4
TH EDITION
Managing and Using
Information Systems
A Strategic Approach
KERI E. PEARLSON
KP Partners
CAROL S. SAUNDERS
University of Central Florida
JOHN WILEY & SONS, INC.
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To Rusty, Russell &Kristin
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Preface
Information technology and business are becoming inextricably interwoven. I
don’t think anybody can talk meaningfully about one without the talking about the
other.1
Bill Gates
Microsoft
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
Give me a fish and I eat for a day; teach me to fish and I eat for a lifetime.
Proverb
Managers do not have the luxury of abdicating participation in information
systems decisions. Managers who choose to do so risk limiting their future business
options. Information systems are at the heart of virtually every business interaction,
process, and decision, especially when one considers the vast penetration of the
Web in the last few years. Managers who let someone else make decisions about
their information systems 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 of introducing the
broader implications of the impact of information systems.
The goal of this book is to assist managers in becoming knowledgeable participants in information systems decisions. Becoming a knowledgeable participant
means learning the basics and feeling comfortable enough to ask questions. It
does not mean having all the answers nor having a deep understanding of all the
technologies out in the world today. No text will provide managers with everything
they need to know to make important information systems decisions. Some texts
instruct on the basic technical background of information systems. Others discuss
applications and their life cycle. Some take a comprehensive view of the management information systems (MIS) field 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. This text is intended to provide the reader
with a foundation of basic concepts relevant to using and managing information. It
is not intended to provide a comprehensive treatment on any one aspect of MIS,
1
http://www.woopidoo.com/business quotes/authors/bill-gates-quotes.htm.
iii
iv
Preface
for certainly each aspect is itself a topic of many books. It is not intended to provide
readers with enough technological knowledge to make them MIS experts. It is not
intended to be a source of discussion of any particular technology. This textbook is
written to help managers begin to form a point of view of how information systems
will help, hinder, and create opportunities for their organizations.
The idea for this text grew out of discussions with colleagues in the MIS area.
Many faculty 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 one, hence students had to purchase thick
reading packets made up of articles and case studies to provide them with the basic
concepts. The course was structured to provide the general MBA with enough
knowledge of the field of MIS 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 deeper 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
information systems decisions.
Today many students are digital natives—people who have grown up using
information technologies all of their lives. That means that students come to
their courses with significantly more knowledge about things like personal computers, cell phones, texting, the Web, social networking, file downloading, online
purchasing, and social media than their counterparts in school just a few years
ago. This is a significant trend that is projected to continue; students will be
increasingly knowledgeable in personally using technologies. That knowledge has
begun to change the corporate environment. Today’s digital natives expect to find
information systems in corporations that provide at least the functionality they
have at home. At the same time, they 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. This edition of the text has been completely edited
with this new group of students in mind. We believe the basic foundation is still
needed for managing and using information systems, but we understand that the
assumptions and knowledge base of today’s students is significantly different.
This book includes an introduction, 12 chapters of text and minicases,
and a set of case studies and supplemental readings on a Web site. The
introduction makes the argument introduced in this preface that managers must
be knowledgeable participants in information systems decisions. The first few
chapters build a basic framework of relationships between business strategy,
information systems strategy, and organizational strategy and explore the links
between these strategies. Readers will also find a chapter on how information
Preface
v
systems relate to business transformation. Supplemental materials, including
longer cases from all over the globe, can be found on the Web. Please visit
http://www.wiley.com/college/pearlson for more information.
General managers also need some foundation on how IT is managed if
they are to successfully discuss their next business needs with IT professionals
who can help them. Therefore, the remaining chapters describe the basics of
information architecture and infrastructure, the sourcing of information systems,
the organization and governance of the MIS function, the ethical issues, the funding
of information systems resources, project management, and business analytics and
knowledge management.
No text in the field of MIS is current. The process of writing the chapters,
coupled with the publication process, makes a text 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 coupling the chapters with the
most current readings and cases. Students are encouraged to search the Web for
examples and current events that further clarify the issues at hand. The format
of each chapter begins with an example case and the basic language for a set
of important management issues. This is followed up with a set of managerial
concerns related to the topic. Each chapter then has a food for thought section on
an additional, but relatively new, topic. The chapter concludes with a set of study
questions, key words, and case studies.
This is the fourth edition of this text, and this version includes several significant
additions and revisions. Gone is the chapter on ‘‘doing business on the Internet’’
because after all, virtually every business now uses the Internet. Instead, this
edition has a new chapter on sourcing. Major changes include a new focus on Web
2.0 (Chapter 2); new framework of managerial levers (Chapter 3); new discussion
on collaboration (Chapter 4); alignment and business processes (Chapter 5); SOA
WOA, SaaS, enterprise architecture, and cloud computing (Chapter 6); sourcing
(Chapter 7); new IT governance framework (Chapter 8); security and compliance
(Chapter 9); new discussion of business cases (Chapter 10); new focus on managing
business projects (Chapter 11); and on business analytics and business intelligence
(Chapter 12). Many of the older cases have been replaced with newer examples
throughout the text, and many of the food for thought issues are new.
Who should read this book? General managers interested in participating
in information systems decisions will find this a good reference resource for the
language and concepts of MIS. Managers in the information systems field will find
this book a good resource for beginning to understand the general manager’s view
of how information systems affect business decisions. And MIS students will be
able to use the readings and concepts in this book as the beginning point in their
journey to become informed and successful business people.
The information revolution is here. Where do you fit in?
Keri E. Pearlson and Carol S. Saunders
!
Acknowledgments
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 off.
We apologize in advance if that is the case here.
Philip Russell Saunders came to our rescue when we were in a pinch by
researching various topics, finding cases, and verifying examples from previous
editions. We really appreciate his efforts. We also appreciate the considerable
efforts of Mihir Parikh at the University of Central Florida. Mihir wrote many of
the new cases that appear in this fourth edition of the text. Thanks also go to Craig
Tidwell who updated the teaching materials.
We also want to acknowledge and thank pbwiki.com. Without their incredible,
and free, wiki, we would have been relegated to e-mailing drafts of chapters back
and forth. For this edition, we wanted to use Web2.0 tools as we wrote about them.
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, and John Butler. In addition, the students of
the spring 2008 Technology Management and summer 2008 Information Resource
Management classes at the University of Central Florida provided comments that
proved helpful in writing some cases and making revisions. Though 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 at John Wiley & Sons, Inc., Beth Lang Golub. Her
persistence and patience have helped shepherd this book through many months
of creation, modification, evaluation, and production, and she will shepherd it
through translation into other languages. Special thanks go to Maria Guarascio,
who very cheerfully and very competently helped us through the revision process.
We also appreciate the help of (Jennifer Snyder, Lorraina Raccuia, Gitti Lindner,
and Sujin Hong) and others at Wiley, who have made this edition a reality.
From Keri: Thank you to my husband, Dr. Yale Pearlson, and my daughter,
Hana Pearlson. Their patience with me while I worked on this project was
incredible. They celebrated and commiserated the ups and downs that came with
the process of writing this book. I love you guys!
From Carol: Rusty, thank you for being my compass (always keeping me headed
in the right direction) and my release valve (patiently walking me through stressful
times). I couldn’t do it without you. I love you, Russell, and Kristin very much!
vi
!
About the Authors
Keri E. Pearlson
Dr. Keri E. Pearlson is president of KP Partners, a consultancy specializing in creating leaders skilled in the strategic use of information systems and organizational
design in the Web 2.0 world.
Dr. Pearlson has held various positions in academia and industry. She was a
member of the information systems faculty at the Graduate School of Business
at the University of Texas at Austin, where she taught management information
systems courses to MBAs and executives. She was a research director at the
Research Board, held positions at the Harvard Business School, CSC-Index’s
Prism Group, nGenera (formerly the Concours Group), AT&T, and Hughes
Aircraft Company.
