities to exist

and remain coordinated. Each activity may affect how other activities are performed, suggesting that information

resources should not be applied in isolation. For example, more efcient IS for repairing a product may increase

the possible number of repairs per week, but the customer does not receive any value unless his or her product is

repaired, which requires that the spare parts be available. Changing the rate of repair also affects the rate of spare

parts ordering. If information resources are focused too narrowly on a specic activity, then the expected value may

not be realized because other parts of the chain have not adjusted. The value chain framework suggests that competition stems from two sources: lowering the cost to perform

activities and adding value to a product or service so that buyers will pay more. To achieve true competitive

advantage, a rm requires accurate information on elements outside itself. Lowering activity costs achieves an

advantage only if the rm possesses information about its competitors’ cost structures. Even though reducing

isolated costs can improve prots temporarily, it does not provide a clear competitive advantage unless the

rm can lower its costs below a competitor’s. Doing so enables the rm to lower its prices as a way to grow its

market share. For example, many Web sites sell memory to upgrade laptops. But some sites, such as crucial.com, have an

option that automates the process prior to the sales process. These sites have the “Crucial System Scanner Tool,”

which scans the customer’s laptop, identies the current conguration and the capacity, and then suggests com-

patible memory upgrade kits. The customer uses the scanner, which identies the conguration of the laptop, and

automatically opens a Web page with the appropriate memory upgrades. The customer does not have to gure out

the conguration or requirements; it’s done automatically. By combining a software program like its congurator

with the sales process, crucial.com has added value to the customer’s experience by automating a key process.

Organization

Human Resources

TechnologyPurchasing

Inbound Logistics OutboundLogistics

Operations Marketing

and SalesService

Materials handling

DeliveryManufacturing

Assembly

Order

processingShippingProduct

Pricing

PromotionPlace Customer service

Repair

Primary Activities Support Activities

FIGURE 2.5

Value chain of the rm.

Source: Adapted from Michael Porter and Victor Millar, “How Information Gives You Competitive Advantage,” Harvard Business

Review (July–August 1985), reprint no. 85415.

Although the value chain framework emphasizes the activities of the individual rm, it can be extended, as

in Figure 2.6, to include the rm in a larger value system. This value system is a collection of rm value chains

connected through a business relationship and through technology. From this perspective, a variety of strategic

opportunities exist to use information resources to gain a competitive advantage. Understanding how information is

used within each value chain of the system can lead to new opportunities to change the information component of

value‐added activities. It can also lead to shakeouts within the industry as rms that fail to provide value are forced

out and as surviving rms adopt new business models. Opportunity also exists in the transfer of information across value chains. For example, sales forecasts gener-

ated by a manufacturer, such as a computer or automotive company, and linked to supplier systems create orders

for the manufacture of the necessary components for the computer or vehicle. Often this coupling is repeated from

manufacturing company to vendor/supplier for several layers, linking the value chains of multiple organizations. In

this way, each member of the supply chain adds value by directly linking the elements of its value chains to others. Optimizing a company’s internal processes, such as its supply chain, operations, and customer relationship

processes, can be another source of competitive advantage. Tools are routinely used to automate the internal oper-

ations of a rm’s value chain, such as supply chain management (SCM) to source materials for operations,

enterprise resource planning (ERP) systems to automate functions of the operations activities of the value chain,

and customer relationship management (CRM) systems to optimize the processing of customer information.

These systems are discussed in more detail in Chapter 5. In an application of the value chain model to the Zara example discussed earlier, Figure 2.7 describes the value

added to Zara’s primary and support activities provided by information systems. The focus in Figure 2.7 is on

value added to Zara’s processes, but suppliers and customers in its supply chain also realize the value added by

information systems. Most notably, the customer is better served as a result of the systems. For example, the stores

place orders twice a week over personal digital assistants (PDAs). Each night, managers use their PDAs to learn

about newly available garments. The orders are received and promptly processed and delivered. In this way, Zara

can be very timely in responding to customer preferences. Unlike the ve competitive forces model, which focuses on industry dynamics, the focus of the value chain is

on the rm’s activities. Yet, using the value chain as a lens for understanding strategic use of information resources

affects competitive forces because technology innovations add value to suppliers, customers, or even competitors

and potential new entrants.

Supplier’s Value

Chains Firm’s

Value

Chain Channel’s

Value

Chains Buyer’s

Value

Chains

FIGURE 2.6 The value system: Interconnecting relationships between organizations.

Sustaining Competitive Advantage

It might seem obvious that a rm would try to sustain its competitive advantage. After all, the rm might have

worked very hard to create advantages, such as those previously discussed. However, there is some controversy

about trying to sustain a competitive advantage. On one side are those who warn of hypercompetition as discussed in Chapter 1. 7

In an industry facing hyper-

competition, recall that trying to sustain an advantage can be a deadly distraction. Consider the banking industry as

a good example that has undergone much change over the past ve decades. In the 1960s, people needed to visit a

physical bank for all transactions, including withdrawing from or depositing to their accounts and transferring among

accounts. In the 1970s, some banks took a chance and invested in automated teller machines (ATMs) and were

among the innovators in the industry. In the 1980s, some banks pioneered “bank‐by‐phone” services that enabled

customers to pay bills by phone, attempting to establish competitive advantage with technology. In the late 1990s,

Web sites served to augment banking services, and “bank‐by‐web” was the new, exciting way to compete. Most

recently, many banks are providing mobile banking, enabling customers to make deposits by using their smartphone

camera to take photos of checks that previously needed to be turned in physically. Then the checks can be destroyed. The obvious picture to paint here is that competitors caught up with the leaders very quickly, and competitive

advantage was brief. When ATMs were introduced, it did not take long for others to adopt the same technology.

Even small banks found that they could band together with competitors and invest in the same technologies. The

same imitation game took place with “bank by phone,” “bank by Web,” and mobile banking. More interestingly, what sounds like an exciting way to show off the power of technology can also be interpreted

as a way to increase the cost of doing business. Although some investments, such as using ATMs to replace tellers,

lowered costs, other investments raised costs (such as needing to offer phone, Web, and mobile banking options to

customers). FIGURE 2.7

Application of value chain model to Zara.

Activity Zar s Value Chain

Primary Activities

Inbound Logistics IT‐enabled just‐in‐time (JIT) strategy results in inventory being received when needed. Most

dyes are purchased from its own subsidiaries to better support JIT strategy and reduce

costs. Many suppliers are located near its production facilities.

Operations Information systems support decisions about the fabric, cut, and price points. Cloth is ironed and products are packed on hangers so they do t need ironing when they arrive at stores.

Price tags are already on the products. Zara produces 60% of its merchandise in house.

