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A stakeholder analysis approach for interorganizational systems.

There is a need to develop IS strategy which goes beyond firm-level analysis and embraces the stakeholder approach to strategic management

Introduction

A large body of literature emerged in the early 1980s, which addressed the competitive implications of private investments in information systems (IS) at the level of individual firms. With a few exceptions, all the existing research is based on Porter[1,2], particularly on the five competitive forces. The work of Porter serves well as a conceptual framework for the formulation of information systems strategy in cases where the return on investment is expected to benefit a single firm. But as Harris[3] points out, even information systems developed by single firms, such as the SABRE flight reservation system of American Airlines, can have impacts that extend well beyond the individual firm. There is a need to develop IS strategy theory that goes beyond the firm-level analysis, and can contribute to an understanding of the industrial and societal implications of IS. This is especially true in the case of the emerging class of interorganizational systems (IOSs), which would comprise interdependent subsets of a future information infrastructure.

We must bear in mind that an information architecture would entail massive amounts of both private and public investment, setting of standards and regulation by the public sector, and some transfer of risk to society. In turn, society would expect to benefit generally from such investment. The analytical framework of Porter does not address these issues. It is in the normative literature of the strategic management field that insight into the challenge of strategic information infrastructure development can be obtained.

In the remainder of this article we first examine the literature stream arising from Porter, and provide a review of the Porter-based IS strategy literature. In particular, we characterize the work of several authors within Porter's framework. Other disparate IS literature is then examined, and the limitations of the existing literature are discussed. Finally, we suggest that the stakeholder approach to strategic management promises a more complete basis for analysing the impact of IS and IOSs at the firm, industry and societal levels.

Competitive implications of IS

Porter analysis

Nearly all the literature on information systems is based on Porter[1,2]. Thus, it is useful to summarize first the ideas of Porter before reviewing the IS literature.

Porter's three generic strategies. These include low cost, differentiation and focus.

Porter's five competitive forces. These include rivalry among existing competitors, bargaining power of buyers, bargaining power of suppliers, threat of new entrants, threat of substitute products.

Porter's value chain. These fall into two categories including: primary activities - inbound logistics operations, outbound logistics, marketing and sales service; and secondary activities - firm infrastructure, human resource management, technology development, procurement.

Porters' four dimensions of competitive scope. These include segment scope, vertical scope (degree of vertical integration), geographic scope, industry scope (range of industries in which firm competes).

In general, the literature describes the competitive implications of IS by providing extensive examples and prescriptions housed within Porter's five competitive forces, or value chain, so that the impact is seen as occurring primarily at the firm level.

An early example of the application of Porter to IS strategy is Parsons[4]. Parsons considers information technology to impact at three levels - at the firm level, which may be explained in terms of Porter's five competitive forces; at the strategy level, which could be explained in terms of Porter's three generic strategies; and at the industry level. Industry-level impacts on products and services are considered by Parsons[4] to result essentially through the dimension of time - by reducing the product development cycle, product life cycle, or time spent in the distribution pipeline (for products which can be reduced to their information content and transported electronically).

Similarly, product markets are impacted by an increasing demand for information-based products. The impact of IT on a firm's production economics varies greatly by industry. Several authors refer to information systems or information technology as a weapon to be deployed in interfirm rivalry. Parsons notes that the introduction of new IS technology into the competitive environment can nucleate episodes of firm warfare. One of the chief causes of conflict is the inclusion of "systems bias" or "tilt" in information systems[5], that is, providing information to customers in a way that provides advantage to the IS sponsor at the expense of competing firms also participating in such systems. An example would be the SABRE flight reservation system of American Airlines, which preferentially listed American's flights first (this practice has since been removed from SABRE). While Parsons[4] identifies such bias as destabilizing, Petre[5] would suggest that such bias, together with efforts to maximize switching costs for customers captive of the IS provider, presents an opportunity to extract economic rents.

Examples of competitive analysis that may be explained in terms of Porter's value chain include Clemons and McFarlan[6], and Porter and Millar[7]. Porter and Millar[7] view competitive advantage as being derived through careful management and exploitation of the linkages between activities of the value chain, as well as between a firm's value chain and that firm's suppliers and channels. Furthermore, they assert that IT can impact on Porter's four dimensions of competitive scope, particularly by enabling a broadening of scope. They also decompose each activity in the value chain into both a physical and an information-processing component, the relative proportion of which varies by product. They note that technological change is now centred almost exclusively on the reformation-processing aspect, with sharply declining costs for information processing, relative to the costs of manipulating physical entities. They first describe an information intensity matrix to analyse the information-processing content of value chain activities, and their matrix remains a potential tool for practitioners. Finally they note that IT strongly impacts on the choice of generic strategy.

