18 Chapter 2 Business Driven Information Systems 2.1 Organizations 2.1.1 Business Organization An organization is a formal collection of people and other resources established to accomplish a set of goals. An organization is a system. People, materials, machines and equipment, money, data, information, and decisions are constantly in use in any organization. Outputs (goods or services) produced by an organization are of higher relative value than the inputs (raw material, labor, and other resources). It is through this difference in value or worth that organizations attempt to achieve their goals. A business is a formal organization whose aim is to produce products or provide services for a profit. There are of course nonprofit firms and organizations, and government agencies that are complex formal organizations, which produce services and products but do not operate in order to produce a profit. In general, the information systems found in nonprofit organiza- tions are remarkably similar to those found in private industry. Every business can be seen as a collection of business processes. A business process is a logically related set of activities that define how specific business tasks are performed. Large businesses have thousands of business processes, some more important than others. To a large extent, the efficiency 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. For example, the sales and marketing function would be responsible for identifying customers, and the human resources function would be responsible for hiring employees. Other business processes cross many different functional areas and require coordination across departments. The hierarchy of management in a business organization is composed of senior management, which makes long-range strategic decisions about products and services as well as ensures financial performance of the firm; middle management, which carries our the programs and plans of senior management; and operational management, which is responsible for monitoring the daily activities of the business. Knowledge workers, such as engineers, scientists, or architects, design products or services and create new knowledge for the firm, where data workers, such as secretaries or clerks, assist with paperwork at all levels of the firm. Production or service worker actually produce the product and deliver the service. Each of these groups has different needs for information given their different responsibilities, and each can be seen as major information constituents. Senior managers need summary information that can quickly inform them about the overall performance of the firm. Middle Organizations Business Organizations Organization Structure and Culture Competitive Strategies Organization Change Information Systems in Organizations Brief History of Information Systems in Business Levels of Information Systems in Business Major Types of Information Systems Information Systems Classification Systems from a Functional Perspective Systems from a Constituency Perspective Integrated Information Systems Enterprise-wide and Inter-enterprise Systems Contents After completing this chapter, you will be able to • Understand the structure, culture, and changes in organizations. • Describe how organizations can use information systems to support their operations, products/services and decision- making. • Identify the basic types of information systems from functional and constituency perspectives. • Understand enterprise information systems and inter-enterprise systems. Objectives
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Chapter 2 Business Driven Information Systems
2.1 Organizations
2.1.1 Business Organization An organization is a formal collection of people and other resources established to accomplish a set of goals. An organization is a system. People, materials, machines and equipment, money, data, information, and decisions are constantly in use in any organization. Outputs (goods or services) produced by an organization are of higher relative value than the inputs (raw material, labor, and other resources). It is through this difference in value or worth that organizations attempt to achieve their goals.
A business is a formal organization whose aim is to produce products or provide services for a profit. There are of course nonprofit firms and organizations, and government agencies that are complex formal organizations, which produce services and products but do not operate in order to produce a profit. In general, the information systems found in nonprofit organiza-tions are remarkably similar to those found in private industry.
Every business can be seen as a collection of business processes. A business process is a logically related set of activities that define how specific business tasks are performed. Large businesses have thousands of business processes, some more important than others. To a large extent, the efficiency 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. For example, the sales and marketing function would be responsible for identifying customers, and the human resources function would be responsible for hiring employees. Other business processes cross many different functional areas and require coordination across departments.
The hierarchy of management in a business organization is composed of senior management, which makes long-range strategic decisions about products and services as well as ensures financial performance of the firm; middle management, which carries our the programs and plans of senior management; and operational management, which is responsible for monitoring the daily activities of the business. Knowledge workers, such as engineers, scientists, or architects, design products or services and create new knowledge for the firm, where data workers, such as secretaries or clerks, assist with paperwork at all levels of the firm. Production or service worker actually produce the product and deliver the service. Each of these groups has different needs for information given their different responsibilities, and each can be seen as major information constituents. Senior managers need summary information that can quickly inform them about the overall performance of the firm. Middle
Organizations Business Organizations Organization Structure and Culture Competitive Strategies Organization Change
Information Systems in Organizations Brief History of Information Systems in Business Levels of Information Systems in Business
Major Types of Information Systems Information Systems Classification Systems from a Functional Perspective Systems from a Constituency Perspective Integrated Information Systems Enterprise-wide and Inter-enterprise Systems
Contents
After completing this chapter, you will be able to
• Understand the structure, culture, and changes in organizations. • Describe how organizations can use information systems to support their operations, products/services and decision-
making. • Identify the basic types of information systems from functional and constituency perspectives. • Understand enterprise information systems and inter-enterprise systems.
Objectives
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managers need more specific information on the results of specific functional areas and departments of the firm. Operational managers need transaction-level information. Knowledge workers may need access to external scientific databases or internal databases with organizational knowledge. Finally, production or service workers need access to information from production machines, and service workers need access to customer records in order to take orders and answer questions from customers.
Within an organization, various subsystems contain transformation processes that help turn specific inputs into goods or services of increasing values. These value-added processes increase the relative worth of the combined inputs on their way to becoming final outputs of the organization. All business organizations contain a number of value-added processes. A series (chain) of value-added processes that includes inbound logistics, warehouse and storage, production, sales and marketing, outbound logistics, and customer service is called the value chain (Figure 2-1). Each of these processes is investigated to determine what can be done to increase the value perceived by a customer. Depending on the customer, value may mean lower price, better service, higher quality, or uniqueness of product. The value comes from the skill, knowledge, time, energy, and capital invested by the company. In general, business organizations establish these value-added processes to achieve their goals by exploiting opportunities and solving problems
The relationship between information systems and organizations is complex. Because there are many types of organiza-tions, it stands to reason that the technology of information systems will have a different impact on different types of organiza-tions. There is no single effect of information systems. Even using the same type of information systems, different organiza-tions in different circumstances experience different effects. However in general, what role do information systems play in these value-added processes? First, organizations use information systems to control and monitor value-added processes to ensure effectiveness and efficiency. An information system can turn feedback from the value-added process subsystems into more meaningful information for employees' use within an organization. This information might summarize the performance of the systems and be used as the basis for changing the way the system operates. Such changes could involve using different raw materials (inputs), designing new assembly-line procedures (product transformation process), or developing new products and services (outputs).
Second, for most organizations, information systems are so intimately intertwined with the underlying value-add process that they have become part of the value-added process itself. The information systems are internal to and play an integral role in the process, whether by providing input, aiding product transformation, or producing output. The information systems do not just monitor the process externally but also works as part of the process to transform a product. From this point of view, studying the potential role of information systems within the process itself often leads to the discovery of new and better ways to accomplish the process.
Figure 2-1 The value chain of a typical manufacturing company
Raw material suppliers Inbound logistics Warehouse & storage Production
Sales & marketing
Outbound logistics Customer service
Consumers
Supplier management system
Tracking system Inventory control system
Process control system
Ordering system
Shipment scheduling system Customer service system
Customer relationship management
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Third, information systems have provided effective support of an or-ganization's strategies for gaining competitive advantage. This strategic role of information systems involves using information technology to develop products, services, and capabilities that give an organization advantages over the competitive forces it faces in the global marketplace.