She is co-author of Zero Time: Providing Instant Customer Value—Every
Time, All the Time (John Wiley & Sons, 2000). Her work has been published
in Sloan Management Review, Academy of Management Executive, Information
Resources Management Journal, and Beyond Computing. Many of her case studies
have been published by Harvard Business School Publishing and are used all over
the world.
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.
Carol S. Saunders
Dr. Carol S. Saunders is professor of MIS at the University of Central Florida in
Orlando, Florida. She served as General Conference Chair of the International
Conference on Information Systems (ICIS) in 1999 and Telecommuting in 1996.
She was the chair of the ICIS Executive Committee in 2000. She was editor-in-chief
of MIS Quarterly and is a Fellow of the Association of Information Systems (AIS).
Her current research interests include the impact of information system on power
and communication, virtual teams, virtual worlds, time, information overload,
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,
Academy of Management Journal, Academy of Management Review, Communications Research, and Organization Science.
vii
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Contents
Introduction
1
The Case for Participating in Decisions about Information Systems 2
What If A Manager Doesn’t Participate? 5
What Skills Are Needed to Participate Effectively in Information
Technology Decisions? 7
Basic Assumptions 9
Food for Thought: Economics of Information Versus Economics of
Things 16
Summary 18
Key Terms 18
Discussion Questions 19
Case Study I-1: Terry Cannon, MBA 19
Case Study I-2: Anyglobal Company Inc. 21
! CHAPTER 1
The Information Systems Strategy Triangle
22
Brief Overview of Business Strategy Frameworks 25
Brief Overview of Organizational Strategies 34
Brief Overview of Information Systems Strategy 37
Food for Thought: The Halo Effect and Other Business Delusions
Summary 40
Key Terms 40
Discussion Questions 41
Case Study 1-1: Roche’s New Scientific Method 41
Case Study 1-2: Google 43
! CHAPTER 2
Strategic Use of Information Resources
46
Evolution of Information Resources 47
Information Resources as Strategic Tools 48
How Can Information Resources Be Used Strategically? 52
Strategic Alliances 66
Risks 68
Food for Thought: Co-creating IT and Business Strategy 69
viii
38
Contents
Summary 71
Key Terms 71
Discussion Questions 71
Case Study 2-1: Lear Won’t Take A Backseat
Case Study 2-2: Zipcar 74
! CHAPTER 3
ix
73
Organizational Impacts of Information Systems Use
76
Information Technology and Organizational Design 77
Information Technology and Management Control Systems 85
Information Technology and Culture 89
Food for Thought: Immediately Responsive Organizations 92
Summary 93
Key Terms 94
Discussion Questions 94
Case Study 3-1: US Air and America West Merger Case 94
Case Study 3-2: The FBI 96
! CHAPTER 4
Information Technology and the Design of Work
98
Work Design Framework 101
How Information Technology Supports Communication
and Collaboration 102
How Information Technology Changes the Nature of Work 108
How Information Technology Changes Where Work Is Done and Who
Does It 115
Virtual Teams 120
Gaining Acceptance for IT-Induced Change 125
Food for Thought: Security With Remote Workers 127
Summary 129
Key Terms 130
Discussion Questions 130
Case Study 4-1: Automated Waste Disposal, Inc. 131
Case Study 4-2: Virtually There? 132
! CHAPTER 5
Information Technology and Changing Business Processes
Silo Perspective Versus Business Process Perspective 135
The Tools for Change 141
Shared Services 145
Enterprise Systems 147
Integrated Supply Chains 152
Food for Thought: Is ERP a Universal Solution? 155
134
x
Contents
Summary 157
Key Terms 158
Discussion Questions 158
Case Study 5-1: Santa Cruz Bicycles 159
Case Study 5-2: Boeing 787 Dreamliner 160
! CHAPTER 6
Architecture and Infrastructure
162
From Vision to Implementation 163
The Leap from Strategy to Architecture to Infrastructure 165
Architectural Principles 171
Enterprise Architecture 171
Other Managerial Considerations 174
From Strategy to Architecture to Infrastructure: An Example 181
Food for Thought: Cloud Computing 183
Summary 186
Key Terms 187
Discussion Questions 187
Case Study 6-1: Hasbro 188
Case Study 6-2: Johnson & Johnson’s Enterprise Architecture 189
! CHAPTER 7
Information Systems Sourcing
190
Sourcing Decision Cycle Framework 192
Insourcing 193
Outsourcing 193
Outsourcing Abroad 198
Backsourcing 206
Outsourcing Models 207
Food for Thought: Outsourcing and Strategic Networks 211
Summary 212
Key Terms 212
Discussion Questions 213
Case Study 7-1: Sodexho Asia Pacific 213
Case Study 7-2: Overseas Outsourcing of Medical Transcribing
! CHAPTER 8
215
Governance of the Information Systems Organization
Understanding the IS Organization 219
What a Manager Can Expect from the IS Organization 224
What the IS Organization Does Not Do 230
IT Governance 231
Food for Thought: CIO Leadership Profiles 240
218
Contents
Summary 241
Key Terms 242
Discussion Questions 242
Case Study 8-1: IT Governance at UPS 242
Case Study 8-2: The Big Fix at Toyota Motor Sales (TMS)
! CHAPTER 9
Using Information Ethically 246
Normative Theories of Business Ethics 248
Control of Information 253
Security and Controls 259
IT Governance and Security 262
Sarbanes–Oxley Act of 2002 265
Food for Thought: Green Computing 270
Summary 272
Key Terms 272
Discussion Questions 273
Case Study 9-1: Ethical Decision Making 274
Case Study 9-2: Midwest Family Mutual Goes Green 276
! CHAPTER 10
Funding IT 278
Funding IT Resources 278
How Much Does IT Cost? 281
Building a Business Case 287
IT Portfolio Management 290
Valuing IT Investments 292
Monitoring IT Investments 296
Options Pricing 300
Food For Thought: Who Pays for the Internet?
Summary 305
Key Terms 306
Discussion Questions 306
Case Study 10-1: Troon Golf 306
Case Study 10-2: Valuing IT 307
Project Management
309
What Defines a Project? 310
What is Project Management? 312
Project Elements 314
IT Projects 319
IT Project Development Methodologies
322
! CHAPTER 11
304
243
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Contents
Managerial Influences 328
Managing Project Risk 330
The PMO 338
Food for Thought: Open Sourcing 339
Summary 341
Key Terms 342
Discussion Questions 342
Case Study 11-1: Sabre Holdings 343
Case Study 11-2: Dealing with Traffic Jams in London
! CHAPTER 12
Managing Business Knowledge
344
346
Knowledge Management 347
Data, Information, and Knowledge 348
From Managing Knowledge to Business Intelligence 351
Why Manage Knowledge? 352
Knowledge Management Processes 356
Competing with Business Analytics 365
Components of Business Analytics 366
Caveats for Managing Knowledge 368
Food for Thought: Business Experimentation 369
Summary 370
Key Terms 371
Discussion Questions 371
Case Study 12-1: GSD&M’s Virtual Crowd Uses Analytics 372
Case Study 12-2: The Brain Behind the Big, Bad Burger 373
Glossary 375
Index
385
!
INTRODUCTION
Why do managers need to understand and participate in the information
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 field 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 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. 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 financial resources. The ubiquity of personal computers (PCs) and the
Internet highlights this fact because together they form the backbone for virtually
all new business models. Further, the proliferation of supply chain partnerships
has extended the urgent need for business managers to be involved in technology
decisions. In addition, the availability of seemingly free (or at least very inexpensive)
applications and collaboration in the consumer area has changed the landscape
once again, increasing the integration of IS and business processes. A manager
who does not understand the basics of managing and using information cannot be
successful in this business environment.