Clemons and McFarlan[6] provide many examples of the impact of IS on each of the activities of Porter's value chain. In addition, however, they raise two concerns. The first is that some interorganizational systems deployed by first entrants can cause customers to ignore subsequent entrants. The second is that better dialogue between IS staff and top management would benefit organizations, a point also made by Gerstein and Reisman[8].

Other IS strategy models

One notable exception to firm level analysis of IS strategy based on Porter is Cash and Konsynski[9]. They focus on the industry-level impacts of IS which mediate the relationship between buyer and seller organizations. Such systems cross organizational boundaries and can either include multiple sellers (such as SABRE or ATM networks) or block future entry of any but the first seller (as in the case of American Hospital Supply's online ordering system). Cash and Konsynski[9] refer to these arrangements as IOSs, and observe that multiple roles exist for participants, making possible varying degrees of involvement, benefits and risk. IOSs are unique in that they consist of both participants who use the IOS in some primary business activity, such as buyer-seller interactions, and a sponsor organization, such as the INTERNET committee or American Airlines for SABRE. The sponsor usually bears the costs and risks of system implementation to varying degrees but, if the sponsor is also a participant in business exchanges over the system, opportunities for rent may be present. Cash and Konsynski[9] also note the role of technical standards and government regulation in enabling IOSs. They too analyse the impact of IOSs on firms in terms of Porter's five competitive forces.

Ives and Learmonth[10] have developed an IS competitive model based on the customer resource life cycle. Their model presents an extension of the IBM four-stage Business Systems Planning process[11], and the 11-stage resource lifecycle of Burnstine[12]. Although their model is based on a life cycle concept, it is not a contingency theory - rather an isolation of the aspects of the firm-customer relationship that might provide opportunities for invoking one of Porter's three generic strategies. In fact, the simultaneous application of a strategic contingency theory (such as those discussed by Steiner[13] or Hofer[14]) to the customer's product life cycle should be of real benefit to those applying these life cycle model variants to IS strategic planning.

Gerstein and Reisman[8] describe a four-cell matrix, the DP Systems Analyst Matrix, in which the first dimension of analysis is whether the system provides competitive advantage in its application, and the second is whether the system is operationally critical. While their model was not originally intended to include IOSs, they mention two implications of their model which are relevant for IOSs. First, systems that provide competitive advantage have little inherent downside risk, other than the cost of development, unless they are also operationally critical. Second, systems which are both operationally critical and intended to provide competitive advantage can be expected to multiply the levels of both risk and reward. They note further that incremental and cost-reduction approaches to IS implementation often preclude the dramatic gains in productivity achievable in principle.

Other models exist concerning the firm-level impact of IS. These models have practical value to firms as well. For example, McFarlan[15] has developed a two-dimensional matrix to assess the potential strategic impact of IS to be developed, versus the strategic impact of existing IS. Benjamin et al.[16] present a two-dimensional strategic opportunities framework. Lederer and Mendelow[17] explore the difficulty of convincing top management of the strategic impact of IS.

Towards new theories of IS strategy

When Porter[1,2] is used as the basis for IS strategy formulation, it provides a useful guide to practitioners. In fact, the usual approach taken to support IS strategy is to provide a series of affirming examples of successful IS implementations.

Another approach is to use the strategic contingency theory described by Steiner[13] or Hofer[14] with one of the life cycle models explained by Ives and Learmonth[10]. IS strategy theory needs to proceed in a manner that takes advantage of what is already known about theory building and theory testing in strategic management[18-20]. As Montgomery et al.[18] explain, scientific understanding is the result of an interactive research process in which theory generation must be based on past observations and theories are tested and interpreted through observation. Theories should be testable, falsifiable, consistent with a body of existing theories, and undertaken with the ultimate goal of application to real problems. Most IS strategy literature is concerned with the impact on a single firm of investment in IS. But in the case of IOSs, where impacts occur simultaneously at the firm, industry, and societal levels, one must refer directly to industrial organization economics[21], or to some strategic theory[22].

Bakos and Treacy[23] have applied organization theory to what they call the internal strategy of the firm to develop an IS strategy based on bounded rationality and an information-processing view of the organization. Their thesis is that IT enhances organizational effectiveness by reducing the effects of bounded rationality of individual and group decision making. Their work ties the firm-level impact of IS strategy to the established research tradition of organization theory. They also provide insight into the firm-level impact of IS and IOSs.

