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Social exchange theory

Paper Type: Free Essay Subject: Information Systems
Wordcount: 3362 words Published: 1st Jan 2015

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Main dependent factor(s):

Value and utility: profit, rewards, approval, status, reputation, flexibility, and trust

Main independent factor(s):

Exchange relation, dependency, and power

Summary of theory

Social exchange theory was formed by the intersection of economics, psychology and sociology. The theory was developed to understand the social behaviour of humans in economic undertakings, according to the theory’s initiator Hormans (1958). There is a fundamental difference between the two the theories: economic exchange and social exchange theories, which is the way in which the actors are seen. Exchange theory “views actors (persons or a firm) as dealing not with another actor but with a market” (Emerson, 1987, P.11), reacting to various market characteristics; while social exchange theory sees the exchange relationship between specific actors as “actions contingent on rewarding reactions from others.” (Blau, 1964, P.91)

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Nowadays, various forms of social exchange theory exist, but all of them possess the same driving force which essentially is the same central concept of actors exchanging resources via a social exchange relationship. Where social exchange (e.g., Ax; By) is the intentional transfer of resources (x, y …) between several actors (A, B…) (Cook, 1977). A network model (Cook, 1977) with market properties (Emerson, 1987) is the evolved form of the theory which previously was a dyadic model. The core of the theory is best captured in Homans’s own words (1958, P.606)

“Social behaviour is an exchange of goods, material goods but also non-material ones, such as the symbols of approval or prestige. Persons that give much to others try to get much from them, and persons that get much from others are under pressure to give much to them. This process of influence tends to work out at equilibrium to a balance in the exchanges. For a person in an exchange, what he gives may be a cost to him, just as what he gets may be a reward, and his behaviour changes less as the difference of the two, profit, tends to a maximum.”In conclusion, social exchange theory is best understood as a framework for explicating movement of resources, in imperfect market conditions, between dyads or a network via a social process (Emerson, 1987).

Agency Theory or Principal-Agent Problem

Key dependent factor(s)

Efficiency, alignment of interests, risk sharing, successful contracting

Key independent factor(s)

Information asymmetry, contract, moral hazard, trust

Summary of Theory

In economics, the principal-agent dilemma treats the technical hitches that come up under conditions of unfinished and asymmetric information when a principal hires an agent. A variety of mechanisms could possibly be used in an attempt to align the interests of the agent with those of the principal, for instance piece rates/commissions, profit sharing, efficiency wages, the agent posting a bond, or fear of firing. The principal-agent problem is seen in the majority of employer/employee relationships.

Agency theory is focussed at the ever-present agency relationship, which basically is: one party (the principal) entrusts work to another (the agent), who carries out that work. The resolution of the two problems in an agency relationship that can occur is the primary concern of agency theory. Firstly, is the agency problem which surfaces when (a) the desires or goals of the principal and agent conflict and (b) it’s difficult or expensive for the principal to authenticate what the agent is actually doing. The predicament here is the principal can’t confirm that the agent has behaved fittingly. Secondly, is the problem of risk sharing that arises when the principal and agent have dissimilar attitudes towards the risk. The problem at this point is that the principal and the agent may fancy different actions since they have different risk preferences.

Relationship between theory and Information Systems

Agency theory sees the firm as a nexus of contracts amongst interested individuals. The owner employs agents (employees) to execute work on his/her behalf and delegates some decision-making power to the agents. Agents must be under constant supervision and management; this stems the introduction of management costs. As firms grow consequently management costs rise. Information technology minimises agency costs by providing information without difficulty so that managers can oversee a larger number of people with fewer resources.

Simply, technological changes support the agency theory, which enables managers to supervise more employees at a reduced cost. Technology in general, and information systems particularly, save companies lots of money by reducing the number of managers needed to oversee larger numbers of workers.

Transaction Cost Theory or Transaction cost economics

Main dependent factor(s)

Governance structure, degree of outsourcing, outsourcing success, inter-organizational coordination and collaboration

Main independent factor(s)

Coordination costs, transaction risk (opportunity costs), coordination costs, operational risk, opportunism risk, asset specificity, uncertainty, trust

Summary of Theory

In the field of economics and its related disciplines, a transaction cost is a cost incurred while making an economic exchange. A variety of transaction costs exist, for instance, search and information costs are the costs incurred in determining if a required good is available on the market, who has the lowest price, etc… The costs required to achieve a satisfactory agreement with the other party to the transaction, drawing up an suitable contract, etc., is known as the bargaining cost. Policing and enforcement costs are costs that make sure the other party abide the terms of the contract, and taking appropriate action (regularly through the legal system) if this turns out not to be the case.

