Information Systems and Networks

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1 Information Systems and Networks by Samuel Rota Bulò Department of Management Università Ca' Foscari Venezia

2 Lesson 3 Information Systems, Organizations and Strategy

3 Case study Verizon vs AT&T Verizon and AT&T are the two largest telecommunications companies in the US they offer digital products and services voice communication, internet access, HD TV,... Competition in this industry is exceptionally intense and fast-changing Both companies are trying to outflank one another by refining their wireless, landline, and high-speed Internet networks by expanding the range of products, applications, and services available to customers Wireless services are the most profitable AT&T is staking its growth on the wireless market by aggressively marketing leading-edge high-end devices such as the iphone Verizon has bet on the reliability, power, and range of its wireless and landline networks and its renowned customer service.

4 Case study Verizon's business strategy For a number of years, Verizon has tried to blunt competition by making heavy technology investments in both its landline and wireless networks. Its wireless network is considered the most far-reaching and reliable in the US. Verizon is now pouring billions of dollars into a rollout of fourth-generation (4G) cellular technology capable of supporting highly data-intensive applications e.g., downloading large streams of video and music through smart phones and other network appliances. Returns from Verizon s 4G investment are still uncertain

5 Case study AT&T's business strategy AT&T's strategy is to partner with other companies to capitalize on their technology innovations AT&T contracted with Apple Computer to be the exclusive network for its iphone Even though AT&T subsidizes some of the iphone s cost to consumers, the iphone s streamlined design, touch screen, exclusive access to the itunes music service, and over 250,000 downloadable applications have made it an instant hit This strategic choice made AT&T the US leader in the smart-phone carrier marketspace AT&T has 43% of US smart-phone customers, while Verizon has 23% Smart-phone customers are highly desirable because they pay higher monthly rates for wireless data service plans

6 Case study What is the best strategy? In the short-term, the strategy of AT&T appears to be the most profitable

7 Case study What is the best strategy? The iphone became so wildly popular that users overstrained AT&T s networks many dense urban areas such as New York and San Francisco were left with sluggish service or dropped calls Possible solution: upgrade the wireless network this solution would have crippled profits experts estimated an expense between $5 and $7 billion to bring its network up to Verizon s quality AT&T's solution to curb excessive use: move to a tiered pricing model for new iphone users data charges based on how much data customers actually use

8 Case study What is the best strategy? Adding to AT&T s woes, its monopoly on the iphone may be ending Apple reached an agreement with Verizon in 2010 to make an iphone that is compatible with Verizon's network. Apple can double its market for this device some AT&T iphone customers will move to Verizon in the hope of finding better network service Verizon is further hedging its bets by offering leading-edge smart-phones based on Google s Android operating system With or without the iphone, if Verizon s Android phone sales continue to accelerate, the competitive balance will shift again

9 Case study: Verizon

10 Organizations and IS IS and organizations influence one another IS are built by managers to serve the interests of the business firm the organization must be aware of and open to the influences of IS to benefit from new technologies

11 Organizations and IS The interaction between IT and organizations is complex and influenced by many mediating factors

12 Organization: technical view a stable, formal social structure that takes resources from the environment and processes them to produce outputs. capital and labour are the primary production factor provided by the environment the organization transforms these inputs into products and services in a production process products and services are consumed by the environment in return for supply inputs

13 Organization: behavioural view collection of rights, privileges, obligations and responsibilities that is delicately balanced over a period of time through conflict and conflict resolution

14 Organization and IS From the technical perspective we focus on how inputs are combined to create outputs when technology changes are introduced in the company we see how firms in competitive markets combine capital, labor and IT From the behavioural perspective we focus on how building new IS, or renewing old ones, change the organizational balance of rights, privileges, obligations, responsibilities, and feelings that have been established over a long period of time we see how technology affects the organization's inner workings

15 Organization and IS technological changes require changes in who owns and controls information who has the right to access and update information who makes decisions changes in the behavioural elements can take a long time, be very disruptive, requires more resources to support training and learning