Fabric is cut and dyed by robots in 23 highly automated Spanish factories.

Outbound Logistics Clothes move on miles of automated conveyor belts at distribution centers and reach stores within 48 hours of the order.

Marketing and Sales Limited inventory allows low percentage of unsold inventory (10%); POS at stores linked to headquarters track how items are selling; customers ask for what they want, and this

information is transmitted daily from stores to designers over handheld computers.

Service No focus on service on products.

Support Activities

Organization IT supports tightly knit collaboration among designers, store managers, market specialists, production managers, and production planners.

Human Resources Managers are trained to understand wha s selling and report data to designers every day. The manager is key to making customers feel listened to and to communicating with head-

quarters to keep each store and the entire Zara clothing line at the cutting edge of fashion.

Technology Technology is integrated to support all primary activities. Zar s IT staff works with vendors to develop automated conveyors to support distribution activities.

Purchasing Vertical integration reduces amount of purchasing needed.

7 Don Goeltz, “Hypercompetition,” vol. 1 of The Encyclopedia of Management Theory, ed. Eric Kessler (Los Angeles: Sage, 2013), 359–60.

Rather than arguing that sustaining a competitive advantage is a deadly distraction, Piccoli and Ives 8

provide

a framework that outlines the ways in which a rm can provide barriers to competitors, which would build sus-

tainability. The framework outlines four types of barriers: IT project barrier, IT resources and capabilities barrier,

complementary resources barrier, and preemption barrier. See Figure 2.8 for a brief denition and a few examples of each. So, should a rm focus attention on building barriers to the competition, or should it just give up on the

established competitive advantage and focus on seeking the next revolution? Given that some technologies can be

copied quickly, or even just purchased from the same well‐known vendor who supplied it to the leader, it seems

prudent to spend some time to explore each technological option in the Piccoli and Ives’ framework and determine

where the rm can increase sustainability. If the project is rather small, then the rm should focus on the other

three barriers. If the rm can build loyalty with customers who appreciate innovation, a two‐month competitive

advantage might turn into a two‐year or longer advantage (thus building a preemption barrier). If a rm can capture

valuable data right at the beginning, a copycat rm may fall further behind. Also, building partnerships or securing

exclusive rights to some of the technologies can further slow down a competitor. It would not be wise to stop there, however. The rm should continue to seek ways in which IT can improve

offerings or service to customers. And the rm should go beyond those steps, focusing on how it might change

its entire industry. One example is the way in which Netix continued to speed its DVD delivery service while

focusing on movie streaming, a technology that will someday make the delivery service obsolete. Netix was more

than aware that its revenue was falling every quarter, but it expected and embraced the shortfall with its strategic

move into streaming. 9

Given that other services such as Amazon and many cable companies had begun streaming,

Netix has created original series offerings such as House of Cards and Orange Is the New Black.

Therefore, a rm might (1) seek ways to build sustainability by looking into each of the four potential barriers

to identify promising ways to block the competition and at the same time (2) continue to innovate and change the

industry. Netix has done both by building a dependable and efcient mailing business and creating new business

models such as streaming and series production. Focusing only on building sustainability has the potential effect of

ghting a losing battle, and focusing only on new business models might be too risky as the sole source of growth.

The last strategic framework, resource‐based view, is more general and emphasizes ways in which to exploit its

many potential resources. The framework, described next, can be helpful for sustaining and creating competitive

advantage. FIGURE 2.8

Barriers to competition and building sustainability.

Barrier Denition Examples

IT project barrier It would be a large undertaking for a competitor to build the system to copy

the capability. • Requires a large investment

• Requires a long time to build

• Complicated to build

IT assets and capabilities barrier Competitors might lack the IT resources to copy the capability. • Database of customers that cannot

be copied

• Expert developers or project managers

Complementary resources barrier The rm has other resources that create a synergy with the IT that provides

competitive advantage. • Respected brand

• Partnership agreements

• Exclusivity arrangements

• Good location

Preemption barrier The rm “got there rst.” • Loyal customer base built at the beginning

• Firm known as “the” source

8 Piccoli and Ives, “IT‐Dependent Strategic Initiatives and Sustained Competitive Advantage,” 755.

9 Greg Sandoval, “Netflix CEO, DVD Subscribers to Decline Now and Forever,” CNET, http://www.cnet.com/news/netflix‐ceo‐dvd‐subscribers‐to‐

decline‐now‐and‐forever (accessed August 19, 2015).

Using the Resource‐Based View (RBV)

A fourth framework, the resource‐based view (RBV) ,10

is useful for determining whether a rm’s strategy has

created value by using IT. Like the value chain model, the RBV concentrates on areas that add value to the rm.

Whereas the value chain model focuses on a rm’s activities, the resource‐based view focuses on the resources that

it can manage strategically in a rapidly changing competitive environment. Like the Piccoli and Ives framework,

the RBV focuses on sustaining competitive advantage but through use of resources rather than by raising compet-

itive barriers. The RBV has been applied in the area of IS to help identify two types of information resources: those that enable

a rm to attain competitive advantage and those that enable a rm to sustain the advantage over the long term.

From the IS perspective, 11

some types of resources are better than others for creating attributes that enable a rm to

attain competitive advantage (i.e., value, rarity) whereas other resources are better for creating attributes to sustain

competitive value (e.g., low substitutability, low mobility, low imitability).

Resources to Attain Competitive Advantage

Valuable and rare resources that rms must leverage to establish a superior resource position help companies attain

competitive advantage. A resource is considered valuable when it enables the rm to become more efcient, effec-

tive, or innovative. It is a rare resource when other rms do not possess it. For example, many banks today would

not think of doing business without a mobile banking app. Mobile banking apps are very valuable to the banks in

terms of their operations. A bank’s customers expect it to provide a mobile banking app that can be used on any

mobile device. However, because many other banks also have mobile banking apps, they are not a rare resource,

and they do not offer a strategic advantage. Some call them table stakes or resources required just to be in the

business. Many systems in Eras I and II, and especially Era III, were justied on their ability to provide a rare and

valuable resource. In some cases these very systems have become table stakes.

