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Chapter 3

Review Questions

1. What is an organization? Compare the technical definition of organizations with the behavioral definition.

The technical definition for an organization defines an organization as a stable, formal social structure that takes resources from the environment and processes them to produce outputs. The technical definition of an organization focuses on three elements: capital and labor, production, and products for consumption. The technical definition also implies that organizations are more stable than an informal group, are formal legal entities, and are social structures.

The behavioral definition states that an organization is a collection of rights, privileges, obligations, and responsibilities that are delicately balanced over a period of time through conflict and conflict resolution. This definition highlights the people within the organization, their ways of working, and their relationships.

The technical definition shows us how a firm combines capital, labor, and information technology. The behavioral definition examines how information technology impacts the inner workings of the organization. The behavioral definition is the more realistic of the two.

2. What features do all organizations have in common? In what ways can organizations differ?

Table 3-3 summarizes the common and unique features of organizations. Common features for organizations include formal structure, standard operating procedures, politics, and culture. Organizations can differ in their organizational type, environment, goals, power, constituencies, function, leadership, tasks, technology, and business processes.

3. How are information technology services delivered in organizations? Describe the role played by programmers, systems analysts, information systems managers, and the chief information officer (CIO).

Information services are usually designed, built, and operated through information systems departments which are assigned the responsibilities of maintaining the hardware, software, data storage, and networks that comprise the firm’s information technology infrastructure. Depending on the size of the organization, and thus its information systems department, the department includes programmers, systems analysts, telecommunications and network specialists, and operations staff.

Programmers are the people who actually write or create the computer instructions. Systems analysts are the liaison between the users of an information system and the people who create it. The information systems managers are the leaders of various specialists in the information systems department. The chief information officer (CIO) is the overall manager of the information systems department who sets policies and the direction for the information systems department. The CIO is at the same level as the chief operating officer (COO) and the chief financial officer (CFO) in the organization. Each of these officers is responsible for part of the organization's operation. The CEO, CFO, and CIO help to set policy for the firm.

4. Describe the major economic theories that help explain how information systems affect organizations.

The two economic theories discussed in the book are transaction cost theory and agency theory. The transaction cost theory is based on the notion that a firm incurs transaction costs when it buys on the marketplace rather than making products for itself. Traditionally, firms sought to reduce transaction costs by getting bigger, hiring more employees, vertical and horizontal integration, and small-company takeovers. Information technology helps firms lower the cost of market participation (transaction costs) and helps firms shrink in size while producing the same or greater amount of output.

The agency theory views the firm as a nexus of contracts among interested individuals. The owner employs agents (employees) to perform work on his or her behalf and delegates some decision-making authority to the agents. Agents need constant supervision and management, which introduces management costs. As firms grow, management costs rise. Information technology reduces agency costs by providing information more easily so that managers can supervise a larger number of people with fewer resources.

5. Describe the major behavioral theories that help explain how information systems affect organizations.

Behavioral theories, from sociology, psychology, and political science, are useful for describing the behavior of individual firms. Behavioral researchers theorize that information technology could change the decision-making hierarchy by lowering the costs of information acquisition and distribution. IT could eliminate middle managers and their clerical support by sending information from operating units directly to senior management and by enabling information to be sent directly to lower-level operating units. It even enables some organizations to act as virtual organizations because they are no longer limited by geographic locations.

One behavioral approach views information systems as the outcome of political competition between organizational subgroups. IT becomes very involved with this competition because it controls who has access to what information, and information systems can control who does what, when, where, and how.

6. Why is there considerable organizational resistance to the introduction of information systems?

There is considerable organizational resistance to new information systems because they change many important organizational dimensions, such as culture, structure, politics, and work. Leavitt puts forth a model that says that changes in technology are absorbed, deflected, and defeated by organizational task arrangements, structures, and people. In this model the only way to bring about change is to change the technology, tasks, structure, and people simultaneously. In a second model, the authors speak of the need to "unfreeze" organizations before introducing an innovation, quickly implementing the new system, and then "refreezing" or institutionalizing the change.

