Achieving Efficiency and Effectiveness through Systems

Site: Saylor Academy
Course: BUS303: Strategic Information Technology
Book: Achieving Efficiency and Effectiveness through Systems
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Date: Thursday, March 28, 2024, 7:11 AM

Description

This chapter discusses the four components of information systems and the role information technology plays in business. Read it to gain a basic understanding of these two critical topics, then attempt the two case studies and answer the questions that accompany each case.

Learning objectives

  • understand the differences between information systems and information technology
  • be able to identify the four components of information systems
  • understand the relationships between the four components of information systems
  • understand the reasons for having an information system
  • be able to assess the value of information systems from the financial as well as managerial points of view



Source: University of Georgia, https://s3.amazonaws.com/saylordotorg-resources/wwwresources/site/wp-content/uploads/2013/04/InformationSystems.pdf
Creative Commons License This work is licensed under a Creative Commons Attribution 3.0 License.

Introduction

An information system is designed to collect, process, store and distribute information. Although information systems need not be computerized, Information Technology (IT) plays an increasingly important role in organizations due to the fast pace of technological innovation. Today most information systems beyond the smallest are IT-based because modern IT enables efficient operations as well as effective management in organizations of all sizes. This chapter will first define the critical components of modern information systems, and then discuss how organizations achieve higher efficiency, better effectiveness, and improved coordination through their use.

What is an information system?

To understand what an information system is we need to first clearly differentiate it from information technology - with which it is often confused. Let's look at example. A manufacturing company with 1,200 employees used to pay the employees by checks. At the end of every month, the human resources staff would look at how much each employee should be paid and cut 1,200 checks; one for each employee. To collect their pay, the employees would have to go to the human resources office with their employee identification cards. Every employee would show his/her identification card to the human resources staff so the staff could ensure the checks were given to the right employees. Note that, while there is a system managing the payroll, the process of issuing paycheck requires no information technology and is completely manual.

One day an ill-advised employee visits the human resources office with a fake identification card and obtains the check which does not belong to him. As a result of the stolen check, the company suffers a loss - having to compensate the employee whose check was stolen.

Reacting to this event, the director of human resources considers installing a system that automates the end-of- month payment process. The information of employees' bank accounts will be stored in the system and their pay will be directly deposited into their bank accounts at the end of every month. The objectives of this new information system is to improve efficiency - saving the human resources staffs time in manually preparing 1,200 checks and verifying employees identification cards 1,200 times a month - and to improve effectiveness of the organization by reducing the possibility of lost checks.

After a few months, the human resources director finds out that the human resources staff are still preparing the checks manually for employees every month, and that the employees are still coming to collect their checks in person. In other words, the new technology is not being used. When the director investigates what went wrong with the system, the staff tell him that there is nothing wrong with the system. When an employee's account number is input, the system will notify the bank to deposit the salary into that account on every payday.

However, upon further investigation, the director discovers several possible causes for the system's failure. First, the employees are reluctant to provide their bank account information for various reasons, such as not feeling comfortable with releasing their personal information. Also, when the wrong account number is entered and the money is deposited into the wrong account, nobody in the human resources department is in charge of contacting the bank to rectify the mistakes. This discredits the new system, and employees who encounter this problem no longer want their salaries directly deposited.

IT is not information system

As can be seen from the above example, information technology and information system are two related but separate concepts. In our example the IT component seems to be working quite well, yet the organization is not reaping the benefits of the time saved by human resources staff and employees. In other words, the system fails to achieve its objectives due to the failure of other components.

Let's look at another example. When the most famous banker in the Ching Dynasty, Mr. Hu Syue-Yan, established his first bank, Fu-Kang, in the mid-1800s, we can be absolutely sure that there were no computer systems in the bank! At that time, the services a retail bank provided were very similar to those offered today: a customer could deposit money in the bank and earn interests, borrow money, or remit money orders. All these activities had to be recorded to reflect a customer's current balance in the bank. That is, an information system needed to be in place in order to keep track of how much the customer deposited, how much the customer withdrew, how much the customer borrowed, and how much the customer transferred into other accounts.

