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Section 1.1: Bullet Text Study Guide Chapter Contents

The Role of Information Systems in Business Today

Information technology and systems have revolutionized firms and industries, becoming the

largest component of capital investment in the U.S. and many industrialized societies.Investment in information technology accounts for approximately 50 percent of all capital

invested in the United States.

Figure 1-1

FIGURE 1-1 INFORMATION TECHNOLOGY CAPITAL INVESTMENT

Information technology capital investment, defined as hardware, software, andcommunications equipment, grew from 34% to 50% between 1980 and 2004.

Source: Based on data in U.S. Department of Commerce, Bureau of Economic Analysis,

National Income and Product Accounts, 2006.

Information systems are transforming business and the visible results of this include theincreased use of cell phones and wireless telecommunications devices, a massive shift toward

online news and information, booming e-commerce and Internet advertising, and new federal

security and accounting laws that address issues raised by the exponential growth of digital

information. The Internet has also drastically reduced the costs of businesses operating on aglobal scale.

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These changes have led to the emergence of the digital firm, a firm in which:

Most of the firm's significant business relationships with customers, suppliers, and

employees are digitally enabled and mediated.

Core business processes, or logically related business tasks, are accomplished throughdigital networks.

Key corporate assets (intellectual property, core competencies, and financial and human

assets) are managed through digital means

Business responses to changes in their environment are enhanced through digitalcommunications, allowing for time shifting (business being conducted 24x7) and space

shifting (business being conducted globally or beyond traditional geographic

boundaries).

Information systems are essential for conducting day-to-day business in the U.S. and most otheradvanced countries, as well as achieving strategic business objectives. Some firms, such asAmazon and E*Trade, would be nonexistent without information systems. Some service

industries, such as finance, insurance, and real estate industries, could not operate without

information systems. The ability of a firm to use IT is becoming intertwined with the firm's

ability to implement corporate strategy.

Figure 1-2

FIGURE 1-2 THE INTERDEPENDENCE BETWEEN ORGANIZATIONS AND

INFORMATION SYSTEMS

There is a growing interdependence between a firm’s information systems and its business

capabilities. Changes in strategy, rules, and business processes increasingly require changes


















in hardware, software, databases, and telecommunications. Often, what the organization

would like to do depends on what its systems will permit it to do.

Business firms invest heavily in information systems to achieve six strategic business objectives:

1. Operational excellence: Efficiency, productivity, and improved changes in businesspractices and management behavior

2. New products, services, and business models: A business model describes how acompany produces, delivers, and sells a product or service to create wealth. Information

systems and technologies create opportunities for products, services, and new ways to

engage in business.

3. Customer and supplier intimacy: Improved communication with and service to

customers raises revenues, and improved communication with suppliers lowers costs.

4. Improved decision making: Without accurate and timely information, business

managers must make decisions based on forecasts, best guesses, and luck, a process thatresults in over and under-production of goods, raising costs, and the loss of customers.

5. Competitive advantage: Implementing effective and efficient information systems can

allow a company to charge less for superior products, adding up to higher sales and

profits than their competitors.

6. Survival: Information systems can also be a necessity of doing business. A necessity

may be driven by industry-level changes, as in the implementation of ATMs in the retailbanking industry. A necessity may also be driven by governmental regulations, such as

federal or state statutes requiring a business to retain data and report specific information.


Perspectives on Information Systems

An information system is a set of interrelated components that collect or retrieve, process,store, and distribute information to support decision making and control in an organization.

Information systems can also be used to analyze problems, visualize complex subjects, and

create new products.

Information is data, or raw facts, shaped into useful form for humans.

Figure 1-3





















FIGURE 1-3 DATA AND INFORMATION

Raw data from a supermarket checkout counter can be processed and organized to produce

meaningful information, such as the total unit sales of dish detergent or the total salesrevenue from dish detergent for a specific store or sales territory.

Input, processing, and output are the three activities in an information system that produce the

information an organization needs. Input captures or collects raw data from within theorganization or from its external environment. Processing converts this raw input into a

meaningful form. Output transfers the processed information to the people who will use it or to

the activities for which it will be used. Information systems also require feedback, which is

output that is returned to appropriate members of the organization to help them evaluate orcorrect the input stage.

Figure 1-4


















FIGURE 1-4 FUNCTIONS OF AN INFORMATION SYSTEM

An information system contains information about an organization and its surroundingenvironment. Three basic activities — input, processing, and output — produce the information

organizations need. Feedback is output returned to appropriate people or activities in the

organization to evaluate and refine the input. Environmental actors, such as customers,suppliers, competitors, stockholders, and regulatory agencies, interact with the organization

and its information systems.

It is important to distinguish information systems, which are designed to produce informationand solve organizational problems, from the computer technology and software that is typically

used to create and manage information systems.

Computer literacy focuses primarily on knowledge of information technology. Information

systems literacy, the understanding of information systems, includes a behavioral and technical

approach to understanding the broader organization, management, and information technology

dimension of systems and their power to provide solutions. The field of management

information systems (MIS) tries to achieve this broader information systems literacy.