All employees in an organization need information to perform their jobs effectively. The primary users of information, however, are managers. In an organization, managers are responsible for coordinating the use of resources such as people, money, materials, and information so the organization can operate efficiently and prosper. Managers work toward these goals by performing the four following management activities that are usually performed in sequence and form a cycle (see Figure 2-2):
• Planning involves establishing goals and objectives and establishing the strategies or tactics needed to meet these goals and objectives.
• Organizing includes identifying and bringing together the resources necessary to achieve the plans of an organization. Organizing also involves establishing the management structure of an organization, such as the departments and reporting relationships.
• Leading, sometimes referred to as directing, involves instructing and authorizing others to perform the necessary work. • Controlling involves measuring performance and, if necessary, taking corrective action
2.1.2 Organizational Structure and Culture The organizational structure refers to organizational subunits and the way they are related to the overall organization. Depending on the goals of the organization and its approach to management, a number of structures can be used. An organiza-tion's structure can have an impact on how and what kinds of information system are used. Although there are many possibili-ties, organizational structure typically falls into one of these categories: traditional, project, team, or multidimensional.
• Traditional organizational structure. In the traditional organizational structure, the major departments are usually divided according to function and can include marketing, production, information systems, finance, accounting, research and development, and so on (Figure 2-3). The department heads report to a president or top-level manager. The traditional organizational structure is often referred to as a hierarchical structure, since it can be viewed as a series of levels, with those at higher levels having more power and authority within the organization. Information systems can be a key element when companies empower their employees. Empowerment involves giving employees and their managers more power, responsibility, and authority to make decisions, take certain actions, and have more control over their jobs. Empowerment usually results in faster action and quicker resolution of problems. Information systems make empowerment possible by providing information to employees at lower levels of the hierarchy. Corporate information systems may be used by a sa-lesclerk to cancel an order and make adjustments to a customer's bill, by a factory floor operator to shut down the auto-mated assembly line to fix a problem, or by midlevel managers to rapidly implement decisions. The employees may also be empowered to develop their own personal information systems.
• Project organizational structure. The project orga-nizational structure is cen-tered on major products or services. For example, in a manufacturing firm that pro-duces numerous types of baby food and products, each type is produced by a separate unit, such as baby food division, diaper divi-sion, and toy division. Tradi-tional functions like market-ing, finance, and production are positioned within these major units (Figure 2.4).
• Team organizational structure. The team organi-
Planning
Organizing Controlling
Leading
Figure 2-2 The four management activities
Figure 2-3 Traditional organization structure
President
Accounting Department
Marketing Department
Production Department
Human Resource
Department
Information Systems
Department
Supervisor 1 Supervisor 2
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zational structure is centered on work teams or groups. In some cases, these teams are small; in other instances, they can be very large. Typically, each team has a team lead-er who reports to an upper-level manager in the organization. Depending on the tasks being performed, the team can be either temporary or permanent.
• Multidimensional organizational struc-ture. The multidimensional organizational structure may incorporate several structures at the same time. For example, an organiza-tion might have both traditional functional areas and major project units. When dia-grammed, this structure forms a matrix, or grid (Figure 2-5). One advantage of the mul-tidimensional organizational structure is the ability to simultaneously stress both tradi-tional corporate areas and important product lines. A potential disadvantage is multiple lines of authority. With this situation, an employee will have two bosses or supervisors: one functional boss and one project boss. As a result, conflicts may occur. One way to resolve this problem is to give one boss priority if there are problems or conflicts.
Culture is a set of major understandings and assumptions shared by a group. Organizational culture consists of the major understandings and assumptions for a business, a corporation, or an organization. The understandings, which can include common beliefs, values, and approaches to decision making, are often not stated or documented in goal statements or formal policies. Employees, for example, might be expected to be clean-cut, wear conservative outfits, and be courteous in dealing with all customers.
Like organizational structure, organizational culture can have a significant impact on the development and operation of information systems within the organization. A procedure associated with a newly designed information system, for example, might conflict with an informal procedural rule that is part of organizational culture. Organizational culture might also influence a decision maker's perception of the factors and priorities that must be considered in determining the objectives of a decision.
2.1.3 Competitive Strategies What are competitive strategies? How a company use information systems to support its competitive strategies? A company can survive and succeed in the long run only if it successfully develops strategies to confront five competitive forces that shape the structure of competition in its industry. In Michael Potter's classic model of competitive strategy, any business that wants to survive and succeed must develop and implement strategies to effectively counter (1) the rivalry of competitors within its industry, (2) the threat of new entrants into its industry and its markets, (3) the threat of substitute products and services, (4) the bargaining power of customers, and (5) the bargaining power of suppliers. To counter the threats of competitive forces, a company must implement five basic competitive strategies:
• Cost Leadership Strategy: Becoming a low-cost producer of products and services in the industry. A com-pany can use information systems to substantially reduce the cost of business processes and to lower the costs of customers of suppliers.
• Differentiation Strategy: Developing ways to differen-tiate a company's products and services from its competi-tors or reduce the differentiation advantages of competi-tors. A company can use the existing IT features or devel-op new IT features to focus its products and services to give it an advantage in particular segments or niches of a market.
Baby Products Company
Baby Food Division
Production
Diaper Division Toy Division
Marketing
Finance
Production
Marketing
Finance
Marketing
Finance
Production
Figure 2-4 Project organizational structure
Baby Products Company
Production
Marketing
Finance
Baby Food Division
Diaper Division
Toy Division
Production Group
Production Group
Production Group
Marketing Group
Finance Group
Marketing Group
Finance Group
Marketing Group
Finance Group
Figure 2-5 Multidimensional organizational structure
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• Innovation Strategy: Finding new ways of doing business, which include the development of unique products and services or entry into unique markets or market niches. A company can create new products and services that include IT components, develop unique new markets with the help of IT, or make radical changes to business models or business processes with IT for producing or distributing products and services that are so different from the way a business has been conducted that they alter the fundamental structure of an industry.
• Growth Strategies: Significantly expanding a company's capacity to produce goods and services, expanding into global markets, diversifying into new products and services, or integrating into related products and services. A company can use information systems to manage regional and global business expansion.
• Alliance Strategies: Establishing new business linkages and alliances with customers, suppliers, competitors, consultants, and other companies. These linkages may include mergers, acquisitions, joint ventures, forming of "virtual companies," or other marketing, manufacturing, or distribution agreements between a business and its trading partners. A company can use the Internet technology to develop inter-enterprise information systems that support strategic business relationships with customers, suppliers, subcontractors, and others.
A good example of strategic applications of information systems technologies to primary business processes is Wal-Mart. Wal-Mart built an elaborate satellite network linking the point-of-sale terminals in all of its stores. The network was designed to provide managers, buyers, and sales associates with up-to-date sales and inventory status information to improve product buying, inventories, and store management. It also extended its network to its customers and suppliers in order to build innovative continuous inventory replenishment systems that would lock in their business. This creates an inter-enterprise information system that links with its customers and supplier, resulting in new business alliances and partnerships, low cost, better-quality products and services.
2.1.4 Organizational Change Organizational change deals with how organizations plan for, implement and handle change. Change can be caused by internal or external factors. Internal factors include activities initiated by all levels of employees. External factors include activities brought by competitors, stockholders, federal and state laws, community regulations, natural occurrences, technology breakthrough and general economic conditions. Introducing or modifying an information system will also cause change. Improving an organizational process through information systems requires changing the activities and tasks related to the process. Often, this means changing the way individuals, group, and the entire enterprise work.