7. Compare the descriptions of managerial behavior in the classical and behavioral models.

The classical model suggests that managers perform five classical functions. These functions are planning, organizing, coordinating, deciding, and controlling. Although the classical model describes formal managerial functions, it does not provide a description of what managers actually do. The behavioral models suggest that managerial behavior is less systematic, more informal, less reflective, more reactive, less well-organized, and somewhat frivolous. The behavioral models differ from the classical model in that managers perform a great deal of work at an unrelenting pace, managerial activities are fragmented, managers prefer speculation, managers prefer oral forms of communication, and managers give the highest priority to maintaining a diverse and complex web of contacts.

8. What specific managerial roles can information systems support? Where are information systems particularly strong in supporting managers, and where are they weak?

Table 3-4 compares managerial roles with the support systems. Information systems support the liaison, nerve center, disseminator, spokesperson, and resource allocator roles. Currently information systems do not support the figurehead, leader, entrepreneur, disturbance handler, and negotiator roles. Information systems are the strongest at the informational role and the weakest at the interpersonal and decisional roles.

9. What are the four stages of decision making described by Simon?

Simon's four stages of decision making include intelligence, design, choice, and implementation. During the intelligence stage, organizational problems are identified and understood. During the design stage, possible alternative solutions to the problem are conceived. During the choice stage, a choice is made from the possible alternatives. During the implementation stage, the decision is put into effect and the solution's progress is reported.

10. Compare individual and organizational models of decision making.

Individual models of decision making assume that human beings are in some sense rational, although there are a number of individual models. The rational model assumes that individuals can identify goals, rank all possible alternatives, and then select the alternative that contributes the most. However, some research finds that this process is too complex, that individuals cannot possibly specify all alternatives, much less select the best. Research suggests that systematic decision makers structure the decision based on some formal method. On the other hand, intuitive decision makers use many different approaches and use trial and error to find a solution.

Organizational decision making considers the structural and political characteristics of an organization. Organizational models suggest that decisions are not made individually, but are made by groups or the organization. The bureaucratic model of decision making suggests that decisions are shaped by the organization's standard operating procedures. The political models of decision making suggest that decisions result from competition and bargaining among the organization's interest groups and key leaders. The "garbage can" model suggests that organizations are not rational and that decisions are solutions that become attached to problems for accidental reasons.

11. What is the impact of the Internet on organizations and the process of management?

The Internet increases the accessibility, storage, and distribution of information and knowledge for organizations, nearly any information can be available anywhere at any time. The Internet increases the scope, depth, and range of information and knowledge storage. It lowers the cost and raises the quality of information and knowledge distribution, that is, it lowers transaction and information acquisition costs. By using the Internet, organizations may reduce several levels of management, enabling closer and quicker communication between upper levels of management and the lower levels. The Internet also lowers agency costs.

12. What is a strategic information system? What is the difference between a strategic information system and a strategic-level system?

A strategic information system is a computer system at any organizational level that fundamentally changes the goals, operations, products, services, or environmental relationships of organizations, in effect changing the very nature of the firm’s business. In contrast, strategic-level systems provide long-term planning information to senior executives. Strategic information systems are more far-reaching and deeply rooted, and fundamentally transform the organization itself.

13. Describe appropriate models for analyzing strategy at the business level, and the types of strategies and information systems that can be used to compete at this level.

Low-cost producer, product differentiation, and focused differentiation are three generic strategies available at the business level. If a business pursues the low-cost producer strategy, it can evaluate its value chain to identify primary and secondary activities where information technology can effectively help the business obtain a competitive advantage. Strategic information systems help a company offer its products and services at a lower cost than its competitors, or strategic information systems enable the company to provide more value at the same cost as its competitors. Strategic information systems enable the company to improve its internal value chain, as well as establish tight, efficient linkages with its suppliers, customers, and business partners. Additionally, a company can participate in a value web.

Firms pursuing a product differentiation strategy use information systems to create new products and services. These products and services are not easily duplicated by competitors, and therefore, the company does not need to compete on the basis of cost.

A company pursuing a focused differentiation strategy develops new market niches for its specialized products and services. The company competes in this target market by offering its products and services in a superior manner. A company can use strategic information systems to "mine" for information about a particular market or group of customers. The strategic information systems enable the company to analyze customer buying patterns, tastes, and preferences.

Companies can use their strategic information systems to establish tight linkages to customers and suppliers. Companies can use their strategic information systems to create efficient customer response systems, switching costs, and in some instances, stockless inventories.

