On the necessity of an iterative design of business strategy, business organization and information technology

The sfarfing point ($ fhis paper is the producfivify paradox of Information Technology (IT). This means that, in spite of huge investments in IT, there has been no evidence of positive effects on fhe producfivif.v of economy as a whole. The present paper shows that the positive elfects of IT on productivity can only he jiul!y exploited hy implementing new strategies and new organizational concepts. Most of traditional approaches are linear, i.e. thq are either demand oriented or technology driven. Ifence the.y do not consider all relationships between h usiness strategy, business organization, and/T. Ui’th A&W?1 is an iterative design model presented which tries to take into account all interdependencies between these three areas. Final!y, the current status of‘ preconditions, necessary .filr a .successful implementation, are evaluated. 1: Definition of problem and structuring of work The starting point of this paper is the productivity paradox of Information Technology (IT). This means that, in spite of the huge investments in IT, there has been no evidence of positive effects on economy as a whole. The paper presents a model that shows that the positive effects of IT on productivity can only be fully exploited by implementing new strategies and new organizational concepts. To explain this approach, first the productivity paradox and the relevance of [T for business management are discussed. Then the interdependencies of productivity and IT are shown. Finally, a framework for an iterative design strategy for the alignment of strategy, organization and IT, called MIASOI, is presented. 2: The productivity paradox as starting point In the last three decades the budgets of leading companies for IT increased annually by about 15 %, which is by far more than the overall growth rates of these companies. US companies spent as much as over one billion US dollars on IT per year. which means, for example, that in banks and insurance companies expenditures for IT have become the biggest cost item after staff, real estate and interest costs [cp.lO). At the same time, however, empirical studies have revealed, looking at economy as a whole, that there has been no or even a negative correlation between investments in IT and the productivity of a company. It this connection we often come across the term ‘productivity paradox’. The work by the political economists Baily and Gordon [l] was the basis for numerous studies on the correlation between productivity and investment in IT. They determined that, in spite of increasing growth rates of IT investments in the last decades, there had been a decline in the growth of productivity both in manufacturing and non-manufacturing business. Roach [ 15 1 surveyed service undertakings in the USA and found out that in the last ten years they had invested more than X00 billion US dollars in IT; yet their productivity grew by a modest 0.7 % only in the same period. In the foreword to ‘The Corporation of the 1990s’ Thurow (191 arrived at a very gloomy conclusion: ‘Specific cases in which the new technologies have permitted huge increases in output or decreases in cost can be cited. but when it comes to the bottom line there is no clear evidence that these new technologies have raised productivity (...) or profitability’. Loveman [12] and BlyrQolfsson [2) summarized the efforts made so far to research the phenomenon of the productivity paradox at the economy level and offered four hypotheses as an explanation thereof: First, the negative results may be a consequence of too short a period of observation. The learning processes associated with the introduction of IT result, at first, in a 881 1060~3425/95$4,00@1995IEEE Proceedings of the 28th Hawaii International Conference on System Sciences (HICSS '95) 1060-3425/95 $10.00 © 1995 IEEE Proceedings of the 28th Annual Hawaii international Conference on System Sciences 1995 negative correlation between productivity and IT investments. It is only after a longer period of observation that positive factors become visible. Second, we still lack the appropriate tools to measure the gained benefit in its totality. This view was endorsed by Keen [lo, p.1421. who doubted whether such measuring tools would be available in a satisfactory form in the next decade. A third explantation is that IT may be beneficial lo individual firms, but unproductive from the viewpoint of the economy as a whole. ‘IT rearranges the shares of the pie without making it any bigger’. For example, IT may be used disproportionately for market research and marketing, activities which can be very benefical to the firm while adding nothing to total productivity. A fourth reason for the productivity paradox at the economy level may be mismanagement at the organizational level. The basic idea is that strategic and organizational factors determine the benefit of IT. Efforts to research this area go back to the year 1958 [l I]. For a comprehensive systematic approach to and discussion of these works cp. [ 14 p. 14 ffl. The following MIAS01 approach will focus on this fourth aspect, the mismanagement on organizational level. It contributes to the organizational productivity by using a systematic alignment of business strategy, business organization and IT. 4: How does information technology act on productivity, and the resulting necessity of an iterative design strategy 4.1: Reactive design strategy Traditional approaches to IT planning are based on a given business strategy, from which the requirements to be met by business organization are defined. The latter consists of structures in the sense of the configuration of post and positions and of business-internal and business-external processes the latter in the sense of cooperation with suppliers, customers and sales agents. The next step is to define the requirements to IT in order to translate this business organization into practice. According to this approach, IT is geared to existing structures and business processes, or structures and business processes that are designed independently of the potentials of IT. The basis for this is the notion that ‘technology follows organization’. This is called the ‘organizational fit’ of IT. This design strategy is based on a perspective of requirements, which means that the potentials of IT are largely ignored in Redesign. This type of design strategy is currently prevalent in most companies, as confirmed by the study by Venkatraman [ZO]. In the first two phases of the model discussed, the use of IT is determined by previous structures and business processes, which are supported by IT based either on individual staff members or whole departments. Figure 1: The effect of Information Technology on productivity and different design strategies