Resources to Sustain Competitive Advantage

Many rms that invested in systems learned that gaining a competitive advantage does not automatically mean that

they could sustain it over the long term. The only way to do that is to continue to innovate and to protect against

resource imitation, substitution, or transfer. For example, Walmart’s complex logistics management is deeply

embedded in both its own and its suppliers’ operations so that imitations by other rms is unlikely. The Oakland

Athletics’ use of information systems propelled it to victory, as depicted in the movie Moneyball, but as soon as

other teams learned about the secret behind the success Oakland was having with analytics and information sys-

tems, they, too began to use similar techniques, reducing the advantage Oakland initially enjoyed. Finally, to sustain

competitive advantage, resources must be difcult to transfer or replicate, or relatively immobile. Some information

resources can be easily bought. However, technical knowledge—especially that which relates to a rm’s opera-

tion—an aggressive and opportunistic company culture, deep relationships with customers, and managerial experi-

ence in the rm’s environment is less easy to obtain and, hence, considered harder to transfer to other rms. Some IT management skills are general enough in nature to make them easier to transfer and imitate. Although

it clearly is important for IS executives to manage internally oriented resources such as IS infrastructure, systems

development, and running cost‐effective IS operations, these skills can be acquired in many different forms. They

are basic IT management skills possessed by virtually all good IS managers. Other skills, however, are unique to a

rm and require considerable time and resources to develop. For example, it takes time to learn how the rm oper-

ates and to understand its critical processes and socially complex working relationships. However, the message sug-

gested by the RBV is that IS executives must look beyond their own IS shop and concentrate on cultivating resources

10 The resource‐based view was originally proposed by management researchers, most prominently Jay Barney, “Firm Resources and Sustained Compet-

itive Advantage,” Journal of Management 17, no. 1 (1991), 99–120 and “Is the Resource‐Based ‘View’ a Useful Perspective for Strategic Management

Research? Yes,” Academy of Management Review 26, no. 1 (2001), 41–56; M. Wade and J. Hulland, “Review: The Resource‐Based View and Information

Systems Research: Review, Extension and Suggestions for Future Research,” MIS Quarterly 28, no. 1 (2004), 107–42. This article reviewed the resource‐

based view’s application in the MIS literature and derived a framework to better understand its application to IS resources. 11 http://www.minonline.com/best_of_web/Best‐of‐the‐Web‐CommunitySocial‐Networking_10185.html (accessed January 1, 2012).

that help the rm understand changing business environments and allow it to work well with all its external stake-

holders. Even when considering internally oriented information resources, there are differences in the extent to

which these resources add value. Many argue that IS personnel are willing to move, especially when offered higher

salaries by rms needing these skills. Yet, some technical skills, such as knowledge of a rm’s use of technology to

support business processes, and technology integration skills are not easily exported to, or imported from, another

rm. Further, hardware and many software applications can be purchased or outsourced, making them highly imita-

ble and transferrable. Because it is unlikely that two rms have exactly the same strategic alternatives, resources at

one rm might have only moderate substitutability in the other rm.

Zara and RBV

Figure 2.9 indicates the extent to which the attributes of each information resource may add value to Zara, the

company discussed earlier in the chapter. Zara’s advantage did not come from the specic hardware or software

technologies it employed. Its management spent ve to ten times less on technology than its rivals. In contrast, FIGURE 2.9 Information resources at Zara, by attribute.

Source: Based on M. Wade and J. Hulland, “The Resource‐Based View and Information Systems Research: Review, Extension and

Suggestions for Future Research,”

MIS Quarterly 28, no. 1 (2004), 107–42.

Value Creation Value Sustainability

Resource/Attribute Value Rarity Imitation Substitution Transfer

IT ASSET

IT Infrastructure

Moderate because of its skillful use

of the POS equipment, handheld

computers, automated conveyors,

and computer‐controlled equipment

to cut patterns, but similar

technology could be purchased

and used by competitors Easy to imitate and transfer its infrastructure

Moderate for substitution of infrastructure (automated

conveyers)

Information Repository

High value and rarity because of

its information about customer

preferences and body types, which

Zara leverages strategically; well

integrated with Zar s operations

and personnel; retail information

analyzed by designers to identify

future products Difcult to imitate and transfer

Extremely difcult to substitute because of the volume

and nature of the data

IT CAPABILITY

Technical Skills

Low value/rarity because IS

professionals could be hired

relatively easily to perform the

technical work Moderately difcult to imitate, substitute, or transfer;

some sustainability results because the skills are used to

integrate across a range of systems

IT Management Skills

High value/rarity because they were

acquired over time Difcult to imitate, substitute, or transfer; resources

leveraged well

Relationship Skills—

Externally

Focused High value from relationships with

European manufacturers

Moderate rarity because other

companies also have relationships

with manufacturers although required

time to develop the relationship

Difcult to imitate, substitute, or transfer; turnaround time

of under 5 weeks from conception to distribution

Relationship Skills—

Spanning High rarity of spanning Difcult to imitate, substitute, or transfer spanning; unusual

tight‐knit teams at headquarters not easy to imitate or

purchase in the marketplace, allowing the ability to

correctly interpret and quickly respond to customer needs

Zara has created considerable value from the other information asset—its valuable information repository with cus-

tomers ’ preferences and body types.

In terms of information capability, much of Zara ’ s value creation is from its valuable and rare IT management

skills. Zara ’ s relationship skills also serve as a tool for value creation and sustainability. Overall, Zara is able to

create high value from its IT management and relationship skills. It would be moderately to extremely dif cult to

substitute, imitate, or transfer them. The resource‐based theory, although highly cited, has received its share of criticism. 12

The major criticism is that

it doesn ’ t clearly distinguish between value and strategic competitive advantage. Another criticism of the original

theory is that it doesn ’ t consider different types of resources. However, IS researchers addressed this concern when

they categorized resources into assets and capabilities and then provided examples of each. In applying the theory, it is important to recognize that it is focused on internal sources of a rm ’ s competitive advantage and, thus, does

not thoroughly take into account the environment in which the rm is embedded, especially when the environment is quite dynamic. Most rms don ’ t really have a choice of creating competitive advantage by manipulating industry forces either

through their use of information resources or IT‐enhanced activities. Yet, like Zara , they can leverage the IT

resources they do have to create and sustain strategic value for their rms.

Strategic Alliances

The value chain helps a rm focus on adding value to the areas of most value to its partners. The resource‐based

view suggests adding value using externally oriented relationship skills. The Eras framework emphasizes the

importance of collaborative partnerships and relationships. The increasing number of Web applications focused on

collaboration and social networking only foreshadow even more emphasis on alliances. These relationships can

take many forms, including joint ventures, joint projects, trade associations, buyer–supplier partnerships, or car-

tels. Often such partnerships use information technologies to support strategic alliances and integrate data across

Social Business Lens: Social Capital

A management theory that is gaining in popularity as a tool in understanding a social business is the social capital

theory.

Social capital

is the sum of the actual and potential resources embedded within, available through, and

derived from the network of relationships possessed by an individual or social unit. Relationships associated with

networks have the potential of being a valuable resource for businesses. The theory s focus is not on managing

individuals but on managing relationships.