Another concept closely related to organizational change is organizational learning. Organizations adapt to new conditions or alter their practices over time. This means that employees and management learn better ways of doing business and incorpo-rate these approaches into their day-to-day activities. Collectively, these adjustments based on experience and ideas are called organizational learning. The change brought by information systems will result in organizational learning. For instance, a company's decision-making process might become more data driven once employees know they can obtain accurate, complete, and relevant data for decision making.
To stay competitive, organizations must occasionally make fundamental changes in the way they do business. Reengineer-ing involves the radical redesign of business processes, organizational structures, information systems, and culture of the organization to achieve a breakthrough in business results (see Figure 2-6). Reengineering can reduce delivery time, increase product and service quality, enhance customer satisfaction, and increase revenues and profitability. Reengineering challenges the fundamental assump-tions governing the design of work processes. It requires finding and vigorously challenging old rules blocking major business process changes. Today many companies use reengineering to increase their competitive position in the market. For example, although Internet sales are currently a relatively small percentage of many companies' sales, companies are reengineering their sales processes to take advantage
Changes toBusiness Process
Changes toOrganizational Culture
Changes toOrganizational Structure
Changes toInformation Systems Reengineering
Figure 2-6 Reengineering involves the radical redesign of business processes, organiza-tional structure, organizational culture, and information systems to achieve a breakthrough in business results.
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of this opportunity. Along the way, they are learning that the cost to process an order can be cut in half or even more. In addition, orders entered by customers themselves tend to have fewer errors than those dictated over the phone. This type of reengineering enables firms to offer price discounts and better service to E-commerce customers.
The idea of continuous improvement is to constantly seek ways to improve the business processes to add value to prod-ucts and services. This in turn will increase customer satisfaction and loyalty and ensure long-term profitability. The strategic use of information systems can support organizational commitment to the goal of continuous improvement. Continuous improvement involves constantly improving and modifying products and services to remain competitive and to keep a strong customer base. In doing so, companies can increase the quality of their products and services.
Today, the concept of quality means the ability of a product (or service) to meet or exceed customer expectations. For ex-ample, a computer that not only performs well but also is easy to maintain and repair would be considered a high-quality product. This view of quality is customer oriented. A high-quality product satisfies customers by functioning correctly and reliably, meets needs and expectations, and is delivered on time with courtesy and respect. Information systems are fully integrated into businesses in organizations that adhere to continuous improvement. Capturing and analyzing customer feedback and expectations and designing, manufacturing, and delivering quality products and services to customers around the world are only a few ways computers and information systems are helping companies pursue their goals of quality and continuous improvement.
A significant portion of an organization's expenses goes to hire, train, and compensate talented staff. In an effort to control costs, organizations are trying to determine the number of employees they need to maintain high-quality goods and services. With fierce competition in the marketplace, it is critical for organizations to use their resources wisely. Two strategies to contain costs are outsourcing and downsizing.
Outsourcing involves contracting with outside professional services to meet specific business needs. Often a specific business process is outsourced such as product sales promotion, advertising, global telecommunications network support. Outsourcing enables organizations to focus more closely on their core business, to obtain cost saving, and to benefit from the expertise of the service provider. Downsizing involves reducing the number of employees to cut costs. Rather than pick a specific business process to be downsized, companies usually look to downsize across the entire company.
To be competitive, business organizations must make organizational changes. They want to be fast, nimble, flexible, inno-vative, productive, economical, and customer oriented. Combining the improved understanding of the potential of information systems with the growth of new information technology and applications has led organizations to use information systems to gain a competitive advantage. One of example using information systems for strategic purposes is Kmart's use of a large central repository of data on its products to create a merchandising database. The database enables store managers to keep fast-selling items in stock, identify and purge slow-moving products, and increase individual store sales and profitability. Kmart lets suppliers access its data, treating them as extensions to its own purchasing department. The new system lets Kmart "microma-nage" its local stores, while enhancing management's ability to analyze the big picture.
The extent to which companies are using computers and information systems for competitive advantage continues to grow. Forward-thinking companies must constantly update or acquire new systems to remain competitive in today's dynamic marketplace.
2.2 Information Systems in Organizations
2.2.1 Brief History of Information Systems in Business The business application of information systems have expanded significantly over the years. Until the 1960s, the role of most information systems was simple: transaction processing, record-keeping, accounting, and other electronic data processing (EDP) applications. Then another role was added, as the concept of management information systems (MIS) was conceived. This new role focused on developing business applications that provided managerial end users with predefined management reports that would give managers the information they needed for decision-making purposes.
By the 1970s, it was evident that the prespecified information products produced by such management information sys-tems were not adequately meeting many of the decision-making needs of management. So the concept of decision support systems (DSS) was born. The new role for information systems was to provide managerial end users with ad hoc and interac-tive support of their decision-making processes. This support would be tailored to the unique decision-making style of managers as they confronted specific types of problems in the real world.
In the 1980s, several new roles for information systems appeared. First, the rapid development of microcomputer processing power, application software packages, and telecommunications networks gave birth to the phenomenon of end user computing. Now, end users could use their own computing resources to support their job requirements instead of waiting for the indirect support of corporate information services departments. Second, it became evident that most top corporate execu-tives did not directly use either the reports of management information systems or the analytical modeling capabilities of decision support systems, so the concept of executive information systems (EIS) was developed. These information systems
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were created to give top executives an easy way to get the critical information they want, when they want it, tailored to the formats they prefer. Third, breakthroughs occurred in the development and application of artificial intelligence (AI) techniques to business information systems. Expert systems (ES) and other knowledge-based systems forged a new role for information systems. Today, expert systems can serve as consultants to users by providing expert advice in limited subject areas.
An important new role for information systems appeared in the 1980s and continued through the 1990s. This is the concept of a strategic role for information systems, sometimes called strategic information systems (SIS). In this concept, information technology becomes an integral component of business processes, products, and services that help a company gain a competi-tive advantage in the global marketplace.
Finally, the rapid growth of the Internet, intranets, extranets, and other inter-connected global networks in the 1990s dra-matically changed the capabilities of information systems in business at the beginning of the twenty-first century. Internet-based and Web-enabled enterprise and global electronic business and commerce systems are becoming commonplace in the operations and management of today's business enterprises. Information systems support business processes for all business functions and processes that span more than one function. Enterprise applications--enterprise systems, supply chain manage-ment systems, customer relationship management systems, and knowledge management systems--enable organizations to integrate information from multiple functions and business processes across entire firms and even entire industries.
Existing business information systems will undergo profound changes as a result of the development of the computer tech-nology and new concepts of business. As computers become increasing ubiquitous and technologies converge, business will rely on computers for whole business operations and management, and users at all levels will need to be computer literate. New information technologies will enhance security measures, provide computers for all employees, improve communications and health care in hospitals, and shape t-commerce (embedded television advertising) and e-business. Amazing business opportuni-ties increase daily by the ubiquitous computer technology.
