Book: Essentials of Business Information Systems, 7E Authors: Laudon & Laudon Original Lecture Files by Barbara J. Ellestad Topic: Business Information Systems 2.1 Introduction Technology, to a large extent, has driven organizations to change the way they operate and that includes the way they manage. We re going to take an in-depth look at how organizations work and how they ve been transformed by technology. 2.1.1 Business Objectives of Information Systems Businesses don t spend millions of dollars each year on new technology just because it s popular. They do so out of necessity. Let s take a look at the six major reasons for such massive spending on information technology: Achieve operational excellence through higher levels of efficiency, quality, and productivity Create new products, services, and business models Raise revenue and profits while lowering costs by increasing customer and supplier intimacy Improve decision making for managers and employees Increase competitive advantages Insure survival caused by business environment changes Business models continue to change as new technology is introduced. One of the best examples is how the music industry s business model has migrated from traditional distribution of records and CDs in brick-and-mortar stores to instant online downloads of single songs. The industry didn t cause the change, consumers did. Other industries, such as retailers and banks, have readily adapted their business models to take advantage of new information technologies because of the six reasons outlined above. The common thread throughout all of these objectives is the effective use of databases to supply useful information to employees, managers, and executives throughout the firm. As we ll see later in this chapter, each functional area of an organization is impacted by how well the information system transforms data, or raw facts, into information that helps achieve the business objectives. 1-1
Bottom Line: Business models in thousands of industries throughout the world are being transformed by technology. Technology helps businesses improve operations, increase profits, reduce costs, improve decision making, increase competitive advantages, and insure a business s survival. 2.1.2 Perspectives on Information Systems and Information Technology As information technology becomes the glue that holds a business together, it s important that you understand exactly what is involved. Bottom Line: Information technology (IT) infrastructures include hardware, software, data management, telecommunications, and networking technologies. Data are simply raw facts. Information is the compilation of data into a useful form that serves a purpose. As a successful manager you must concentrate on all three parts of the information systems triangle (hardware, software, and persware) and integrate them into a single, cohesive system that serves the needs of the organization, the wants of the customer, and the desires of the employees. 2.1.3 Dimensions of Information Systems As Figure 2-1 shows, there are three basic dimensions of information systems. Organizations Business organizations have their major business processes, which need many kinds of players with various talents, who are well-trained and well-informed, in order to succeed. 1-2
The larger the organization, the more formal the management structure, including the need for standardized business processes. Formal business processes help managers and employees properly complete their tasks in a more efficient manner. Many companies now integrate these business processes into their information systems to ensure uniformity, consistency, and compliance. People A business organization requires different employees to help it succeed. Knowledge workers help create new knowledge for the organization and data workers help process the paperwork necessary to keep an organization functioning. Without production or service workers, how would the company get its products and services to the customer? Every good organization needs good managers. Take professional football managers. They don t actually play the game,, they don t hit the home run, catch the fly ball for the last out, or hang every decoration for the celebration party. They stay on the sidelines during the game. Their real role is to develop the game plan by analyzing their team s strengths and weaknesses. But that s not all; they also determine the competition s strengths and weaknesses. Every good manager has a game plan before the team even comes out of the locker room. That plan may change as the game progresses, but managers pretty much know what they re going to do if they are losing or if they are winning. The same is true in workplace organizations. In every organization you ll find senior managers making long-range decisions, middle managers carrying out the plans and goals set by senior managers, and operational managers handling the day-to-day operations of the company. As we ll see, information systems output must be geared to each of these levels of management. Technology Do you own a high-definition television? Maybe not, since the technology has only been on the market for a short time. How old is your car or truck? Manufacturers are constantly offering us new vehicles, yet we tend to upgrade only every few years. Your personal computer may be a year old or three years old. Do you have the latest gadgets? Chances are you don t. Face it, you just can t keep up with all the new hardware. No one can. Think about how hard, not to mention expensive, it is for an individual to acquire each new software program introduced to the marketplace. Think how difficult it is sometimes to learn how to use every feature of all those new products. No matter how big your computer s storage device seems to be, you re constantly running out of room to store all the new software programs and all the data you create. Speaking of data, what kind of data management technology do you use to organize all of your music, pictures, and word documents? As the products and services on the 1-3