16 Features of organizations Organizations are bureaucracies with clear-cut divisions of labor and specialization they arrange specialists in a hierarchy of authority everyone is accountable to someone authority is limited to specific actions governed by abstract rules or procedures they are based on rules that create a system of impartial and universal decision making hiring and promoting employees based on technical qualifications and professionalism (not on personal connections) the organization is devoted to the principle of efficiency maximum output using limited input

17 Features of organizations: routines and business processes firm become efficient over time through routines developed by individuals for producing goods and services routines (standard operating procedures) are rules, procedures, practices developed to cope with virtually all expected situations employees become efficient by learning these routines and the firm is able to reduce its costs business processes are a collection of routines

18 Features of organizations: organizational politics people in organizations occupy different positions with different specialities, concerns and perspectives divergent viewpoints about how resources, rewards and punishments should be distributed political resistance is one of the main obstacles to organizational changes like the development of new IS managers that know how to deal with the politics of an organization will have more success in implementing new IS

19 Features of organizations: organizational culture organizations have bedrock, unquestioned assumptions that define their goals and products organizational culture encompasses this set of assumptions business processes are usually rooted in the organization's culture it is a powerful unifying force that restrains political conflicts and promotes common understanding, agreement on procedures and common practice at the same time it is a powerful restraint on change, especially technological change as they may undermine the assumptions underlying the organizational culture

20 Features of organizations: organizational environments Organizations reside in environments from which they draw resources and to which they supply goods and services IS are the key instrument for environmental scanning environments change much faster than organizations new technologies, new products, and changing public tastes and values put strains on any organization's culture, politics and people most organizations are unable to adapt to a rapidly changing environment organizations are obstructed in making changes by inertia built into the standard operating procedures political conflicts raised by changes to the existing order threat to closely held cultural values only 10% of the Fortune 500 companies in 1919 still exist today

21 Features of organizations: organizational environments

22 Disruptive technologies

23 Features of organizations: organizational structure

24 Economic impacts of IS IS technology can be viewed as a factor of production like labour and capital as IS cost decreases it is preferred over labour resulting in a decline in the number of middle managers and clerical workers it is preferred over other forms of capital such as buildings and machinery, which remain relatively expensive

25 Economic impacts of IS: transaction cost theory firms and individuals try to economize on transactions costs, i.e., the cost incurred when buying on the marketplace what cannot be made on its own. using markets is expensive locating and communicating with distant suppliers, monitoring contract compliance, buying insurance, obtaining information on products,... traditional solution: buying suppliers and distributors, hiring employers and getting bigger and bigger (e.g., General Motors, Ford) IT and the use of the network allow to lower the cost of transaction costs making it worthwhile for firms to contract with external suppliers As a result, firms can shrink in size because it is far less expensive to outsource work than hiring employees

26 Economic impacts of IS: transaction cost theory Chrysler corporation by exploiting digital links to external suppliers can achieve economies by obtaining more than 70% of its parts from outside Cisco Systems and Dell Inc. IS makes possible to outsource their production to contract manufacturers such as Flextronics instead of making their products themselves Eastman Chemical Company split off from Kodak in 1994 with $3.3 billion in revenue and full-time employees in 2009, it generated over $5 billion in revenue with only employees

27 Economic impacts of IS: transaction cost theory

28 Economic impacts of IS: agency theory IT can reduce internal management costs firm is a nexus of contracts among self-interested individuals rather than an unified, profit-maximizing entity an principal (owner) employs agents (employees) to perform a work agents need constant supervision and management to prevent agents from pursuing their interest as the company size increases, agency costs (or coordination costs) rise as owners must expend more and more effort supervising and monitoring employees IT permits organizations to reduce agency costs as it becomes easier for managers to oversee a greater number of employees

29 Economic impacts of IS: agency theory

30 Organizational and behavioural impacts of IS: flattening large, bureaucratic organizations, which were mostly developed before the computer age, have the following problems: inefficiency slow to change less competitive than newly created organizations some of these large organizations have downsized reduced the number of employees reduced the number of levels in their hierarchical organization

