UNIT 1

MANAGING THE DIGITAL FIRM- WHY INFORMATION SYSTEM

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, and communications 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 the increased 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

global

scale.

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

through digital 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 digital

communications, 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 other
advanced countries, as well as achieving strategic business objectives. Some firms, such as Amazon
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 firms 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 business
practices and management behavior
2. New products, services, and business models: A business model describes how
a company 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 that results 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
retail banking 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 SYSTEM

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 sales revenue 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 the
organization 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
or correct the input stage.
Figure 1-4

FIGURE

1-4

FUNCTIONS

OF

AN

INFORMATION

SYSTEM

An information system contains information about an organization and its surrounding environment. Three
basic activitiesinput, processing, and outputproduce 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

information and 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
ofmanagement 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
standard operating procedures. Managerial, professional, and technical employees form the
upper levels of the organization's hierarchy while lower levels consist of operational
personnel.
Figure 1-6

FIGURE

1-6

LEVELS

IN

FIRM

Business organizations are hierarchies consisting of three principal levels: senior management, 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 financial
performance. Middle management carries out the plans of senior management andoperational
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 service can 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; a computer 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 other Web 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
information system, 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 to improve 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
returns from 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 is doomed by new technology.
Figure 1-8

FIGURE 1-8 VARIATION IN RETURNS ON INFORMATION TECHNOLOGY INVESTMENT

Although, 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

effective unless they are accompanied by complementary assets: assets required to derive
value from a primary investment. For instance, to realize value from automobiles requires
complementary investments 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 information system (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 APPROACH TO INFORMATION SYSTEM

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
systemsand their solutionsare rarely all technical or behavioral, a multidisciplinary
approach
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 technical and behavioral
disciplines.

The technical approach emphasizes mathematically based, normative models to study

information 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 by
jointly 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
operate and prosper.
Figure 1-10

FIGURE

1-10

SOCIOTECHNICAL

PERSPECTIVE

ON

INFORMATION

SYSTEMS

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

LEARNING TO USE INFORMATION SYSTEMSLEARNING TO

TECHNOLOGY

USE

INFORMATION

SYSTEMS:

NEW

OPPORTUNITIES

WITH

Although information systems are creating many exciting opportunities for both businesses
and individuals, they are also a source of new problems, issues, and challenges for
managers. In this course, you will learn about both the challenges and opportunities
information systems pose, and you will be able to use information technology to enrich your
learning experience.
The Challenge of Information Systems: Key Management Issues

Although information technology is advancing at a blinding pace, there is nothing easy or

mechanical about building and using information systems. There are five major challenges
confronting managers:
1.The information systems investment challenge: How can organizations obtain
business value from their information systems? Earlier in this chapter we described
the importance of information systems as investments that produce value for the
firm. We showed that not all companies realize good returns from information
systems investments. It is obvious that one of the greatest challenges facing
managers today is ensuring that their companies do indeed obtain meaningful
returns on the money they spend on information systems. Its one thing to use
information technology to design, produce, deliver, and maintain new products. Its
another thing to make money doing it. How can organizations obtain a sizable
payoff from their investment in information systems? How can management ensure
that
information
systems
contribute
to
corporate
value?
Senior management can be expected to ask these questions: How can we evaluate
our information systems investments as we do other investments? Are we receiving
the return on investment from our systems that we should? Do our competitors get
more? Far too many firms still cannot answer these questions. Their executives are
likely to have trouble determining how much they actually spend on technology or
how to measure the returns on their technology investments. Most companies lack
a clear-cut decision-making process for deciding which technology investments to
pursue and for managing those investments (Hartman, 2002).
2.The strategic business challenge: What complementary assets are needed to use
information technology effectively? Despite heavy information technology
investments, many organizations are not realizing significant business value from
their systems, because they lackor fail to appreciatethe complementary assets
required to make their technology assets work. The power of computer hardware
and software has grown much more rapidly than the ability of organizations to
apply and use this technology. To benefit fully from information technology, realize
genuine productivity, and become competitive and effective, many organizations
actually need to be redesigned. They will have to make fundamental changes in
employee and management behavior, develop new business models, retire obsolete
work rules, and eliminate the inefficiencies of outmoded business processes and
organizational structures. New technology alone will not produce meaningful
business benefits.
3.The globalization challenge: How can firms understand the business and system
requirements of a global economic environment? The rapid growth in international
trade and the emergence of a global economy call for information systems that can
support both producing and selling goods in many different countries. In the past,
each regional office of a multinational corporation focused on solving its own unique
information problems. Given language, cultural, and political differences among
countries, this focus frequently resulted in chaos and the failure of central

