Chapter 3 Study Questions
1. What is the productivity paradox?
Productivity Paradox – “We see computers everywhere except in the
productivity statistics.” The question of how IT adds to productivity still remains
important. Today, we are interested in how investments in information
technology can create business value (tangible benefits for organizations
through either more efficient use of resources or more effective delivery of their
services to customers).
Over time it has been recognized that measurement error may be a critical
reason for the observed lack of productivity from IT investments. The difficulty in
measuring productivity in an increasingly service-based economy has made it
challenging to find productivity increases from IT.
Benefits from IT are often invisible or intangible, therefore hard to measure
Researchers suggest 3 ways through which the value of IT can be realized: (1)
through productivity; (2) through the structure of competition – altering the way
corporations compete; (3) through benefits to the end customer – helps make
processes more efficient and changes the nature of competition, and reduces
Successful organizations need to understand specifically what business value
they are seeking and how information technology can help secure that value.
2. Can information systems improve productivity?
Increasing efficiency means that business processes can be accomplished either
more quickly or with fewer resources and facilities. When companies focus on
increasing effectiveness, they are interested in– offering new or improved goods
or services that the customers value. Often requires companies to change their
business processes to deliver something new and improved.
Business Processes & Value Chains
A value chain is a network of activities that improve the effectiveness of a good
or service. Therefore they are made up of at least one, and often many, business
processes. Each step in the chain—each business process—adds value to an
item. Organizations that expand into activities that affect raw materials are said
to be undertaking backward integration or to be moving upstream on the value chain. Those that move closer to end customers would be undertaking forward
integration, or moving downstream on the value chain.
The more value a company adds to a good or service in its value chain, the
higher the price the company can charge for the final product.
The difference between the price the customer is willing to pay and the cost the
company incurs in moving the goods or services through the value chain is
defined as the margin. The greater the margin, the greater the profit.
Two types of activities support value chains. Primary activities are activities in
which value is added directly to the product (ex: shipping raw materials,
designing tires, manufacturing tires, shipping finished tires, and installing tires,
etc). Support activities support the primary activities (ex: paying the workers in a
factory, buying machines for a factory, scheduling the shipping, etc) – they add
value only indirectly.
3. How are organizational strategy and industry structure related?
An organization’s strategy reflects its goals and objectives. A company’s strategy
is influenced by the competitive structure of the company’s industry.
Organizational strategy begins with an assessment of the fundamental
characteristics and structure of an industry. One model is the five forces model –
five competitive forces determine industry profitability: (1) bargaining power of
customers, (2) threat of substitutions, (3) bargaining power of suppliers, (4)
threat of new entrants, (5) rivalry among existing firms. The intensity of each of
the five forces determines the characteristics of the industry, how profitable it is,
and how sustainable that profitability will be.
Ex: soft drink industry.
1 – customers can switch pretty easily between competing soft drinks, so
companies within the industry have to be willing to please the customer.
2 – threat of customers turning to substitutes is ever-present, so the industry
must constantly respond to it.
3 – companies within the industry also have significant amounts of power over
their suppliers because contracts can be lucrative. Thus, they get very
competitive prices for their ingredients.
4 – new entrants to the industry would have a hard time because they are
unable to obtain the same kinds of terms from t