Consider the now-historic rise of companies such as Amazon.com and Google.
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 on ahead,
keeping its leadership position on the Web by leveraging its new 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
profitability hurdle in the fourth quarter of 2001 by achieving a good mix of IS
and business basics: capitalizing on operational efficiencies derived from inventory
software and smarter storage, cost cutting, and effectively partnering with such
companies as Toys ‘‘R’’ Us Inc. and Target Corporation.1 In 2008, Amazon.com
once again changed the basis of competition in another market, but this time
it was the Web services 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.
1
Robert Hof, ‘‘How Amazon Cleared the Profitability Hurdle,’’ BusinessWeek Online (February 4,
2002), http://www.businessweek.com/magazine/content/02 05/b3768079.htm (accessed May 23,
2002).
1
2
Introduction
Likewise, Google played an important role in revolutionizing the way information is located and used as well as revolutionizing the world of advertising and
publishing. Google began in 1999 as a basic search company but quickly learned
that a unique business model was a critical factor for future success. The company changed the way people thought about Web content by making it available
in a searchable format with an incredibly fast response time. Further, Google’s
keyword-targeted advertising program revolutionized the way companies advertise. By 2001, Google announced its first quarter of profitability, solidifying the
way the world finds information, publishes, and advertises.2 By 2008, Google had
expanded into a complete suite of Web-based applications, such as calendaring,
e-mail, collaboration, shopping, and maps. Further, like Amazon.com, Google also
offers clients similar on-demand services.3
These and other online businesses are able to succeed where traditional
companies were not, in part because their management understood the power of
information, IS, and the Web. They did not succeed because their managers could
build Web pages or assemble an IS network. Quite the contrary. The executives
in these new businesses understood the fundamentals of managing and using
information and could marry that knowledge with a sound, unique business vision
to achieve domination of their intended market spaces.
The goal of this book is to provide the foundation to help the general
business manager become a knowledgeable participant in IS decisions because
any IS decision in which the manager does not 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 managerial
skills, this introduction identifies the most important ones. These skills will be
helpful not just in making IS decisions, but all business decisions. We describe
how a manager should participate in the decision-making process and outline
how the remaining chapters of this book develop this point of view. Finally, the
introduction presents current models for understanding the nature of a business
and that of an information system to provide a framework for the discussions that
follow in subsequent chapters.
! THE CASE FOR PARTICIPATING IN DECISIONS ABOUT
INFORMATION SYSTEMS
Experience shows that business managers have no problem participating in most
organizational decisions, even those outside their normal business expertise. For
example, ask a plant manager about marketing problems, and the result will
probably be a detailed opinion on both key issues and recommended solutions.
Dialogue among managers routinely crosses all business functions in formal as
2
3
Adapted from information at www.google.com/corporate/history.html (accessed June 17, 2005).
For more information on the latest services by these two companies, see http://www.amazon.com
and http://code.google.com/.
The Case for Participating in Decisions about Information Systems
3
Reasons
IS must be managed as a critical resource.
IS enable change in the way people work together.
IS are part of almost every aspect of business.
IS enable business opportunities and new strategies.
IS can be used to combat business challenges from competitors.
FIGURE I.1 Reasons why business managers should participate in information
systems decisions.
well as informal settings, with one general exception: IS. Management continues
to tolerate ignorance in this area relative to other specialized business functions.
Culturally, managers can claim ignorance of IS issues without losing prestige
among colleagues. On the other hand, admitting a lack of knowledge regarding
marketing or financial aspects of the business will earn colleagues’ contempt.
These attitudes are attributable to the historic role that IS played in businesses.
For many years, technology was regarded as a support function and treated as
administrative overhead. Its value as a factor in important management decisions
was minimal. It often took a great deal of technical knowledge to understand even
the most basic concepts. However, in today’s business environment, maintaining
this back-office view of technology is certain to cost market share and could
ultimately lead to the failure of the organization. Technology has become entwined
with all the classic functions of business— operations, marketing, accounting,
finance—to such an extent that understanding its role is necessary for making
intelligent and effective 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. Finally, with the robust number of
consumer applications available on the Web, many decisions made by the IS group
are increasingly being made by individuals.
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
Information technology (IT) is a critical resource for today’s businesses. It both
supports and consumes a significant 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 spends a significant portion of corporate budgets. Worldwide IT spending
topped $3 trillion in 2007, a jump of 8% from the previous year. It’s projected to
continue to increase.4 U.S. corporations spent about $3,500 per worker in 1994
4
www.cio.com/article/144551/IT Spending to Surpass Trillion (accessed July 31, 2008).
4
Introduction
on IT and about $8,000 in 2005.5 Industry-level research from the Gartner group
found that the typical level of IT operating budget as a percentage of gross revenue
ranges from 2.3% to 2.5% for consumer packaged goods companies and even
higher for pharmaceuticals (4% to 6%) and logistics companies (5% to 6%).
These 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 performance of the investment. Therefore, the business manager
needs a basic grounding in managing and using information. On the flip side, IS
managers need a business view.
People and Technology Work Together
In addition to financial issues, a manager must know how to mesh technology and
people to create effective work. Collaboration is increasingly common, especially
with the rise of social networking. Companies are reaching out to individual
customers using social media. In fact, the term Web 2.0 has emerged to describe
the use of the World Wide Web (the Internet) to enhance creativity, information
sharing, and collaboration among users.6 Technology facilitates the work that
people do and the way they interact with each other. Correctly incorporating IS
into the design of a business enables people to focus their time and resources
on issues that bear directly on customer satisfaction and other revenue- and
profit-generating activities. Adding IS to an existing organization, however, requires
the ability to manage change. The skilled business manager must balance the
benefits of introducing new technology with the costs associated with changing
the existing behaviors of people in the workplace. Making this assessment does
not require a detailed technical knowledge. It does require an understanding
of what the short-term and long-term consequences are likely to be 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 Technology
IS are now integrated with almost every aspect of business. For example, as
CEO of Wal-Mart Stores International, Bob L. Martin described IS’s role, ‘‘Today
technology plays a role in almost everything we do, from every aspect of customer
service to customizing our store formats or matching our merchandising strategies
to individual markets in order to meet varied customer preferences.’’7 IS place
information in the hands of Wal-Mart associates so that decisions can be made
5
A. McAfee and E. Brynjolfsson, ‘‘Investing in the IT that Makes a Competitive Difference,’’ Harvard
Business Review (2008).
6
Wikipedia, www.wikipedia.com (accessed July 31, 2008).
7
‘‘The End of Delegation? Information Technology and the CEO,’’ Harvard Business Review
(September–October 1995), 161.
What If a Manager Doesn’t Participate?
5
closer to the customer. IS help simplify organizational activities and processes such
as moving goods, stocking shelves, or communicating with suppliers.
Rapid Change in Technology
The proliferation of new technologies creates a business environment filled with
opportunities. The changing demographics of the workforce and the integration
of ‘‘‘digital natives,’’ individuals who have grown up completely fluent in the use
of personal technologies and the Web, also increase the rate of adoption of new
technologies beyond the pace of traditional organizations. Even today, new 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 opportunities so that others can
understand them, to evaluate them against existing business needs, and finally
to pursue any that fit with an articulated business strategy. The quality of the
information at hand affects the quality of both the decision and its implementation.
Managers must develop an understanding of what information is crucial to the
decision, 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 managers are
often called on to demonstrate a clear understanding of how their own technology
programs and products compare with those of their competitors.
! WHAT IF A MANAGER DOESN’T PARTICIPATE?