31 Organizational and behavioural impacts of IS: flattening IT facilitates flattening of hierarchies broad distribution of information to lower-level employees pushes decision-making rights lower in the organization as lower-level employees have the information needed to make decisions moreover employees have higher educational levels, which provide capabilities for intelligent decisions managers are faster in making decisions and employee management is more efficient less managers are needed management costs decline

32 Organizational and behavioural impacts of IS: flattening

33 Organizational and behavioural impacts of IS: teamworking authority relies on knowledge and competence and not merely on formal position professional workers tend to be self-managing decision-making can be decentralized as knowledge and information become more widespread through the firm IT encourages task-force-networked organizations groups of professionals come together (physically or virtually) for short periods of time to accomplish a specific task once a task is accomplished, the individuals join other task forces this contributes also to flattening

34 Organizational and behavioural impacts of IS: change resistance new IS require changes in personal, individual routines that can be painful for those involved requires re-training and additional efforts since IS induces a potential change in structure, culture, business processes and strategy of a business, there is often considerable resistance to them resistance may compromise the productivity increase expected by IT investments reason of failure is not the technology, but the organizational and political resistance

35 Organizational and behavioural impacts of IS: change resistance Leavitt (1965)

36 Impacts of Internet Internet and specially the WWW impacts: the relationship between a firm and external entities the internal business processes increases accessibility, storage and distribution of knowledge and information can dramatically lower transaction and agency costs businesses are rapidly rebuilding some of their key business processes based on Internet technology and making it a key component of their IT infrastructure this results in simpler business processes, fewer employees, flattened organization

37 Competitive advantage In almost every industry, some firms prevail over others. There is almost always a stand-out firm Toyota, Amazon, Walmart, Apple's itunes, Google Firms that do better are said to have competitive advantage Reason: access to special resources, use of available resources more efficiently, superior knowledge and information assets How do IS contribute to achieving a competitive advantage?

38 Porter's competitive forces model

39 Porter's competitive forces model Traditional competitors firms share the market with competitors that attempt to attract customers by developing their brands and imposing switching costs New market entrants new companies are always entering the market place in some industries, entry barriers are low (e.g., pizza business). In others, they are very high (e.g., computer chip business) Advantages for new companies: new plants and equipment, younger and less expensive workers Disadvantages: depend on outside financing, less-experienced workforce, little brand recognition

40 Porter's competitive forces model Substitute products and services customers might prefer substitutes if prices are too high e.g., ethanol vs gasoline, vegetable oil vs diesel fuel, wind-solar-coal vs industrial electricity, VOIP vs traditional telephone the more substitute in the industry, the less a firm can control pricing and the lower the profit margin Customers a profitable company depends on its ability to attract customers and charge high prices the power of customers grows if they can switch easily to a competitor there is little product differentiation and all prices can be known instantly (e.g., through Internet)

41 Porter's competitive forces model Suppliers significant impact on firm profits the more different suppliers, the greater control can be exercised over them in terms of price, quality, delivery schedules

42 IS strategies for dealing with competitive forces Low-cost leadership use IS to achieve lowest operational costs and prices e.g., Walmart automatic inventory management, automatic adjustment of replenishments to meet the customers' demand Product differentiation use IS to enable new products and services, or change the customer convenience in using your existing products and services e.g., Google Maps, ebay purchased PayPal, ipod use IS to create customized products or services e.g., Nike offer on-line customizable sneakers

43 IS strategies for dealing with competitive forces

44 IS strategies for dealing with competitive forces Focus on Market Niche use IS to serve a narrow target market better than competitors IS can produce and analyse data for finely tuned sales and marketing techniques IS enables companies to analyse customer buying patterns, tastes, preferences data can come from multiple sources credit card transactions, demographic data, checkout scanners at supermarkets and retail stores, data from user interaction with the Web e.g., Hilton Hotels