Figure 1-5

















FIGURE 1-5 INFORMATION SYSTEMS ARE MORE THAN COMPUTERS

Using information systems effectively requires an understanding of the organization,management, and information technology shaping the systems. An information system

creates value for the firm as an organizational and management solution to challenges posed

by the environment.

The dimensions of information systems include organizations, management, and information

technology.

The key elements of an organization are its people, structure, business processes, politics, and

culture. An organization coordinates work through a structured hierarchy and formal standardoperating procedures. Managerial, professional, and technical employees form the upper levelsof the organization's hierarchy while lower levels consist of operational personnel.

Figure 1-6



FIGURE 1-6 LEVELS IN A FIRMBusiness organizations are hierarchies consisting of three principal levels: seniormanagement, middle management, and operational management. Information systems serve

each of these levels. Scientists and knowledge workers often work with middle management.

Senior management makes long-range strategic decisions and ensures the firm's financialperformance. Middle management carries out the plans of senior management and operational

management monitors the firm's daily activities. Knowledge workers such as engineers and

scientists design products and create and distribute new knowledge for the organization. Data

workers such as secretaries process the organization's paperwork. Production or service

workers produce the products or services.

Experts are employed for the major business functions: the specialized tasks performed by

organizations, which consist of sales and marketing, manufacturing and production, finance and

accounting, and human resources.

An organization coordinates work through its hierarchy and business processes. These processes

may be documented and formal, or informal, unwritten work processes, such as how to handle a

telephone call.

Each organization has a unique culture, or fundamental set of assumptions, values, and ways of

doing things, that are accepted by most of its members. Parts of an organization's culture can be

found in its information systems. For example, UPS's organizational focus on customer servicecan be found in the package tracking system available to customers. Information systems may

also reflect the organizational politics or conflicts that result from differing views and opinions

in an organization.

Information systems are also a key component in the ability of management to make sense of

the challenges facing a company and in management's ability to create new products and

services, manage the company, and even re-create the organization from time to time.







































Information technology is one of the many tools used by management to cope with change. A

firm's information technology (IT) infrastructure is a technology platform or foundation on

which a firm can build its information systems. IT infrastructure consists of:

Computer hardware: The physical equipment and computing devices used for input,storage, processing, output, and telecommunications

Computer software: The detailed, preprogrammed instructions that control and

coordinate the computer hardware components

Data management software: The software governing the organization of data on

physical storage media

Networking and telecommunications technology: Hardware and software used to link

the various pieces of hardware and transfer data from one physical location to another; acomputer network links two or more computers together to share data, such as files,

images, sounds, video, or share resources, such as a printer.

The Internet is the world's largest and most widely used network. The Internet is a global

network that uses universal technology standards to connect many private and public networks.The universal standards and technologies used in the Internet are also used in systems and

networks within the firm. Intranets are internal corporate networks based on Internet

technology, and extranets are corporate networks extended to authorized users outside of the

firm.

The World Wide Web is a service provided by the Internet that uses universally accepted

standards for storing, retrieving, formatting, and displaying information in a page format on the

Internet. Web pages contain text, graphics, animations, sound, and video and are linked to otherWeb pages. The Web can serve as the foundation for new kinds of information systems such as

UPS's Web-based package tracking system

From a business perspective, an information system is an important instrument for creating

value for the firm. Information systems enable the firm to increase its revenue or decrease its

costs by providing information that helps managers make better decisions or that improves the

execution of business processes.

Every business has an information value chain in which raw data is systematically acquired and

then transformed through various stages that add value to that information. The value of an

information system to a business, as well as the decision to invest in any new informationsystem, is, in large part, determined by the extent to which the system will lead to better

management decisions, more efficient business processes, and higher firm profitability.

Figure 1-7







































FIGURE 1-7 THE BUSINESS INFORMATION VALUE CHAIN

From a business perspective, information systems are part of a series of value-adding

activities for acquiring, transforming, and distributing information that managers can use toimprove decision making, enhance organizational performance, and ultimately increase firm

profitability.The business perspective calls attention to the organizational and managerial nature of information systems. An information system represents an organizational and management

solution based on information technology to a challenge or problem posed by the environment.

Some firms achieve better results from their information systems than others. Studies of returnsfrom information technology investments show that there is considerable variation in the returns

firms receive. Reasons for lower return on investment include failure to adopt the right business

model that suits the new technology or seeking to preserve an old business model that isdoomed by new technology.

Figure 1-8



FIGURE 1-8 VARIATION IN RETURNS ON INFORMATION TECHNOLOGY

INVESTMENTAlthough, on average, investments in information technology produce returns far above

those returned by other investments, there is considerable variation across firms.

Source: Erik Brynjolfsson and Lorin M. Hitt, "Beyond Computation: Information

Technology, Organizational Transformation and Business Performance." Journal of Economic Perspectives14, no. 4 (Fall 2000).

Information technology investments cannot make organizations and managers more effectiveunless they are accompanied by complementary assets: assets required to derive value from a

primary investment. For instance, to realize value from automobiles requires complementaryinvestments in highways, roads, gasoline stations, repair facilities, and a legal regulatory

structure to set standards and control drivers.

