2.2 Strategies to Improve the Value of Information Technology Within Organizations

Defining the Value of Information Technology Within Organizations

Over the past decades, businesses and managers have focused on understanding how to employ IT systems to achieve goals in diverse organizational, consumer, and societal contexts. Transformative opportunities have been ushered in with the emergence of a new generation of IT, including elements such as:

• crowdsourcing platforms: online marketplaces where businesses or individuals can outsource tasks or problems to a large, dispersed group of people
• cloud computing: on-demand access to computing resources like storage and processing power
• big data infrastructure: systems and technologies needed to manage and analyze massive datasets
• AI: empowering machines to learn and make intelligent decisions
• the Internet of Things: connecting everyday objects to the internet, enabling them to collect and share data

Today’s IT systems have evolved and are used in handling tasks that involve high degrees of uncertainty and take place in dynamic and unstructured situations. Some examples of these situations include cars driving autonomously, chatbots supplanting customer service representatives, and email applications suggesting writing improvements. This paradigm shift demands that we explore novel relationships between the strategic value of IT systems and the performance of organizations.

The most common means of understanding the value of information systems in a business is to measure the relationship between IT investments and output measures of revenue and human productivity. This evaluation can be conducted at both the industry level and organizational level. However, the business value of IT goes beyond direct output or revenue measures because IT often supports organizational redesign efforts, such as the traditional taxi services being disrupted by new ride services like Uber or Lyft. This type of business model innovation leverages IT to create entirely new business models, not just enhance existing ones.

Managers should consider which of the following three primary methods of value IT brings to their organization (Figure 2.5):

• automation of operation
• information generation for managing people and resources
• transformation of existing processes or combined tasks called routines

Figure 2.5 Information technology creates value for organizations through automation, information generation, and transformation. (credit: modification of work “Tiling 6 simple” by T. Piesk/Wikimedia Commons, CC BY 4.0)

The automation of repetitive and mundane tasks via IT enables organizations to increase efficiency and reduce human error. For example, automating inventory management processes can streamline supply chain operations, leading to cost savings and improved inventory control. Automation can also enhance customer service through the deployment of chatbots or virtual assistants that can handle routine inquiries and thereby free up human agents to focus on more complex customer needs. For instance, Domino’s leverages IT to automate tasks associated with delivery route planning, finding the most efficient delivery routes, reducing the need for manual planning, and saving valuable time for employees.

Information generation through IT can also empower organizations to make strategic choices based on real-time and accurate data, which can lead to better decision-making and increased competitiveness. Information technology systems capture vast amounts of data from various sources, including customer interactions, market trends, and internal operations. Through advanced data analytics and business intelligence tools, organizations can derive valuable insights and make data-driven decisions. For instance, understanding customer preferences based on data analysis allows businesses to tailor their products and services to meet specific demands, improving customer satisfaction and loyalty. Domino’s utilizes various IT systems to generate real-time data on traffic conditions, delivery times, and customer locations. By analyzing this data, Domino’s gains valuable insights that inform decision-making. For instance, they can identify areas for improvement in delivery routes or optimize staffing levels based on anticipated demand.

Through IT, organizations can transform and reimagine their products, services, and customer experiences. The rise of e-commerce transformed the retail industry, allowing companies to reach an international audience and provide personalized shopping experiences. Embracing cloud computing, AI, and data analytics can lead to innovation and new revenue streams, ultimately enhancing an organization’s overall value proposition. For example, Under Armour attempted to transform itself from a sports apparel brand into a holistic fitness and wellness company through the acquisition of MyFitnessPal and the development of its own fitness app. It planned for IT and its management to leverage data and technology to move beyond selling clothes and become a central hub for athletes and fitness enthusiasts.¹⁰

An individual department or functional area within a large organization may have its own specific IT application program known as a functional area information system (FAIS), an information system designed to support specific business functions within the organization. These FAISs are designed to enhance the internal efficiency and effectiveness of each department by providing valuable support tailored to each respective department’s functions. These information systems often generate a diverse range of reports. Some common examples of functional areas for FAIS include accounting, finance, production and operations management, marketing, and human resources. The indicators of value listed in Table 2.2 signify the positive outcomes and advantages that result from investing in IT within each functional area and system category.

Strategies to Improve the Value of Information Technology for Organizations

Understanding the role of business processes within an organization is vital to measuring the specific value that IT can deliver and the mechanisms through which it achieves this. Information systems professionals know that technology alone is not the sole determinant of digital success, and that strategy is an important catalyst in the digital domain. Business-IT alignment, or strategic alignment, refers to the strong integration of the IT function with an organization’s strategy, mission, and objectives. This simply means that IT directly supports the business goals of the organization. Successful alignment exhibits six key characteristics (Figure 2.6):

• Organizations consider IT to be a driver of innovation that continuously transforms the business, leading to new revenue opportunities.
• Internal and external customers, as well as customer service, hold paramount importance for these organizations.
• Business and IT professionals are cross-trained and move across different departments and job roles.
• Clear overarching goals are established and understood by both IT and business employees.
• Information technology employees are informed about the company’s revenue generation and cost-saving mechanisms.
• The organization fosters a vibrant and inclusive company culture.