Industrial organization economics was originally developed as a regulatory tool to help identify and correct situations where sellers had achieved the structural conditions necessary to sustain rent extraction, as well as to provide a tool to allocate best scarce societal resources[24,25]. When considering the regulatory environment and the challenge of strategic management of a future information infrastructure, we should first take maximum advantage of an integrative approach. Stakeholder analysis provides just such a framework.

A stakeholder approach to IOS strategy

We propose using stakeholder analysis as a tool to take into account the multiple impact of IOSs when engaging in strategic planning and ongoing strategic management of such systems[26-28]. Freeman[29] defines a stakeholder as follows:

A stakeholder in an organization is (by definition) any group or individual who can affect or is affected by the achievement of the organization's objectives.

One should not be confused about the nature of stakeholder analysis. It is not in itself so much an attempt at ethically responsible management as an effort to identify systematically and take into account the interests of, and impacts on, the various affected parties. According to Goodpaster[26], to go beyond analysis and include ethical considerations requires something more than simply analysis.

Freeman[29] presents a history of the development of the stakeholder concept. Mallott[28] identifies a three-step framework for conducting the strategic planning process based on the stakeholder analysis concept. Mallott[28] also develops the framework more fully, particularly for use as an empirical tool. The three-step process is as follows:

(1) Identify and specify the stakeholders and their interests, domain and specificity.

(2) Identify and describe the relationships between the stakeholders and the firm, and among the stakeholders. Include power relationships.

(3) Incorporate the concepts of action and time. Construct stakeholder and successive stakeholder maps.

As an illustration of what might be accomplished using the above framework, we construct a conceptual stakeholder map for a hypothetical IOS [ILLUSTRATION FOR FIGURE 1 OMITTED]. Stakeholder maps such as this can become much more detailed and can be constructed as a series of "snapshots" to take into account the evolution of an IOS over its product life cycle. Alternatively, the dimension of time can be incorporated by consideration of a strategic contingency theory (see [13,14]) applied to one or more of the stakeholders as one endeavours to construct a set of maps.

Once a stakeholder map has been constructed one might use the decision matrix method of Hosseini and Brenner[27] to choose optimal strategies in the case of specific strategic issues confronting the IOS sponsor. Freeman[29] shows how to use this matrix and his stakeholder audit process provides a framework for establishing a set of control loops to keep corporate stakeholder strategies in line with the desires of stakeholders.

Yet another perspective on the advantage of stakeholder analysis can be seen when studying the rates of technology diffusion and social acceptance of IT in different cultures. Ping and Grimshaw[30] observe that a key factor affecting the acceptance of IS in China is management's concern about the loss of its own employment. As a result, they report instances of wasted IS investments. They also contend that the experience in China is not peculiar to that society, but merely a more acutely felt echo of the Western experience with IS deployment in the 1960s.

Even if one believes that shareholder wealth maximization ought to be the primary concern of management, it has become abundantly Clear that the strategic challenge facing organizations has become complex and uncertain, and more than simply a question of identifying the correct product, market or technology. Viewing their role as that of balancing stakeholder interests enables IOS sponsors best to assure long-run success, and avoid excess seller concentration or other fiascos that invite regulatory intervention to restore balance forcibly.

Clearly, a future information infrastructure, with its promise of fundamentally reshaping human exchanges and perfecting the march to globalization, will have many fundamental impacts that a traditional model would fail to predict, and that only a paradigm such as stakeholder analysis could capture.

Conclusion

In this article, we have presented the utility of stakeholder analysis in IOS planning. Its use as a tool would enable stakeholder analysis to be first applied to study existing IOS and telecommunications utility situations. Once stakeholder analysis is validated as an IOS strategic planning framework, this new tool may be utilized by practitioners within their organizations. Stakeholder analysis could potentially prove useful as a planning framework for joint public/private investments in an information infrastructure, either as an adjunct to or as a replacement for an industrial organization approach to industry regulation.

References

1. Porter, M.E., Competitive Advantage, Free Press, New York, NY, 1980.

2. Porter, M.E., Competitive Strategy: Techniques for Analysing Industries and Competitors, Free Press, New York, NY, 1985.

3. Harris, C.L., "Information power: how companies are using new technologies to gain competitive edge", Business Week, 14 October 1985, pp. 108-14.