2.2.2 Levels of Information Systems in Business Since there are different levels, functions, specialties, and interests in an organization, there are various types of information systems. No single system can provide all the information an organization needs. An organization can be divided into strategic, management, knowledge, and operational levels. It can also be divided into functional areas such as manufacturing, sales and marketing, finance, accounting, and human resources. Organizational activities occur at different levels and functions. People in the organization have unique information needs and thus require various sets of IT tools. Information systems are built to serve these different organizational levels and functional areas (see Figure 2-7).
Typically, information systems serve four major organizational levels: operational level, knowledge level, management level, and strategic level. At the operational level of an organization, the routine day-to-day business processes and interaction with customers occur. People perform daily tasks such as processing transactions. Operational-level information systems support online transaction processing (OLTP) that captures transaction and event information using technology to (1) process
Marketing Accounting Production Finance Human Resource
Operational Level
Knowledge Level
Management Control Level
Strategic Planning Level
Organizational Structure Activities Information
Needs IT Tools
Transactional
Processes
Analytical
Fine
Granularity
Coarse
Online Transaction Processing
Processing
Online Analytical
Processing
Figure 2-7 Business view of organization, information, and information technology
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the information according to defined business rules, (2) store the information, and (3) update existing information to reflect the new information. During OLTP, the organization must capture every detail of transactions and events. The principal purpose of information systems at this level is to support routine operational activities, to track the flow of transactions through the organization, and to improve the efficiency of business processes and the customer interface. Examples of operational-level systems include a system to record bank deposits from automatic teller machines, one that monitors inventory stock in the store, or one that tracks the number of hours worked each day by employees on a factory floor.
Knowledge-level information systems support knowledge and data workers in an organization. Information systems at this level are designed to help the business firm organize, discover, and integrate new knowledge into the business and to help the organization control the flow of paperwork. Knowledge-level systems, especially in the form of workstations and office systems, are the fastest-growing applications in business today.
Moving up through the organizational pyramid, people deal less with the details and more with meaningful aggregations of information that help them make broader decisions for the organization. At the management level of the organization, func-tional managers focus on monitoring and controlling operational-level activities and providing information to higher levels of the organization. Managers at this level, often referred to as middle managers, focus on effectively utilizing and deploying organizational resources to reach the strategic objectives of the organization. Management-level information systems are designed to serve the monitoring, controlling decision-making, and administrative activities of middle managers. Management-level systems typically provide periodic reports rather than instant information on operations. Some management-level systems support nonroutine decision making. They tend to focus on less structured decisions for which information requirements are not always clear. These systems often answer "what if" questions: What would be the impact on production schedules if we were to double sales in the next month? What would happen to our return on investment if the new factory project delayed for six month?
At the executive level of an organization, top managers focus on long-term strategic issues. Managers at this level include the president and chief executive officer, vice presidents, and other senior managers. Executive-level decisions often deal with very complex problems with broad and long-term ramifications for the organization. Executive-level decision making is often referred to as being unstructured because senior managers must consider the ramifications of their decision on the overall organization. Understanding how a given decision impacts the overall organization makes executive decision making extreme-ly complex. Strategic-level information systems support online analytical processing (PLAP) that helps senior management tackle and address strategic issues and long-term trends, both in the organization and from the external environment. Depend-ing on the question of the moment, senior managers must be able to make sense of a vast amount of changing information. Information related to market segments, competitors, general economic conditions, and new government regulations must be compared and contrasted as part of the decision making process. Strategic-level systems enable senior managers to examine extremely complex data easily in textual and graphical summaries. These systems are helping the executives of organizations to more easily deal with the complexities of their rapidly changing environment and achieve a strategic advantage.
In summary, most organizations have four general levels: operational, knowledge, management, and strategic. Each level has unique activities, and each requires different types of information. The next section examines various types of information systems designed to support each organizational level and their value to organizations.
2.3 Major Types of Information Systems
2.3.1 Information Systems Classification Because there are different interests, specialties, and levels in an organization, there are different kinds of systems. No single system can provide all the information an organization needs. In fact, large- and medium-size firms have thousands of comput-ers and hundreds of different systems. Conceptually, the applications of information systems that are implemented in today's business world can be classified in several different ways. However, people commonly view these different systems from two different perspectives: a functional perspective identifying systems by their major business function, and a constituency perspective that identifies systems in terms of the major organizational groups that they serve. Functional information systems are systems that are tailored to meet the information needs of the major functional areas of the organizations. Constituency information systems are systems that support data-processing, decision-making, and communications at each of organizational levels in an organization.
2.3.2 Systems from a Functional Perspective From a historical perspective functional systems were the first kind of systems developed by business firms. These systems were located in specific departments, such as accounting, marketing and sales, production, and human resources. Let us take a close look at systems from this functional perspective (see Figure 2-8).
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Accounting and Finance Systems
The accounting function is responsible for maintaining and managing the firm’s financial records—receipts, disbursements, depreciation, and payroll— to account for the flow of funds in a firm. The finance function is responsible for managing the firm’s financial assets, such as cash, stocks, bonds, and other investments, to maximize the return on these financial assets. The finance function is also in charge of managing the capitalization of the firm. To determine whether the firm is getting the best return on its investments, the finance function must obtain a considerable amount of information from sources external to the firm. Finance and accounting share related problems—how to keep track of a firm’s financial assets and fund flows.
Senior management uses accounting and finance systems to establish long-term investment goals for the firm and to pro-vide long-range forecasts of the firm’s financial performance. Middle management uses the systems to oversee and control the firm’s financial resources. Operational management uses the systems to track the flow of funds in the firm through transactions, such as paychecks, payments to vendors, securities reports, and receipts.
Manufacturing and Production Systems
The manufacturing and production function is responsible for actually producing the goods and services. Manufacturing and production systems deal with the planning, development, and maintenance of production facilities; the establishment of production goals; the acquisition, storage, and availability of production materials; and the scheduling of equipment, facilities, materials, and labor required to fashion finished products.
Senior management uses manufacturing and production systems that deal with the firm’s long-term manufacturing goals, such as where to locate new plants or whether to invest in new manufacturing technology. Middle management uses manufac-turing and production systems to analyze and monitor manufacturing and production costs and resources. Operational man-agement uses manufacturing and production systems that deal with the status of production tasks. Most manufacturing and production systems use some sort of inventory system. Data about each item in inventory are either scanned or keyed into the
Function Example of System Description Groups Served
Sales and Marketing
Order processing Pricing analysis Sales trend forecasting
Enter, process and track orders Determine prices for products and services Prepare long-range sales forecasts
Operational manage-ment, employee Middle management Senior management
Manufacturing and Production
Machine control Production planning Facility location
Controls the actions of machines and equipment Decides when and how many products should be produced Decides where to locate new production facilities
Operational manage-ment Middle management Senior management
Accounting and Finance
Accounts receivable Budgeting Profit planning
Tracks money owed the firm Prepares short-term budgets Plans long-term profits
Operational manage-ment Middle management Senior management
Human Resources
Training and develop-ment Compensation analysis Human resources planning
Tracks employee training, skills, and performance appraisals Monitors the range and distribution of employee wages, salaries and benefits Plans the long-term labor force needs of the organization
Operational manage-ment Middle management Senior management
Figure 2-8 Examples of functional systems
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system. The inventory master file contains basic data about each item, including the unique identification code for each item, a description of the item, the number of units on hand, the number of units on order, and the reorder point. Companies can estimate the number of items to reorder, or they can use a formula for calculating the least expensive quantity to reorder called the economic order quantity.