Internet expand everyday, your need for new telecommunications technology and better networking links just seems to grow and grow. Now put those thoughts into a much larger context of an organization s information technology (IT) infrastructure. Yes, it would be nice if your company could purchase new computers every three months so you could have the fastest, best technology on the market. But it can t. Not only is it expensive to buy the hardware and the software, but the costs of installing, maintaining, updating, integrating, and training must all be taken into account. We ll look at the hardware and software sides of the information systems triangle in upcoming chapters, but it s important that you understand now how difficult it is for an organization, large or small, to take advantage of all the newest technology. The fastest and biggest change in modern computing is the Internet. To say that the Internet is transforming the way we live, work, and play is probably the greatest understatement in years. Businesses can create new opportunities, but they can also lose opportunities just as quickly. Now an organization has to design new systems, or transform old ones, with not just the company in mind, but 100 million other users of the Internet, extranets, and intranets. They have to decide how much or how little information to provide, in what way, with what level of access, and how best to present it. It s a huge job! The World Wide Web allows big companies to act small, and small companies to act big. It has leveled the playing field so entrepreneurs can break into new markets previously closed to them. A Web site, consisting of a few pages or hundreds of pages, enables businesses to get close and stay close to their customers in new ways. It is truly a revolution in our global economy. Bottom Line: Information literacy is more than just clicking a mouse, pounding the computer keyboard, or surfing the Web. It s about integrating the various elements of an organization, technical and non-technical, into a successful enterprise. Organizations, technology, and people, are integral dimensions of information systems. The Internet has led many businesses to restructure themselves and take advantage of extranets, intranets, and the World Wide Web distribution channels. 2.2 Components of a Business Both information systems and businesses require inputs and some sort of processing, both have outputs, and both depend on feedback for successful completion of the loop. Information systems use data as their main ingredient and businesses rely on people. However, the similarities are remarkable. Both are a structured method of turning raw products into useful entities. 1-4
Organizing a Business: Basic Business Functions Whether you are a one-person show or a huge conglomerate, your business still needs four basic functions in order to be successful. Figure 2-2 shows you these functions. Figure 2-2: The Four Major Functions of a Business Business Processes Business processes integrate functions throughout an organization. Processes that deliver the best product for the lowest cost in the most efficient manner are imperative to success. 1-5
The way a business organizes its workflows, the method it uses to accomplish tasks, and the way it coordinates its activities among employees, customers, and suppliers determines its business processes. Businesses, from the smallest one- or two-person group to the largest you can imagine, must have orderly processes that all divisions can understand. No part of the organization can work in isolation from any other part. That s why a successful business needs information integration. 2.3 Types of Business Information Systems 2.3.1 Systems from a Functional Perspective Each management level has a special type of information system that best serves its needs. Each functional area of a business requires specific pieces of information according to their mission. Let s begin by looking at the information system requirements for the four functional areas. Sales and Marketing Systems As both of these functions have close or direct contact with customers, they usually work hand-in-hand. The marketing mission is to identify customers and their wants and needs. Sales mission is to put the product or service into the hands of the customer. As both are so closely related, it stands to reason their information requirements are similar. That s why you ll generally find combined sales and marketing information systems in organizations. Table 2.1 shows some sample sales and marketing systems and the organizational levels they serve. Keep in mind that some of the information used in these systems can greatly affect other functional areas. Sales and marketing must also gather information from other areas of the organization. For instance, while pricing analysis may primarily be a task for sales and marketing, they must gather information from manufacturing and production to ensure that the cost of making the product or providing the service is covered. 1-6
Manufacturing and Production Systems After sales and marketing actually sell a product or service, someone has to make it. That s where manufacturing and production information systems come into the picture. And there is more to these systems than just the assembly line. Someone has to decide where the manufacturing plants will be located. Someone else has to decide how many raw materials will be needed and then order those materials. Finally, someone will have to make sure the product gets produced on a daily basis. Many companies collect massive amounts of data about their products and manufacturing processes. In the past much of that data went unused or wasn t put into its proper context. Newer information systems take advantage of all the collected data by producing useful information managers need to make intelligent decisions about the manufacturing and production systems. Table 2.2 shows examples of manufacturing and production information systems needed to make products for the organization. Finance and Accounting Systems Pity the company without adequate finance and accounting systems. How will they know how much money will be available for future expansion or even for next week s payroll? Who makes sure the financial assets of the organization are put to the best use? When your paycheck is short $100, who will fix the error? Table 2.3 shows the types of systems this function uses at each organizational level. Integration of information throughout the business is most apparent in the finance and accounting systems. They must gather data from all areas of the company. These data 1-7