management controls. To develop integrated, multinational, information systems,

businesses must develop global hardware, software, and communications
standards; create cross-cultural accounting and reporting structures; and design
transnational business processes.
4.The information technology infrastructure challenge: How can organizations develop
an information technology infrastructure that can support their goals when business
conditions and technologies are changing so rapidly? Many companies are saddled
with expensive and unwieldy information technology platforms that cannot adapt to
innovation and change. Their information systems are so complex and brittle that
they act as constraints on business strategy and execution. Meeting new business
and technology challenges may require redesigning the organization and building a
new
information
technology
(IT)
infrastructure.
Creating the IT infrastructure for a digital firm is an especially formidable task. Most
companies are crippled by fragmented and incompatible computer hardware,
software, telecommunications networks, and information systems that prevent
information from flowing freely between different parts of the organization.
Although Internet standards are solving some of these connectivity problems,
creating data and computing platforms that span the enterpriseand, increasingly,
link the enterprise to external business partnersis rarely as seamless as
promised. Many organizations are still struggling to integrate their islands of
information and technology. Chapters 6 through 10 provide more detail on IT
infrastructure issues.
5.Ethics and security: The responsibility and control challenge: How can organizations
ensure that their information systems are used in an ethically and socially
responsible manner? How can we design information systems that people can
control and understand? Although information systems have provided enormous
benefits and efficiencies, they have also created new ethical and social problems
and challenges. Chapter 5 is devoted entirely to ethical and social issues raised by
information systems, such as threats to individual privacy and intellectual property
rights, computer-related health problems, computer crimes, and elimination of
jobs. A major management challenge is to make informed decisions that are
sensitive to the negative consequences of information systems as well to the
positive
ones.
Managers face an ongoing struggle to maintain security and control. Today, the
threat of unauthorized penetration or disruption of information systems has never
been greater. Information systems are so essential to business, government, and
daily life that organizations must take special steps to ensure their security,
accuracy, and reliability. A firm invites disaster if it uses systems that can be
disrupted or accessed by outsiders, that do not work as intended, or that do not
deliver information in a form that people can correctly use. Information systems
must be designed so that they are secure, function as intended, and so that

humans can control the process. Chapter 10 treats these issues in detail. Managers
will need to ask: Can we apply high-quality assurance standards to our information
systems, as well as to our products and services? Can we build systems with tight
security that are still easy to use? Can we design information systems that respect
peoples rights of privacy while still pursuing our organizations goals? Should
information systems monitor employees? What do we do when an information
system designed to increase efficiency and productivity eliminates peoples jobs?
This text is designed to provide future managers with the knowledge and understanding
required to deal with these challenges. To further this objective, each succeeding chapter concludes
with a Management Opportunities, Challenges, and Solutions section that outlines the key issues of
which managers should be aware.

Return to Top
Integrating Text with Technology: New Opportunities for Learning
In addition to the changes in business and management that we have just described, we believe that
information technology creates new opportunities for learning that can make the MIS course more
meaningful and exciting. We have provided a series of hands-on projects, a student Web site, and an
interactive

multimedia

CD-ROM

for

integrating

the

text

with

leading-edge

technology.

Application software exercises require students to use spreadsheet, database, Web browser,
and other application software in hands-on projects related to chapter concepts. Students can apply
the application software skills they have learned in other courses to real-world business problems. You
can find these exercises following the Discussion Questions at the end of each chapter, and both the
exercises

and

their

data

files

can

be

found

at

the

Laudon

Web

site.