Sales and Marketing Systems
The sales and marketing is responsible for selling the products or services. Marketing is concerned with identifying the customers from the firm’s products or services, determining what customers need or want, planning and developing products and services to meet their needs, and advertising and promoting these products and services. Sales is concerned with contacting customers, selling the products and services, taking orders, and following up on sales. Sales and marketing information systems support these activities. As shown in Figure 2-8, information systems are used in sales and marketing in a number of ways.
Sales and marketing systems help senior management monitor trends affecting new products and sales opportunities, sup-port planning for new products and services, and monitor the performance of competitors. Sales and marketing systems aid middle management by supporting market research and by analyzing advertising and promotional campaigns, pricing decisions, and sales performance. Sales and marketing systems assist operational management and employees in locating and contacting prospective customers, tracking sales, processing orders, and providing customer service support.
Human Resources Systems
All larger organizations have a human resources function that handles tasks concerning the personnel resource of the organiza-tion. The human resources function is responsible for attracting, developing, and maintaining the firm’s workforce. Human
System Type
Input
Processing Output Users Functions Supported
ESS Internal, external, aggregate data
Graphics, simulations, interactive
Projections, responses to queries
Senior managers
Budget forecasting, operation planning, profit planning, personnel planning
DSS Analytical models, data analysis tools, massive data
Interactive, simulations, analysis
Special reports, decision analyses, responses to queries
Profession-als, staff managers
Sales region analysis, production scheduling, cost analysis, pric-ing/profitability analysis, contract cost analysis
MIS Summary transaction data, analysis models, high-volume data
Routing reports, business models, business analysis
Summary and exception reports
Middle managers
Sales management, inventory control, annual budgeting, capital investment, relocation analysis
KWS Design specifica-tions, knowledge base
Modeling, simulations
Models, graphics
Profession-als, technical staff
Engineering workstations, graphics workstations, managerial workstations
OIS Documents, schedules
Document management, scheduling, communication
Documents, schedules, messages
Clerical workers
Word processing, document imaging, electronic calendars
TPS Transactions, events
Sorting, listing, merging, updating, storing
Detailed reports, lists, summaries
Operations personnel, supervisors
Order processing/tracking, machine control, plant scheduling, material movement control, securities trading, cash management, payroll, accounts payable, accounts receivable, employee record keeping, training & development
BIS Internal, external data
Artificial intelli-gence tools, simulations, data mining
Patterns, relationships, insights
Decision makers
Optimization analysis, expert knowledge, credit evaluation, risk analysis
Figure 2-9 Characteristics of information systems
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resources information systems support activities such as identifying potential employees, maintaining complete records on existing employees, and creating programs to develop employees’ talents and skills.
Human resources systems help senior management identify the manpower requirements (skills, educational level, types of positions, number of positions, and cost) for meeting the firm’s long-term business plans. Middle management uses human resources systems to monitor and analyze the recruitment, allocation, and compensation of employees. Operational manage-ment uses human resources systems to track the recruitment and placement of the employees.
2.3.3 Systems from a Constituency Perspective The constituency perspective examines information systems in terms of the various levels of management and types of decisions that they support. Each of three main management groups uses a different type of system to deliver the information required to manage the company. From this perspective, information systems can be classified into seven categories: executive support systems (ESS), management information systems (MIS), decision-support systems (DSS), office information systems (OIS), knowledge work systems (KWS), transaction processing systems (TPS), and business intelligence systems (BIS). Figure 2-9 summarizes the features of these information systems.
Transaction Processing Systems
A transaction is any business-related exchanges such as payments to employees, sales to customers, or payments to suppliers. Operational managers need systems that keep track of the elementary activities and transactions of the organization, such as sales, receipts, cash deposits, payroll, credit decisions, and the flow of materials in a firm. Transactional information encom-passes all of the information contained within a single business process or unit or work, and its primary purpose is to support the performing of daily operational tasks. A transaction processing system (TPS) is a computerized system that performs and records the daily routine transactions necessary to conduct business, such as sales order entry, hotel reservations, payroll, employee record keeping, and shipping. The principal purpose of the systems at this level is to answer routine questions and to track the flow of transactions through the organization. How many parts are in inventory? What happened to Mr. William’s payment? To answer these kinds of questions, information generally must be easily available, current, and accurate. Managers need TPS to monitor the status of internal operations and the firm’s relations with the external environment. TPS are also major producers of information for the other types of systems. Transaction processing systems are often so central to a business that TPS failure for a few hours can lead to a firm’s demise and perhaps that of other firms linked to it.
Managers Reports
MIS
Expense data
Product change
data
Unit product
cost data
Sales data
MIS Files
Accounting file
Production master file
Order file Order
processing system
Materials resource planning system
General ledger system
Transaction Processing Systems Management Information Systems
Figure 2-10 How MIS obtains data from the TPS
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Management Information Systems
Middle management needs systems to help with monitoring, controlling, decision-making, and administrative activities. The principal question addressed by such systems is: Are things working well? Management information systems (MIS) provide middle managers with reports on the organization’s current performance. MIS summarize and report on the company’s basic operations using data supplied by TPS. MIS serve managers primarily interested in weekly, monthly, and yearly results, although some MIS enable managers to drill down to see daily or hourly data if required. MIS generally provide answers to routine questions that have been specified in advance and have a predefined procedure for answering them. These systems generally are not flexible and have little analytical capability. Today, many of these reports are delivered online. Figure 2-10 show how a typical MIS transforms transaction-level data from inventory, production, and accounting into MIS files that are used to provide managers with reports.
An MIS generates three basic types of information: detailed, summary, and exception (see Figure 2-11). Detailed informa-tion typically records and confirms transaction processing activities. A Detailed Order Report is an example of a detail report. Summary information consolidates data into a format that an individual can review quickly and easily. To help synopsize information, a summary report typically contains totals, tables, and graphics. An Inventory Summary Report is an example of a summary report. Exception information filters data to report information that is outside of a normal condition. These conditions, called the exception criteria, define the range of what is considered normal activity or status. An example of an exception report is an Inventory Exception Report that notifies the purchasing department of items it needs to reorder. An exception report brings exceptions to the manager’s attention in an easily identifiable form.
Decision Making Information Systems
One of the main contributions of information systems has been to improve decision making, both for individuals and groups. Different management levels in an organization have different information requirements for decision support and responsibility for different types of decisions (see Figure 2-12). Decisions are classified as structured, semistructured, and unstructured.
Figure 2-11 MIS generates accurate and timely information in detailed, summary and exception forms
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Unstructured decisions are those in which the decision maker must provide judgment, evaluation, and insight to solve the problem. Each of these decisions is novel, important, and nonroutine, and there is no well-understood or agreed-on procedure for making them. Senior executives face many unstructured decision situations, such as establishing the long-term goals or deciding new markets to enter. Structured decisions, by contrast, are repetitive and routine, and they involve a definite procedure for handling them so that they do not have to be treated each time as if they were new. Operational management and employees tend to make more structured decisions. Many decisions have elements of both structured and unstructured and are called semistructured. Middle management faces more semistructured decision scenarios. In general, structured decisions are more prevalent at lower organizational levels, whereas unstructured decisions are more common at higher levels of the firm.