How did Mr. Hu Syue-Yan's employees do so? Relevant information was collected, processed, stored, and distributed using pen and paper. Thus, although a computerized technology was unavailable at the time, the bank's information system still achieved its goals - enabling the business to serve its customers. Again, here is evidence that information technology is not information system. Even though IT is often at the core of modern information systems, information technology, and information system are two different concepts. But what is the difference? What are the components of an information system?

The four components of an information system

An information system is defined as a socio-technical system comprised of two sub-systems: a technical subsystem and a social sub-system. The technical sub-system encompasses the technology and process components, while the social sub-system encompasses the people and structure components. The critical insight from the Exhibit 2: The socio-technical system examples introduced earlier is that for an information system to perform and achieve its objectives, all four components have to be present and working together. We now define and describe the four components of a modern information system (see Exhibit 2).


Exhibit 2: The socio-technical system

Information technology

As discussed earlier, an information system needs not to use computers. However, modern organizations increasingly rely on information technology as the core of their information systems. We define information technology to include hardware, software, and telecommunication equipment that is used to capture, process, store and distribute information.

Hardware is the physical equipment - such as a personal computer, a laptop, a portable computing device, and even a modern cell phone - used to process information. Software is the set of coded instructions (programs) that direct the hardware to perform the required tasks. A typical example is Google Docs - a word processing program designed to instruct a computer to create text documents. Telecommunication systems are the networking equipment enabling users and devices to communicate. An example of a telecommunication system is a telephone network, which allows two callers to interact by voice over a distance.

These three elements - hardware, software, and telecommunication systems - comprise the IT component of an information system. For example, the technology components of the automated payroll system mentioned in the first example include:

  • hardware - computers and printers
  • software - the accounting software application designed to keep track of the salaries and the staff scheduling system designed to keep track of hours worked and how much each employees should be paid
  • telecommunication systems - local and inter-organizational channels of communication and routing equipment designed to connect the company to the bank for automatic money transfers.

Process

A process is the set of steps employed to carry out a specific business or organizational activity. In other words, a process maps the set of actions that an individual, a group, or an organization must enact in order to complete an activity. Consider the job of a grocery store manager and the process he engages in when restocking an inventory of goods for sale. The store manager must:

  • check the inventory of goods for sale and identify the needed items
  • call individual suppliers for quotations and possible delivery dates
  • compare prices and delivery dates quoted among several suppliers for the same goods
  • select one or more suppliers for each of the needed items based on the terms of the agreement (e.g. availability, quality, delivery)
  • call these suppliers and place the orders
  • receive the goods upon delivery, checking the accuracy and quality of the shipped items; pay the suppliers

Note that there are multiple viable processes that an organization can design to complete the same activity. In the case of the grocery store, the timing and form of payment can differ dramatically, from cash on delivery to direct transfer of the payment to the supplier's bank account within three months of the purchase. The critical insight here is that the design of the process must fit with the other components of the information system and be adjusted when changes occur. For example, imagine the grocery store manager purchasing a new software program that enables her to get quotations from all of the suppliers in the nearby regions and place orders online. Clearly the preceding process would need to change dramatically, and the store manager would need to be trained in the use of the new software program - in other words, changes would also affect the people component.

People

The people component of an information system encompasses all those individuals who are directly involved with the system. These people include the managers who define the goals of the system, and the users. In the opening example concerning the automated payroll system, the people component of the system includes the human resources director who wants to enhance an efficient and effective payroll process, the human resources staff who maintain the correct employee account information, and the employees whose salaries will be deposited directly into their account. An analysis of the opening example clearly shows that problems with the people component were partly to blame.

The critical insight here is that the individuals involved in the information system come to it with a set of skills, attitudes, interests, biases, and personal traits that need to be taken into account when the organization designs the information system. Very often, an information system fails because the users do not have enough skills, or have a negative attitude toward the system. Therefore, there should be enough training and time for users to get used to the new system.