are processed through the various information systems and then disseminated back out to all the other organizational functions. Human Resources Systems Somebody has to hire employees with the right skills and experience and then make sure those employees are utilized to the full benefit of themselves and the organization. How will production even know how many employees are necessary or how many the organization can afford to hire? What is the best ratio of managers to workers for the organization? How can the organization find the employees to begin with? All of these information needs can be fulfilled with human resources information systems. Table 2.4 shows the systems used at each organizational level in this functional area. Human Resources information requirements are greatly impacted by external environmental forces. The government requires extensive record keeping for many different programs such as Equal Employment Opportunity, retirement programs, and tax collection. Without effective information systems, much of this information would be too costly to provide. 2.3.2 Systems from a Constituency Perspective As we saw in the tables in the last section, each functional area has three distinct management levels: senior, middle, and operational. Each level has different information requirements. There are four different types of systems to help out. There are transaction processing systems (TPS), management information systems (MIS), decision-support systems (DSS), and executive support systems (ESS). Types of Decisions There are generally three classifications of decisions: Unstructured: requires judgment, evaluation, and insight into non-routine situations. Usually made at senior levels of management Structured: repetitive, routine, with definite (clear-cut) procedures for making the decision. Usually made at the lowest organizational levels Semistructured: A combination of the two. Usually made by middle managers. 1-8
Transaction Processing Systems The operational level of the organization is responsible for daily operations. The information systems used in this level of the organization are transaction processing systems (TPS), so-called because they record the routine transactions that take place in everyday operations. TPS combine data in various ways to fulfill the hundreds of information needs a company requires to be successful. The data are very detailed at this level. Characteristics of TPS 1. Record the routine transactions that take place in everyday operations. 2. Very rich with data and the data is very detailed. 3. Typically helps with structured decisions. 4. Relies heavily on Data Management Technology (database technology). You have to remember that a lot of work is required to get the product from the manufacturing plant to the store shelves. How much did the company pay to package the product, store the product, and ship the candy bar to the stores? All that data can be recorded in a TPS, right down to how many truck drivers were required to deliver the product to the local convenience store. The operational level of an organization also includes functions not directly associated with the actual production, but vital in keeping the company running smoothly. The people in accounting may not be pouring the chocolate over the nuts on the assembly line, but those workers that do appreciate the fact that they get a paycheck every two weeks. Production workers also like to know that the human resource division is keeping track of training programs that may help them advance within the company. Each of these divisions requires an information system that helps it keep track of the many details that make the production worker happy and productive. The best transaction processing system will be integrated throughout the organization to supply useful information to those who need it when they need it. Note on Data Management: A typical component of a TPS is the database which represents the repository of the data collected by the TPS. Databases are usually managed by a type of software that is referred to as database management system (DBMS). A DMBS will control the how data is inserted, modified, and deleted from the database. It also provides capabilities like making sure that users can only access that data that they have access to (access control). It also insures that many users can access the database at the same time (concurrent access). Moreover, a DBMS will typically insure required properties of transactions such as atomicity (either completing he whole transaction or canceling all of it) among many other things. Management Information Systems and Decision-Support Systems Think about the functions of managers that you may have learned about in other classes: directing, controlling, communicating, planning, and decision-making. Each manager 1-9
takes on these roles countless times a day. Managers review endless amounts of data hoping to make their jobs easier and more efficient. Those using management information systems (MIS) require information on a periodic basis instead of on a daily recurring basis like those using a transaction processing system. Managers also require information on an exception basis. That is, they need to know if production is higher or lower than the targeted rate or if they are over or under their budgets. They also need to know about trends instead of straight numbers. The questions they may ask of the system would be: How far behind in production are we for this quarter? The MIS will draw data from the transaction processing system to help managers answer structured questions such as: How much more sugar must we purchase if we increase production from 5,000 bars to 7,000? Figure 2-3: How Management Information Systems Obtain Their Data from the Organization s TPS. Before integrated systems, managers received periodic printed reports that gave them lots of data, but often didn t supply information that they could use to make timely decisions. Planning was sometimes a wasted effort because the information the managers needed just wasn t there when they needed it. If they wanted to know how many candy bars were produced in a month, they had to wait until that one piece of information was produced in a report published at the end of the quarter. The human resources department manager would likely not be able to find out about new job opportunities in a different part of the company until after the workers were laid off and had found other employment. Worse yet, production might have to stop the assembly lines because accounting hadn t purchased enough supplies to cover the increase in the number of candy bars rolling off the line. 1-10