A running case study based on a simulated company called Dirt Bikes U.S.A. enables students
to learn about a specific business and develop information system solutions for that business. Each
chapter of the text contains a running case scenario and project where students can apply their
analytical skills and chapter concepts. Many of these projects require extensive use of the Web or
spreadsheet and database software. You can find a Dirt Bikes U.S.A. project following the Application
Software Exercise at the end of every chapter. A complete description of each running case project and
any data files required by the project can be found at the Laudon Web site and on the Laudon
interactive

multimedia

CD-ROM.

For each chapter, you will also find an Electronic Commerce or Electronic Business project for
which you can use Web research and interactive software at various company Web sites to solve
specific business problems. The project is described at the end of each chapter after the running case
and

additional

details

can

be

found

at

the

Laudon

Web

site

for

that

chapter.

As you read each chapter of the text, you can visit the Prentice Hall Laudon Web site at
www.prenhall.com/Laudon and use the Internet for additional interactive learning and management
problem solving. You will find an Internet Connection margin note in every chapter directing you to
Web sites for which we have provided additional exercises and projects related to the concepts and

organizations described in that particular chapter. A graded online Interactive Study Guide contains
questions to help you review what you have learned and test your mastery of chapter concepts. Also
at the Laudon Web site are links to additional online case studies and international resources.
The interactive CD-ROM multimedia version of the text features audio/video overviews
explaining key concepts, bullet text summaries of key points in each chapter, full color graphics and
photos, Web links to the companion Web site, interactive quizzes, Dynamic Blackboard, a hyperlinked
digital glossary, and the complete running case, along with any files or materials required by each
running case project. You can use the CD-ROM as an interactive study guide or as an alternative to the
traditional

text.

Longer, comprehensive projects conclude each major section of the text. These projects
require students to apply what they have learned to more demanding problems, such as analyzing
enterprise system requirements, developing an Internet business model, designing a corporate
knowledge intranet, and redesigning business processes for a new system. Some of these projects
require use of the Web.

INFORMATION SYSTEM IN THE ENTERPRISE

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 external firms 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 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

ORGANIZATION

Firms 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 even revenue growth accompanied by shrinking size.

Agency theory views the firm as a nexus of contracts among self- interested individuals, 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 manager can oversee a larger number of
employees.
Figure 3-7

FIGURE 3-7 THE AGENCY COST THEORY OF THE IMPACT OF INFORMATION TECHNOLOGY ON
THE

ORGANIZATION

As 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 empower lower-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 by providing managers with
information to supervise larger numbers of workers and by giving lower-level employees more decisionmaking 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 address specific tasks.

Because information systems potentially change an organization's structure, culture,

business processes, and strategy, there is often considerable resistance to them 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

RELATIONSHIP

BETWEEN

RESISTANCE
TECHNOLOGY

AND

THE

AND

MUTUALLY
THE

ADJUSTING

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, dramatically lowering 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.

The Information Systems Function in Business

In all but the smallest of firms, the information systems department is the formal

organizational 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 new business 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 for

computers

Systems analysts: the principal liaisons between the information systems

groups and the rest of the organization

Information systems managers: leaders of teams of programmers and

analysts, 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
for
whom
applications
are
developed.
Small companies may not have a formal information systems group. Larger
companies will have 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

function operates as a separate department similar to the other functional
departments with a large 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 or the Chemicals and Additives Division) to have its own
information systems group. All of these divisional information systems
groups report to a high-level central information systems group and CIO.

MAJOR TYPES OF SYSYTEM IN ORGANIZATION SYSTEMS FROM FUNCTIONAL

PERSPECTIVES
Types of Business Information Systems

No single system can provide all the information an organization needs. Even small
firms have a 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, developing products 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

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.

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

SYSTEM

This system provides information about the number of items available in inventory to support
manufacturing and production activities.

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

Figure 2-4

FIGURE

2-4

AN

ACCOUNTS

RECEIVABLE

SYSTEM

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

Human resources information systems maintain employee records, track

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

Figure 2-5

FIGURE

2-5

AN

EMPLOYEE

RECORD

KEEPING

SYSTEM

This system maintains data on the firms employees to support the human resources function.

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

1. Transaction processing systems (TPS) are basic business systems that
serve the operational level of the organization by recording the daily routine
transactions required to conduct business, such as payroll and sales
receipts.
2. Management information systems (MIS) serve middle managers'
interests by providing 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

ORGANIZATIONS

TPS

In the system illustrated by this diagram, three TPS supply summarized transaction data to the
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.