14. Describe appropriate strategies for the firm level, and how information systems can help companies compete at this level.

A firm is typically a collection of businesses which are organized financially as a collection of strategic business units. Information systems can enhance the integration of separate units into a whole (synergy). Also, information systems can allow different business units to share information in the organization’s core competencies.

15. How can the competitive forces model, information partnerships, and network economics be used to identify strategies at the industry level?

These industry-level models help a company answer the key strategic question of “How and when should we compete with as opposed to cooperate with others in the industry?”

Firms can form information partnerships and even link their information systems to achieve unique synergies. An information partnership enables companies to join forces without actually merging by sharing information. For example, these partnerships can help firms gain access to new customers as can be seen in the partnership between American Airlines and Citibank.

The competitive forces model explains the interaction of external influences (threats and opportunities) that affect an organization's strategy and ability to compete. The threats include new entrants into the market, pressure from substitute products and services, bargaining power of customers, and positioning of traditional industry competitors. Information systems are used at this level to develop industry-wide standards for exchanging information or business transactions, create value webs, and create industry-wide, IT-supported consortia, symposia, and communications networks for coordinating activities.

Traditionally, the more any given resource is applied to production, the lower the marginal gain, until additional inputs do not produce additional outputs (the law of diminishing returns). However, some situations exist where adding additional participants adds almost nothing to costs. One common example is when the telephone company adds another person to its network. The company has almost no additional continuing costs. Finding such opportunities will benefit a company. For example Microsoft Corporation supports a community of software developers around the world who support local companies in making better use of Microsoft products. Adding an additional developer, or many new developers, costs Microsoft almost nothing.

The network economics model suggests that in a network the addition of another participant entails zero marginal costs but can create much lager marginal gain. For instance, the Internet can be used to build "communities of users".

16. How have the value chain and competitive forces models changed as a result of the Internet and the emergence of digital firms?

Internet technology has enabled a firm to extend the concept of its value chain to include all of the firm’s suppliers and business partners into a single Web. The main reason for this is that the Internet greatly reduces the cost of connecting online with partners. This enables companies to work directly with companies around the world and with companies too small to build their own international network. The same is true with digital firms because they essentially exist mainly because they can operate over the Net.

Similarly, because of the Internet and digital firms, corporations find it cheaper and easier to relate to suppliers and customers, enabling the company to meet the competitive problem identified using the competitive forces model. The competitive forces model has also changed in the Internet era because firms do not just compete with each other within the same industry, they compete as part of industry sets.

17. Why are strategic information systems difficult to build?

Strategic information systems are difficult to build because they can entail massive sociotechnical changes within the organization. Organizational boundaries between the firm and its customers and suppliers and between departments within the organization usually must be broken down. New relationships among parts of the company and with customers and suppliers must be redefined. Sometimes entirely new organizational structures may need to be built (as with the Saturn division of General Motors). Also, resistance to such changes may exist because these changes impact responsibilities and jobs.

Case Study – What Happened to Kmart?

1. Evaluate Kmart using the value chain and competitive forces models. What was Kmart's business model and business strategy?

Kmart has numerous problems with its value chain. This is evident from the suppliers sending items that the suppliers want to sell, shelves remaining unstocked, the "hand shifting" reordering process for popular items, products being allocated by central planners and not based on individual store demand, excess inventory stored in 15,000 truck-trailers behind its stores, shrinkage, and having to choose to either ship toothpaste or Christmas trees. Since its entrance as the first discount store in the 1960s, Kmart has not been able to ward off new entrants into the discount chain business. The new entrants, such as Wal-Mart and Target, have come on strong and surpassed Kmart. Kmart's suppliers seem to be calling the shots with the retailer, since they are promoting the items that they can sell and not helping Kmart address its mounting problems. Kmart's customers are voting with their pocketbooks and shopping at its competitors' stores.

Kmart uses a promotions-drive business model. The company uses advertising circulars to promote its "blue-light" specials.

2. What was the relationship of information systems to Kmart's business processes and business strategy? How well did its systems support its strategy?

Kmart's information systems and its business processes and business strategy were not in alignment. As an example, the information systems could collect data, but the data were not available for analysis and decision-making purposes. As the case mentions, forecasting decisions were based on management's judgment, not on the data.