Decisions about IS directly affect the profits of a business. The basic formula
Profit=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. Inadequate IS can
cause a breakdown in servicing customers, which hurts sales. On the expense side,
a poorly calculated investment in technology can lead to overspending and excess
capacity. Inefficient business processes sustained by ill-fitting IS also increase
expenses. Lags in implementation or poor process adaptation each reduce profits
and therefore 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 and organizational strategies. These consequences
are discussed briefly in this section and in more detail in later chapters. While examining IS-related consequences in greater detail, consider their potential effects on
an organization’s ability to achieve its business goals. How would each consequence
change the way people work? Which customers would be most affected and how?
Would the organization still be able to implement its business strategy?
6
Introduction
Information Systems Must Support Business Goals
IS represent a major investment for any firm in today’s business environment. Yet
poorly chosen IS can actually become an obstacle to achieving business goals. If the
systems do not allow the organization to realize its goals, or if IS lack the capacity
needed to collect, store, and transfer critical information for the business, the
results can be disastrous. Customers will be dissatisfied 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. Toys ‘‘R’’ Us experienced
such a calamity when its well-publicized Web site was unable to process and
fulfill orders fast enough. It not only lost those customers, but it also had a major
customer relations issue to manage as a result. Consider the well-intended Web
designer who was charged with building a Web site to disseminate information to
investors, customers, and potential customers. If the business goal is to do business
over the Web, then the decision to build an informational Web site, rather than
a transactional Web site, is misdirected and could potentially cost the company
customers by not taking orders online. Even though it is possible to redesign a
Web site, the task requires expending additional resources that might have been
saved if business goals and IS strategy were discussed together.
Information Systems Must Support Organizational Systems
Organizational systems represent the fundamental elements of a business—its
people, work processes, and structure—and the plan that enables them to work
efficiently 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. It seems odd to think that a manager might add functionality to a
corporate Web site without providing the training these same employees need to
use the tool effectively, and yet this mistake—and many more costly ones—occur
in businesses every day. Managers make major decisions, such as switching to a
new major IS or implementing a standard that prohibits access to an external Web
site, without informing all the affected staff of necessary changes in their daily
work. For example, when companies put in an enterprise resource planning (ERP)
system, the system often dictates how many business processes are executed.
Deploying technology without thinking through how it actually will be used in
the organization—who will use it, how they will use it, how to make sure the
applications chosen actually accomplish what is intended—results in significant
expense without a lot to show for it. In another example, a company may decide to
prohibit access to the Internet, thinking that they are prohibiting employees from
accessing offensive or unsecure sites. But that decision also means that employees
can’t access social networking sites, which may be useful for collaboration, or
new Web-based applications, which may offer functionality to make the business
more efficient. The general manager, who, after all, is charged with ensuring that
company resources are used effectively, must ensure that the company’s IS support
its organizational systems and that changes made in one system are reflected in
Skills Needed to Participate Effectively in Information Technology Decisions
7
other related systems. For example, a company that plans to institute a wide-scale
telecommuting program needs an information system strategy compatible with
its organization strategy. Desktop PCs located within the corporate office are not
the right solution for a telecommuting organization. Instead, laptop computers,
applications that are accessible online anywhere and anytime, and networks that
facilitate information sharing are needed. If the organization only allows the
purchase of desktop PCs and only builds systems accessible from desks within the
office, 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.
Managers are asked to take on tasks that require different skills at different
times. Those tasks can be divided into visionary tasks, or tasks that provide
leadership and direction for the group; informational/interpersonal tasks, or tasks
that provide information and knowledge the group needs to have to be successful;
and structural tasks, tasks that organize the group. Figure I.2 lists basic skills
required of managers who wish to participate successfully in key IT decisions.
This list emphasizes understanding, organizing, planning, and solving the business
needs of the organization. Individuals who want to develop fully as managers will
find this an excellent checklist for 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 is not required to become a knowledgeable participant in the
IS decisions of a business. What a manager needs includes curiosity, creativity, and
the confidence to question in order to learn and understand. A solid framework
that identifies key management issues and relates them to aspects of IS provides
the background needed to participate.
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 that drive both organizational and IS decisions. Business,
organizational, and information strategies are fundamentally linked in what is called
the Information Systems Strategy Triangle. 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 managers with a foundation
for understanding business issues related to IS from a managerial perspective.
8
Introduction
Managerial Role
Skill
Visionary
Creativity—the ability to transform resources and
create something entirely new to the organization
Curiosity—the ability to question and learn about
new ideas, applications, technologies, and business
models
Confidence—the ability to believe in oneself and
assert one’s ideas at the proper time
Focus on Business Solutions—the ability to bring
experience and insight to bear on current business
opportunities and challenges
Flexibility—the ability to change rapidly and
effectively, such as by adapting work processes,
shifting perspectives on an issue, or adjusting a plan
to achieve a new goal
Informational and Interpersonal
Communication—the ability to share thoughts
through text, images, and speech
Information gathering—the ability to gather
thoughts of others through listening, reading, and
observing
Interpersonal skills—the ability to cooperate and
collaborate with others on a team, among groups, or
across a chain of command to achieve results
Structural
Project management—the ability to plan,
organize, direct, and control company resources to
effectively complete a project
Analytical skills—the ability to break down a whole
into its elements for ease of understanding and
analysis
Organizational skills—the ability to bring together
distinct elements and combine them into an
effective whole
Planning skills—the ability to develop objectives
and to allocate resources to ensure objectives are met
FIGURE I.2
Skills of successful managers.
Organization of the Book
To be a knowledgeable participant, managers must know about both using information and managing information. The first five chapters offer basic frameworks
to make this understanding easier. Chapter 1 explains the Information Systems
Strategy Triangle and provides a brief overview 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
Basic Assumptions
9
have studied these areas, this chapter is a brief refresher of major concepts used
throughout the remaining chapters of the book. Subsequent chapters provide
frameworks and sets of examples for understanding the links between IT and
business strategy (Chapter 2), organizational forms (Chapter 3), collaboration and
individual work (Chapter 4), and business process transformation (Chapter 5).
The rest of the text looks at issues related to building IS strategy itself.
Chapter 6 provides a framework for understanding the four components of IS
architecture: hardware, software, networks, and data. Chapter 7 discusses sourcing
and where companies look for IS resources. Chapter 8 looks at the governance
and organization of IS resources. Chapter 9 presents some of the ethical issues
that need to be considered. Chapter 10 focuses on the economics of managing IS.
Chapter 11 discusses project management in general and the management of IS
projects specifically. Finally, Chapter 12 provides an overview of how companies
manage knowledge and create a competitive advantage using business analytics.
! BASIC ASSUMPTIONS
Every book is based on certain assumptions, and understanding those assumptions
makes a difference in interpreting the text. The first 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
have a basic understanding of the business and technology issues related to IS.
Because technology changes rapidly, this text also assumes that the technology of
today is different from the technology of yesterday, and most likely, the technology
available to readers of this text today differs significantly from that available when
the text was written. Therefore, this text focuses on generic concepts that are, to
the extent possible, technology independent. It provides a framework on which to
hang more current information, such as new uses of the Internet or new networking
technologies. It is assumed that the reader will seek out current sources to learn
about the latest technology.
Although some may debate this next assumption, a second assumption is
that the role of a general manager and the role of an IS manager are distinct.
The general manager must have a basic knowledge of IS to make decisions that
may have serious implications for the business. In addition to general business
knowledge, the IS manager must have more in-depth knowledge of technology to
manage IS and to partner with general managers who must use the information.
As the digital natives take on increasingly more managerial roles in corporations,
this second assumption may have to be altered. But for this text, we will assume
a different skill set for the IS manager. Assumptions are also made about how
business is done and what IS are in general. Knowing what assumptions are made
about each will support an understanding of the material to come.
Assumptions about Management
The classic view of management includes four activities, each dependent on the
others: planning, organizing, leading, and controlling (see Figure I.3). A manager
10
Introduction
Classic Management Model
Planning
Organizing
Leading
Controlling
FIGURE I.3
Managers think through their goals and actions in advance. Their
actions are usually based on some method, plan, or logic, rather
than a hunch or gut feeling.
