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ABI summary
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A summary of all the readings required for the ABI course.
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ABI - Aligning Business and InformationWeek 1 – readings:
Managers and business firms invest in information technology and systems because they
provide real economic value to the business. We can see that from a business
perspective, an information system is an important instrument for creating value for the
firm. Information systems enable the firm to increase its revenue or decrease its costs by
6providing information that helps managers make better decisions or that improves the
execution of business processes.
Awareness of the organisational and managerial dimensions of information systems can
help us understand why some firms achieve better results from their information systems
than others.
Some firms invest a great deal
and receive a great deal
(quadrant 2); others invest an
equal amount and receive few
returns (quadrant 4). Still
other firms invest little and
receive much (quadrant 1),
whereas others invest little
and receive little (quadrant 3).
This suggests that investing in
information technology does
not by itself guarantee good
returns. What accounts for this
variation among firms?
The answer lies in the concept of complementary assets. Complementary assets are
those assets required to derive value from a primary investment ( Teece, 1998 ). For
,instance, to realize value from automobiles requires substantial complementary
investments in highways, roads, gasoline stations, repair facilities, and a legal regulatory
structure to set standards and control drivers. Research indicates that firms that support
their technology investments with investments in complementary assets, such as new
business models, new business processes, management behaviour, organizational
culture, or training, receive superior returns, whereas those firms failing to make these
complementary investments receive less or no returns on their information technology
investments. These investments in organization and management are also known as
organizational and management capital.
What is the impact of information systems on organizations?
Information systems have become integral, online, interactive tools deeply involved in
the minute-to-minute operations and decision making of large organizations.
Economic impact
From the point of view of economics, IT changes both the relative costs of capital and the
costs of information. Information systems technology can be viewed as a factor of
production that can be substituted for traditional capital and labour. As the cost of
information technology decreases, it is substituted for labour, which historically has been
a rising cost. Hence, information technology should result in a decline in the number of
middle managers and clerical workers as information technology substitutes for their
labour.
According to transaction cost theory, firms and individuals seek to economize on
transaction costs, much as they do on production costs. Using markets is expensive
, because of costs such as locating and communicating with distant suppliers, monitoring
contract compliance, buying insurance, obtaining information on products, and so forth
( Coase, 1937 ; Williamson, 1985 ). Traditionally, firms have tried to reduce transaction
costs through vertical integration, by getting bigger, hiring more employees, and buying
their own suppliers and distributors, as both General Motors and Ford used to do.
Information technology also can reduce internal management costs. According to agency
theory, the firm is viewed as a “nexus of contracts” among self-interested individuals
rather than as a unified, profit-maximizing entity ( Jensen and Meckling, 1976 ). A
principal (owner) employs “agents” (employees) to perform work on his or her behalf.
However, agents need constant supervision and management; otherwise, they will tend
to pursue their own interests rather than those of the owners.
Organizational and Behavioural Impacts
Behavioural researchers have theorized that information technology facilitates flattening
of hierarchies by broadening the distribution of information to empower lower-level
employees and increase management efficiency. IT pushes decision-making rights lower
in the organization because lower-level employees receive the information they need to
make decisions without supervision.
Because managers now receive so much more accurate information on time, they
become much faster at making decisions, so fewer managers are required. Management
costs decline as a percentage of revenues, and the hierarchy becomes much more
efficient.
Post-industrial Organizations
Post-industrial theories based more on history and sociology than economics also support
the notion that IT should flatten hierarchies. In post-industrial societies, authority
increasingly relies on knowledge and competence and not merely on formal positions.
Hence, the shape of organizations flattens because professional workers tend to be self-
managing, and decision making should become more decentralized as knowledge and
information become more widespread throughout the firm.
What are the challenges posed by strategic information systems, and
how should they be addressed?
Strategic information systems often change the organization as well as its products,
services, and operating procedures, driving the organization into new behavioural
patterns. Successfully using information systems to achieve a competitive advantage is
challenging and requires precise coordination of technology, organizations, and
management.
Sustaining Competitive Advantage
The competitive advantages that strategic systems confer do not necessarily last long
enough to ensure long-term profitability. Because competitors can retaliate and copy
strategic systems, competitive advantage is not always sustainable. Markets, customer
expectations, and technology change; globalization has made these changes even more
rapid and unpredictable. The Internet can make competitive advantage disappear very
quickly because virtually all companies can use this technology.
Aligning IT with Business Objectives
The research on IT and business performance has found that (a) the more successfully a
firm can align information technology with its business goals, the more profitable it will
be, and (b) only one-quarter of firms achieve alignment of IT with the business. About
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