4. Parsons, G.L., "Information technology: a new competitive weapon", Sloan Management Review, Autumn 1983, pp. 3-14.

5. Petre, P., "How to keep customers happy captives", Fortune, 2 September 1985, pp. 42-6.

6. Clemons, E.K. and McFarlan, E.W., "Telecom: hook up or lose out", Harvard Business Review, July-August 1986, pp. 91-7.

7. Porter, M.E. and Millar, V.E., "How information gives you competitive advantage", Harvard Business Review, July-August 1985, pp. 149-60.

8. Gerstein, M. and Reisman, H., "Creating competitive advantage with computer technology", The Journal of Business Strategy, Summer 1986, pp. 53-60.

9. Cash, J.I. and Konsynski, B.R., "IS redraws competitive boundaries", Harvard Business Review, March-April 1985, pp. 134-42.

10. Ives, B. and Learmonth, G.P., "The information system as a competitive weapon", Communications of the ACM, Vol. 27 No. 12, 1984, pp. 1193-201.

11. IBM Corporation, "Business systems planning: information systems-planning guide", GE20-0527-3, IBM Corp., Armonk, NY, July 1981.

12. Burnstine, D.C., "BIAIT: an emerging management engineering discipline"? Working Paper BIAIT Int. Inc., Petersburg, NY, 1980.

13. Steiner, G., "Contingency theories of strategy and strategic management", in Schendel, D. and Hofer, C. (Eds), Strategic Management, 1979.

14. Hofer, C., "Towards a contingency theory of business strategy", Academy of Management Journal, Vol. 10 No. 4, 1975, pp. 784-810.

15. McFarlan, F.W., "Information technology changes the way you compete", Harvard Business Review, May-June 1984, pp. 98-103.

16. Benjamin, R.I., Rockart, J.F., Morton, M.S.S. and Wyman, J., "Information technology: a strategic opportunity", Sloan Management Review, Spring 1984, pp. 3-10.

17. Lederer, A.L. and Mendelow, A.L., "Convincing top management of the strategic potential of information systems", MIS Quarterly, December 1988, pp. 525-34.

18. Montgomery, C.A., Wernerfelt, B. and Balakrishnan, S., "Strategy content and the research process: a critique and commentary", Strategic Management Journal, Vol. 10 No. 2, 1989, pp. 189-97.

19. Montgomery, C.A., Wernerfelt, B. and Balakrishnan, S., "Strategy content and the research process: a reply", Strategic Management Journal, Vol. 12 No. 1, 1991, p. 1.

20. Seth, A. and Zinklan, G., "Strategy content and the research process: a comment", Strategic Management Journal, Vol. 12 No. 1, 1991, pp. 73-82.

21. Caves, R., American Industry: Structure, Conduct, Performance, 7th ed., Prentice-Hall, Englewood Cliffs, NJ, 1992.

22. Mintzberg, H., "The design school: reconsidering the basic premises of strategic management", Strategic Management Journal, Vol. 11 No. 3, 1990, pp. 171-95.

23. Bakos, J.Y. and Treacy, M.E., "Information technology and corporate strategy: a research perspective", MIS Quarterly, June 1986, pp. 107-19.

24. Barney, J.B., "The debate between traditional management theory and organizational economics: substantive differences or intergroup conflict?", Academy of Management Review, Vol. 15 No. 3, 1990, pp. 382-93.

25. Donaldson, L., "The ethereal hand: organizational economics and management theory", Academy of Management Review, Vol. 15 No. 3, 1990, pp. 369-81.

26. Goodpaster, K.E., "Business ethics and stakeholder analysis", Business Ethics Quarterly, Vol. 1 No. 1, 1991, pp. 53-71.

27. Hosseini, M. and Brenner, S., "The stakeholder theory of the firm: a methodology to generate value matrix weights", Business Ethics Quarterly, Vol. 2 No. 2, 1992, pp. 99-120.

28. Mallott, M., "Mapping stakeholder patterns", paper presented at the Academy of Management Meetings, Social Issues in Management Division, 1990.

29. Freeman, R.E., Strategic Management: A Stakeholder Approach, Pitman, Boston, MA, 1984.

30. Ping, Z. and Grimshaw, D.J., "A comparative study of the application of IT in China and the West: culture and stages of growth model", International Journal of Information Management, Vol. 12 No. 4, 1992, pp. 287-93.

Amit Gupta is Assistant Professor at the Graduate School of Business, University of Wisconsin-Madison, Madison, Wisconsin, USA.
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Author:Gupta, Amit
Publication:Industrial Management & Data Systems
Date:Jun 1, 1995
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