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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
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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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.


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