A Business Perspective on Information Systems

It Isn’t Just Technology: A Business Perspective on Information SystemsManagers and business firms invest in information technology and systems because they provide real economic value to the business. The decision to build or maintain an

information system assumes that the returns on this investment will be superior to other investments in buildings, machines, or other assets. These superior returns

will be expressed as increases in productivity, as increases in revenues (which will increase the firm’s stock market value), or perhaps as superior long-term

strategic positioning of the firm in certain markets (which produce superior revenues in the future).
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 providing information that helps managers make better decisions or that improves the execution of business processes. For

example, the information system for analyzing supermarket checkout data illustrated in Figure 1.3 can increase firm profitability by helping managers make better

decisions as to which products to stock and promote in retail supermarkets.
Every business has an information value chain, illustrated in Figure 1.7, in which raw information is systematically acquired and then transformed through various

stages that add value to that information. The value of an information system to a business, as well as the decision to invest in any new information system, is, in

large part, determined by the extent to which the system will lead to better management decisions, more efficient business processes, and higher firm profitability.

Although there are other reasons why systems are built, their primary purpose is to contribute to corporate value.
From a business perspective, information systems are part of a series of value-adding activities for acquiring, transforming, and distributing information that

managers can use to improve decision making, enhance organizational performance, and, ultimately, increase firm profitability.
The business perspective calls attention to the organizational and managerial nature of information systems. An information system represents an organizational and

management solution, based on information technology, to a challenge or problem posed by the environment. Every chapter in this book begins with a short case study

that illustrates this concept. A diagram at the beginning of each chapter illustrates the relationship between a business challenge and resulting management and

organizational decisions to use IT as a solution to challenges generated by the business environment. You can use this diagram as a starting point for analyzing any

information system or information system problem you encounter.

Figure 1.7 The Business Information Value Chain
From a business perspective, information systems are part of a series of value-adding activities for acquiring, transforming, and distributing information that

managers can use to improve decision making, enhance organizational performance, and, ultimately, increase firm profitability.
Review the diagram at the beginning of this chapter. The diagram shows how the San Francisco Giants’ systems solved the business problem presented by the need to

generate revenue in a highly competitive industry. These systems provide a solution that takes advantage of opportunities provided by new digital technology and the

Internet. They opened up new channels for selling tickets and interacting with customers, optimized ticket pricing, and used new tools to analyze player performance.

These systems were essential in improving the Giants’s overall business performance. The diagram also illustrates how management, technology, and organizational

elements work together to create the systems.
Complementary Assets: Organizational Capital and the Right Business Model
Awareness of the organizational and managerial dimensions of information systems can help us understand why some firms achieve better results from their information

systems than others. Studies of returns from information technology investments show that there is considerable variation in the returns firms receive

(see Figure 1.8). 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. Information technology investments alone cannot make organizations and managers more effective unless they are

accompanied by supportive values, structures, and behavior patterns in the organization and other complementary assets. Business firms need to change how they do

business before they can really reap the advantages of new information technologies.
Some firms fail to adopt the right business model that suits the new technology, or seek to preserve an old business model that is doomed by new technology. For

instance, recording label companies refused to change their old business model, which was based on physical music stores for distribution rather than adopt a new

online distribution model. As a result, online legal music sales are dominated not by record companies but by a technology company called Apple Computer.
Complementary assets are those assets required to derive value from a primary investment (Teece, 1988). 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.
Figure 1.8 Variation in Returns on Information Technology Investment
Although, on average, investments in information technology produce returns far above those returned by other investments, there is considerable variation across

Source: Based on Brynjolfsson and Hitt (2000).
Research indicates that firms that support their technology investments with investments in complementary assets, such as new business models, new business processes,

management behavior, 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 (Brynjolfsson, 2003; Brynjolfsson and Hitt, 2000; Laudon, 1974). These investments in organization and

management are also known as organizational and management capital.
Table 1.3 lists the major complementary investments that firms need to make to realize value from their information technology investments. Some of this investment

involves tangible assets, such as buildings, machinery, and tools. However, the value of investments in information technology depends to a large extent on

complementary investments in management and organization.
Table 1.3 Complementary Social, Managerial, and Organizational Assets Required to Optimize Returns from Information Technology Investments
Organizational assets Supportive organizational culture that values efficiency and effectiveness
Appropriate business model
Efficient business processes
Decentralized authority
Distributed decision-making rights
Strong IS development team
Managerial assets Strong senior management support for technology investment and change
Incentives for management innovation
Teamwork and collaborative work environments
Training programs to enhance management decision skills
Management culture that values flexibility and knowledge-based decision making.
Social assets The Internet and telecommunications infrastructure
IT-enriched educational programs raising labor force computer literacy
Standards (both government and private sector)
Laws and regulations creating fair, stable market environments
Technology and service firms in adjacent markets to assist implementation
Key organizational complementary investments are a supportive business culture that values efficiency and effectiveness, an appropriate business model, efficient

business processes, decentralization of authority, highly distributed decision rights, and a strong information system (IS) development team.
Important managerial complementary assets are strong senior management support for change, incentive systems that monitor and reward individual innovation, an emphasis

on teamwork and collaboration, training programs, and a management culture that values flexibility and knowledge.
Important social investments (not made by the firm but by the society at large, other firms, governments, and other key market actors) are the Internet and the

supporting Internet culture, educational systems, network and computing standards, regulations and laws, and the presence of technology and service firms.
Throughout the book we emphasize a framework of analysis that considers technology, management, and organizational assets and their interactions. Perhaps the single

most important theme in the book, reflected in case studies and exercises, is that managers need to consider the broader organization and management dimensions of

information systems to understand current problems as well as to derive substantial above-average returns from their information technology investments. As you will

see throughout the text, firms that can address these related dimensions of the IT investment are, on average, richly rewarded.

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