45 IS strategies for dealing with competitive forces Strengthen Customer and Supplier Intimacy use IS to tighten linkages with suppliers and develop intimacy with customers e.g., Chrysler uses IS to facilitate direct access by suppliers to production schedules and let them decide how and when to ship supplies to its factories e.g., Amazon tracks user's preferences and recommends titles purchased by others this increases switching costs for the customer

46 Impact of the Internet on competitive forces Substitute products and services: enables new substitutes to emerge with new approaches to meet needs and performing functions Customer's bargaining power due to availability of global price and product information Supplier's bargaining power procurement over the Internet raises bargaining power over suppliers suppliers can benefit from reduced barriers to entry and from elimination of distributors and other intermediates Threat of new entrants Internet reduces barriers to entry Positioning and rivalry among existing competitors widens the market, increases the number of competitors, reduces differences; makes more difficult to sustain operational advantages; puts pressure to compete on price

47 The business value chain model highlights specific activities in the business where competitive strategies can best be applied and where IS is most likely to have a strategic impact the value chain model views the firm as a series or chain of basic activities that add a margin of value to a firm's products or services activities can be primary activities directly related to the production and distribution of products and services, which create value for customers support activities make the delivery of the primary activities possible

48 The business value chain model

49 The industry value chain focuses on the strategic advantage that can derives from linking up efficiently the business value chain with the value chain of suppliers, strategic partners and customers. e.g., Amazon wants to build systems that Make it easy for suppliers to display goods and open stores on the Amazon site Make it easy for customers to pay for goods Develop systems that coordinate the shipment of goods to customers Develop shipment tracking systems for customers

50 Value webs IT has made possible to create highly synchronized industry value chains called value web A value web is a collection of independent firms that use IT to coordinate their value chains to produce a product or service for a market collectively A value web synchronizes the business processes of customers, suppliers, and trading partners among different companies in an industry or in related industries. Value webs are flexible and adaptive to changes in supply and demand Relationships can be bundled or unbundled in response to changing market conditions. Firms will accelerate time to market and to customers by optimizing their value web relationships to make quick decisions on who can deliver the required products or services at the right price and location

51 The value web

52 Synergies and core competencies A large corporation is a collection of strategic business units and its returns are directly tied to the performance of all the units A synergy is a relationship among businesses that lower costs and generate profits output of some units can be used as inputs to other units some organizations pool markets and expertises IS allows to tie together the operations of disparate business units so that they can act as a whole IS can also be used to enhance core competencies by sharing of knowledge across business units a core competence is an activity for which a firm is a world-class leader the performance of all business units will increase insofar as these business units develop, or create, a central core of dependencies

53 Network-Based Strategies The availability of Internet and networking technologies have inspired strategies taking advantage of firm's ability to network with others Network economics marginal cost of adding participants is about zero, while the marginal gain is much larger the law of diminishing returns does not apply e.g., community-based businesses like ebay, commercial software vendors

54 Network-Based Strategies Virtual company model uses networks to ally with other companies to create and distribute products and services without being physically tied to them e.g., Li & Fung handles product development, raw material sourcing, production planning, quality assurance, and shipping does not own any fabric, factories, or machines outsources all of its work to a network of more than 7,500 suppliers in 37 countries all over the world customers place orders to Li & Fung over its private extranet. Li & Fung then sends instructions to appropriate raw material suppliers and factories where the clothing is produced. The Li & Fung extranet tracks the entire production process for each order working as a virtual company keeps Li & Fung flexible and adaptable so that it can design and produce the products ordered by its clients in short order to keep pace with rapidly changing fashion trends

55 Network-Based Strategies Business Ecosystem loosely coupled but interdependent networks of suppliers, distributors, outsourcing firms, transportation service firms, and technological manufacturers like value web but among industries rather than firms e.g, Microsoft, Walmart have few keystone firms dominating the ecosystem and many niche firms IT plays a powerful role in establishing business ecosystems

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