Kmart's systems did not support its strategy. One of the problems mentioned in the case is that its supply chain management system could not easily accommodate the sharp increases and decreases in demand. The distribution center's outdated technology led to supplies sitting on pallets for 24 hours until they were recorded in the central tracking system. When reordering popular products, the employees would hand sift through previous purchasing receipts.

3. What management, organization, and technology factors contributed to Kmart's problems?

From the case, it appears that Kmart management is inconsistent with its implementation of the company's strategy. Management is unable to use data to forecast demand; it has lost sight of its core competencies, and is unable to change Kmart's image. Although management wanted to restructure its supply chain, it continued to expand its product offerings, as opposed to focusing on the fastest selling items. Mr. Conaway's plan to restructure Kmart has obviously not worked out. Although Mr. Conaway wanted the local stores to make their own stocking decisions, the stocking decisions were still being made by the central planners. When the new system was installed, Mr. Buzek made the comment that "the information would be useless because management just didn't believe in the system."

Although the company uses a promotions-driven strategy, the company reduced its advertising circulars. As the case points out, no other alternative for achieving the strategy was provided. Although Kmart wanted to reinvent its supply chain, management was unwilling to unify the distribution system's two computers because the project was too expensive.

From an organizational perspective, the suppliers, central planners, business processes, individual stores, warehouses, and distribution center have definite communication problems and are not sharing data as efficiently as possible. One could argue that very little data sharing is going on. Central planners are making the stocking decisions for the individual stores, but what needs to be stocked at each store is not being effectively communicated.

From a technology perspective, outdated technology and incompatible systems were in place. The new i2 project did not succeed for a variety of reasons, including the need for more hardware, the inability of the project to connect the point-of-sale systems and inventory systems to the distribution systems, and not being robust enough to handle a large number of SKUs.

4. How important was supply chain management in contributing to Kmart's problems? Evaluate Conaway's decision to use i2 software to improve Kmart's supply chain management.

Supply chain management was very important to Kmart. Kmart has been unable to successfully manage its inbound logistics, operations, sales and marketing, service, and outbound logistics. Unfortunately, the company's inability to effectively manage its supply chain led to ineffective advertising, lots of items being overstocked, popular items being understocked, a large product offering, poor communication with suppliers and its business units, items sitting on pallets waiting to be entered into the central tracking system, and shipping problems.

The goals for the i2 project were commendable, since the project was supposed to improve Kmart's sales forecasting, inventory sourcing, logistics, and reporting. The project was supposed to facilitate micromarketing, supplier product tracking, order execution, shipment scheduling, and delivery tracking.

It is interesting that Mr. Conaway chose i2 Technologies for the new supply chain management project, since i2 Technologies had "only recent and limited experience in the retail sector." The decision to use i2 Technologies was not a good decision, since the system was not designed to work with the large number of SKUs, Kmart (according to some) wrote off and abandoned some of its i2 software, the project fell behind schedule, and the inability to connect the point-of-sale systems and inventory systems to the distribution systems.

5. Were those blaming software for the collapse of Kmart correct? Explain your answer.

Actually, there is enough blame to go around. i2 Technologies did a very poor job analyzing and designing the system for Kmart. It also appears that Kmart's management did not get behind the project and was also unwilling to transform its core business processes.

6. It has been said that "Wal-Mart uses their IT strategically, and they fully integrate it into their operating model." Does this statement apply to Kmart? Explain your response.

This statement does not apply to Kmart. Kmart is using an outdated business model and has been unwilling to change its model. Its unwillingness to change is one of the reasons why Wal-Mart and Target have been able to successfully compete against Kmart and why Kmart is in bankruptcy.

7. List the problems Conaway faced when he took over Kmart, and then describe the short- and long-range policies you would have followed had you been in his place.

When Mr. Conaway took over Kmart, he faced several problems, including stiff competition from Wal-Mart and Target. The company was using an outdated business model, spending more money than the competition to get its goods into its stores, its information systems were collecting data but not using it effectively, it had significant problems with its entire value chain, it had a frumpy reputation, its shelves were often empty, it offered a wide range of products, it provided poor customer service, and it did not care about the competition. Students will provide a variety of short- and long-range policy recommendations.