The value from networks may be derived in one of three interrelated ways: structural, relational, and cognitive.

The

structural dimension is concerned with the pattern of relationships in the network—who is connected to whom.

The

relational dimension looks at the nature of relationships among members in the network (i.e., respect, friend-

ship)—how the connected people interact. The third

cognitive dimension looks at the way people think about

things in the network, in particular whether they have a shared language, system of meanings or interpretations—

how the connected people think. The unusual thing about social capital is that no one person owns it. Rather, the

people in the relationship own it jointly. Thus, it can t be traded easily, but it can be used to do certain things more

easily. In particular, in social business applications, social capital may make it easier to get the information needed

to perform a task or connect with certain key people. In IS development teams, social capital may improve the

willingness and ability of team members to coordinate their tasks in completing a project.

Source:

J. Nahapiet and S. Ghosal , “ Social Capital, Intellectual Capital and the Organizational Value , “

Academy of Management

Review

, 23 , no. 2 ( 1998 ), 242 – 66 .

For an excellent discussion of criticisms of the resource‐based view, see J. Kraaijenbrink , J‐C Spender , and A. J. Groen “ The Resource‐Based View:

A Review and Assessment of Its Critiques ,” Journal of Management

, 36 , no. 1 , ( 2010 ), 349 – 72 .

partners’ information systems. A strategic alliance is an interorganizational relationship that affords one or more

companies in the relationship a strategic advantage. An example is the strategic alliance between game maker

Zynga and Facebook. As documented in Facebook’s IPO ling in January 2012, the relationship is a mutually

benecial one. Zynga developed some of the most popular games found on Facebook, including Maa Wars,

Farmville, and WordsWithFriends. Facebook has exclusive rights to Zynga’s games, many of which have generated

thousands of new members for Facebook. It also gained access to Zynga’s customer database. The alliance gen-

erates signicant revenue for both parties because players of these games purchase virtual goods with real money

and Zynga purchases signicant advertising space from Facebook to promote its games. Zynga benets from the

revenue resulting from its gamers on Facebook community. 13

Business ecosystems are often groups of strategic alliances in which a number of partners provide important ser-

vices to each other and jointly create value for customers. The Facebook ecosystem could be said to include many

of the companies that use that platform to deliver their apps, that allow customers to post directly on their Facebook

page from the app, or that allow customers to log on to their site using their Facebook account. This adds value

for customers by providing greater convenience, and by offering the ability to automatically update their activity

stream with information from the app, and both Facebook and the app provider benet from their alliance. IS often provides the platform upon which a strategic alliance functions. Technology can help produce the prod-

uct developed by the alliance, share information resources across the partners’ existing value systems, or facilitate

communication and coordination among the partners. Because many services are information based today, an IS

platform is used to deliver these services to customers. The Facebook– Zynga alliance is an example of this type of

IS platform. Further, linking value chains through supply chain management (SCM) is another way that rms build

an IT‐facilitated strategic alliance. Co‐opetition

Clearly, not all strategic alliances are formed with suppliers or customers as partners. Rather, co‐opetition is an

increasingly popular alternative model. As dened by Brandenburg and Nalebuff in their book of the same name, co‐opetition is a strategy whereby companies cooperate and compete at the same time with companies in their

value net. 14

The value net includes a company and its competitors and complementors as well as its customers and

suppliers and the interactions among all of them. A complementor is a company whose product or service is used in

conjunction with a particular product or service to make a more useful set for the customer. For example, Goodyear

is a complementor to Ford and GM because tires are a complementary product to vehicles. Likewise, Amazon is a

complementor to Apple in part because the Amazon reading application, the Kindle, the reading tablet that Amazon

sells, is one of the most popular apps for the iPad. Finally, a cellular service is a complementor to Google’s search

engine because the service allows more consumers to use Google’s search function. Co‐opetition, then, is the strategy for creating the best possible outcome for a business by optimally combining

competition and cooperation. It can also be used as a strategy for sourcing as discussed in Chapter 10. It fre-

quently creates competitive advantage by giving power in the form of information to other organizations or groups.

For example, Covisint.com hosts the auto industry’s e‐marketplace, which grew out of a consortium of compet-

itors, including General Motors, Ford, DaimlerChrysler, Nissan, and Renault. By addressing multiple automo-

tive functional needs across the entire product life cycle, Covisint offers support for collaboration, supply chain

management, procurement, and quality management. Covisint.com has extended this business‐to‐partner platform

to other industries including health care, manufacturing, life sciences, food and beverage, and oil and gas. Thus,

co‐opetition as demonstrated by Covisint not only streamlines the internal operations of its backers but also has the

potential to transform an industry.

13 Adapted from N. Wingfield, “Virtual Products, Real Profits” The Wall Street Journal (September 9, 2011), A1, 16; L. B. Baker, “Zynga’s Sales Soar

on Facebook Connection,” Reuters News (February 2, 2012), http://www.reuters.com/article/2012/02/02/us‐zynga‐shares‐idUSTRE8111PO20120202

(accessed September 14, 2015); Jackie Cohen, “So Much for the Facebook Effect: Zynga Sees $978.6 Million Loss In 2011,” Yahoo News (February 14,

2012), http://www.allfacebook.com/facebook‐zynga‐eps‐2012‐02 (accessed February 20, 2012). 14 A. Brandenburg and B. Nalebuff, Co‐opetition (New York: Doubleday, 1996).

Risks

As demonstrated throughout this chapter, information resources may be used to gain strategic advantage even if that

advantage is eeting. When information systems are chosen as the tool to outpace a rm’s competitors, executives

should be aware of the many risks that may surface. Some of these risks include the following: • Awakening a sleeping giant: A rm can implement IS to gain competitive advantage only to nd that it

nudged a larger competitor with deeper pockets into implementing an IS with even better features. FedEx

offered its customers the ability to trace the transit and delivery of their packages online. FedEx’s much

larger competitor, UPS, rose to the challenge. UPS not only implemented the same services but also added

a new set of features eroding some of the advantages FedEx enjoyed, causing FedEx to update its offerings.

Both the UPS and FedEx sites passed through multiple Web site iterations as the dueling delivery companies

continue to struggle for competitive advantage.

• Demonstrating bad timing: Sometimes customers are not ready to use the technology designed to gain

strategic advantage. For example, Grid Systems created the GRiDPAD in 1989. It was a tablet computer

designed for businesses to use in the eld and was well reviewed at that time. But it didn’t get traction.

Three decades later, in 2010, Apple introduced the iPad, and tablet computing took off.