Complementary investments include:

Organizational assets: These include a supportive business culture that values

efficiency and effectiveness, an appropriate business model, efficient business processes,

decentralization of authority, highly distributed decision rights, and a strong informationsystem (IS) development team.

Managerial assets: These include strong senior management support for change,incentive systems that monitor and reward individual innovation, an emphasis on

teamwork and collaboration, training programs, and a management culture that values

flexibility and knowledge.

Social assets: These are not made by the firm but by the society at large, other firms,

governments, and other key market actors, such as the Internet, educational systems,network and computing standards, regulations and laws, and the presence of technology







and service firms.

Research indicates that firms that support their technology investments with investments in

complementary assets, such as new business processes or training, receive superior returns.These investments in organization and management are also known as organizational and

management capital.


Contemporary Approaches to Information Systems

Information systems are sociotechnical systems. Although they are composed of machines,devices, and "hard" physical technology, they require substantial social, organizational, and

intellectual investments to make them work properly. Since problems with information

systems — and their solutions — are rarely all technical or behavioral, a multidisciplinaryapproach is needed.

Figure 1-9

FIGURE 1-9 CONTEMPORARY APPROACHES TO INFORMATION SYSTEMS

The study of information systems deals with issues and insights contributed from technicaland behavioral disciplines.

The technical approach emphasizes mathematically based, normative models to studyinformation systems, as well as the physical technology and formal capabilities of these

systems. The behavioral approach, a growing part of the information systems field, does not

ignore technology, but tends to focus on non-technical solutions concentrating instead on

changes in attitudes, management and organizational policy, and behavior.













MIS combines the work of computer science, management science, and operations research

with a practical orientation toward developing system solutions to real-world problems and

managing information technology resources. It is also concerned with behavioral issues

surrounding the development, use, and impact of information systems, which are typically

discussed in the fields of sociology, economics, and psychology

In the sociotechnical view of systems, optimal organizational performance is achieved byointly optimizing both the social and technical systems used in production. Adopting a

sociotechnical systems perspective helps to avoid a purely technological approach to

information systems.

Technology must be changed and designed, sometimes even "de-optimized," to fit

organizational and individual needs. Organizations and individuals must also be changed

through training, learning, and planned organizational change to allow technology to operateand prosper.

Figure 1-10

FIGURE 1-10 A SOCIOTECHNICAL PERSPECTIVE ON INFORMATION SYSTEMS

In a sociotechnical perspective, the performance of a system is optimized when both thetechnology and the organization mutually adjust to one another until a satisfactory fit is

obtained.


Business Processes and Information Systems

Business processes refer to the manner in which work is organized, coordinated, and focused toproduce a valuable product or service. Business processes also refer to the unique ways in

which organizations coordinate work, information, and knowledge, and the ways in which





management chooses to coordinate work. Every business can be seen as a collection of businessprocesses.

To a large extent, the performance of a business firm depends on how well its business

processes are designed and coordinated. Many business processes are tied to a specific

functional area, such as sales and marketing, while others cross many different functional areasand require coordination across departments.

Figure 2-1

FIGURE 2-1 THE ORDER FULFILLMENT PROCESSFulfilling a customer order involves a complex set of steps that requires the close

coordination of the sales, accounting, and manufacturing functions.

Information systems enhance business processes in primarily two ways:

1. Increasing the efficiency of existing processes

2. Enabling entirely new processes that are capable of transforming the business


Types of Business Information Systems

No single system can provide all the information an organization needs. Even small firms havea collection of different systems: e-mail systems, sales tracking systems, etc. Different systems

can be described through:





A functional perspective: Identifying systems by their major business function

A constituency perspective: Identifying systems in terms of the major organizational

groups that they serve

There are four main types of information systems that serve different functional systems:

1. Sales and marketing information systems help the firm with marketing business

processes (identifying customers for the firm's products or services, developingproducts and services to meet their needs, promoting products and services) and sales

processes (selling the products and services, taking orders, contacting customers, and

providing customer support).

Figure 2-2

FIGURE 2-2 EXAMPLE OF A SALES INFORMATION SYSTEM

This system captures sales data at the moment the sale takes place to help the business

monitor sales transactions and to provide information to help management analyze sales

trends and the effectiveness of marketing campaigns.






2. Manufacturing and production information systems deal with the planning,development, and production of products and services, and controlling the flow of

production.

Figure 2-3

FIGURE 2-3 OVERVIEW OF AN INVENTORY SYSTEMThis system provides information about the number of items available in inventory to

support manufacturing and production activities.

3. Finance and accounting information systems keep track of the firm's financial assetsand fund flows.

Figure 2-4









FIGURE 2-4 AN ACCOUNTS RECEIVABLE SYSTEM

An accounts receivable system tracks and stores important customer data, such as paymenthistory, credit rating, and billing history.

4. Human resources information systems maintain employee records, track employee

skills, job performance and training, and support planning for employee compensationand career development.

Figure 2-5






FIGURE 2-5 AN EMPLOYEE RECORD KEEPING SYSTEM

This system maintains data on the firm’s employees to support the human resourcesfunction.

