Information Technology’s Impact on Organizations

Posted on Feb 5, 2025 in Business Administration and Management (BAM)

Information Technology and Organizations Influence Each Other

  • Relationship Influenced by an Organization’s:

    • Structure
    • Business Processes
    • Politics
    • Culture
    • Environment
    • Management Decisions

What Is an Organization?

  • Technical Definition:

    • A formal social structure that processes resources from the environment to produce outputs.
    • A formal legal entity with internal rules and procedures, as well as a social structure.

  • Behavioral Definition:

    • A collection of rights, privileges, obligations, and responsibilities that is delicately balanced over a period of time through conflict and conflict resolution.

The Technical Microeconomic Definition of the Organization

In the microeconomic definition of organizations, capital and labor (the primary production factors provided by the environment) are transformed by the firm through the production process into products and services (outputs to the environment). The products and services are consumed by the environment, which supplies additional capital and labor as inputs in the feedback loop.

Routines and Business Processes

  • Routines (Standard Operating Procedures)

    • Precise rules, procedures, and practices developed to cope with virtually all expected situations.

  • Business Processes

    • Collections of routines.

  • Business Firm

    • Collection of business processes.

Routines, Business Processes, and Firms

All organizations are composed of individual routines and behaviors, a collection of which make up a business process. A collection of business processes make up the business firm. New information system applications require that individual routines and business processes change to achieve high levels of organizational performance.

Disruptive Technologies

  • Technology That Brings About Sweeping Change to Businesses, Industries, and Markets

  • Examples

    • Personal computers
    • Word processing software
    • The Internet
    • The PageRank algorithm

  • First Movers and Fast Followers

    • First movers—Inventors of disruptive technologies.
    • Fast followers—Firms with the size and resources to capitalize on that technology.

Economic Impacts

  • IT Changes Relative Costs of Capital and the Costs of Information

  • Information Systems Technology Is a Factor of Production, Like Capital and Labor

  • IT Affects the Cost and Quality of Information and Changes Economics of Information

    • Information technology helps firms contract in size because it can reduce transaction costs (the cost of participating in markets).
      • Outsourcing

Transaction Cost Theory

  • Firms Seek to Economize on Transaction Costs (the Costs of Participating in Markets)

    • Vertical integration, hiring more employees, buying suppliers and distributors.

  • IT Lowers Market Transaction Costs for Firm, Making It Worthwhile for Firms to Transact with Other Firms Rather Than Grow the Number of Employees

Agency Theory

  • Firm Is Nexus of Contracts Among Self-Interested Parties Requiring Supervision

  • Firms Experience Agency Costs (the Cost of Managing and Supervising), Which Rise as Firm Grows

  • IT Can Reduce Agency Costs, Making It Possible for Firms to Grow Without Adding to the Costs of Supervising, and Without Adding Employees

Organizational and Behavioral Impacts

  • IT Flattens Organizations

    • Decision-making is pushed to lower levels.
    • Fewer managers are needed (IT enables faster decision-making and increases span of control).

  • Postindustrial Organizations

    • Organizations flatten because in postindustrial societies, authority increasingly relies on knowledge and competence rather than formal positions.

Why Do Some Firms Become Leaders in Their Industry?

Michael Porter’s Competitive Forces Model

  • Provides General View of Firm, Its Competitors, and Environment

  • Five Competitive Forces Shape Fate of Firm

    1. Traditional competitors
    2. New market entrants
    3. Substitute products and services
    4. Customers
    5. Suppliers

Traditional Competitors

  • All firms share market space with competitors who are continuously devising new products, services, efficiencies, and switching costs.

New Market Entrants

  • Some industries have high barriers to entry, for example, the computer chip business.
  • New companies have new equipment, younger workers, but little brand recognition.

Substitute Products and Services

  • Substitutes customers might use if your prices become too high, for example, iTunes substitutes for CDs.

Customers

  • Can customers easily switch to a competitor’s products? Can they force businesses to compete on price alone in a transparent marketplace?

Suppliers

  • Market power of suppliers when a firm cannot raise prices as fast as suppliers.

Four Generic Strategies for Dealing with Competitive Forces, Enabled by Using IT

  • Low-Cost Leadership

  • Product Differentiation

  • Focus on Market Niche

  • Strengthen Customer and Supplier Intimacy

Low-Cost Leadership

  • Produce products and services at a lower price than competitors.
  • Example: Walmart’s efficient customer response system.

Product Differentiation

  • Enable new products or services, greatly change customer convenience and experience.
  • Examples: Google, Nike, Apple.
  • Mass customization.

Focus on Market Niche

  • Use information systems to enable a focused strategy on a single market niche; specialize.
  • Example: Hilton Hotels’ OnQ system.

Strengthen Customer and Supplier Intimacy

  • Use information systems to develop strong ties and loyalty with customers and suppliers.
  • Increase switching costs.
  • Examples: Netflix, Amazon.

Value Web

  • Collection of independent firms using highly synchronized IT to coordinate value chains to produce a product or service collectively.
  • More customer-driven, less linear operation than traditional value chain.

Traditional Economics

  • Law of Diminishing Returns

    • The more any given resource is applied to production, the lower the marginal gain in output, until a point is reached where the additional inputs produce no additional outputs.

Network Economics

  • Marginal cost of adding a new participant is almost zero, with much greater marginal gain.
  • Value of community grows with size.
  • Value of software grows as installed customer base grows.