Decision support systems (DSS), or business intelligence systems, help

managers with non-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 analyze internal and external data or condense large
amounts of data for analysis.

Figure 2-8

FIGURE

2-8

VOYAGE-ESTIMATING

DECISION-SUPPORT

SYSTEM

This DSS operates on a powerful PC. It is used daily by managers who must develop bids on
shipping contracts.

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 nonroutine decisions 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. Often the 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

SYSTEM

This 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

SYSTEMS

The 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 integrate information
that resides in many different systems.

INTEGRATING FUNCTIONS AND BUSINESS PROCESSES

Business Processes and Information Systems

Business processes refer to the manner in which work is organized, coordinated,

and focused to produce 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
business
processes.
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 areas and require coordination across departments.
Figure 2-1

FIGURE

2-1

THE

ORDER

FULFILLMENT

PROCESS

Fulfilling 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

INTRODUCTION TO ENTERPRISE APPLICATION

Systems that Span the Enterprise

Enterprise applications are systems that span functional areas, focus on executing
business processes 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.
Figure 2-11

FIGURE
Enterprise

2-11
applications

ENTERPRISE
automate

processes

APPLICATION
that

span

multiple

ARCHITECTURE
business

functions

and

organizational levels and may extend outside the organization.

Enterprise systems, or enterprise resource planning (ERP) systems, model and

automate many business processes, such as filling an order or scheduling a
shipment, with the goal of integrating information across the entire company and
eliminating complex, expensive links between computer systems in different areas
of the business. Information that was previously fragmented in different systems
can seamlessly flow throughout the organization so that it can be shared by
business processes in manufacturing, accounting, human resources, and other
areas of the firm. Discrete business processes from sales, production, finance, and
logistics can be integrated into company-wide business processes that flow across
organizational
levels
and
functions.
The enterprise
stores the data
by other parts
information for
view
of

system collects data from various key business processes and

in a single comprehensive data repository where they can be used
of the business. Managers emerge with more precise and timely
coordinating the daily operations of the business and a firm-wide
business
processes
and
information
flows.

Figure 2-12

FIGURE

2-12

ENTERPRISE

SYSTEMS

Enterprise systems integrate the key business processes of an entire firm into a single software
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
their suppliers. 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
and
services
efficiently.
SCM systems increase firm profitability by lowering the costs of moving and
making products and 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 they automate 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 consumption with the least amount of time and the
lowest
cost.
Figure 2-13

FIGURE

2-13

EXAMPLE

OF

SUPPLY

CHAIN

MANAGEMENT

SYSTEM

Customer orders, shipping notifications, optimized shipping plans, and other supply chain
information flow among Haworths 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 service to optimize revenue, customer satisfaction, and customer
retention. They consolidate customer data from multiple sources and

communication channels to help firms identify profitable customers, acquire new

customers, improve service and support, and target products and services 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 have better 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 integrating external sources of
knowledge.
Companies that do not have the resources to invest in enterprise applications can
still achieve some measure of information integration by using intranets and
extranets.

Intranets typically present information to employees through a private

portal that provides a single point of access to information from several
different systems and to documents using a Web interface. Corporate
portals often feature e-mail, collaboration tools, and tools for searching for
internal corporate systems and documents. 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 to execute 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. It encompasses 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

UNIT 2
INFORMATION SYSYTEMS AND ORGANIZATION
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 an
organization must be open itself to the influences of information systems in order to more
fully 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

FIGURE 3-1 THE TWO-WAY RELATIONSHIP BETWEEN ORGANIZATIONS AND INFORMATION

TECHNOLOGY
This complex two-way relationship is mediated by many factors, not the least of which are the decisions
madeor not madeby 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

In the microeconomic definition of organizations, capital and labor (the primary production 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

ORGANIZATIONS

The 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 and
labor 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 essential
characteristics: clear division of labor, hierarchy, explicit rules and procedures, impartial
judgments, 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
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 supply
goods 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 technology plays 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, in

a 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 to
rapidly 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.