There are four main categories of systems from a constituency perspective.

1. Transaction processing systems (TPS) are basic business systems that serve theoperational level of the organization by recording the daily routine transactions requiredto conduct business, such as payroll and sales receipts.

2. Management information systems (MIS) serve middle managers' interests byproviding current and historical performance information to aid in planning,

controlling, and decision making at the management level. MIS typically compress TPS

data to present regular reports on the company's basic operations.

Figure 2-6, Figure 2-7



FIGURE 2-6 HOW MANAGEMENT INFORMATION SYSTEMS OBTAIN THEIR

DATA FROM THE ORGANIZATION’S TPS

In the system illustrated by this diagram, three TPS supply summarized transaction data tothe MIS reporting system at the end of the time period. Managers gain access to the

organizational data through the MIS, which provides them with the appropriate reports.

FIGURE 2-7 SAMPLE MIS REPORT

This report showing summarized annual sales data was produced by the MIS in Figure 2-6.



3. Decision support systems (DSS), or business intelligence systems, help managers withnon-routine decisions that are unique, rapidly changing, and not easily specified in

advance. DSS are more analytical than MIS, using a variety of models to analyzeinternal and external data or condense large amounts of data for analysis.

Figure 2-8

FIGURE 2-8 VOYAGE-ESTIMATING DECISION-SUPPORT SYSTEMThis DSS operates on a powerful PC. It is used daily by managers who must develop bids

on shipping contracts.

4. Executive support systems (ESS) provide a generalized computing and

communications environment that help senior managers address strategic issues and

identify long-term trends in the firm and its environment. ESS address nonroutinedecisions requiring judgment, evaluation, and insight because there is no agreed-on

procedure for arriving at a solution. ESS present graphs and data from many internal

and external sources through an interface that is easy for senior managers to use. Oftenthe information is delivered to senior executives through a portal, which uses a Web

interface to present integrated personalized business content.

Figure 2-9







FIGURE 2-9 MODEL OF AN EXECUTIVE SUPPORT SYSTEMThis system pools data from diverse internal and external sources and makes them available

to executives in an easy-to-use form.

Ideally, these constituency-based systems are interrelated. TPS are typically a major source of data for other systems, whereas ESS are primarily a recipient of data from lower-level systems

and external sources.

Figure 2-10



FIGURE 2-10 INTERRELATIONSHIPS AMONG SYSTEMSThe various types of systems in the organization have interdependencies. TPS are major

producers of information that is required by many other systems in the firm, which, in turn,

produce information for other systems. These different types of systems are loosely coupled

in most business firms, but increasingly firms are using new technologies to integrateinformation that resides in many different systems.


Systems that Span the Enterprise

Enterprise applications are systems that span functional areas, focus on executing businessprocesses across the business firm, and include all levels of management. Enterprise

applications help businesses become more flexible and productive by coordinating their

business processes more closely.

There are four major enterprise applications:

1. Enterprise systems

2. Supply chain management systems

3. Customer relationship management systems

4. Knowledge management systems

Each of these enterprise applications integrates a related set of functions and business

processes to enhance the performance of the organization as a whole.


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The enterprise system collects data from various key business processes and stores the data ina single comprehensive data repository where they can be used by other parts of the business.

Managers emerge with more precise and timely information for coordinating the daily

operations of the business and a firm-wide view of business processes and information flows.

Figure 2-12

FIGURE 2-12 ENTERPRISE SYSTEMSEnterprise systems integrate the key business processes of an entire firm into a singlesoftware system that enables information to flow seamlessly throughout the organization.

These systems focus primarily on internal processes but may include transactions with

customers and vendors.

Supply chain management (SCM) systems help businesses manage relationships with theirsuppliers. These systems provide information to help suppliers, purchasing firms, distributors,

and logistics companies share information about orders, production, inventory levels, and

delivery of products and services so that they can source, produce, and deliver goods andservices efficiently.

SCM systems increase firm profitability by lowering the costs of moving and making productsand by enabling managers to make better decisions about how to organize and schedule

sourcing, production, and distribution.

Supply chain management systems are one type of interorganizational system because theyautomate the flow of information across organizational boundaries. Firms that skillfully

manage their supply chains get the right amount of products from their source to point of

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consumption with the least amount of time and the lowest cost.

Figure 2-13

FIGURE 2-13 EXAMPLE OF A SUPPLY CHAIN MANAGEMENT SYSTEM

Customer orders, shipping notifications, optimized shipping plans, and other supply chain

information flow among Haworth’s Warehouse Management System (WMS),

Transportation Management System (TMS), and its back-end corporate systems.

Customer relationship management (CRM) systems focus on coordinating the business

processes surrounding a firm's interactions with its customers in sales, marketing, and serviceto optimize revenue, customer satisfaction, and customer retention. They consolidate customer

data from multiple sources and communication channels to help firms identify profitablecustomers, acquire new customers, improve service and support, and target products andservices more precisely to customer preferences.