For example, when implementing the automated payroll system, training on how to enter employees' account information, how to correct wrong entries, and how to deposit the salaries into each account should be provided to the human resources staff. The benefits of the system should be communicated to both the human resources staff and the employees in order to build up positive attitudes towards the new system.

Structure

The structure (or organizational structure) component of information systems refers to the relationship among the individuals in the people component. Thus, it encompasses hierarchical and reporting structures, and reward systems. The structure component plays a critical role in an information system, simply because systems often fail when they are resisted by their intended users. This can happen because individuals feel threatened by the new work system, or because of inherent human resistance to change. When designing a new information system the organization needs to be cognizant of the current and future reward system in order to create incentives to secure its success.

Relationships between the four components At this point it should be clear how information systems, while enabled by IT, are not synonymous with IT. Each of the four components discussed above can undermine the success of an information system - the best software application will yield little result if users reject it and fail to adopt it. More subtly, the four components of information systems must work together for the systems to perform. Thus, when the organization decides to bring in a new technology to support its operation, the design team must adjust the existing processes or develop new ones. The people involved must be trained to make sure that they can carry out the processes. If the skills of these individuals are such that they can't perform the required tasks or be trained to do so, a different set of individuals need to be brought in to work with the system. Finally, the design team must evaluate whether the organizational structure needs to be modified as well. New positions may need to be created for additional responsibilities, and old jobs may need to be eliminated. The transition from the old way of doing things to the new system needs to be managed, ensuring that appropriate incentives and a reward structure is put in place. Following is an example that illustrates the interdependence of the four components of information systems.

Mrs. Field's Cookies (Ostofsky and Cash, 1988), one of the world's largest snack-food stand franchisors, which currently owns stores in the United States, Canada, Hong Kong, Japan, the United Kingdom, and Australia, was started by a young mother with no business experience. Debbi Fields started baking when she was a teenager. Her cookies were so popular that she decided to open her first store in Palo Alto, California in 1977. When the business started expending, Randy Fields, Debbi's husband, believed that it was more important to keep the size of the staff small in order to enable the decisions making process to be faster and more accurate. He saw information systems as a way to avoid expanding staff while growing the business.

The system introduced at Mrs. Field's that was used by the store manager on a daily basis was the day planner system. Every morning, the store manager entered information, such as day of the week and weather condition, into the system. Then, the system computed the projected sales and recommended when the cookies should be baked. The store sales were then periodically entered into the system during the day to adjust the projections and recommendations. Every day, the sales results were sent to the corporate database for review so the headquarters could respond quickly if any store was not performing well.

The objectives of building information systems: Having defined what information systems are, we now look at the reasons why modern organizations introduce them.

Efficiency

Efficiency is often referred to as "doing things right" In this chapter, we define efficiency in general terms as the ratio of output to input. In other words, a firm is more efficient when it produces more with the same amount of resources, produces the same amount of output with a lesser investment of resource, or - even better - produces more output with less input. The firm achieves efficiency improvements by reducing resource waste while maximizing productivity.

More output with the same input

To illustrate how organizations can be more efficient by introducing an information system, we provide an example of a hospital using an information system to manage patient information. Without a system to manage patients' personal and historical information, a doctor would need to ask a patient the same questions about allergies, family history, and the like each time they visit the hospital - even if the patient has been to the same hospital and visited the same doctor a number of times before. As a result, the doctor's time is wasted in asking redundant questions each time the patient visits.

The most immediate solution to this information management problem is to create and maintain a folder for the patient containing their medical history, which is then used by any doctor treating the same patient in the future. The doctor retrieves the patient's historical information from the folder and saves time asking the same questions again.

With this simple information system, a doctor can serve more patients (more output) within the same amount of time (same input). An even higher degree of efficiency can be achieved by using a computerized information system. That is, doctors enter the patients' clinical results into a computerized database instead of writing on a piece of paper and filing the paper in a folder. When a patient returns to the hospital in the future, a doctor can obtain the patient's information at the click of a mouse. As a result, doctors can serve even more patients, since they do not need to search through all the patients' folders in order to find the specific information needed.