• Implementing IS poorly: Stories abound of information systems that fail because they are poorly imple-

mented. Typically, these systems are complex and often global in their reach. An implementation asco took

place at Hershey Foods when it attempted to implement its supply and inventory system. Hershey devel-

opers brought the complex system up too quickly and then failed to test it adequately. Related systems prob-

lems crippled shipments during the critical Halloween shopping season, resulting in large declines in sales

and net income. More recently, in 2012, more than 100,000 Austin Energy customers received incorrect util-

ity bills due to problems with the company’s vendor‐supplied bill collection system. Some customers went

months without a bill, and others were incorrectly billed. Some businesses that owed $3,000 were billed $300,000. Still others tried to pay their bill online only to be told that the payment had not recorded when it

had been. The utility calculated that the problems cost it more than $8 million. 15

• Failing to deliver what users want: Systems that do not meet the needs of the rm’s target market are likely

to fail. For example, in 2011, Netix leadership divided the company into two, calling the DVD‐rental

business Qwikster and keeping the streaming business under Netix. But customers complained, and worse,

closed their accounts, and less than a month later, Qwikster was gone. Netix reunited both businesses under the Netix name. 16

• Running afoul of the law: Using IS strategically may promote litigation if the IS results in the violation of

laws or regulations. Years ago, American Airlines’ reservation system, Sabre, was challenged by the airline’s

competitors on the grounds that it violated antitrust laws. More recently, in 2010, Google said it was no

longer willing to adhere to Chinese censorship. The Chinese government responded by banning searching

via all Google search sites (not only google.cn but all language versions, e.g., google.co.jp. google.com.au),

including Google Mobile. Google then created an automatic redirect to Google Hong Kong, which stopped

June 30, 2010, so that Google would not lose its license to operate in China. Today, Google, Inc. is acting

in compliance with the Chinese government’s censorship laws and Chinese users of Google.cn see ltered

results as before. More recently, European antitrust ofcials claimed that Google’s search engine unfairly

generates results that favor its shopping sites over those of its competitors and that its Android mobile phone

operating system unfairly features Google as the default search engine. 17

Marty Toohey, “More Than 100,000 Austin Energy Customers Hit by Billing Errors from $55 Million IBM System,” Statesman (February 18, 2012),

http://www.statesman.com/news/local/more‐than‐100‐000‐austin‐energy‐customers‐hit‐2185031.html (accessed February 20, 2012). 16 Qwikster = Gonester (October 10, 2011), http://www.breakingcopy.com/netflix‐kills‐qwikster (accessed February 20, 2012).

17 “Viewed as a Monopoly in Europe, Google Takes on Role as a Wireless Trust‐Buster in U.S.,” The New York Times (May 8, 2015), B1, B6.

Every business decision has risks associated with it. However, with the large expenditure of IT resources needed

to create sustainable, strategic advantages, the manager should carefully identify and then design a mitigation strat-

egy to manage the associated risks.

Co‐Creating IT and Business Strategy

This chapter has discussed the alignment of IT strategy with business strategy. Certainly, the two strategies must

be carefully choreographed to ensure receiving maximum value from IT investments and obtaining the maximum

opportunity to achieve the business strategy. However, in the fast‐paced business environment where information

is increasingly a core component of the product or service offered by the rm, managers must co‐create IT and

business strategy. That is to say that IT strategy is business strategy; one cannot be created independently of the

other. In many cases, they are now one in the same. For companies whose main product is information, such as nancial services companies, it ’ s clear that information

management is the core of the business strategy itself. How an investment rm manages the clients ’ accounts, how

its clients interact with the company, and how investments are made are all done through the management of

information. A nancial services company must co‐create business and IT strategy.

But consider a company like FedEx , most well known as the package delivery company. Are customers paying

to have a package delivered or to have information about that package ’ s delivery route and timetable? One could

argue that they are one in the same and that increasingly the company ’ s business strategy is its IS strategy. Certainly,

there are components of the operation that are more than just information. There are actual packages to be loaded

on actual trucks and planes, which are then actually delivered to their destinations. However, to make it all work,

the company must rely on IS. Should the IS stop working or have a serious failure, FedEx would be unable to do

business. A company like this must co‐create IT strategy and business strategy. This was not true a few years ago. Companies could often separate IS strategy from business strategy in part

because their products or services did not have a large information component. For example, a few years ago,

should the IS of a trucking company stop working, the trucks would still be able to take their shipments to their

destination and pick up new ones. It might be slower or a bit more chaotic, but the business wouldn ’ t stop. Today,

that ’ s not the case. Complicated logistics are the norm, and IS are the foundation of the business as seen at FedEx . With the increasing number of IS applications on the Web and on mobile devices, rms increasingly need to

co‐create business and IT strategy. Managers who think they can build a business model without considering the

opportunities and impact of information systems, using both the resources owned by the rm and those available on

the Web, will nd they have signi cant dif culties creating business opportunities as well as sustainable advantage

in their marketplace.

Geographic Box: Mobile‐Only Internet Users Dominate Emerging Countries

More than 25% of mobile Web users in emerging markets connect to the Internet solely through mobile devices.

This is the case for 70% of mobile Web users in Egypt, 59% in India, and 50% in Nigeria but only for 25% of U.S. and

22% of U.K. mobile Web users. Malaysia is emerging as a test case for a mobile‐only Internet. It has rolled out a

next‐generation, high‐speed broadband network that covers most of its population. This infrastructure makes it

possible to make video calls with Apple

s FaceTime application in locations throughout the country using a tiny

pocket router that accesses a WiMAX wireless‐broadband network set up by a local conglomerate, YTL Corp.

Bhd . To further encourage the spread of Internet, Malaysia s leaders have pledged not to censor the Internet.

Sources:

G. Dunaway , “ Mobile Only Internet Users Dominate Emerging Markets ” Adotas.com (October 24, 2011), http://www.adotas.

com/201w1/10/mobile only internet users dominate emerging markets/ (accessed August 19, 2015) ;

J. Hookway , “ Broadband in

the Tropics ,”

The Wall Street Journal (September 21, 2011 ) , B6.

SUMMARY • Information resources include data, technology, people, and processes within an organization. Information resources can be either assets or capabilities.

• IT infrastructure and information repositories are IT assets. Three major categories of IT capabilities are technical skills, IT management skills, and relationship skills.

• Using IS for strategic advantage requires an awareness of the many relationships that affect both competitive business

and information strategies.

• The ve competitive forces model implies that more than just the local competitors inuence the reality of the business

situation. Analyzing the ve competitive forces—threat of new entrants, buyers’ bargaining power, suppliers’ bargaining

power, industry competitors, and threat of substitute products—from both a business view and an information systems

view helps general managers use information resources to minimize the effect of these forces on the organization.