With the integration of information systems up and down the management levels, and throughout the corporation, managers can often get needed information in a real-time mode. The data are kept online, the system can gather the precise information managers need to make a decision, and the information can be cross-integrated into all departments of the company. All divisions in the company can see what s going on throughout the corporation. Information can be passed from department to department so that they are all working on the same page. Characteristics of MIS 1. Answers structured questions 2. Produces routine reports. The term routine refers to: (1) scheduled (e.g., monthly or quarterly, but not daily like TPS), and (2) has predefined contents and format. 3. Helps middle managers in monitoring and controlling their units. Monitoring refers to the ability to see information about the performance of their units and controlling refers to the manager ability to correct problems by making decisions based on the comparing the actual performance and the desired performance. 4. MIS works typically by summarizing and aggregating the data collected by TPS. 5. MIS, compared to DSS, is more general in terms of type of problems and scope of the organization. Decision-support systems (DSS) also serve the management level of an organization, but in a somewhat different way from an MIS. An MIS uses internal data to supply useful information. A DSS uses internal data but also combines it with external data to help analyze various decisions management must make. Analyzing complex, interactive decisions is the primary reason for a company to use a DSS. You ll notice we describe decisions at this level as semistructured. Not all decisions required for an organization to function smoothly are cut-and-dried. There are a lot of gray areas in successfully managing an organization and the larger the company, the more diverse the decision-making process becomes. As a company is affected not only by what goes on solely within the company, but also by external forces not under its control, decision-support systems can help upper-level management. What happens to the pricing structure and availability of the raw materials if civil war breaks out in the sugar producing countries of Central America? Fluctuating gasoline prices affect the profit margins by increasing or decreasing the distribution costs of the product. All these external events can be put into context in a decision-support system so that management can make effective decisions. Characteristics of DSS 1. Helps managers in semi-structured decisions 2. Produces ad-hoc reports (ad hoc is Latin for to this, in other words for a specific purpose) 3. Interactive. That is, there is a dialog between the manager and the DSS 1-11
4. A DSS has analytical capabilities. For instance, it provide what-if analysis and goal seeking analysis. An advanced DSS might even utilize data mining or artificial intelligence. 5. Relies on management science models (e.g., formulas) to help in solving the structured part of the problem. 6. Typically, the output of a DSS is graphical. A class of DSS referred to as Geographical Information Systems (GIS) utilizes maps in producing output. 7. Usually relies on external data 8. Specific. DSS usually is designed to address domain-specific problems. That is, the problems in a specific field. Executive Support Systems Executive support systems (ESS) are used at the very upper echelons of management. At the strategic level, the typical decision is very much unstructured. Often there is no specific question, but rather a series of undefined situations executives may face. There are no easy, definable answers. These executives require summarized, historical information gleaned from all other levels of the organization, coupled with large amounts of external data gathered from many sources. Figure 2-4: Model of an Executive Support System. As executives haven t been using computers that long or don t have time to fiddle around learning how to type, executive support systems must be easy to use and the information 1-12
must be easily manipulated. The ESS must be able to incorporate external information with internal data to offer concise, complete information for the imprecise and incomplete scenarios executives face. And most importantly, the systems must have a fast response time. Characteristics of ESS 1. Helps top managers with unstructured problems 2. Typically the interface is dashboard that is imbedded in a personalized web portal. 3. Relies heavily on data from outside the organization along with current and historical data from within the organizations. 2.3.4 Relationship of Systems to One Another Figure 2.5 Interrelationships Among Systems. Bottom Line: Each functional area of an organization has unique information system needs at each level of management. A well-designed, well-constructed information system will serve each functional area according to its needs. All four system types must be integrated so that data in one system feeds all the others. No more islands of information. 1-13
