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Topic Overview – Decision Efficiency and Effectiveness In A Business Simulation

Learning Outcome:

LO.1 explain the theory and practice of businesses (COI, CID, SID)

LO.5 students will discuss good practice for organization success (COI, CID, SID).

LO.6 undertake a critical audit of skills and capabilities for a professional career and identify areas

required for improvement (COI, CID, EID).

1. Decision Efficiency and Effectiveness

Decision efficiency refers to the amount of resources a group or individual consumes in the process of

making a decision. Money, materials, space, computer time, etc. all exemplify resources which need to

be consumed efficiently. However, the major resource consumed during the decision process of an

academic business simulation is time. The less time required to complete a particular decision, the more

efficient the group’s decision process, ceteris parabis. As described below, the decision times for all

teams were carefully monitored during each decision. Decision time refers to the amount of time, in

minutes, between the distribution of the results (output) of one set of decisions and the team’s

submission of its next set of decisions (input). The resulting total decision time served as a measure of

each teams decision efficiency. Efficiency is only one measure of a group’s decision performance, the

decisions made must also be effective. Return on investment and accuracy of sales forecasts to be

accurate measures of a group’s competitive performance. An objective function must be included in

measurement of the firm’s profitability, market share, pollution, and production efficiency as well as the

Opportunity cost, must reflected by decision time, including a minor factor that encourages the use of

decision tools outside of class (Newgren, Stair, & Kuehn, 1981).

The use of information technology (IT) as a competitive weapon has already become a popular cliche:

but there is still a marked lack of understanding of the issues that determine die influence of IT on a

panicular organization and the processes that will allow a smooth coordination of IT and corporate

strategy (Bakos & Treacy, 1986). Senior executives, strategic planners, and information systems

managers are increasingly turning their attention to opportunities for achiieving competitive advantage

through information technology (IT), in the form of innovative information and communications systems.

There are several reasons underlying this recent trend, not the least of which is the publicity received by

a few companies that have gained significant advantage through IT. Many organizational and managerial

remedies for these problems have been suggested, ranging from the development of better measures of

the efficiency and effecdveness of organizational fiinctions, to major changes in the current structure of

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organizations. These recommendations for increasing the utilization of IT focus on correcting

organizational deficiencies that have restrained its effective use. Another group of researchers have

focused on the potential for information technology to improve strategic performance. Opportunities

arising from information technology can be viewed from three perspectives: (1) that of an organizational

designer trying to improve the efficiency and effectiveness of the current organization, (2) that of an

industr}’ insider trying to out-maneuver other participants in a competitive game, and (3) that of an

outsider investigating whether to enter an industry. These three perspectives are consistent with our

treatment of corporate strategy in this paper, as having Lhree major component strategies: internal,

competitive, and business portfolio. Internal strategy is concerned with the development of an efficient

and effective organizational structure for achieving goals and objectives. Competitive strategy focuses on

competitive moves within the industries in which the organization does business. Business Portfolio

strategy concerns the choice of which industries to compete in and how to position the organization in

those industries. These components of corporate strategy are closely related and information technology

can affect all three. For example, a firm in the distribution business may build an on-line order entry

system, and place terminals in customer’s purchasing departments. This system can improve die

efficiency of the firm’s operations, which is an element of internal strategy. The terminal can supply the

customer with useful information, and by speeding orders can help the customer to reduce inventories.

These effects make it more difficult for other distribution firms to compete, and contribute to the

competitive strategy of the firm. The order entry system may also be an important asset in other

industries, such as mail-order retailing. Thus, the firm might enter this industry on the strength of its

technology, which would impact the business portfolio strategy.

2. IT and Internal Strategy

Organizations are designed to carry out their goals and objectives efficiently and effectively. This is the

subject of internal strategy, and the primary focus of the organizational design literature, which has

identified two relevant domains: organizational structure (form) and process (function). Organizational

structure is concerned with the study of alternative organizational forms at both the corporate and work

group levels. Organizational process, the dual problem to organizational form, is concerned with systems

for getting the work done, or what Perrow defines as organizational technology (Perrow, Charles 1967).

Improving the efficiency and effectiveness of organizations is the traditional domain of the Information

Systems function. Rockart and Scott Morton (1984) have suggested that the impacts of traditional

information systems can have important implications for the competitive position of the firm. They employ

a modifications of Leavitt’s organizational model (1965) to show that these systems can affect competitive

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performance through their impact on management processes, roles and people, and organizational

structure. Thus, by improving the design of an organization through internal strategy, one can also affect

compedtive strategy. In this secdon we review a num.ber of conventional approaches to improve

organizational performance through information technology, and proceed by proposing a framework to

link Informadon Systems to the theory of organizational design.