• The value chain highlights how information systems add value to the primary and support activities of a rm’s internal

operations as well as to the activities of its customers and of other components of its supply chain.

• The resource‐based view (RBV) helps a rm understand the value created by its strategy. RBV maintains that compet-

itive advantage comes from a rm’s information resources. Resources enable a rm to attain and sustain competitive

advantage.

• IT can facilitate strategic alliances. Ecosystems are groups of strategic alliances working together to deliver goods and

services. Supply chain management (SCM) is a mechanism that may be used for creating strategic alliances.

• Co‐opetition is the complex arrangement through which companies cooperate and compete at the same time with other

companies in their value net.

• Numerous risks are associated with using information systems to gain strategic advantage: awaking a sleeping giant,

demonstrating bad timing, implementing poorly, failing to deliver what customers want, avoiding mobile‐based alterna-

tives, and running afoul of the law.

KEY TERMS

business ecosystem (p. 34) co‐opetition (p. 48)customer relationship management(CRM) (p. 42)enterprise resource planning (ERP) (p. 42) information resources (p. 36)IT asset (p. 36)IT capability (p. 36)

network effects (p. 34)

resource‐based view (RBV) (p. 45)

strategic alliance (p. 48) social capital (p. 47)supply chain management

(SCM) (p. 42)

DISCUSSION QUESTIONS 1. How can information itself provide a competitive advantage to an organization? Give two or three examples. For each

example, describe its associated risks.

2. Use the five competitive forces model as described in this chapter to describe how information technology might be used to

provide a winning position for each of these businesses:

a. A global advertising agency

b. A local restaurant

c. A mobile applications provider

d. An insurance company

e. A Web‐based audio book service

3. Using the value chain model, describe how information technology might be used to provide a winning position for each of

these businesses:

a. A global advertising agency

b. A local restaurant

c. A mobile applications provider

d. An insurance company

e. A Web‐based audio book service

4. Use the resource‐based view as described in this chapter to describe how information technology might be used to provide

and sustain a winning position for each of these businesses:

a. A global advertising agency

b. A local restaurant

c. A mobile applications provider

d. An insurance company

e. A Web‐based audio book service

5. Some claim that the only sustainable competitive advantage for an organization is its relationships with its customers. All

other advantages eventually erode. Do you agree or disagree? How can information systems play a role in maintaining the

organization ’ s relationship with its customers? Defend your position.

6. Cisco Systems has a network of component suppliers, distributors, and contract manufacturers that are linked through

Cisco ’ s extranet. When a customer orders a Cisco product at its Web site, the order triggers contracts to manufacturers of

printed circuit board assemblies when appropriate and alerts distributors and component suppliers. Cisco ’ s contract manu-

facturers are aware of the order because they can log on to its extranet and link with Cisco ’ s own manufacturing execution

systems. What are the advantages of Cisco ’ s strategic alliances? What are the risks to Cisco? To the suppliers?

Groupon, Inc. raised $700 million at its IPO in the fall of 2011, instantly providing a valuation of almost $13 billion for a

company that was only three years old at the time. Some question the value, claiming Groupon has no sustainable compet-

itive advantage. Others see Groupon as an innovative company with high potential. Groupon sells Internet coupons for events, services, and other popular items that customers might want to buy. Customers

sign up for daily e‐mails targeted to their local market. The daily deal, offered for one‐day only and only if a predetermined

minimum number of customers buy it, gives customers 50% off the “retail” price. For example, a $100 three‐month health

club membership would sell for $50 on Groupon . The customer pays $50 to Groupon and prints a certi cate to redeem at the

health club. Groupon keeps 50% of the revenue, or $25 in this case, and gives the rest to the health club. Effectively, retail ers

are offering 75% off with the customer saving 50% and Groupon taking the rest. Groupon pays the retailer when the coupon is redeemed, making money both on the oat between the time revenue is

collected and the time the retailer is paid and on the certi cates that are never redeemed at all, which the industry calls break-

age. Retailers make money in the long run by introducing customers to their products, selling them additional products and

services when they come in to redeem their coupons, and turning them into repeat customers. And retailers bene t from the

buzz created when their business is on Groupon . In August 2010, Groupon launched its rst national deal, a coupon worth $50 of Gap apparel and accessories for $25.

It sold over 440,000 coupons, netting Groupon and the Gap close to $11 million. But not all vendors are the size of the

Gap , and smaller vendors have been overwhelmed with too many coupons. One local business owner said the company lost

$8,000 on its Groupon promotion when too many coupons were issued. In fact, a study of 150 retailers showed that only 66% found their deals pro table.

Around the time of the IPO, analysts and observers alike claimed that Groupon ’ s business model was not sustainable. In

addition to the large number of retailers who found their deals unpro table, observers noted that Groupon does not produce

anything of value, and it isn ’ t adding value to the retailers. Further, there are no barriers to entry to stop competitors. In May

2011, more than 450 competitors offering discounts and deals included LivingSocial , another daily deal site; restaurant.com,

a site for restaurant gift certi cates at a deep discount; and overstock.com and woot.com , sites offering discounted merchan-

dise, not to mention deep‐pocketed competitors like Amazon.com .

■

CASE STUDY 2‐1

Groupon

Zipcar is an answer for customers who want to rent a car for a few hours in their home city rather than for a few days from

a traditional rental agency. Car reservations are for a speci c pick‐up time and location around the city, often in neighbor-

hoods so the customers need only to walk to pick up their reserved car. Customers apply for a Zipcard, which enables them

to reserve a car online and unlock their car when they arrive at its location.

The company operates with a very small staff compared to traditional rental agencies. Very little human interaction is

required between the customer and Zipcar for a transaction. A customer reserves a car online, enters into the reserved car by

waving the RFID‐enabled Zipcard against the card reader mounted behind the driver ’ s side windshield, returns the car to the same location, and is billed on the credit card already on le. The customer can check all rental records and print receipts

from the online reservation system. The system also has a color‐coded time chart showing the availability and location of all

rental cars in the vicinity. This transparent information exchange allows a customer to pick the car he or she wants, if avail-

able, or delay the reservation until that car is returned by another customer. Zipcar also created and installed a GPS‐enabled

wireless device in each car, which allows members to nd and reserve a vehicle nearby using a cell phone. Customers also

can use an iPhone or Android app on their iPhone or Android mobile device to nd and reserve a Zipcar on a 24/7 basis.

Zipcar sends text alerts near the end of the rental period, and customers can text back if they want to extend their rental ti me.