Decision-making and problem-solving abilities are now the most sought-after traits in up-and-coming executives, accord-ing to a recent survey of 1000 executives by Caliper Associates, as reported in The Wall Street Journal. To put this mildly, decision makers and problem solvers have limitless career potential. Decision making and problem solving in today’s electron-ic world encompass large-scale, opportunity-oriented, strategically focused solutions. The traditional “cookbook” approach to decision making simply will not work.
Business is accelerating at a breakneck pace. The more information a business acquires, the more difficult it becomes to make decisions. The amount of information people must understand to make good decisions is growing exponentially. In the past, people could rely on manual processes to make decisions because they had limited amounts of information to process. Today, with massive volumes of available information it is almost impossible for people to make decisions without the aid of information systems. High complex decisions—involving far more information than the human brain can comprehend—must be made in increasingly shorter time frames. Managers must depend on information systems to make decisions for the follow-ing reasons:
1. People need to analyze large amounts of information—Improvements in technology itself, innovations in communica-tion, and globalization have resulted in a dramatic increase in the alternatives and dimensions people need to consider when making a decision or appraising an opportunity.
2. People must make decision quickly—Time is of the essence and people simply do not have time to sift through all the information manually.
3. People must apply sophisticated analysis techniques, such as modeling and forecasting to make good decisions—Information systems substantially reduce the time required to perform these sophisticated analysis techniques.
4. People must protect the corporate asset of organizational information—Information systems offer the security required to ensure organizational information remains safe.
A model is a simplified representation or abstraction of reality. Models can calculate risks, understand uncertainty, change variables, and manipulate time. Decision-making information systems work by building models out of organizational informa-tion to lend insight into important business issues and opportunities. Three common types decision-making information
Senior
Management
Middle Management
Operational Management, Employees, Team
Decision Characteristics Examples of Decisions
Unstructured
Semistructured
Structured
• Decide entrance or exit from markets • Approve capital budget • Decide long-term goals
• Design a marketing plan • Develop a departmental budget • Design a new corporate Web site
• Determine overtime eligibility • Restock inventory • Offer credit to customers • Determine special offers to customers
Figure 2-12 Decision characteristics of key decision-making groups in a firm
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systems used in organization today include decision support systems, executive information systems, and business intelligent systems. Each system uses different models to assist in decision making, problem solving, and opportunity capturing.
Decision-support systems (DSS) support nonroutine decision making for middle management. They focus on problems that are unique and rapidly changing, for which the procedure for arriving at a solution may not be fully predefined in advance. They try to answer questions such as these: What would be the impact on production schedules if we were to double sales in next month? What would happen to our return on investment if a factory schedule were delayed for six months? Although DSS use internal information from TPS and MIS, they often bring in information from external sources, such as current stock prices or product prices of competitors. These systems use a variety of models to analyze data, or they condense large amounts of data into a form in which decision makers can analyze them. DSS are designed so that users can work with them directly; these systems explicitly include user-friendly interface. Three quantitative models often used by DSS include:
1. Sensitivity analysis is the study of the impact that changes in one or more parts of the model have on other parts of the model.
2. What-if analysis checks the impact of a change in an assumption on the proposed solution. 3. Goal-seeking analysis finds the inputs necessary to achieve a goal such as a desired level of output.
Senior managers need systems that address strategic issues and long-term trends, both in the firm and in the external envi-ronment. They are concerned with questions such as: What are the long-term industry cost trends and where does our firm fit in? What products should we be making in five years? What new acquisitions would protect us from cyclical business swings? Executive support systems (ESS) help senior management make these decisions. ESS address nonroutine decisions requiring judgment, evaluation, and insight because there is no agreed-on procedure for arriving at a solution. ESS are designed to incorporate data about external events, such as new tax laws or competitors, but they also drew summarized information from internal MIS and DSS. They filter, compress, and track critical data, displaying the data of greatest importance to senior managers. ESS present graphs and data from many 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 persona-lized business content.
EES systems help executives react to information as it becomes available and make decisions, solve problems, and change strategies daily instead of monthly. Consolidation, drill-down, and slice-and-dice are a few of the capabilities offered in most ESS.
• Consolidation involves the aggregation of information and features simple rollups to complex groupings of interrelated
Figure 2-13 Example of marketing analysis dashboard
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information. • Drill-down enables users to view details, and details of details, of information. • Slice-and-dice is the ability to look at information from different perspectives.
A common feature of an ESS is a digital dashboard. Digital dashboards integrate information from multiple components and tailor the information to individual preferences (see Figure 2-13). Digital dashboards commonly use indicators to help executives quickly identify the status of key information or critical success factors. As digital dashboards become easier to use, more executives can perform their won analysis without inundating IT personnel with questions and requests for reports.
Decision-making systems are starting to take advantage of artificial intelligence to help executives make strategic deci-sions. For example, RivalWatch, based in Santa Clara, California, offers a strategic business information service using artificial intelligence that enable organizations to track the product offerings, pricing policies, and promotions of online competitors. Clients can determine the competitors they want to watch and the specific information they wish to gather, ranging from products added, removed, or out of stock to price changes, coupons offered, and special shipping terms.
Intelligent systems are various commercial applications of artificial intelligence. Artificial intelligence (AI) simulates hu-man intelligence such as the ability to reason and learn. AI systems can learn or understand from experience, make sense of ambiguous or contradictory information, and even use reasoning to solve problems and make decisions effectively. The ultimate goal of AI is the ability to build a system that can mimic human intelligence.
AI systems dramatically increase the speed and consistency of decision making, solve problems with incomplete informa-tion, and resolve complicated issues that cannot be solved by conventional computing. There are many categories of AI systems; four of the most familiar are:
1. Expert systems are computerized advisory programs that imitate the reasoning processes of experts in solving difficult problems. Human expertise is transferred to the expert system, and users can access the expert system for specific advice. Most expert systems reflect expertise from many humans and can therefore perform better analysis than any single expert.
2. A neural network is a category of AI that attempts to emulate the way the human brain works. The types of decisions for which neural networks are most useful are those that involve pattern or image recognition because a neural network can learn from the information it processes. The finance industry is a veteran in neural network technology and has been rely-ing on various forms of it for over two decades.
3. A genetic algorithm is an artificial intelligence system that mimics the evolutionary, survival-of-the-fittest process to generate increasingly better solutions to a problem. A genetic algorithm is essentially an optimizing system: it finds the combination of inputs that gives the best outputs.
4. An intelligent agent is a special-purpose knowledge-based information system that accomplishes specific tasks on fulfills the intentions of a user. One of the simplest examples of an intelligent agent is a shopping bot, which is software that will search several retailer Web sites and provide a comparison of each retailer’s offerings including price and availability.
Business intelligence systems (BIS) contain a series of intelligent tools that enables users to consolidate, analyze, and pro-vide access to vast amounts of data. Principal tools for business intelligence systems include software for database querying and reporting, tools for multidimensional data analysis, and data mining tools. These tools enable users to analyze the data to see new patterns, relationships, and insights that are useful for guiding decision making. Business intelligence systems provide firms with the capability to amass information; develop knowledge about customers, competitors, and internal operations; and change decision-making behavior to achieve higher profitability and other business goals.