Same output with less input

One of the main objectives of any organization is to attempt to control costs and reduce the investment necessary to produce its output - in other words, most organizations are constantly trying to become more efficient by way of cost reductions. Information systems can help in this regard when they help lower costs, for example through a reduction in excess inventory, or by eliminating mistakes in operations.

Consider a grocery store as an example. If the store is able to better communicate with its suppliers, thus placing more recurrent orders for smaller quantities, it can minimize the costs of holding inventory (less input), yet be able to maintain the same level of service to its customers (same output). The store manager can also install a system that maintains inventory information. The data entered into the system are the items that are sold in the store and the quantity of these items. Every time an item is sold or ordered, the manager adjusts the quantity of the item in the inventory system. Without this system, the manager has to periodically go around the shop and the storage room to check if any items need to be restocked. After this system is installed, the manager can just look at the record to identify which items are almost sold out and need to be restocked. This also reduces the input (manager's time) to achieve the same output (restock all items).

Effectiveness

Effectiveness is often referred to as "doing the right thing". In this chapter, we define effectiveness as the ability of an organization to achieve its stated goals and objectives. Typically, a more effective firm is one that makes better decisions and is able to carry them out successfully.

Responding better to the needs of different customers: An organization can create or refine its products and services based on data collected from customers as well as information accumulated from its operations. In other words, information systems help organizations to understand their customers better, and provide products and services customers desire. Doing so even helps organizations to provide personalized service if the organization collects customer data at the individual level.

We can once again use the grocery store as an example. The grocery store can accumulate information about what customers have been purchasing in the past and analyze this information to find out what items tend to sell well and at what time. The manager can also ask customers what kind of products and services they would like to purchase in the future, thereby attempting to anticipate their needs. With this information in hand the grocery store management can order products that will attract customers and stop ordering unpopular products.

Information systems can help organizations to improve product or service quality, or maintain the consistency of quality. To be able to improve product or service quality or to ensure consistency, organizations need information from the past as a source of error correction and as a reference point of improvement or consistency.

With the information system, which keeps track of the inventory in a grocery store, the manager can identify which items are popular and which are not. As a result, the manager can reduce the quantity ordered or stop ordering these slow-selling products.

In the same manner, a manufacturing company can collect information from quality control tests so as to analyze the most recurrent problems during the manufacturing process. The company can then find a solution to reduce these recurring problems. For example, a furniture manufacturer may find that the majority of the chairs produced do not pass quality control tests. The manager then reviews the results of these quality control tests and finds out that most of them fail because they are unstable. The manager can then look at the machine which produces the chairs and change the specification to rectify the problem. As a result, the quality of the chairs improves.

The company can also collect customer feedback on its products and services, and make improvements based on that feedback. For example, a telephone company collects customer feedback on their phone calls and then adds services such as call waiting according to customer suggestions. As a result, the telephone company can deliver products and services that fit their customers' needs.

Responding better to the needs of different employees: An opportunity to improve effectiveness that is often overlooked involves better catering to the needs of the firm's employees. This can be achieved by providing useful information to employees or faster access to information that helps them to perform their job. An information system can respond to the needs of employees by collecting data from various sources, processing the data in order to make it useful, and finally distributing it according to the needs of employees.

Another often overlooked opportunity to use information systems to fulfill the needs of employees is through empowerment. Empowerment represents the notion that the organization's employees can be trusted to take on more responsibility and make more independent decisions when they are given the information necessary to do so. Consider, for example, the employees of a large grocery store who typically receive and stock goods to be inventoried. If they have access to the appropriate information, such as original order forms and the invoices, they could be given responsibility to check, accept and even pay for the goods.

Better communication and coordination: Coordination is rooted in the ability to share information so that different individuals, different departments within an organization, or different organizations are brought together to pursue a common goal. Information systems support communication and coordination by better managing the distribution of information.