Managers coordinate the human and material resources of the organization. The effectiveness of an organization depends on its ability
to direct its resources to attain its goals.
Managers direct and influence subordinates, getting others to perform essential tasks. By establishing the proper atmosphere, they
help their subordinates do their best.
Managers attempt to assure that the organization is moving toward
its goal. If part of their organization is on the wrong track, managers
try to find out why and set things right.
Classic management model.
Source: Adapted from James A. F. Stoner, Management, 2nd ed. (Upper Saddle River, NJ: Prentice
Hall, 1982).
performs these activities with the people and resources of the organization to
attain the established goals of the business. Conceptually, this simple model
provides a framework of the key tasks of management, which is useful for
both general business and IS management activities. Although many books have
been written describing each of these activities, organizational theorist Henry
Mintzberg offers a view that most closely details the perspective relevant to IS
management.
Mintzberg’s model describes management in behavioral terms by categorizing
the three major roles a manager fills: interpersonal, informational, and decisional
(see Figure I.4). This model is useful because it considers the chaotic nature of the
environment in which managers actually work. Managers rarely have time to be
reflective 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 experiences in different firms. 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 chaotic and random activities. This book uses several conceptual models
of business. Some take a functional view and others take a process view.
Basic Assumptions
Type of Roles
Manager’s Roles
IS Examples
Interpersonal
Figurehead
Leader
CIO greets touring dignitaries.
IS manager puts in long hours to help motivate
project team to complete project on schedule
in an environment of heavy budget cuts.
Chief information officer works with the
marketing and human resource vice presidents
to make sure that the reward and
compensation system is changed to encourage
use of new IS supporting sales.
Liaison
Informational
Monitor
Disseminator
Spokesperson
Decisional
Entrepreneur
Disturbance handler
Resource allocator
Negotiator
FIGURE I.4
11
Division manager compares progress on IS
project for the division with milestones
developed during the project’s initiation and
feasibility phase.
Chief information officer conveys
organization’s business strategy to IS
department and demonstrates how IS strategy
supports the business strategy.
IS manager represents IS department at
organization’s recruiting fair.
Division manager suggests an application of a
new technology that improves the division’s
operational efficiency.
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.
CIO allocates additional personnel positions to
various departments based upon business
strategy.
IS manager negotiates for additional personnel
needed to respond to recent user requests for
enhanced functionality in a system that is being
implemented.
Manager’s roles.
Source: Adapted from H. Mintzberg, The Nature of Managerial Work (New York: Harper & Row,
1973).
Functional View
The classical view of a business is based on the functions that people perform, such
as accounting, finance, 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 first flows vertically up and down
Introduction
12
FIGURE I.5
Sales and Support
Marketing
Operations
Accounting
Information flows
Executive Management
Hierarchical view of the firm.
between line positions and management; after analysis it may be transmitted across
other functions for use elsewhere in the company (see Figure I.5).
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 (see Figure I.6). The primary activities of inbound logistics,
operations, outbound logistics, marketing and sales, and service are chained
together in sequences that describe how a business transforms its raw materials
into value-creating products. This value chain is supported by common activities
shared across all the primary activities. For example, general management and
legal services are distributed among the primary activities. Improving coordination
among activities increases business profit. Organizations that effectively manage
core processes across functional boundaries will be winners in the marketplace. IS
are often the key to this process improvement and cross-functional coordination.
Firm Infrastructure
rgi
Ma
Human Resource Management
n
Technology Development
Procurement
Marketing
& Sales
Process view of the firm: the value chain.
Source: M. Porter, Competitive Advantage (New York: Free Press, 1985).
Service
n
Outbound
Logistics
rgi
FIGURE I.6
Operations
Ma
Inbound
Logistics
Basic Assumptions
13
Both the process and functional views are important to understanding IS. The
functional view is useful when similar 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 flow of information throughout a business. For example,
understanding the information associated with order fulfillment or 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 technologist’s viewpoint. Both the nature of information 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 significant and discrete meanings 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 definitions is difficult. However, his work (summarized in Figure I.7) provides a nice starting point for understanding the subtle but important differences.
The information hierarchy begins with data, or simple observations. Data are
a set of specific, 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.
Information is data endowed with relevance and purpose.8 People turn
data into information by organizing it 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 provides individually, and that makes it
information. Deciding on the appropriate unit of analysis involves interpreting the
context of the data and summarizing it into a more condensed form. Consensus
must be reached on the unit of analysis.
To be relevant and have a purpose, information must be considered within
the context that it is received and used. Because of differences in context,
information needs vary across the function and hierarchical level. 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 manager in the accounting
department probably won’t be interested in any of these details, but instead will
8
Peter F. Drucker, ‘‘The Coming of the New Organization,’’ Harvard Business Review
(January–February 1988), 45–53.
14
Introduction
Data
Information
Knowledge
Definition
Simple observations of
the state of the world
Data endowed with
relevance and
purpose
Information from the
human mind
(includes reflection,
synthesis, context)
Characteristics
• Easily structured
• Easily captured on
machines
• Often quantified
• Easily transferred
• Mere facts
• Requires unit of
analysis
• Data that have been
processed
• Human mediation
necessary
• Hard to structure
• Difficult 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 manager
Inventory manager
knowing which items
need to be reordered
in light of daily
inventory report,
anticipated labor
strikes, and a flood in
Brazil that affects the
supply of a major
component.
FIGURE I.7
Comparison of data, information, and knowledge.
Source: Adapted from Thomas Davenport, Information Ecology (New York: Oxford University
Press, 1997).
want 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.8 and reflect the different activities
performed at each level. At the supervisory level, activities are narrow in scope and
focused on 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 defined in a detailed manner. The activities of senior management
are much broader in scope. Senior management performs long-term planning and
needs information that is aggregated, externally oriented, and more subjective.
The information needs of middle managers in terms of these characteristics fall
between the needs of supervisors and senior management. Because information
needs vary across levels, a daily inventory report of a large manufacturing firm may
serve as information for a low-level inventory manager, whereas the CEO would
consider such a report to be merely data. A report does not necessarily mean
information. The context in which the report is used must be considered.
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
Basic Assumptions
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
Integrated
Often financial
Very detailed
Very accurate
Often nonfinancial
Orientation
Primarily external
Internal
Primarily internal
with limited external
Decision
Extremely
judgmental
Uses creativity and
analytical skills
Relatively
judgmental
FIGURE I.8
15
Heavy reliance on
rules
Information characteristics across hierarchical level.
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, judgment, and
wisdom. Knowledge also involves the synthesis of multiple sources of information
over time.9 The amount of human contribution increases along the continuum
from data to information to knowledge. Computers work well for managing data,
but are less efficient at managing information.
Some people think there is a fourth level in the information hierarchy,
wisdom. In this context, 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 level
of experience who seem to ‘‘just know’’ what to do and how to apply the knowledge
they gain.
System Hierarchy
An information system comprises 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 defined by the organization’s
infrastructure. In this text the term infrastructure refers to everything that
supports the flow and processing of information in an organization, including
hardware, software, data, and network components, whereas architecture refers
to the strategy implicit in these components. These ideas will be discussed in
greater detail in Chapter 6. Information system is defined more broadly as the
combination of technology (the ‘‘what’’), people (the ‘‘who’’), and process (the
9
Thomas H. Davenport, Information Ecology (New York: Oxford University Press, 1997), 9–10.
16
Introduction
Management
Information Systems
People
FIGURE I.9
Technology
Process
System hierarchy.
‘‘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 define information technology as all forms of technology used
to create, store, exchange, and use information.