The value of a firm's products and services is based not only on its physical resources but also

on intangible knowledge assets. Some firms perform better than others because they havebetter knowledge about how to create, produce, and deliver products and services. Knowledge

management systems support processes for discovering and codifying, sharing, and

distributing knowledge, as well as processes for creating new knowledge and integratingexternal sources of knowledge.

Companies that do not have the resources to invest in enterprise applications can still achievesome measure of information integration by using intranets and extranets.

Intranets typically present information to employees through a private portal thatprovides a single point of access to information from several different systems and todocuments using a Web interface. Corporate portals often feature e-mail, collaboration

tools, and tools for searching for internal corporate systems and documents.

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Companies can connect their intranets to internal company transaction systems,enabling employees to take actions central to a company's operations, such as checking

the status of an order or granting a customer credit.

Extranets expedite the flow of information between the firm and its suppliers and

customers. They can allow different firms to work collaboratively on product design,marketing, and production.

Enterprise applications and technologies are transforming firms' relationships with customers,employees, suppliers, and logistic partners into digital relationships using networks and the

Internet.

Electronic business, or e-business, refers to the use of digital technology and the Internet toexecute the major business processes in the enterprise. E-business includes activities for the

internal management of the firm and for coordination with suppliers and other business

partners. It also includes electronic commerce, or e-commerce. E-commerce is the part of e-

business that deals with the buying and selling of goods and services over the Internet. Itencompasses activities supporting those market transactions, such as advertising, marketing,

customer support, security, delivery, and payment.

E-government refers to the application of the Internet and networking technologies to

digitally enable government and public sector agencies' relationships with citizens, businesses,

and other arms of government. In addition to improving delivery of government services, e-government can make government operations more efficient and also empower citizens by

giving them easier access to information


The Information Systems Function in Business

In all but the smallest of firms, the information systems department is the formalorganizational unit responsible for information technology services. The information systems

department is responsible for maintaining the hardware, software, data storage, and networks

that comprise the firm's IT infrastructure. The information systems department suggests newbusiness strategies and new information-based products and services, and coordinates both

the development of the technology and the planned changes in the organization.

The information systems department consists of specialists, such as:

Programmers: technical specialists who write the software instructions forcomputers

Systems analysts: the principal liaisons between the information systems groups andthe rest of the organization

Information systems managers: leaders of teams of programmers and analysts,

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project managers, physical facility managers, telecommunications managers, or

database specialists

In many companies, the information systems department is headed by a chief information

officer (CIO), a senior manager who oversees the use of information technology in the firm.

End users are representatives of departments outside of the information systems group forwhom applications are developed.

Small companies may not have a formal information systems group. Larger companies willhave a separate information systems department, which may be organized along several

different lines, depending on the nature and interests of the firm, such as:

Decentralized arrangement: Each functional area of the business has its own

information systems department and management that typically reports to a senior

manager or chief information officer.

Separate department: In this arrangement, the information systems functionoperates as a separate department similar to the other functional departments with alarge staff, a group of middle managers, and a senior management group.

Divisional groups: Very large "Fortune 1,000"-size firms with multiple divisions and

product lines might allow each division (such as the Consumer Products Division orthe Chemicals and Additives Division) to have its own information systems group.

All of these divisional information systems groups report to a high-level centralinformation systems group and CIO.


Organizations and Information Systems

Organizations and information systems have a mutual influence on each other. The

information needs of an organization affect the design of information systems and anorganization must be open itself to the influences of information systems in order to morefully benefit from new technologies. The organization's environment, culture, structure,

standard operating procedures, politics and management decisions are mediating factors that

influence the interaction between information technology and organizations.

Figure 3-1

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FIGURE 3-1 THE TWO-WAY RELATIONSHIP BETWEEN ORGANIZATIONS

AND INFORMATION TECHNOLOGYThis complex two-way relationship is mediated by many factors, not the least of which

are the decisions made — or not made — by managers. Other factors mediating the

relationship include the organizational culture, structure, politics, business processes, and

environment.

From a technical view, an organization is a formal, legal, social structure that processes

resources, or inputs, to produce outputs. The firm is seen as infinitely malleable, with capital

and labor substituting for each other quite easily.

Figure 3-2

FIGURE 3-2 THE TECHNICAL MICROECONOMIC DEFINITION OF THE

ORGANIZATION

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In the microeconomic definition of organizations, capital and labor (the primaryproduction factors provided by the environment) are transformed by the firm through the

production process into products and services (outputs to the environment). The products

and services are consumed by the environment, which supplies additional capital and

labor as inputs in the feedback loop.

A behavioral definition of an organization is that it is a collection of rights, privileges,

obligations, and responsibilities that is balanced over time through conflict and conflict

resolution. This definition suggests that building new information systems or rebuilding old

ones involves much more than a technical rearrangement of machines or workers.Technological change requires changes in who owns and controls information, who has the

right to access and update that information, and who makes decisions about whom, when,

and how.

Figure 3-3

FIGURE 3-3 THE BEHAVIORAL VIEW OF ORGANIZATIONSThe behavioral view of organizations emphasizes group relationships, values, and

structures.