2.4 Systems That Span the Enterprise How do you manage all the information needs from different functional areas serving different managerial requirements? Let s find out. Enterprise Applications No business can afford disjointed information systems that don t work together to produce a coherent picture of the entire organization. All the functions of a business must be integrated across traditional lines of demarcation. Islands of information can be devastating to a company if data cannot be shared throughout the company. Even worse, the islands of information can create problems if each faction of an enterprise has differing information that conflicts with other islands of information. These kinds of problems are what gave rise to enterprise applications that share the same data anywhere it s needed in an organization as Figure 2-6 shows. Enterprise applications easily combine internal and external information to present a complete picture of the business. As networks of all kinds take hold, from the Internet to intranets to extranets, Web-based enterprise applications are increasingly widespread. The following section is an overview of four major enterprise applications: enterprise, supply chain management, customer relationship management, and knowledge management systems. We ll also study each of these systems in depth in future chapters. Enterprise Systems It s not unusual to find an organization in which systems don t exchange information very well, if at all. Accounting and finance may have a system that serves their needs very well, but they can t collect information from the system used by manufacturing and production. Sales and marketing is doing its own thing with its system and losing valuable information from the other systems, which could help it do a better job. These situations violate the basic business objectives of operational excellence and improved decision making. Enterprise systems aim to correct the problem. Also known as enterprise resource planning (ERP) systems, their main goal is to bridge the communication gap between all departments and all users of information within a company. If production enters information about its processes, the data are available to accounting, sales, and human resources. If sales and marketing is planning a new advertising campaign, anyone anywhere within the organization will have access to that information. Enterprise systems truly allow a company to use information as a vital resource and enhance the bottom line. 1-14
Figure 2-6: Enterprise Application Architecture Supply Chain Management Systems Supply chain management systems offer new opportunities for companies to address the business objective of supplier intimacy by integrating information systems with suppliers and customers and lowering costs for everyone. Supply chain management system, a form of interorganizational systems (IOS), create a cohesive network for buying the raw materials, creating the candy bars, and getting the packaged goods to the retail outlets. 1-15
Table 2-5 lists the benefits of using a supply chain management system to get the right product in the correct quantity to the right place with the least cost While supply chain management systems have drastically improved over the last few years, there are still some problems associated with them. It is very difficult to integrate systems with outside suppliers who probably have other companies to service. Some businesses may have dozens of suppliers with which to connect. It is very expensive and time consuming to build and implement supply chain management systems, therefore some suppliers will shy away from doing so. Customer Relationship Management Systems Do you wait for the customer to complain about your poor service before you take a critical look at your business processes? Do you spend more time and money acquiring new customers than you do in keeping your existing ones? Does each functional area of your organization have a completely different and separate viewpoint of your customers? Does your sales and marketing department make promises to your customers that manufacturing and production can t possibly keep? If you answered yes to one or more of these questions you re in serious need of a good Customer Relationship Management system. CRM technology isn t just a nice looking Web site for customers to click through or more reports dumped on manager s desks that they don t have time to review. CRM systems involve business processes in all the functional areas and every management level of a firm. The ideal CRM system provides end-to-end customer care from receipt of order through product delivery and addresses the business objective of customer intimacy. CRM also helps a firm cut the costs of keeping good customers by supplying the entire organization with a consolidated view of the customers needs. Unprofitable customers are more easily identified with a CRM system, and the time and energy spent can be retargeted to more profitable customers. 1-16
Knowledge Management Systems Most of the other systems we ve discussed have been recognized for many years, but knowledge management systems may be thought of as relatively new. KMS systems help a business meet the objectives of new products and services and improved decision making. In some cases a KMS may even help a business to survive. Knowledge workers are those who promote the creation of new knowledge and integrate it into the organization. Research scientists may discover new methods of mixing sugar and cocoa beans and dairy products to make a better chocolate. Maybe a team of engineers will develop a new method of packaging to make it easier to open. The legal knowledge workers may spend their time determining the copyright protections that could be afforded to the product name. A key distinction made by the majority of knowledge management practitioners is Nonaka's reformulation of Polanyi's distinction between tacit and explicit knowledge. The former is often subconscious, internalized, and the individual may or may not be aware of what he or she knows and how he or she accomplishes particular results. At the opposite end of the spectrum is conscious or explicit knowledge -- knowledge that the individual holds explicitly and consciously in mental focus, and may communicate to others. In the popular form of the distinction tacit knowledge is what is in our heads, and explicit knowledge is what we have codified. 1-17