All cars were out tted with patented wireless technology. Zipcar ’ s proprietary IT platform carries information ow bet-

ween customers, vehicles, and the company. It is used to monitor car security, ful ll reservations, record hourly usage, and

maintain mileage information. The platform also relays vital technical information such as battery voltage and fuel level. It

even informs the central system if a customer forgot to turn off headlights, which can quickly drain battery power. This business model provides unique advantages over traditional car rentals. Customers do not have to stand in line or

ll out papers to rent a car. They know exactly which make and model they will be getting. Unlike most off‐airport rental

agency locations, which are open only during business hours, Zipcar locations are open 24 hours. The company ’ s rates also

include the cost of gas and insurance as well as reserved parking spots at some locations. Additionally, the company uses social networking technologies to develop an online community of Zipcar members—

Zipsters. It encourages Zipsters to talk about their Ziptrips (i.e., share their personal experiences with Zipcar ). Thus, information technology is not only the key enabler of this business model but also a facilitator in creating a

buzz and encouraging community development around the concept. Zipcar changed the rules of the rental car industry by

■

CASE STUDY 2‐2

Zipcar

But Groupon added to its business strategy with mobile capability and new services. In February 2012, it purchased

Kima Labs , a mobile payment specialist, and Hyperpublic , a company that builds databases of local information. In May

2011, in a few cities, the company launched Groupon Now, a time‐based local application that gives customers instant deals

at merchants nearby using location‐based software. CEO Andrew Mason told Wall Street analysts in February 2012 that he

saw signi cant growth potential, including working on new features that will help customers personalize offers and avoid

deals they don ’ t want.

Discussion Questions

1. How does information technology help Groupon compete?

2. Do you agree or disagree with the statement that “Groupon has no sustainable competitive advantage?” Please explain your point of view.

3. How does Groupon add value to the companies whose offers are sold on the site?

4. What impact, if any, will Groupon Now have on Groupon ’ s competitive position? Explain.

5. What would you advise Groupon leaders to consider as their next application?

6. Analyze the business model of Groupon using Porter ’ s five forces model.

Sources: Adapted from http://mashable.com/2010/08/19/gap‐groupon/ (accessed February 21, 2012); http://www.forbes.com/sites/

petercohan/2011/06/06/memo‐to‐sec‐groupon‐has‐no‐competitive‐advantage‐stop‐its‐ipo/ (accessed February 21, 2012); http://blogs .

wsj.com/venturecapital/2010/09/29/rice‐university‐study‐groupon‐renewal‐rate‐not‐so‐hot/ (accessed February 21, 2012); http://a rticles.

chicagotribune.com/2011‐05‐18/business/ct‐biz‐0519‐groupon‐now‐20110518_1_groupon‐chief‐executive‐andrew‐mason‐ rst‐phase

(accessed February 21, 2012); http://www.reuters.com/article/2012/02/09/us‐groupon‐idUSTRE81727 B20120209 (accessed February 21 ,

2012).

bringing the new Web 2.0 mind‐set of focusing on automation, customer empowerment, transparency, and community.

Zipcar is very successful; as of August 2015, its Website boasts over 900,000 paying members and renting over 10,000

vehicles in 30 major metro markets in the United States, Canada, and the United Kingdom, as well as 400 college cam-

puses and 50 airports.

Discussion Questions

1. Apply the resource‐based view to Zipcar ’ s business model to show how information resources may be used to gain and sustain competitive advantage.

2. Discuss the synergy between the business strategy of Zipcar and information technology.

3. What network effects are part of Zipca r ’ s strategy? How do they add value?

4. As the CEO of Zipca r, what is your most threatening competition? What would you do to sustain a competitive advantage?

Sources: Adapted from Paul Boutin , “ A Self‐Service Rental Car ,”

Businessweek

(May 3 , 2006 ), http://www.bloomberg.com/bw/

stories/2006‐05‐03/a‐self‐service‐rental‐car (accessed August 19, 2015)

; Mary K. Pratt

, “ RFID: A Ticket to Ride ,” Computerworld

(Decem-

ber 18, 2006 ), http://www.computerworld.com/article/2554153/mobile‐wireless/r d—a‐ticket‐to‐ride.html (accessed August 19, 2015) ;

“Zipcar: Our Technology Downloaded,” http://www.zipcar.com/how/technology; Zipcar: “Zipcar Overview,” http://www.zipcar.com/

press/overview (accessed August 19, 2015).

chapter

In order for information systems (IS) to support an organization in achieving its goals, the

organization must re ect the business strategy and be coordinated with the organizational

strategy. This chapter focuses on linking and coordinating the IS strategy with the three

components of organizational strategy:

•

Organizational design (decision rights, formal reporting relationships and structure,

informal networks)

• Management control systems (planning, data collection, performance measurement,

evaluation, incentives, and rewards)

• Internal culture (values, locus of control)

Organizational Strategy

and Information Systems

After 20 years of fast growth, in 2014 Cognizant Technology Solutions was a company with $8.84

billion in revenues from providing IS outsourcing services. However, growing at such a breakneck

speed, it had to reinvent its organizational structure many times to make sure that it facilitated the ow of information. Initially, its India‐centric structure located managers of each group in India

along with software engineers. Employees at customer locations worldwide reported to the man-

agers. As the company grew and its focus shifted from simple, cost‐based solutions to complex, relationship‐based solutions, this structure had to be changed to be more customer oriented. Under

the redesigned reporting structure, managers were moved to customer locations but software engi-

neers remained in India. This change improved customer relations but brought about new headaches

on the technical side. Under the new arrangement, managers had to spend their days with cus-

tomers and unexpectedly ended up spending their nights with software engineers to clarify customer

requirements and x bugs. This created a tremendous strain on managers, who threatened to quit.

It also hampered the company ’ s business of systems development. Thus, neither of these organiza-

tional structures was working well. Neither structure was well aligned with the business strategy

and the IS strategy. However, Cognizant found that despite these problems, some work teams were working and

performing well. Upon an extensive analysis of those groups, the company decided to adopt a matrix

structure of comanagement throughout the company. In this matrix structure, each project has two managers equally responsible for the project in a location. One manager is in India and the other

is at the client site. They work out among themselves how and when to deal with issues. And both

managers are equally responsible for customer satisfaction, project deadlines, and group revenue.

The new structure (Figure 3.1 ) enables Cognizant to work more closely with its clients to focus on

improving operations. That is, the new matrix structure makes it possible to build IS that the cus-

tomers wanted. During the same time period in 2008, the largest outsourcing company and software exporter

in India, Tata Consultancy Services (TCS), also found that growth led to problems. “As we scale

up over 100,000 employees, TCS needs a structure that allows us to build a nimble organization to

capture new growth opportunities,” said then TCS CEO and Managing Director S. Ramadorai. 1

Growth led to a

high volume of issues that needed the attention of the CEO and COO, and eventually it was difcult to keep up.