The technical and behavioral views of organizations complement one another. The technical

definition describes how thousands of firms in competitive markets combine capital andlabor with information technology, whereas the behavioral model describes how technology

affects the organization's inner workings.

All modern organizations can be seen as bureaucracies which share some essentialcharacteristics: clear division of labor, hierarchy, explicit rules and procedures, impartial



udgments, technical qualifications for positions, and maximum organizational efficiency.

Additionally, all organizations develop routines and business procedures, politics, and

cultures.

Business processes are collections of routines, or standard operating procedures (SOPs),

which enable a firm's efficiency.

Figure 3-4

FIGURE 3-4 ROUTINES, BUSINESS PROCESSES, AND FIRMS

All organizations are composed of individual routines and behaviors, a collection of which make up a business process. A collection of business processes make up the

business firm. New information system applications require that individual routines and

business processes change to achieve high levels of organizational performance.

Organizational politics reflects the political struggles due to divergent concerns and

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perspectives of individuals and groups within the organization. Political resistance is one of

the great difficulties of bringing about organizational change.

Organizational culture is the set of fundamental assumptions about what products the

organization should produce, how it should produce them, where, and for whom.

Organizational culture is a powerful unifying force that restrains political conflict. However,technological change that threatens commonly held cultural assumptions usually meets great

resistance.

No two organizations are identical. Organizations have different structures, goals,

constituencies, leadership styles, tasks, and surrounding environments. Differences in these

characteristics will affect the type of information systems used by the organization.

Organizations have different social and physical environments, which exert a powerful

influence on the organization's structure. Information systems help organizations respond to

their surrounding environments, from which they draw resources and to which they supplygoods and services. Information systems are key tools for environmental scanning, helping

managers identify external changes that might require an organizational response.

Figure 3-5

FIGURE 3-5 ENVIRONMENTS AND ORGANIZATIONS HAVE RECIPROCAL

RELATIONSHIPS

Environments shape what organizations can do, but organizations can influence their



environments and decide to change environments altogether. Information technologyplays a critical role in helping organizations perceive environmental change and in

helping organizations act on their environment.

The Mintzberg classification of organizations includes five categories:

1. Entrepreneurial structure: Young, small firm, such as a small startup business, ina fast-changing environment. It has a simple business structure and is managed by an

entrepreneur serving as its single chief executive officer.

2. Machine bureaucracy: Large bureaucracy, such as a midsize manufacturing firm,

existing in a slowly changing environment, producing standard products. It is

dominated by a centralized management team and centralized decision making.

3. Divisionalized bureaucracy: Combination of multiple machine bureaucracies, such

as a Fortune 500 firm, each producing a different product or service, all topped by

one central headquarters.

4. Professional bureaucracy: Knowledge-based organization (such as law firms,

school systems, hospitals) where goods and services depend on the expertise and

knowledge of professionals. Dominated by department heads with weak centralized

authority.

5. Adhocracy: Task force organization (such as a consulting firm) that must respond torapidly changing environments. Consists of large groups of specialists organized into

short-lived multidisciplinary teams and has weak central management.

Organizations also differ in their ultimate goals, the types of power used to achieve them,the groups and constituencies they serve, the nature of leadership within the organization,

the tasks performed, and the technology used.


How Information Systems Impact Organizations and Business Firms

From an economic point of view, information systems technology can be seen as a

factor of production that can be freely substituted for capital and labor. As

information systems technology automates the production process, less capital and

labor are required to produce a specified output.

Transaction cost theory states that organizations grow in size because they can

obtain certain products or services internally at lower cost than by using externalfirms in the marketplace. By lowering the cost of market participation (transaction

costs) information technology allows firms to obtain goods and services more

cheaply from outside sources than through internal means. Information systems


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can thus help firms increase revenue while shrinking in size.

Figure 3-6

FIGURE 3-6 THE TRANSACTION COST THEORY OF THE IMPACT OF

INFORMATION TECHNOLOGY ON THE ORGANIZATIONFirms traditionally grew in size to reduce transaction costs. IT potentially

reduces the costs for a given size, shifting the transaction cost curve inward,

opening up the possibility of revenue growth without increasing size, or evenrevenue growth accompanied by shrinking size.

Agency theory views the firm as a nexus of contracts among self- interestedindividuals, who must be carefully supervised to ensure they pursue the interests

of the organization. Information technology can help reduce agency costs, the

costs of coordinating many different people and activities, so that each managercan oversee a larger number of employees.

Figure 3-7

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FIGURE 3-7 THE AGENCY COST THEORY OF THE IMPACT OF

INFORMATION TECHNOLOGY ON THE ORGANIZATIONAs firms grow in size and complexity, traditionally they experience rising

agency costs. IT shifts the agency cost curve down and to the right, enabling

firms to increase size while lowering agency costs.

Behavioral researchers have theorized that information technology facilitates

flattening of hierarchies by broadening the distribution of information to empowerlower-level employees and increase management efficiency.

Figure 3-8



FIGURE 3-8 FLATTENING ORGANIZATIONS

Information systems can reduce the number of levels in an organization byproviding managers with information to supervise larger numbers of workers

and by giving lower-level employees more decision-making authority.