Communication consists in the exchange of information between two points, with the goal of having the recipients understand the sender's message. Communication is essential to every organization, as communication among employees ensures that they work together to carry out internal activities; communication between an organization and its suppliers ensures the suppliers provide correct materials for the organization to generate products and services to sell; and communication between an organization and its customers ensures that customers understand the products and services they are buying, receive confirmation when transactions occur, and are able to resolve problems that may occur encounter purchasing - the after-sale service.

Information systems can enhance communication by providing for more, and at times superior, channels. For example, the invention of electronic mail (email) has reduced the use of memos and written correspondence within an organization. As a consequence, the speed at which communication takes place improves. Multimedia communication elements, including images, sound, and video files that employ a combination of presentation formats (text, graphics, animation, audio, and video) have also improved the richness of communication. These multimedia elements can be attached to an email and the email can be sent to suppliers or clients to better present or describe the parts wanted or the products and services provided.

For example, a salesperson from a hotel can attach a video clip with an advertising email to better illustrate the quality of its guest room. Such attachments can not be done by handwritten correspondence. Thereby, the quality of communication is improved. The invention of email has also reduced the use of the telephone. Now employees can read messages at their convenience without being interrupted by telephone calls while working.

Information systems not only improve point-to-point communication, but also within networks, which involves more than two parties. A computer network is a group of hardware (nodes in the network) with links to each other so that information can travel among them. A network helps organizations to collect information from and distribute information to different parties (such as suppliers, customers, and partners) in order to receive a more complete set of information of business activities, which then enhances coordination within the organization. For example, the operation department in an manufacturing company can collect information from the sales and marketing department to find out how many products need to be produced, information from the purchasing department to find out the costs of the parts, information from the executives to find out special about product changes, and information from quality control to find out how to improve product design and minimize defects.

Regulatory compliance

At times an organization will introduce information systems that may not improve the organization's efficiency, effectiveness, or enable it to communicate and coordinate better. This happens when regulations and laws require the organization to perform certain tasks - for example, recurrent maintenance on the machinery they use - or produce some information - for example, tax reports. Regulatory compliance typically requires the organization to be able to create, manage, store or produce information - for example, maintenance logs or financial reports to compute taxes. In these situations the firm will introduce an information system.

Measuring the impact of an information system: The measurement of efficiency and effectiveness gives managers guidelines to assess the value of information systems. Without these measures, managers may be misled and make wrong decisions when investing in new technology and designing information systems. On the one hand, if the value of the system is underestimated, managers may cut back the allocated resources, which will result in foregoing the benefits of the new system. If the value of the system is overestimated, managers are wasting resources which could be used in other projects with higher returns. In this section, we introduce several established methods to measure efficiency and effectiveness improvements (or lack thereof) deriving from the use of information system.

Financial measures

A number of financial metrics have been proposed and used over the years to evaluate the costs and benefits associated with information systems implementation. In this chapter, we will discuss two of them: Return on Investment and IS Budgeting.

Return on Investment

Return on investment (ROI) is the ratio of monetary benefits gained from an investment to the amount of money invested.

ROI=\frac{\text { estimated benefit -initialinvestment }}{\text { initial investment }}

ROI looks at how the introduction of the information system enables the usage of resources to contribute to the organization. The organization can benefit from the introduction of the new system in various ways. First, a new system can reduce the costs of current operation by increasing efficiency. For example, a business can implement a new system which stores transactional information automatically, therefore saves the labor costs of data entry. Therefore, the estimated benefit in the above equation will be the differences in labor costs. Second, a company may modify the current system to take advantage of newly developed technology. For example, a bank which offers online banking can reduce the cost of mailing monthly statements to clients. Therefore, the estimated benefit will be the differences between the cost of mailing the statements before and after the installation of the system. Finally, a new information system may also support growing business transactions. For example, a retail store may switch to an Internet ordering system from a call center to be able to serve more customers. Doing so enables the business to respond to more customers at the same time by letting customers browse products and services online and enter ordering information by themselves. The estimated benefit is the extra revenue generated from online ordering.