2.1. Internal Strategy and MIS

There are more than two hundred published techniques for identifying opportunides to support

management processes with information technology. Several detailed reviews have been published. The

techniques differ in focus, emphasis, and applicability to particular areas of concern. Traditional

approaches to idenufy areas for the application of information technology have focused on its capability

to improve the efficiency and effectiveness of specific functional areas of die firm. The first generation of

mediodologies uulized a strictly operational view of the firm, with an objective to improve the efficiency of

requisite business processes. Representative of this approach are Business Systems Planning (1981),

and Office Automation Methodology. These techniques represent ways of formally modeling die

operations of die enterprise so that potential improvements in efficiency and effectiveness can be

analyzed. They are not easily applied to poorly structured functions, such as senior management roles,

because these areas are not amenable to formal modeling.

These traditional MIS approaches focus on improving organizational efficiency and efTectiveness. They

identify opportunities for using information technology to improve the internal strategy of the organization.

As one moves toward techniques for analyzing unstructured functional areas, corporate objectives grow

in importance as they provide a starting point for discovering latent structure. Yet, they fall short of

treating strategic considerations as the driving force for the identification of IT opportunities. Furthermore,

each of these approaches is based on an implicit, idiosyncratic theory of organizations that stands apart

from the main body of organizational design literature. Although some of these theories are inventive,

they neither contribute to, nor are leveraged by, the accumulated knowledge of organizational theory.

They are only “private theories” of organizational design, embedded within traditional MIS techniques.

3. The link between IT and Competitive Strategy

A number of authors have addressed the task of identifying opportunities for the application of information

technology to create competitive advantage. They generally have recognized the importance of the link

between IT and competitive strategy, although this has not always been their primary focus. Two general

approaches can be identified in this literature, distinguished by their underlying models: a value-added

chain analysis of the firm’s operations and Porter’s framework for competitive analysis (Porter, 1980).

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Rockart and Scott Morton (1984) have introduced the use of the value-added chain to describe the

potential opportunities arising from IT. They identify three types of opportunities that can create

competitive advantage: (1) improve each value adding function. (2) link with customers and suppliers to

increase their switching costs, and (3) create new businesses through service or product and Learmonth

(1984), further this effort by using a generic, thirteen function resource lifecycle model to identify

competitive opportunities. It should be noted that these value-added chain analyses, geared toward

operadonal efficiency and functional effectiveness, are closely related to internal strategy. Porter (1980),

advanced the idea that competition in any industry is rooted in its underiying economic structure, and

thus it is more than a superficial game of moves and countermoves among participating firms. This

approach is reflected in the framework he proposed to explain the dynamics of compeution in an industry.

As Figure 2 illustrates, it includes five major forces underiying competition: rivalry among existing

competitors, threat of new entrants, threat of substitute products or services, bargaining power of

suppliers, and bargaining power of customers.

Source: Bakos, J. Y., & Treacy, M. E. (1986). Information technology and corporate strategy: a research

perspective. MIS quarterly, page. 21.

An important implicadon of this framework is the idea of extended rivalry. To understand competition in

an industry, one must look beyond current competitors to include customers, suppliers, firms producing

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subsutute products, and potendal entrants. Firms generally try to manipulate the competitive forces in

their industry, in order to achieve comparative advantage over competitors. There are certain generic

strategies that can be employed to that end. Porter (1980) has idenufied cost leadership and product

differentiation as two such strategies. He identifies a third strategy, the pursuit of niche markets, which is

similar to product differentiation strategies from the perspective of IT-related opportunity (Bakos &

Treacy, 1986).

Parsons. Rockan and Scott Morton, and Learmonth, and others each have different categorizations of

competitive opportunities created by information technology. From these we have distilled four areas of

opportunity for IT to support competitive strategy. These categories may not be comprehensive; new

ways of employing IT to support strategy will be found. Nevertheless, they represent a useful starting

point for someone trying to identify specific opportunities within their firm. They can be seen as tactics to

support competitive strategies. For example, when a firm employs information systems to improve the

efficiency of operations, it is making a tactical mov^ that can support a cost leadership strategy. The four

areas of opportunity that have been identified are: (1) improvement of operational efficiency and

functional effectiveness. (2) product innovation with IT. (3) acquisition of bargaining advantage against

one’s customers and suppliers, and (4) exploitation of interorganizational synergies. In the next four

subsections, we briefly discuss each of these areas of opportunity, which competitive strategies they

support, and how one can begin to identify specific opportunities.