Postindustrial theories also support the idea that IT should flatten hierarchies by

allowing professionals to be self-managing, by decentralizing decision making,

and by encouraging formation of ad-hoc, temporary "task forces" that addressspecific tasks.

Because information systems potentially change an organization's structure,

culture, business processes, and strategy, there is often considerable resistance tothem when they are introduced. In one model describing organizational resistance,

the only way to bring about change is to change the technology, tasks, structure,

and people simultaneously.

Figure 3-9.



FIGURE 3-9 ORGANIZATIONAL RESISTANCE AND THE MUTUALLYADJUSTING RELATIONSHIP BETWEEN TECHNOLOGY AND THE

ORGANIZATION

Implementing information systems has consequences for task arrangements,structures, and people. According to this model, to implement change, all four

components must be changed simultaneously.

Source: Leavitt (1965).

The Internet and World Wide Web are increasing the accessibility, storage, and

distribution of information and knowledge for organizations, dramaticallylowering transaction and agency costs. Businesses are rapidly rebuilding some key

business processes based on Internet technology.

To deliver genuine benefits, information systems must be built with a clear

understanding of the organization in which they will be used, and consideration of

the firm's environment, structure, culture, politics, organization and leadership,

business processes, as well as the principle interest groups affected by the system.


Using Information Systems to Achieve Competitive Advantage

Firms with a competitive advantage over others typically have access to special resourcesthat others do not or are able to use resources more efficiently, resulting in higher revenue

growth, profitability, or productivity growth (efficiency), all of which ultimately in the

long run translate into higher stock market valuations than their competitors.

Michael Porter's competitive forces model describes five competitive forces that shape

the fate of the firm.


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1. Traditional competitors: Existing firms that share a firm's market space

2. New market entrants: New companies have certain advantages, such as not being

locked into old equipment and high motivation, as well as disadvantages, such as

less expertise and little brand recognition. Some industries have lower barriers toentry, ie: cost less for a new company to enter the field.

3. Substitute products and services: These are substitutes that your customers

might use if your prices become too high. For example, Internet telephone service

can substitute for traditional telephone service. The more substitute products andservices in your industry, the less you can control pricing and raise your profit

margins.

4. Customers: The power of customers grows if they can easily switch to a

competitor's products and services, or if they can force a business and its

competitors to compete on price alone in a transparent marketplace where there islittle product differentiation and all prices are known instantly (such as on the

Internet).

5. Suppliers: The more different suppliers a firm has, the greater control it can

exercise over suppliers in terms of price, quality, and delivery schedules.

Figure 3-10

FIGURE 3-10 PORTER’S COMPETITIVE FORCES MODEL In Porter’s competitive forces model, the strategic position of the firm and its strategiesare determined not only by competition with its traditional direct competitors but also

by four forces in the industry’s environment: new market entrants, substitute products,

customers, and suppliers.

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There are four generic strategies used to manage competitive forces, each of which often

is enabled by using information technology and systems:

1. Low-cost leadership: Use information systems to achieve the lowest operationalcosts and the lowest prices. For example, a supply chain management system can

incorporate an efficient customer response system to directly link consumerbehavior to distribution and production and supply chains, helping lower inventory

and distribution costs.

2. Product differentiation: Use information systems to enable new products and

services, or greatly change the customer convenience in using your existingproducts and services. For instance, Land's End uses mass customization, offeringindividually tailored products or services using the same production resources as

mass production, to custom-tailor clothing to individual customer specifications.

3. Focus on market niche: Use information systems to enable a specific market

focus and serve this narrow target market better than competitors. Information

systems support this strategy by producing and analyzing data for finely tunedsales and marketing techniques. Hilton Hotels uses a customer information system

with detailed data about active guests to provide tailored services and reward

profitable customers with extra privileges and attention.

4. Strengthen customer and supplier intimacy: Use information systems to tighten

linkages with suppliers and develop intimacy with customers. ChryslerCorporation uses information systems to facilitate direct access from suppliers to

production schedules, and even permits suppliers to decide how and when to ship

suppliers to Chrysler factories. This allows suppliers more lead time in producinggoods. Strong linkages to customers and suppliers increase switching costs (thecost of switching from one product to a competing product) and loyalty to your

firm.

The Internet has nearly destroyed some industries and has severely threatenedmore. The Internet has also created entirely new markets and formed the basis for

thousands of new businesses.

Because of the Internet, the traditional competitive forces are still at work, but

competitive rivalry has become much more intense. Internet technology is based

on universal standards, making it easy for rivals to compete on price alone and fornew competitors to enter the market. Because information is available to everyone,

the Internet raises the bargaining power of customers, who can quickly find the

lowest-cost provider on the Web. Some industries, such as the travel industry and

the financial services industry, have been more impacted than others. However, theInternet also creates new opportunities for building brands and building very large

and loyal customer bases, such as Yahoo!, eBay, and Google.

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The value chain model highlights specific activities in the business wherecompetitive strategies can best be applied and where information systems are most

likely to have a strategic impact. The value chain model views the firm as a series

or chain of basic activities that add a margin of value to a firm's products orservices. These activities can be categorized as either primary activities or support

activities.