Above the information system itself is management, which oversees the design
and structure of the system and monitors its overall performance. Management
develops the business requirements and the business strategy that the information
system is meant to satisfy. The system’s architecture provides a blueprint that
translates this strategy into components, or infrastructure.10
! FOOD FOR THOUGHT: ECONOMICS OF INFORMATION
VERSUS ECONOMICS OF THINGS
In their book, Blown to Bits, Evans and Wurster argued that every business is
in the information business.11 Even those businesses not typically considered to
be 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, a high-end Mercedes automobile contains as much computing power as a midrange personal
computer. Information-intensive processes in the manufacturing and marketing
of the automobile include market research, logistics, advertising, and inventory
management.
10
Gordon Hay and Rick Muñoz, ‘‘Establishing an IT Architecture Strategy,’’ Information Systems
Management 14 (Summer 1997), 67– 69.
11
Philip Evans and Thomas Wurster, Blown to Bits (Boston: Harvard Business School Press, 2000).
Food for Thought: Economics of Information Versus Economics of Things
Things
Information
Wear out
Doesn’t wear out, can become obsolete or
untrue
Is replicated at almost zero cost without
limit
Does not physically exist
When sold, seller may still possess and sell
again
Price based on value to consumer
Are replicated at the expense of the
manufacturer
Exist in a tangible location
When sold, possession changes hands
Price based on production costs
FIGURE I.10
17
Comparison of the economics of things with the economics of information.
As our world is reshaped by information-intensive industries, it becomes even
more important for business strategies 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, though 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 the value to the consumer. Figure I.10 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, firms are vulnerable if they do not separate the two. The Encyclopædia
Britannica story serves as an example. Bundling the economics of things with
the economics of information made it difficult for Encyclopædia Britannica to
gauge the threat posed by Encarta, the encyclopedia on CD-ROM that was given
away to promote the sale of computers and peripherals. 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 Encyclopædia Britannica grasp the need to separate the
economics of information from economics of things and sell bits of information
online. Clearly, Encyclopædia Britannica’s business strategy, like that of many
other companies, needed to reflect the difference between the economics of things
from the economics of information.12
12
Ibid.
Introduction
18
! SUMMARY
The explosive growth of Internet-based businesses 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.
This chapter makes the case for general managers’ full participation in strategic business
decisions concerning IS. It outlines 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 strate•
•
•
•
gies? (Chapter 1)
How can a business achieve competitive advantages using its IS? (Chapter 2)
What does it mean to align IT decisions with organizational decisions? (Chapter 3)
How is the work of the individual in an organization affected by decisions concerning IS? (Chapter 4)
How might IS enable business transformation? (Chapter 5)
IS Management Issues
• What are the components of an IT architecture? (Chapter 6)
• How should IS services be provided? (Chapter 7)
• What is an IS organization? How can a manager effectively manage IS?
(Chapter 8)
• What ethical and moral considerations bind the uses of information in business?
(Chapter 9)
• How are IS funded within an organization? What are the total costs of ownership of
IS? (Chapter 10)
• What does it mean to manage a project? (Chapter 11)
• How should knowledge be managed within an organization? (Chapter 12)
! KEY TERMS
architecture (p. 15)
data (p. 13)
information (p. 13)
information system (p. 15)
information technology
(p. 16)
infrastructure (p. 15)
knowledge (p. 14)
mashup (p. 13)
Web 2.0 (p. 4)
wisdom (p. 15)
Case Study
19
! DISCUSSION QUESTIONS
1. Why is it important for a general manager to be knowledgeable about information technology?
2. Indicate whether each of the following is information, data, or knowledge:
a. A daily sales report of each sales transaction that is sent to the chief operating officer
b. A daily sales report of each sales transaction over $100,000 that is sent to the division
marketing manager
c. A monthly production report that is sent to shop floor supervisors who don’t use the
report because they believe the figures reported are outdated and inaccurate
d. An exception report of all accounts that are more than 90 days past-due, which is sent
to the Accounts Receivable Manager
e. A list of Social Security numbers
f. The contact list in an individual’s LinkedIn account
3. Why, in your opinion, did the term Web 2.0 emerge? What is different in the way the
Web is used today from the ‘‘Web 1.0’’ world?
CASE STUDY I-1
TERRY CANNON, MBA13
Terry Cannon, a typical MBA, was about to graduate from a top-ten business school with
an MBA and a desire to change the world while growing a significant savings account. Terry
was debating among three job opportunities, each of which would be a big step up the
professional ladder from the associates job held when working for Impressive Consulting
Group (ICG) prior to returning to school to get an MBA. Terry wasn’t sure which job to
take, in part because Terry didn’t feel the MBA classes at the business school had provided
enough preparation in information systems.
Terry started business school after four years of experience at Impressive Consulting
Group (ICG), a global consulting organization with practices in virtually every major city
in the world. Terry worked in the Dallas office as an associate right out of undergraduate
school, with a degree in business with a concentration in marketing. Terry had worked on a
number of interesting strategic marketing projects while at ICG. Terry was just completing
a standard MBA program after two years of full-time study and a summer working for
MFG Corporation, a large manufacturing company in the Midwest. The internship at MFG
Corporation involved working with the new Web marketing group, which Terry chose to
see just how a company like MFG takes advantage of the Web. At the same time, Terry
hoped to become more proficient in Web and Internet technologies. The experience at
13
The names in this case are fictitious. This case is written to highlight administrative issues relevant
to general managers, and any resemblance to real individuals or organizations is coincidental.
20
Introduction
MFG’s Web marketing group, however, only made Terry more anxious, highlighting how
much more was involved in information systems and the Web than Terry had previously
thought. Terry returned to business school in the fall of the second year wondering just how
much information systems knowledge would be needed in future jobs. Further, Terry felt
that becoming a knowledgeable participant in information decisions was critical to success
in the fast-paced Internet-based business world waiting after graduation.
Terry wondered just what type of information systems knowledge was needed for each
of the three jobs under consideration. All three jobs involved a competitive salary, a signing
bonus, and stock/retirement benefits, so the decision came down to the knowledge needed
to be a success on the job. The three jobs are summarized as follows.
1. Return to ICG as a consultant. This job was attractive to Terry because it meant
returning to a former employer. Terry had left in good standing and liked the company
that rewarded innovation and supported learning and growth among consultants. Terry
figured a partnership was possible in the future. As a consultant, Terry could live
anywhere and travel to the client site four days a week. The fifth day each week, Terry
would be able to work at home, or if desired, in a company office. As a consultant, Terry
initially thought engagements in strategic marketing would be the most interesting.
ICG had a strong programming group that was brought into each engagement to do the
programming and systems analysis work. The consultant role involved understanding
client concerns and assisting in building a marketing strategy. Virtually all the projects
would have some Internet component, if not entirely about building an Internet
presence. This challenge interested Terry, but based on the summer job experience,
Terry wondered just how much technical skill would be required of the consultants in
this arena.
2. Join start-up InfoMicro. Several of Terry’s friends from business school were joining
together to form a new start-up company on the Internet. This business plan for this
company projected that InfoMicro would be one of only two Internet start-ups in their
marketplace, giving the company a good position and great opportunity for growth. The
business plan showed the company intending to go public through an IPO as early as
three years after inception, and Terry believed they could do it. Terry would join as
VP of marketing, supplementing the other three friends who would hold president,
VP of finance, and VP of operations positions. The friends who would be president
and finance VP were just completing a techno-MBA at Terry’s school and would
provide the technical competence needed to get InfoMicro on the Web. Terry would
focus on developing customers and setting marketing strategy, eventually building
an organization to support that operation as necessary. Because InfoMicro was a
Web-based business, Terry felt a significant amount of information systems knowledge
would be required of a successful marketing executive.