Figure 2.6 Successful strategic alignment occurs when information technology directly supports the business goals of the organization, guided by these six characteristics. (attribution: Copyright Rice University, OpenStax, under CC BY 4.0 license; credit Innovation: modification of work “Idea (89054) - The Noun Project” by “Nice and Serious”/Wikimedia Commons, CC0 1.0; credit Customers: modification of work “Noun Project people icon 3376085” by Anhar Ismail, ID/Wikimedia Commons, CC BY 3.0; credit Collaboration: modification of work “Handshake, by David“ by David/Wikimedia Commons, CC BY 3.0; credit Goals: modification of work “Checklist Noun project 5166” by Aaron Dodson/Wikimedia Commons, CC BY 3.0; credit Financials: modification of work “Analysis (1510724) - The Noun Project” by Anwer Hossain/Wikimedia Commons, CC0 1.0; credit Culture: modification of work “Ethics of Open Sharing icon - Organizational culture” by Julius Uusikylä, KRUT Collective/Wikimedia Commons, CC0 1.0)

Unfortunately, many organizations struggle to achieve such close alignment. The primary reasons for the gap between business and IT departments can usually be attributed to the following:

• Different objectives: Business managers focus on achieving business goals and generating revenue, while IT managers concentrate on technology implementation and maintenance.
• Lack of expertise awareness: Business and IT departments often lack awareness of each other’s expertise and perspectives, leading to misunderstandings and misalignment.
• Lack of communication: Inadequate communication between business and IT executives hinders the exchange of valuable insights and requirements.

Business and IT alignment as an integral unit, not separate entities, is vital. It is important that organizations view IT as a strategic partner, not just a support function. By fostering collaboration and communication between business and IT stakeholders, organizations can ensure that technology solutions directly address business needs and objectives. To improve business-IT alignment, organizations can employ several measures:¹¹

• Prioritize organizational communication: Encouraging effective dialogue between different departments, fostering interdepartmental partnerships, and promoting mutual understanding between business and IT teams ensures sufficient knowledge sharing, well-informed decision-making, and seamless collaboration.
• Focus on strengthening governance: Organizations should involve IT in strategic planning to ensure technology initiatives align with overall business goals. Engaging IT in executive committees enhances the decision-making process. Implementing a structured reporting hierarchy establishes clear communication channels, and defining authorization for decision-making roles ensures efficient execution. Coordinated governance can help set criteria whereby IT projects are prioritized based on their alignment with business objectives.
• Align scope and IT architecture: Evaluating IT solutions for their effectiveness and customizing them to suit specific scope and business needs can lead to better outcomes.
• Emphasize the development of human skills: Cultivating readiness to embrace technological changes, adapting management styles to support successful IT implementation, and learning from previous experiences contribute to continuous improvement.

Strategies to Generate Value Using Information Technology

In today’s business landscape, there are five key strategies usually pursued by organizations when seeking to generate value using IT: cost leadership, differentiation, focus/innovation, operational effectiveness, and customer orientation.

Cost leadership strategy is a business approach wherein a company aims to become the lowest-cost producer in its industry or market. The primary goal of this strategy is to offer products or services at the lowest possible price while maintaining acceptable quality levels. Walmart’s focus on cost leadership has allowed it to maintain a dominant position in the retail industry. It consistently outperforms competitors by offering lower prices and attracting a broad customer base, including price-sensitive shoppers. Despite its low-margin business, Walmart’s sheer scale and operational efficiency allow it to generate massive revenue while maintaining profitability.

Differentiation strategy is a business approach wherein a company seeks to distinguish its products or services from those of its competitors in the industry. The primary goal of this strategy is to create a unique and desirable offering that customers perceive as superior and are willing to pay a premium for. Apple exemplifies the differentiation strategy in the marketplace. By designing sleek and user-friendly products, Apple sets itself apart from competitors. The company’s focus on design, seamless integration of hardware and software, and emphasis on creating a unique user experience differentiates its products in the market.

Focus/innovation strategy is a business approach wherein a company focuses on introducing new products, services, or processes—or enhancing existing ones—to stay ahead of the competition and meet evolving customer needs. The primary goal of this strategy is to drive growth and create a competitive advantage by being at the forefront of innovation in the industry. Google is a prime example. Continuously introducing new products and features, such as Google Search, Gmail, and Google Maps, the company revolutionized the way people access and interact with information online.

Operational effectiveness strategy is a business approach wherein a company focuses on improving the efficiency and effectiveness of its internal business processes to outperform competitors. The primary goal of this strategy is to achieve higher productivity, quality, and customer satisfaction while reducing operational costs and time to market. Amazon’s success is attributed to its operational effectiveness strategy. By optimizing its e-commerce platform, warehouse management, and delivery network, Amazon ensures efficient order processing and swift delivery of products to customers.

Customer-oriented strategy is a business approach wherein a company places a strong emphasis on understanding and meeting the needs, preferences, and expectations of its customers. Also known as the customer-centric strategy, the primary goal of this strategy is to build long-lasting and loyal customer relationships by providing personalized and exceptional experiences. Netflix thrives on a customer-oriented strategy. Utilizing sophisticated algorithms and user data, Netflix offers personalized content recommendations to each subscriber, tailoring their streaming experience based on their individual preferences.

Each of these strategies has its pros and cons. For example, if a company focuses only on pursuing a cost leadership strategy, it might not have enough resources for research and development, and so it might lag in terms of innovation. Let’s say a company traditionally sells a one-size-fits-all software product, and they decide to shift toward a customer-oriented strategy by offering customizable features and personalized support options. A customer-oriented strategy impacts the scope, cost, schedule, risk, and quality dimensions of a project. While a customer-oriented approach can lead to higher initial costs, it can also bring significant benefits.