Transaction costs consist of costs incurred in the process of looking for the best supplier/partner/customer, the cost of drawing-up a supposedly “air-tight” contract, and the costs of monitoring and enforcing the carrying out of the contract. Transaction cost theorists state that the total cost incurred by a firm can be grouped basically into two components: transaction costs and production costs. Transaction costs, which are often referred to as coordination costs, are the costs of “all the information processing necessary to coordinate the work of people and machines that perform the primary processes,” whereas production costs comprise the costs incurred from “the physical or other primary processes necessary to create and distribute the goods or services being produced”.

Relationship between theory and Information Systems

Transaction cost theory is based on the notion that a firm incurs transaction costs when the firm buys on the marketplace in comparison to making products for itself. Traditionally, in an attempt to reduce transaction costs firms would’ve gotten bigger, hired more employees, integrated vertically and horizontally, and would’ve taken over small-company. IT helps firms reduce the cost of market participation (transaction costs) and helps firms minimise their size while producing the same or even greater amount of output.

In simplified terms, transaction cost theory supports the idea that assistance or through the help of technology businesses can minimize their costs of processing transactions with the same emphasis and enthusiasm that they attempt to minimize their production costs.


Traditionally, the Chief Information Officer (CIO)’s job description entailed ensuring that the Business Strategy and Information Systems strategy were aligned. Successful information technology/business alignment, however, entails more than executive level communication and strategy translation.

Achieving alignment is usually done by establishing a set of well-planned process improvement programs that systematically tackle obstacles and go further than executive level conversation to filter through the entire IT organization and their culture.

IT/Business Alignment Cycle

A generally used methodology is the “IT/Business Alignment Cycle”, which introduces a straightforward framework that the IT organization can take on to manage a broad range of activities. The cycle’s four phases are: plan, model, manage, and measure. Organization-wide shared expectations between business and IT managers are fostered utilizing this cycle, and a universal framework is defined for a wide-range of activities that jointly serve to align IT and business objectives. Within the cycle the best practices and common processes within and between IT functional groups are identified which makes IT/business alignment sustainable and scalable. When integrated and automated with software applications and monitoring tools the framework functions optimally.

Plan Phase:

In this phase business objectives are translated into quantifiable IT services. This phase aids in closing the gap between what business managers need and expect and what IT can deliver. Giga Research reports that IT leaders in poorly aligned organizations are still trying to elucidate technology management issues to their business colleagues and haven’t made that leap to comprehending business issues and communicating with them on a business-minded level.

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To bridge the gap between what business expects and what IT can deliver, IT must have an ongoing dialogue to elucidate business needs in business terms. Without any ongoing dialogue, it’s difficult for IT to determine which IT services to offer or how to efficiently allot IT resources to maximize business value. Also, when business needs change, IT ought to adjust and modify the service offering and IT resources fittingly.

CIO’s should consent the use of a regimented service level management process that will lead to agreement on precise IT services and service levels required to support business objectives. IT management can then translate service definitions and service levels into fundamental rules and priorities that empower and guide IT resources.

Lastly, IT needs a method to measure and track both business level services and the underlying capabilities that support the services.

Model Phase:

An infrastructure should be designed to optimize business value. The model phase pinpoints resources needed to deliver IT services at dedicated service levels. This phase involves mapping IT assets, processes, and resources back to IT services, then prioritizing and planning resources that support those business critical services.

The bottom line in measuring the triumph of an alignment is the extent in which IT is working on the things which business managers care about. This implies that IT must have processes in place for prioritizing projects, tasks, and support. To effectively prioritize resources, IT needs a service impact model and a centralized configuration and asset management repository to connect the infrastructure components back to particular IT services. This amalgamation is vital if IT is to efficiently plan, prioritize, and constantly deliver services at agreed-upon service levels while also minimising costs.

Manage Phase:

Results should be driven through fused service support. The manage phase permits the IT staff to deliver pledged levels of service. Assurance from the CIO that the organization meets expectations by providing a single location for business users to submit all service requests and by prioritizing those requests based on pre-defined business precedence.

Without a single point-of-service request, it isn’t easy to manage resources to achieve agreed-upon service levels. Furthermore, lacking a system for effectively managing the IT infrastructure and all changes, the IT staff is faced with the danger of causing failures.

In order for the IT staff to ensure the effectiveness of the service desk they need to provide:

  • A technique for prioritizing service requests based on business impact.
  • A well-organized change management process to reduce the risk of negatively affecting service level commitments.
  • An IT event management system to monitor and manage components that support business critical services.
  • The basic operational metrics that enable service delivery at promised levels, in addition to the means for measuring and tracking the advancement of service level commitments using these metrics.

Measure Phase:

Involves the verification of commitments coupled with improvement of operations. Cross-organization visibility into operations and service level commitments is improved in this phase. Conventional IT management tools operate in functional silos which confines data collection and operational metrics to focused areas of functionality, relating more to technology than to business objectives.