3.1. improve operational efficiency and functional effctliveness Systems to improve operations are the

traditional focus of information technology applications and central to the support of the internal strategy

of the firm. These systems can also lend support to the competitive position of the firm to the extent that

they are industry innovations that can be turned into competitive advantage. Usually this requires that the

system be applied to critical functional areas of the firm and that it is a new type of application in its

industry. Simply following the industry leaders does not lead to any advantage. As discussed in the

previous section, opportunities for operational efficiency are found in supporting organizational structure

and management processes. Techniques for identifying them are well established, but unrelated to the

body of organizational theory. Although opportunities to improve operational efficiency and effectiveness

are the best undei”stood, they are also, quite possibly, the least important for targeting IT to support

competitive strategy (Bakos & Treacy, 1986).

3.2. Product innovation with information technology Information technology is providing firms with unique

opportunities for product innovation. In many industries, from automotive to consumer electronics,

information technology is being built into existing products to enhance their value. In other industries,

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such as banking, insurance, and consulting, the technology is providing a development and delivery

vehicle for new service-based products. The technology can provide an important means for

differentiating existing products and developing new and unique ones (Bakos & Treacy, 1986).

3.3. Cooperative information systems Competidve strategies for exploidng synergies with customers or

suppliers generally concentrate upon opportunities for better coordinadon. Through better coordinauon,

operadons can be made more efficient and diis benefit can be shared between the two participants

(Bakos & Treacy, 1986). Coordinadon can be achieved with information systems that couple flmcdonal

areas in two disunct firms. For example, one might tightly couple the production planning system of a firm

with the order entry system of suppliers to lower the amount of inventory in process and the turnaround

time for new orders. Interorganizational systems are a new phenomenon. They allow firms to vertically

integrate from an information perspective without disturbing the legal boundaries of the entities.

Eventually, they may redefine the boundaries of entire industries. Methodologies to identify opportunities

for cooperative systems may be quite similar to those used to improve operational efficiency and

functional effectiveness, the main difference being in the unit of analysis -two organizations instead ofjust

one.

4. Theoretical links between information technology and competitive advantage

Two theoretical links appears between information technology and competitive advantage, that can serve

as the basis for specific dieories examining the impact of information technology on competitive strategy.

Bounded rationality can serve once again as a major theoretical link in studying the competitive impacts

of information technology. Improving the bounds of organizational rationality has direct implicadons for

both bargaining power and comparative efficiency. In particular it affects the cost of search (by improving

the generation and evaluauon of alternatives), as well as transaction costs in organizational interfaces.

According to Williamson [40], transaction costs arise from environmental constraints, opportunism, and

small numbers exchange situations, coupled with bounded rationality. Information technology can have a

direct impact on these variables through its effect on bounded rationality, for example by reducing

contracting and monitoring costs (thus mitigating the effect of opportunism), improving the generation and

evaluation of alternatives (thus mitigating the effect of environmental uncertainty and complexity), and

either decrease or increase information asymmetries (which are related to Williamson’s notion of

information impactedness). The second theoretical link between information technology and industrial

economics theory comes from the effects of IT on producdon processes. It is generally accepted that

information technology is an inherently flexible technology, improving the adaptability of products, and

allowing the realization of scale economies from smaller production runs. Informadon technology will thus

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affect asset specificity, and, in Williamson’s transaction cost franiework, have an impact on small

numbers situations. This view of information technology will be instrumental in understanding its impact

on two determinants of bargaining advantage identified eariier, product uniqueness and switching costs

(Bakos & Treacy, 1986).

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References

Bakos, J. Y., & Treacy, M. E. (1986). Information technology and corporate strategy: a research

perspective. MIS quarterly, 107-119.

International Business Machines Corporation (1981). Business Systems Planning: Information Systems

Planning Guide. . Third Edition, July.

Leavitt, H. J.,( 1965). “Applied organizational change in industry”. In Handbook ofOrganizations. Rand-

McNally, Chicago, II..

Learmonth, Gerard P. (December 1984). “The Information System as a Competitive Weapon”.

Communications ofthe ACM 27, 12, pp. 1193-1201.

Newgren, K. E., Stair, R. M., & Kuehn, R. R. (1981). Decision efficiency and effectiveness in a business

simulation. In Developments in Business Simulation and Experiential Learning: Proceedings of the

Annual ABSEL conference (Vol. 8).

Porter, Michael. (1980). Competitive Strategy. Free Press, New York, N.Y.

Perrow, Charles (1967). “A Framework for the Comparative Analysis of Organizations”. American

Sociological Review 32, pp. 194-208.

Rockart, John F. and Scott Morton, Michael S. (1984). “Implications of Changes in Information

Technology for Corporate Strategy”. Interfaces 14, 1, pp. 84-95.