In all three examples, the initial investment is the cost of bringing in the technology, setting up the new business processes, training the employees, and organizing the reporting and reward structures. In other word, it is the cost of designing, building, and implementing the appropriate information system (as defined above). With this information, we can compute the ROI. An information system with a positive ROI indicates that this system can enhance efficiency and/or improve effectiveness of the organization.

The advantage of using ROI is that we can explicitly quantify the costs and benefits associated with the introduction of an information system. Therefore, we can use such metric to compare different systems and see which systems can help your organization to be more efficient and/or more effective.

The disadvantage of using ROI is that it may be difficult to justify the causal link between the investment in information systems and the gained benefits. For example, the extra revenue generated from online ordering may not be due solely to the introduction of the new system. It may be because your product is in the growing phase and rapidly increasing in popularity, how can you be sure that you would not have generated the increased revenues even without the new online ordering system? As a result, the benefits of the system may be overestimated. On the other hand, some customers may browse your products online but still order through the call center; therefore, you under-estimate the benefits of the system. As you can see, it is difficult to distinguish which part of the revenue is strictly due to the introduction of the new system and this will lead to an inaccurate ROI.

IS budgeting

The IS budget provides a reference point of efficiency at the firm level instead of the system level. An organization with relative less IS budget when comparing with similar organizations is considered to be more efficient since it achieves the same level of services (output) with less resource (input). The advantage of using IS budget as a reference is that the information needed can be obtained relatively easily from financial documentation.

IS budgets, as measure of efficiency, have some significant limitations however. For one, assuming that two organizations are very similar is an over-simplification of reality. Moreover, a firm's IS budget will depend on the systems it currently has, as well as the one it is currently developing.

Managerial performance measures

Effectiveness measures relate to how well a firm is able to meet its business objectives once it is enabled by the new information system, and therefore measures whether the system has improved the organization's effectiveness.


Information usage

Once an information system is implemented, the behaviors of acquiring and using information may be directly influenced. For example, a restaurant manager would not be able to make good staffing decisions without information about forecasted business. An information system which collects data of past business patterns and forecasts future business can provide the restaurant manager with sufficient information to make competent staffing decisions. Therefore, we can measure effectiveness by assessing information usage. Information usage can be evaluated by

  • the extent to which the system is used
  • the correlation between the system inputs and the business objectives

The system usage can be measured by the amount of queries needed to make managerial decisions. The correlation between the system inputs and the business objectives should be assessed to ensure the inputs serve their purpose. For example, an information system would not be effective if it was designed to forecast future business, but only allowed the input of supplier information.


Customer and employee satisfaction

Information systems should also be able to help organizations better respond to the needs of different customers and employees. Therefore, we can also assess the impact of information systems by measuring the extent to which the system improves customer satisfaction, and the extent to which the system fits the needs of employees and owners. These measures can be obtained by self-reported surveys.

Summary

An information system, designed to collect, process, store and distribute information, is comprised of four critical components: technology, process, structure, and people. Technology and process represent the technical sub-system of an information system, while structure and people represent the social sub-system.

The technology component includes hardware, software, and telecommunication equipment. A process is a set of actions that are designed to carry out a specific business or organizational activity. The people component include all of the individuals who are directly involved with the information system. Finally, the structure component refers to the relationship among the individuals in the people component.

These four components of information systems are interdependent. That is, changes in one component may affect the other components. The major reasons of organizations introducing a new information system are to enhance efficiency (doing things right), and/or to improve effectiveness (doing the right thing). Efficiency can be enhanced by reducing inputs while producing same or more outputs, or producing more outputs while using the same level of inputs. Effectiveness can be improved by better responding to the different needs of stakeholders. The impact an information system brought to an organization can be assessed from the financial point of view as well as from the managerial performance point of view.