Component-level metrics and measures are definitely essential for continuing service availability. Nevertheless, to support real-time resource allotment decisions, these measures must be construed in a broader business context, with the inclusion of their connections to business-critical services. Without a business context for construing measures and metrics, isolated functional groups can’t get a holistic view of IT services that sustain business objectives.

By committing to the cycle and integrating and automating activities using software solutions, it’s possible to align a whole organization to make logical improvements that prevail over obstacles.

Competitive Forces Model

Porter’s competitive forces and strategies is one of the popular and effective models for formulating a strategy. After studying a number of business organizations, Michael E. Porter proposed that mangers can formulate a strategy that makes an organization achieve a higher level of profitability and reduce vulnerability if they understand five forces in the industry environment. Porter found the following forces determine a company’s position vis-à-vis competitors in the industry:

  1. The rivalry among existing competitors
  2. The threat of new entrants
  3. The threat of substitute products and services
  4. The bargaining power of buyers
  5. The bargaining power of suppliers

Porter’s framework (competitive forces model) has long been acknowledged as a valuable tool for business people to utilize when thinking about business strategy and the impact of IT. Porter’s framework illustrates why some firms do better than others and how they gain competitive advantage. It also analyzes a business and identifies its strategic advantages, as well as, demonstrating how entrepreneurs can develop strategic advantages for their own business. And lastly, it shows information systems contribute to strategic advantages.

The threat of new entrants: The threat of new entrants to an industry can create pressure for established organizations, which might need to hold down prices of increase their level of investment. The threat of entry from in an industry depends largely on the amount and extent of potential barriers, such as cost.

The power of suppliers: Large, powerful suppliers can charge higher prices, limit services of quality, and shift costs to their customers, keeping more of the value for themselves. The concentration of suppliers and availability of substitute suppliers are significant factors in determining supplier power.

The power of buyers: Powerful customers, the flip side of powerful suppliers, can force prices down, demand better quality or services, and hence drive up costs for the supplying organization.

The threat of substitutes: The power of alternatives and substitutes for a company’s product or service maybe affected by changes in cost, new technologies, social trends that will deflect buyer loyalty, and other environmental changes.

Rivalry among existing competitors: In most industries, especially when there are only a few major competitors, competition will very closely match the offering of others. Aggressiveness will depend mainly on factors like number of competitors, industry growth, high fixed costs, lack of differentiation, capacity augmented in large increments, diversity in type of competitors and strategic importance of the business unit.

Information Systems & Competitive Advantage

In order to be competitive, companies must have a degree of quickness, nimbleness, flexibility, innovativeness, productivity, thriftiness and customer centricity. It must also align its IS strategy with general business strategies and objectives.

Given the five market forces mentioned above, Porter and others have proposed a number of strategies to attain competitive advantage:

Low-Cost Leadership

Information systems can be used achieve the lowest operational costs and the lowest prices. For instance, Wal-Mart has utilized IT to develop anefficient customer response systemthat directly links customer behaviour back to distribution, production, and supply chains.

Product Differentiation

Information systems can be used in the process of enabling new products and services, or significantly changing the customer convenience in the use of an existing products or services. Mass customization enables organizations to offer individually tailored products or services through the use of mass production resources.

Focus on Market Niche

Using information systems enables a firm to pinpoint a specific market focus, and thus allowing them to serve this narrow target market better than competitors. Information systems can support this strategy because it can be used to produce and analyze data for use in finely tuned sales and marketing techniques. Companies can now analyze customer buying patterns, tastes, and preferences closely so that they efficiently and effectively pitch advertising and marketing campaigns to smaller and smaller target markets.

Strengthen Customer and Supplier Intimacy

The use of information systems tightens linkages with suppliers and develops intimacy with customers. Switching costs increase when and where there’re strong linkages between customers and suppliers (expense a customer or company incurs in lost time and expenditure of resources when changing from one supplier or system to a competing supplier or system).


  • The model is a strong tool for competitive analysis at industry level, compared to PEST analysis
  • It provides useful input for performing a SWOT Analysis


  • Care should be taken when using this model for the following: do not underestimate or underemphasize the importance of the (existing) strengths of the organization (Inside-out strategy).
  • The model was designed for analyzing individual business strategies. It does not cope with synergies and interdependencies within the portfolio of large corporations.
  • From a more theoretical perspective, the model does not address the possibility that an industry could be attractive because certain companies are in it.
  • Some people claim that environments which are characterized by rapid, systemic and radical change require more flexible, dynamic or emergent approaches to strategy formulation.
  • Sometimes it may be possible to create completely new markets instead of selecting from existing ones.


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