3. Return to MFG Corporation. The job would be to join the marketing department as
a manager responsible for new customer development. Many of MFG corporation’s
customers were older, established companies like MFG Corporation itself, but
new customers were likely to be start-ups and up-and-coming companies, or highly
successful new companies like Google or Whole Foods. Terry felt that some knowledge
of information systems would be necessary simply to provide innovative interaction
mechanisms such as customer Web pages. Terry knew that discussions with the MFG
information systems group would be necessary to build these new interfaces. How
knowledgeable must Terry be on information systems issues to hold this job?
Case Study
21
As spring break approached, Terry knew a decision had to be made. Recruiters from all
three companies had given Terry a deadline of the end of break week, and Terry wasn’t at
all sure which job to take. All sounded interesting, and all were reasonable alternatives for
Terry’s next career move.
! Discussion Questions
1. For each position Terry is considering, what types of information systems knowledge do
you think Terry would need?
2. How could Terry be a knowledgeable participant in each of the three jobs? What would
it mean to be a knowledgeable participant in each job? Give an example for each job.
3. As a marketing major and an MBA, is Terry prepared for the work world awaiting? Why
or why not?
CASE STUDY I-2
ANYGLOBAL COMPANY INC.14
Memo
To: Chris Bytemaster, CIO
From: Ms. Hazel Hasslefree, CEO
It seems that the article ‘‘IT Doesn’t Matter’’ by Nicholas Carr (Harvard Business Review,
May 2003) has caught the attention of several members of our Board of Directors. I have
been asked to prepare a short presentation about what the article means to our company
and whether IT does, in fact, matter in our company.
Would you please prepare a short report, about a page or two, that I can use as a basis for
my presentation to them? Would you please summarize the Carr article and respond to the
major points that he raises?
Thanks.
14
We appreciate the suggestions provided to us by Ron Murch at the University of Calgary concerning
this case.
!
CHAPTER
1
THE INFORMATION
SYSTEMS STRATEGY
TRIANGLE
When the Eastern United States was hit with an ice storm in 2007, most airlines
cancelled flights much earlier than JetBlue. JetBlue, overly optimistic about the
weather and its ability to fly its planes, wanted to keep the revenues flowing and its
customers happy. So it delayed cancelling flights as long as it could. A crisis erupted
when it finally had to cancel 1,000 flights over a five-day period. At one point up to
nine airplanes full of passengers were stranded on the tarmac at John F. Kennedy
International Airport in New York for six hours or more. JetBlue’s founder and
Chairman, David Neeleman, credited the problems JetBlue experienced to an
inadequate reservation system and a shoestring communication system.
The reservation system was hopelessly overwhelmed, and customers were
unable to get through to human agents to check on the status of their flight or to
obtain an alternative routing. Most reservations agents lived in Salt Lake City—far
away from the storm. Many were women who worked from their homes. And
yet, they were unavailable to respond to the pleas of stranded passengers. After
this crisis, Neeleman realized that JetBlue needed to adjust its work agreement to
require reservation agents to work longer hours during difficult periods, such as
those created by bad weather.1
This case emphasizes the point made in the Introduction: General managers
must take a role in decisions about information systems (IS). Even though it is not
necessary for a general manager to understand all technologies, it is necessary to
aggressively seek to understand the consequences of using technologies relevant
to the business’s environment. General managers who leave IS decisions solely
to their IS professionals often put themselves and their companies at a disadvantage. Although IS can facilitate the movement and exchange of information, an
information system that is inappropriate for a given operating environment can
actually inhibit and confuse that same exchange. This is especially true in crisis
1
Jeff Bailey, ‘‘JetBlue’s C.E.O. Is ‘Mortified’ After Fliers are Stranded,’’ New York Times, February
19, 2007, www.nytimes.com/2007/19/businesss/19jetblue.html.
22
The Information Systems Strategy Triangle
23
environments, such as the ice storm that paralyzed JetBlue’s information exchanges. The IS organization is not an island within a firm. The IS organization
manages an infrastructure that is essential to the firm’s functioning. Further,
this case illustrates that a firm’s IS must be aligned with the way it manages its
employees. In JetBlue’s case, it became clear that personnel policies needed to be
adjusted to have some, if not most, of JetBlue’s 2,000 reservation agents working
longer hours in times of crisis.
This chapter introduces a simple framework 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 operate, as well as the business imperatives that IS
support. Students with extensive background in organizational behavior and business strategy will find this a useful review of key concepts. The Information Systems
Strategy Triangle presented in Figure 1.1 suggests three key points about strategy.
Successful firms have an overriding business strategy that drives both organizational strategy and IS strategy. The decisions made regarding the structure,
hiring practices, and other components of the organizational strategy, as well as
decisions regarding applications, hardware, and other IS components, are all driven
by the firm’s business objectives, strategies, and tactics. Successful firms carefully
balance these three strategies—they purposely design their organization and their
IS strategies to complement their business strategy.
IS strategy can itself affect and is affected by changes in a firm’s business
and organizational strategies. 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
firm designs its business strategy to use IS to gain strategic advantage, the leadership
position in IS can only be sustained by constant innovation. The business, IS, and
organizational strategies must constantly be adjusted.
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 deployment. For example, placing computers on employee desktops without
an accompanying set of changes to job descriptions, process design, compensation
plans, and business tactics will fail to produce the anticipated productivity
Business Strategy
Organizational Strategy
FIGURE 1.1
Information Strategy
The Information Systems Strategy Triangle.
24
Chapter 1 The Information Systems Strategy Triangle
improvements. Success can only be achieved by specifically designing all three
components of the strategy triangle.
In the JetBlue case discussed earlier, the IS Strategy Triangle was out of
alignment at the time of the ice storm. The organizational strategy (e.g., personnel
policies about working hours) did not support the IS strategy (e.g., dispersed
network of systems that allowed a geographically dispersed workforce, but was not
able to handle the high volume of exchanges in a crisis situation). Both of these
strategies did not adequately support the business strategy (low cost but a high
level of customer service).2
Of course, once a firm is out of alignment, it does not mean that it has to
stay that way. To correct the misalignment described earlier, JetBlue changed its
personnel policy by extending working hours during crisis situations, replaced
Neeleman with Dave Barger as CEO, and implemented an ‘‘Operational Recovery
System.’’ This system offers planners the ability to more easily reroute planes in
the case of any disruption. It not only offers a solution to disruptions, but it also
calculates the costs of various alternatives.
What does alignment mean? A recently published book entitled Winning the
3-Legged Race defines alignment as the situation in which a company’s current
and emerging business strategy is enabled, supported, and 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 firms should strive for
synchronization and convergence, alignment in this text means any of these states,
and it pertains to organizational strategy, IS strategy, and business strategy.3
A word of explanation is needed here. This chapter and subsequent chapters
address questions of IS strategy squarely within the context of business strategy.
Studying business strategy alone is something better done in other texts and courses.
However, to provide foundation for IS discussions, this chapter summarizes several
key business strategy frameworks, as well as organizational theories. Studying IS
alone does not provide general managers with the appropriate perspective. 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 sufficient knowledge base to plan for and operate
applications. However, because technologies change so rapidly, keeping a text
current is impossible. Therefore this text takes the perspective that understanding
2
3
We are indebted to a reviewer for this comment
F. Hogue, V. Sambamurthy, R. Zmud, T. Trainer, and C. Wilson, Winning the 3-Legged Race,
(Upper Saddle River, NJ: Prentice Hall, 2005).
Brief Overview of Business Strategy Frameworks
25
what questions to ask is a skill more fundamental to the general manager than
understanding any particular technology. This text provides readers with an
appreciation of the need to ask questions, a framework from which to derive
the questions to ask, and a foundation sufficient to understand the answers
received. The remaining book chapters all 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 fulfill 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 unifies an organization’s effort and describes what the firm is all
about (i.e., its purpose). In a few words the mission statement sums up what is
unique about the firm. Figure 1.2 demonstrates that even though IBM, Dell, and
Apple are all in the computer industry, they view their missions quite differently.