Knowledge Work Systems and Office Information Systems
Knowledge work systems (KWS) serve the information needs at the knowledge level of the organization. In general, knowledge workers are people who hold formal university degrees and who are often members of a recognized profession, like engineers, doctors, lawyers, and scientists. Their jobs consist primarily of creating new information and knowledge. KWS, such as scientific or engineering design workstations, are designed to aid knowledge worker in the creation and integration of new knowledge in the organization. For example, computer-aided design (CAD) systems automate the creation and revision of designs using sophisticated graphics software.
An office information system (OIS) is an information system that uses hardware, software, and networks to enhance workflow and facilitate communications among employees. With an office information system, also described as office automation, employees perform tasks electronically using computers and other electronic devices, instead of manually.
An office information system supports a range of business office activities such as creating and distributing graphics and documents, sending messages, scheduling, and accounting. In fact, all levels of users from executive managers to non-management employees utilize and benefit from the features of an OIS. The software an office information system uses to support these activities include word processing, desktop publishing, document imaging, spreadsheets, databases, presentation graphics, electronic calendars, e-mail, Web browsers, Web page authoring, personal information management, and groupware.
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Office information systems use communications technology such as voice mail, fax, videoconferencing, and electronic data interchange for the electronic exchange of text, graphics, audio, and video.
2.3.4 Integrated Information Systems With today's sophisticated hardware, software, and communications technologies, it often is difficult to classify a system as belonging uniquely to one of the six types of information systems or one of five functional systems discussed above. The various types of systems in the organization are related to one another. A transaction processing system is typically a major source of data for other systems, whereas the executive support system is primarily a recipient of data from lower level systems. The other types of systems may exchange data among one another as well. From the functional perspective, the accounting information system is obviously a major input source for other functional information systems.
Coordinating the many aspects of business requires a wide variety of information from many sources. Perhaps you need to make a decision about how to market a new product. You would retrieve a variety of customer data from the sales database. You would use reports from the production line and a collection of graphs created from the initial marketing surveys. You could use a spreadsheet to analyze this information along with various marketing strategies. Along the way, you would probably use accounting data to create graphs to display costs and projected profits for the various cases. Finally, you would use a word processor to create a formal report for your supervisors that describes the choices and your analysis. Integrating data is only the first step. Modern companies are increasingly based on teams, where individual employees from various departments are assigned to projects. Tools are needed to track the progress of the group and let multiple people work on the same documents at the same time, and track the history of changes.
A difficulty that arises when you are trying to integrate information is the diversity in hardware and software. For example, each software uses its own format to store data files. The problem multiplies rapidly when you consider that most of these formats change with each software revision. For a business to be successful, it needs to integrate information from all aspects of the organization. In recent years there has been a revolution in system planning and design. In this new view, managers take an integrated firm-wide view of IS investments and choices, and consider how to design and build firm-wide information systems that integrate the key business processes within a firm, and even integrate business processes across an entire industry. Organizations increasingly are consolidating their information needs into a single, integrated information system.
2.4 Enterprise-Wide and Inter-Enterprise Systems
Getting all the different kinds of systems in a company to work together is a major challenge. One solution to this problem is to implement enterprise applications, which 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 and integrating group of processes so they focus on efficient management of resources and customer service. Systems that link multiple enterprises, such as a business, and its customers, suppliers, and partners can be called inter-enterprise systems. Enterprise-wide systems are typically implemented via a corporate network; many components can take place via the Internet. Inter-enterprise systems are also being implemented via the Internet on an ad-hoc basis, supported by technologies such as Web services and XML. Some specific types of enterprise-wide and inter-enterprise systems are discussed in the following sections.
Electronic Data Interchange (EDI)
EDI refers to the transfer of data between different companies using networks, such as the Internet. EDI is used to strategically link one organization's computers to the computers of key customers or suppliers. Many companies today order sizable percentages of their supplies or raw materials through EDI. EDI facilitates the exchange of standard business documents--such as purchase orders and invoices--from one company's computer system to the system of another company. The company doing the purchasing often uses EDI to electronically track the progress of its order on the seller's computer system.
Some firms like General Motors and DuPont take EDI a step further. Large suppliers of key items no longer have to wait for purchase orders; instead, they are authorized to continually replenish these items as needed
Sales Forecasting
Operations Planning
Detailed Scheduling
Materials Requirement
Planning
Production Purchasing
Figure 2-14 Production planning process
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using selected real-time inventory information made available through General Motors's or DuPont's computers. When the suppliers see that stocks of certain materials have reached the designated reorder point, they automatically ship the goods and send corresponding electronic invoices.
In addition to traditional EDI activities, new types are expected as electronic document submission and electronic signa-tures become more acceptable as business practices.
Enterprise Systems
A large organization typically has many different kinds of information systems built around different functions, organizational levels, and business processes that cannot automatically exchange information. Enterprise systems (also known as enterprise resource planning (ERP) systems) solve this problem by collecting data from various key business processes in all business functions and storing the data in a single central data repository. This makes it possible for information that was previously fragmented in different systems to be shared across the firm and for different parts of the business to work more closely together. In this way, enterprise systems provide organizations with consistency.
Enterprise systems give companies the flexibility to respond rapidly to customer requests while producing and stocking inventory only with what is needed to fulfill existing orders. Enterprise systems provide much valuable information for improving management decision making. Their ability to increase accurate and on-time shipments, minimize costs, and increase customer satisfaction adds to firm profitability. ERP system contains three major core components that focus on internal operations:
1. Accounting and finance ERP components: Accounting and finance ERP components manage accounting data and financial processes within the enterprise with functions such as general ledger, accounts payable, accounts receivable, budgeting, and asset management. One of the most useful features in the accounting/finance component is its credit-management feature. Most organizations manage their relationships with customers by setting credit limits, or a limit on how much a customer can owe at any one time. ERP financial systems help to correlate customer orders with customer account balances determining credit availability. Another great feature is the ability to perform product profitability analy-sis. ERP financial components are the backbone behind product profitability analysis and allow companies to perform all types of advanced profitability modeling techniques.
2. Production and material management ERP components: Production and materials management ERP components handle the various aspects of production planning and execution such as demand forecasting, production scheduling, job cost accounting, and quality control. Figure 2-14 displays the typical ERP production planning process. The process begins with forecasting sales in order to plan operations. A detailed production schedule is developed if the product is produced, and a materials requirement plan is completed if the product is purchased.
3. Human Resources ERP Components: Human resources ERP components track employee information including payroll, benefits, compensation, and performance assessment, and assure compliance with the legal requirements of multiple juris-dictions and tax authorities. Human resources components even offer features that allow the organization to perform de-tailed analysis on its employees to determine such things as the identification of individuals who are likely to leave the company unless additional compensation or benefits are provided. These components can also help determine whether the most talented people are working for those business units with the highest priority—or where they would have the greatest impact on profit.
ERP systems also contain extended ERP components that meet the organizational need not covered by the core compo-nents and primarily focus on external operations. Many of them are Internet-enabled and require interaction with customers, suppliers, and business partners outside the organization. The four most common extended components are:
1. Business Intelligence: The business intelligence components typically collect information used throughout the organiza-tion, organize it, and apply analytical tools to assist managers with decisions.