Case

Royal Hotel's Espresso! Rapid Response Solution

The Royal Hotel in New York City, NY was a luxury all-suite hotel primarily serving an executive clientèle visiting Manhattan on business. These guests were busy and demanding as they used their suite not only as a place to sleep but also as a temporary office. The general manager stressed the importance of the high quality of service due to the high percentage of repeat guests. "Our guests are extremely discerning, it is completely unacceptable to have a light bulb out in the bathroom when the guest checks in, particularly if she is a returning guest", the general manager said.

To ensure the extremely high quality of service, the general manager decided to purchase and install M-Tech's Espresso! Rapid Response Solution. With this new technology, the housekeepers could report deficiencies directly to the computer, instead of verbally communicated to the maintenance department after they ended of their shift. The housekeepers just needed to dial a special code from the phone in the guest room and an automated attendant would walk them through the reporting process step by step in the language of their choice. Espresso! Then automatically generated, prioritized, and dispatches a work order to a printer, fax, or alphanumeric pager. Therefore, the new system should be able to reduce the response time as the housekeepers did not have to wait until the end of the shift to tell the maintenance department, and sometimes they even forgot to tell the maintenance department. Also, Espresso! had a reporting function so that the management team could obtain information about most frequently occurring or recurring issues, top reporting and completing performers, and so on. With this kind of information, the maintenance department could identify recurrent problems and stop them before they even occurred.

Upon installation, a week of on site training was also offered. The installation and the training session seemed to run smoothly. Employees appeared eager to learn about the new system. However, soon after roll-out the general manager discovered that the employees had reverted to the old manual system and had rapidly lost interest in Espresso!

Case questions

  • What are the elements comprising the four components (technology, process, people, and structure) of new reporting system?
  • Why do you think the new reporting system failed? In other words, which of the four components of the information systems failed to support the goal of the system?

Case

Lands' End's Custom Tailored Apparel Program

In October 2001, Lands' End, a direct merchant of traditionally styled clothing who offers products through catalogs and the Internet, announced its new IT-driven strategic initiatives, a custom tailored apparel program. By November 2002, 40 per cent of Lands' End's web shoppers were buying custom-tailored chinos and jeans, while 20 per cent of these shoppers were new customers.

The concept of this initiative is mass-customization, a process that uses the same production resources to manufacture a variety of similar, yet individually unique products. Experts have found that consumers were willing to pay more for custom apparel and footwear. Other than increasing sales, the custom tailored apparel program brought Lands' End other benefits, including enhancing customer loyalty and lowering the operating costs spent in creating, printing, and mailing catalogs. However, withholding catalogs from Internet buyers does not generate online sales. Therefore, sending catalogs at the optimum frequency and pages to keep them apprised of new products is necessary.

Lands' End's proprietary products, strong distribution infrastructure, and established brand made the company ready for this electronic commerce initiative. Also, Lands' End did not set up a separate Internet division; hence, avoided internal competition. To manufacture these individually unique garments, Lends' End partnered with Archetype Solutions, Inc (ASI). After customers entered sizing information on Lands' End website, the orders were sent to ASI, and software produced electronic patterns and order files for each order, which were then sent via email to production facilities in Latin America or Asia. Manufacturers produced, inspected, and packed the garments. The garments were shipped to a third-party shipping center in the US and then shipped to consumers. During the production process, the garments were scanned and the status was updated at each stage of the process. The status report for all orders was sent nightly to Lands' End. ASI contracted with retailers (i.e. Lands' End) and manufacturers. Retailers pay ASI a license fee, which include an annual fixed component based on number of categories and a per unit fee. Therefore, both retailers and ASI had the incentive to sell a lot of units. The manufacturers were also required to license manufacturing and tracking software from ASI. Therefore, the manufacturers need to be able to be adept and flexible, and able to learn new technologies fairly rapidly.

Case questions

  • Why did Lands' End introduce this new information system? What are the benefits this new system brought to Lands' End?
  • How can the executives of Lands' End assess the financial and managerial performance impact of this new IT-dependent strategic initiative?