Primary activities are most directly related to the production and distribution of

the firm's products and services, which create value for the customer. Primary

activities include inbound logistics, operations, outbound logistics, sales andmarketing, and service.

Support activities make the delivery of the primary activities possible and consistof organization infrastructure (administration and management), human resources

(employee recruiting, hiring, and training), technology (improving products andthe production process), and procurement (purchasing input).

Figure 3-11

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FIGURE 3-11 THE VALUE CHAIN MODEL

This figure provides examples of systems for both primary and support activities of a

firm and of its value partners that can add a margin of value to a firm’s products or

services.

You can use the business value chain model to identify areas where information systemswill improve business processes. You can also benchmark your business processes against

your competitors or others in related industries, and identify and implement industry best

practices.

Benchmarking involves comparing the efficiency and effectiveness of your

business processes against strict standards and then measuring performance againstthose standards.

Industry best practices are usually identified by consulting companies, research

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organizations, government agencies, and industry associations as the most

successful solutions or problem-solving methods for consistently and effectivelyachieving a business objective.

A firm's value chain is linked to the value chains of its suppliers, distributors, andcustomers.

Information systems can be used to achieve strategic advantage at the industry level by

working with other firms to develop industry-wide standards for exchanging information

or business transactions electronically, which force all market participants to subscribe to

similar standards. Such efforts increase efficiency, making product substitution less likelyand perhaps raising entry costs.,

Internet technology has made it possible to create highly synchronized industry value

chains called value webs. A value web is a collection of independent firms that use

information technology to coordinate their value chains to produce a product or service fora market collectively. It is more customer-driven and operates in a less linear fashion than

the traditional value chain.

Figure 3-12

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FIGURE 3-12 THE VALUE WEB

The value web is a networked system that can synchronize the value chains of business

partners within an industry to respond rapidly to changes in supply and demand.

A large corporation is typically a collection of businesses. Information systems can

improve the overall performance of these business units by promoting synergies and corecompetencies.

In synergies, the output of some units can be used as inputs to other units, or twoorganizations pool markets and expertise, and these relationships lower costs and

generate profits.

A core competency is an activity for which a firm is a world-class leader, such as

being the world's best miniature parts designer. A core competency relies on

knowledge that is gained through experience as well as incorporating new, externalknowledge. Any information system that encourages the sharing of knowledge

across business units enhances competency.

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Business models based on a network may help firms strategically by taking advantage of

network economics. In network economics, the marginal costs of adding anotherparticipant or creating another product are negligible, whereas the marginal gain is much

larger. For example, the more people offering products on eBay, the more valuable the

eBay site is to everyone because more products are listed, and more competition amongsuppliers lowers prices.

Another network-based strategy is the virtual company, or virtual organization, whichuses networks to link people, assets, and ideas, enabling it to ally with other companies to

create and distribute products and services without being limited by traditional

organizational boundaries or physical locations. One company can use the capabilities of

another company without being physically tied to that company.

The traditional Porter model of competitive forces assumes a relatively static industry

environment; relatively clear-cut industry boundaries; and a relatively stable set of

suppliers, substitutes, and customers. With the emergence of the digital firm and theInternet, some modifications to the original competitive forces model are needed. Some of

today's firms are much more aware that they participate in business ecosystems, loosely

coupled but interdependent networks of suppliers, distributors, outsourcing firms,transportation service firms, and technology manufacturers. In a business ecosystem,

cooperation takes place across many industries rather than many firms.

Figure 3-13

FIGURE 3-13 AN ECOSYSTEM STRATEGIC MODEL

The digital firm era requires a more dynamic view of the boundaries among industries,firms, customers, and suppliers, with competition occurring among industry sets in a

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business ecosystem. In the ecosystem model, multiple industries work together todeliver value to the customer. IT plays an important role in enabling a dense network of

interactions among the participating firms.

Business ecosystems can be characterized as having one or a few keystone firms thatdominate the ecosystem and create the platforms used by other niche firms. Keystone

firms in the Microsoft ecosystem include Microsoft and technology producers such as

Intel and IBM. Niche firms include thousands of software application firms, softwaredevelopers, service firms, networking firms, and consulting firms that both support and

rely on the Microsoft products.


Using Systems for Competitive Advantage: Management Issues

Because competitors can retaliate and copy strategic information systems,

competitive advantage is not always sustainable. Managers interested inusing information systems for competitive advantage will need to perform a

strategic systems analysis, asking questions such as

What is the structure of the industry in which the firm is located?

What are the competitive forces, and how is the industry changing

and using information systems?

What are the business, firm, and industry value chains for this

industry? How does the firm create value, manage its businessprocesses, and leverage its core competencies?

Adopting the kinds of strategic systems described in this chapter generally

requires changes in business goals, relationships with customers and

suppliers, and business processes. These sociotechnical changes, affecting

both social and technical elements of the organization, can be consideredstrategic transitions — movement between levels of sociotechnical systems.

Managers will need to devise new business processes for coordinating their

firms' activities with those of customers, suppliers, and other organizations.


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