For example, IBM says it focuses on services and solutions, Dell on customer
experiences, and Apple on innovation and personal computing experience.
Are these companies accomplishing their missions? It is hard to determine
whether Dell’s customers are receiving the ‘‘best customer experience.’’ That is
why Dell, like other firms, sets measurable objectives and performance targets.
Once the objectives and performance targets are set, the measurable objectives
Company
Mission Statement
IBM
At IBM, we strive to lead in the creation, development, and manufacture of
the industry’s most advanced information technologies, including computer
systems, software, networking systems, storage devices, and microelectronics. We translate these advanced technologies into value for our customers
through our professional solutions and services businesses worldwide.a
Dell
Dell’s mission is to be the most successful computer company in the world at
delivering the best customer experience in markets we serve.b
Apple
Apple ignited the personal computer revolution in the 1970s with the Apple
II and reinvented the personal computer in the 1980s with the Macintosh.
Apple is committed to bringing the best personal computing experience to
students, educators, creative professionals, and consumers around the world
through its innovative hardware, software, and Internet offerings.c
a
http://www.ibm.com/investor/company/
http://www.dell.com/content/topics/global.aspx/corp/investor/en/faqs?c=us&l=en&s=
corp#faq8
c http://www.corporate-ir.net/ireye/ir site.zhtml?ticker=aapl&script=1800&layout=
7#corpinf
b
FIGURE 1.2
Mission statements of computer companies.
26
Chapter 1 The Information Systems Strategy Triangle
and performance targets can help ensure that a firm is accomplishing its mission.
And then the firm needs to decide on a business strategy to meet its objectives and
performance targets.
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 situation for
the business. Some markets, such as those faced by airlines, makers of personal
computers, and issuers of credit cards, are characterized by many competitors and
a high level of competition such that product differentiation becomes increasingly
difficult. Other markets, such as those for package delivery 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.
Until recently Dell’s business strategy was to sell personal computers directly
to the customer without going through a middleman. Reaching customers in this
way is less expensive and time consuming than selling the computers in retail
stores. The Internet, combined with Dell’s well-designed IS infrastructure, allows
customers to electronically contact Dell, who then designs a PC for a customer’s
specific needs. Dell’s ordering system is integrated with its production system
and shares information automatically with each supplier of PC components. This
IS enables the assembly of the most current computers without the expense of
storing large inventories. Cost savings are passed on to the customer, and the
direct-to-customer model allows Dell to focus its production capacity on building
only the most current products. With small profit margins and new products
arriving quickly to replace existing products, this creative use of IS is aligned
with Dell’s business strategy. This strategic use of IS ultimately results in cost
savings, reflected in the price of systems. In addition, Dell executives achieve
a strategic advantage in reducing response time, building custom computers
for one of the industry’s lowest costs, and eliminating inventories that could
become obsolete before they are sold. Thus, this business strategy is 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 is so
effective, why is Dell now also selling its computers at major retail outlets such as
Wal-Mart and Best Buy? It is likely that the sales figures and profit margins were not
measuring up to Dell’s stated objectives and performance targets. Consequently,
Dell adjusted its business strategy.
Several well-accepted models frame the discussions of business strategy.
We review (1) the Porter generic strategies framework and two variants of its
Brief Overview of Business Strategy Frameworks
27
differentiation, and (2) D’Aveni’s hypercompetition model.4 The end of this
section introduces key questions a general manager must answer to understand
the strategy of the business.
The Generic Strategies Framework
Companies sell their products and services in a marketplace populated with
competitors. Michael Porter’s framework 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.’’5 Porter identified
three primary strategies for achieving competitive advantage: (1) cost leadership,
(2) differentiation, and (3) focus. These advantages derive from the company’s
relative position in the marketplace, and they depend on the strategies and tactics
used by competitors. Figure 1.3 summarizes 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.
Typically, 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.
Uniqueness Perceived
by Customer
Low Cost Position
Differentiation
Overall Cost
Leadership
Industry-wide
Particular
Segment Only
FIGURE 1.3
Focus
Three strategies for achieving competitive advantage.
Source: M. Porter, Competitive Strategies (New York: Free Press, 1998).
4
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 together. This framework is used in Chapter 3 to examine business process design. For further
information, see Michael E. Porter, Competitive Advantage (New York: Free Press, 1985).
5
Michael E. Porter, Competitive Advantage (New York: Free Press, 1985).
28
Chapter 1 The Information Systems Strategy Triangle
Through mass distribution, economies of scale, and IS to generate operating
efficiencies, Wal-Mart epitomizes the cost-leadership strategy.
Through differentiation, the organization qualifies its product or service in a
way that allows it to appear unique in the marketplace. The organization identifies
which qualitative dimensions are most important to its customers and then finds
ways to add value along one or more of those dimensions. For this strategy to
work, the price charged customers by the differentiator must seem fair relative to
the price charged by competitors. Typically, multiple firms in any given market
employ this strategy. Progressive Insurance is able to differentiate itself from
other automobile insurance companies by breaking out of the industry mold. Its
representatives are available 24/7 (i.e., 24 hours a day, 7 days a week) to respond
to accident claims. They arrive at an accident scene shortly after the accident with
powerful laptops, intelligent software, and the authority to settle claims on the
spot. This strategy spurred Progressive’s growth and widened its profit margins.
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. As Porter explained,
The focuser can thus achieve competitive advantage by dedicating itself to the segments exclusively. Breadth of target is clearly a matter of degree, but the essence
of focus is the exploitation of a narrow target’s differences from the balance of
the industry. Narrow focus in and of itself is not sufficient for above-average
performance.6
Marriott International demonstrates focus in the business and related IS
strategies of two of its hotel chains. 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 from the machine. She can also print airline boarding passes at the kiosks.
Further, the kiosks help the Marriott chain implement its cost focus. The kiosk
system is integrated with other systems such as billing and customer relationship
management (CRM) to generate operating efficiencies and enhanced corporate
standardization.
In contrast, kiosks in the lobby would destroy the feeling that the Ritz-Carlton
chain, acquired by Marriott in 1995, is trying to create. 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
6
Michael E. Porter, Competitive Strategies (New York: Free Press, 1998).
Brief Overview of Business Strategy Frameworks
29
individual guest preferences. To demonstrate 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. Class, the CRM, is instrumental in
implementing the differentiation-focus strategy of the Ritz-Carlton chain.7 And its
strategy allows the Ritz-Carlton chain to live up to its very unique motto (mission):
‘‘We are ladies and gentlemen serving ladies and gentlemen.’’8 JetBlue appears to
have adopted a cost focus strategy. At just over six cents per passenger seat mile,
JetBlue has the lowest cost in the airline industry. Even though it is the lowest
in the entire industry, it could be argued that JetBlue has far fewer destinations
than many of its competitors. These larger competitors are saddled with higher
pay scales from having been in the business longer and higher maintenance
costs for their fleets of older planes that they needed to acquire to sustain their
growth. Should its plans for growth be fully realized, 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. That is why the airline continually strives to keep
customers satisfied 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 airlines industry. Thus, it could be
argued that JetBlue also has used a differentiation focus.
Variants on the Differentiation Strategy
Porter’s generic strategies are fundamental to an understanding of how organizations create competitive advantage. Several variations of his differentiation strategy,
including the shareholder value model and the unlimited resources model, are
useful for further analyzing sources of advantage. D’Aveni also described these
‘‘arenas of competition’’ as the timing and know-how advantage and the deep
pockets advantage.
The shareholder value model holds that the timing of the use of specialized
knowledge can create a differentiation advantage as long as the knowledge remains
unique.10 This model suggests that customers buy products or services from an
organization to have access to its unique knowledge. The adva...
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