At the same time, there was a need to spend signicantly more time investigating new potential markets and new

strategic initiatives than the CEO/COO could spare. In 2011, the new TCS CEO N. Chandrasekaran modied the

structure and added a new layer of leaders to oversee the businesses and free up their time to work on strategy (see

Figure 3.2). The new layer focuses on customers and aims to boost revenue growth. 2

While both Cognizant and TCS are large Indian outsourcing companies that found they needed to reorganize

to respond to problems resulting from growth, their problems were profoundly different. Cognizant’s main prob-

lem was its lack of necessary information ows between the software engineers in India and the customer service

managers on the client location. Its complex problems resulted in a correspondingly complex matrix structure. It

focused on the delivery of information systems that reect rened technical solutions to their problems to its cus-

tomers. Its new organization structure both improves customer responsiveness and necessary information ows.

It focuses on system development and delivery and seeks to address the information ow problem that Cognizant

previously experienced in building systems. In contrast, TCS’s organization chart reects a focus not only on current customers but also on future markets.

That is why it added major units called “New Growth Markets” and “Strategic Initiative Unit.” The Business Pro-

cess Outsourcing and Small and Medium Enterprise solutions in this latter major unit indicate the strategic direc-

tions that TCS wants to take. The organizational structure is designed to emphasize these new growth areas and

facilitate information ows along these lines in the organization. Its focus is on building an ever bigger market for

its IS and the IS services that it provides.

CEO

Vertical Functions Software Engineer

Business Manager Customer 1 USA

Horizontal Functions

Business Manager Customer 2 UK

Business Manager Customer 3 China Database Manager

Telecommunication

Specialist

FIGURE 3.1 Example of possible cognizant matrix structure.

Source: Adapted from “The Issue: For Cognizant, Tw s Company,”

Businessweek (January 17, 2008), http://www.bloomberg.

com/bw/stories/2008‐01‐17/the‐issue‐for‐cognizant‐twos‐companybusinessweek‐business‐news‐stock‐market‐and‐nancial‐advice

(accessed August 20, 2015).

1 “Reinvented Blog by Prashanth Rai” (March 19, 2008), http://cio‐reinvented.typepad.com/cioreinvented/2008/03/tcs—new‐organ.html (accessed

December 19, 2011).

2 N. Shivapriya, “TCS CEO N Chandrasekaran Creates New Layer to Oversee Verticals” (May 25, 2011), http://articles.economictimes .indiatimes.

com/2011‐05‐25/news/29581999_1_tcs‐ceo‐n‐chandrasekaran‐tcs‐spokesperson‐structure (accessed December 19, 2011).

Cognizant and TCS are both in the same business but chose different organizational structures to carry out

their objectives. The point is that different organizational structures reect different organizational strategies

that are used to implement business strategies and accomplish organizational goals. These organizational strat-

egies need to be aligned with IS strategies. When used appropriately, IS leverage human resources, capital, and

materials to create an organization that optimizes performance. Companies that design organizational strategy

without considering IS strategies run into problems like those Cognizant experienced. A synergy results from

designing organizations with IS strategy in mind—a synergy that cannot be achieved when IS strategy is just added on. Chapter 1 introduced a simple framework for understanding the role of IS in organizations. The Information

Systems Strategy Triangle relates business strategy with IS strategy and organizational strategy. In an organization

that operates successfully, an overriding business strategy drives both organizational strategy and information strat-

egy. The most effective businesses optimize the interrelationships between the organization and its IS, maximizing

efciency and productivity. Organizational strategy includes the organization’s design, as well as the managerial choices that dene, set

up, coordinate, and control its work processes. As discussed in Chapter 1, many models of organizational strategy

are available. One is the managerial levers framework that includes the complementary design variables shown

in Figure 3.3. Optimized organizational designs support optimal business processes, and they, in turn, reect the

rm’s values and culture. Organizational strategy may be considered as the coordinated set of actions that lever-

ages the use of organizational design, management control systems, and organizational culture to make the orga-

nization effective by achieving its objectives. The organizational strategy works best when it meshes well with

the IS strategy. This chapter builds on the managerial levers model. Of primary concern is how IS impact the three types of

managerial levers: organizational, control, and cultural. This chapter looks at organizational designs that incorpo-

rate IS to dene the ow of information throughout the organization, explores how IS can facilitate management

control at the organizational and individual levels, and concludes with some ideas about how culture impacts IS

and organizational performance. It focuses on organizational‐level issues related to strategy. The next two chapters

complement these concepts with a discussion of new approaches to work and organizational processes. Chief Executive

Officer

Chief Operating Officer Director,

Industry

Solutions Unit

Director,

Organization

Infrastructure

Director,

Strategic

Initiative Unit

Director,

Major

Markets

Director, New

Growth

Markets

India

APAC

Emerging Markets EuropeUK

USA

BusinessProcess

Outsourcing Solutions SME

Solutions Financial

Solutions Process

Excellence

Resource

Management Shared

Services

Technology

Excellence Multiple units

FIGURE 3.2

Tata Consultancy Services.

Source: “TCS Plans New Organizational Structure” (February 12, 2008), http://www.livemint.com/Companies/2ODg7L1mCcRlFow

K1ktX5N/TCS‐plans‐new‐organisational‐structure.html (accessed August 20, 2015).

Information Systems and Organizational Design

Organizations must be designed in a way that enables them to perform effectively. Different designs accomplish

different goals. This section examines organizational variables. It focuses on how IS are designed in conjunction

with an organization’s structure. Ideally, an organizational structure is designed to facilitate the communication

and work processes necessary for it to accomplish the organization’s goals, and the use of IS is often the way

coordination and workow are done. The organizational structures of Cognizant and TCS, while very different,

reect and support the goals of each company. Perhaps intuitively, organizational designers at those companies used

organizational variables described in Figure 3.3 to build their structures. Those variables include decision rights

that underlie formal structures, formal reporting relationships, and informal networks. Organizational processes are another important design component discussed in more detail in Chapter 5. Decision Rights Decision rights indicate who in the organization has the responsibility to initiate, supply information for, approve,

implement, and control various types of decisions. Ideally, the individual who has the most information about a

decision and who is in the best position to understand all of the relevant issues should be the person who has its

decision rights. But this may not happen, especially in organizations in which senior leaders make most of the

important decisions. Much of the discussion of IT governance and accountability in Chapter 9 is based upon who

has the decision rights for critical IS decisions. When talking about accountability, one has to start with the person

who is responsible for the decision—that is