2. Customer Relationship Management Components: The CRM components help an organization plan, schedule, control, and optimize the supply chain from its acquisition of raw materials to the receipt of finished goods by customers.
3. Supply Chain Management Components: An organization uses the SCM components for supply chain planning and supply chain execution.
4. E-Business Components: E-business components help conducting business on the Internet, not only buying and selling, but also serving customer s and collaborating with business partners. Two of the primary features of e-business compo-nents are e-logistics and e-procurement. E-logistics manages the transportation and storage of goods. E-procurement is the business-to-business purchase and sale of supplies and services over the Internet.
Today's ERP applications are commonly put on the Web so users inside and outside of the company can get easy access to ERP-generated data. When information from a ERP or other type of internal system is exchanged between different applica-tions and between organizations, it is called enterprise application integration (EAI). EAI tools can respond to and initiate
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events from multiple third-party applications and act as a common integration point for all of an organization's critical business processes. EAI is beginning to be viewed as a critical e-business tool, because it allows an organization to quickly extend any and all of its administrative systems to customers, suppliers, and other business partners over the Internet. There are many different ERP vendors on the market today, each offering different ERP solutions. The core ERP functions for each vendor are the same and focus on financial, accounting, sales, marketing, human resource, operations, and logistics. ERP vendors differen-tiate themselves by offering unique features and functionality. There is no guarantee of success for an ERP system. ERPs focus on how a corporation operates internally, and optimizing these operations takes significant time and energy.
Customer Relationship Management
Today, most competitors are simply a mouse-click away. The intense competition in today’s marketplace forces organization to switch from sales-focused strategies to customer-focused strategies. Organizations are quickly realizing that without customers, they simply would not exist and it is critical they do everything they can to ensure their customers’ satisfaction. Customer relationship management (CRM) involves managing all aspects of a customer’s relationship with an organization to increase customer loyalty and retention and an organization’s profitability. CRM allows an organization to gain insights into customer’s shopping and buying behaviors. CRM is a business philosophy based on the premise that those organizations that understand the needs of individual customers are best positioned to achieve sustainable competitive advantage in the future. An organization can find its most valuable customers by using a formula that industry insiders call RFM—Recency, Frequency, and Monetary value. An organization must track:
• How recently a customer purchased items (recency) • How frequently a customer purchases items (frequency) • How much a customer spends on each purchase (monetary value)
Once a company has gathered this initial CRM information, it can compile it to identify patterns and create marketing campaigns, sales promotions, and services to increase business. Figure 2-15 provides an overview of a typical CRM system. Customer contact an organization through various means including call centers, Web access, e-mail, faxes, and direct sales. The CRM system tracks every communication between the customer and the organization and provides access to CRM information across different systems from accounting to order fulfillment. Understanding all customer communications allows the organization communicate effectively with each customer. It gives the organization a detailed understanding of each customer’s products and services regardless of the customer’s preferred communication channel. A customer service representative can easily view detailed account information and history through a CRM system when providing information to a customer such as expected delivery dates, complementary product information, and customer payment and billing information.
The two primary components of a CRM strategy are operational CRM and analytical CRM, as shown in Figure 2-16. Op-erational CRM supports traditional transactional processing for day-to-day front-office operations or systems that deal directly with the customers. Analytical CRM supports back-office operations and strategic analysis and includes all systems that do not deal directly with the customers.
Customer Relationship Management System
Accounting System
Order Fulfillment
System
Inventory System
Customer Service System
Figure 2-15 An overview of customer relationship management
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Companies are no longer trying to sell one product to as many customers as possible; instead, they are trying to sell one customer as many products as possible. The three primary operational CRM technologies a marketing department can imple-ment to increase customer are:
1. List Generator: List generations compile customer information from a variety of sources and segment the information for different marketing campaigns. Information sources include Web site visits, Web site questionnaires, online and off-line surveys, flyers, toll-free numbers, current customer lists, and so on. After compiling the customer list, an organization can use criteria to filter and sort the list for potential customers.
2. Campaign Management: Campaign management systems guide users through marketing campaigns performing such tasks as campaign definition, planning, scheduling, segmentation, and success analysis. These systems can even calculate quantifiable results for return on investment (ROI) for each campaign and track the results in order to analyze and under-stand how the company can fine-tune future campaigns.
3. Cross-Selling and Up-Selling: Cross selling is selling additional products or services to a customer. Up-selling is increasing the value of the sale. CRM systems offer marketing departments all kinds of information about their customers and their products, which can help them identify cross-selling and up-selling marketing campaigns.
Unlike operational CRM that automates customer service and sales forces with the aim of enhancing customer transactions, analytical CRM solutions are designed to dig deep into a company’s historical customer information and expose patterns of behavior on which a company can capitalize. Analytical CRM is primarily used to enhance and support decision making and works by identifying patterns in customer information collected from the various operational CRM systems.
For many organizations, the power of analytical CRM solutions provides tremendous managerial opportunities. Depending on the specific solution, analytical CRM tools can slice-and-dice customer information to create made-to-order views of customer value, spending, product affinities, percentile profiles, and segmentations. Modeling tools can identify opportunities for cross-selling, up-selling, and expanding customer relationships. The information produced by analytical CRM solutions can help companies make decisions about how to handle customers based on the value of each and every one. Analytical CRM can help revel information about which customers are worth investing in, which should be serviced at an average level, and which should not be invested in at all.
Analytical CRM relies heavily on data warehousing technologies and business intelligence to glean insights into customer behavior. These systems quickly aggregate, analyze, and disseminate customer information throughout an organization. Data warehouses are providing businesses with information about their customers and products that was previously impossible to locate, and the resulting payback can be tremendous. Organizations are also relying on business intelligence to provide them with hard facts that can determine everything from which type of marketing and sales campaign to launch, to which customer s to target, at what time. Using CRM along with business intelligence allows organizations to make better, more informed decisions and to reap amazing unforeseen rewards.
CRM solutions make organizational processes more intelligent. Organizations achieve this by understanding customer behavior and preferences, then realigning product and service offerings and related communications to make sure they are synchronized with customer needs and preferences. CRM is critical to business success. CRM is the key competitive strategy to stay focused on customer needs and to integrate a customer-centric approach throughout an organization. CRM can acquire enterprise-wide knowledge about customers and improve the business processes that deliver value to an organization’s
Enterprise CRM
Front Office: Operational CRM
Sales systems
Marketing systems
Customer service systems
Back Office: Analytical CRM
Data mining
Data warehouse
Figure 2-16 Operational CRM and analytical CRM
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customers, suppliers, and employees. Using the analytical capabilities of CRM can help a company anticipate customer needs and proactively serve customers in ways that build relationships, create loyalty, and enhance bottom lines.
As technology advances (Internet, intranet, extranet, wireless), CRM will remain a major strategic focus for companies, particularly in industries whose product is difficult to differentiate. CRM is an alternative way to pursue a differentiation strategy with a nondifferentiable product. It is important to realize the CRM is not just a technology, but also a strategy that an organization must embrace on an enterprise level. Although there are many technical components of CRM, it is actually a process and business goal simply enhanced by technology. Implementing a CRM system can help an organization identify customers and design specific marketing campaigns tailored to each customer, thereby increasing customer spending. A CRM system also allows an organization to treat customers as individuals, gaining important insights into their buying preferences and behaviors and leading to increased sales, greater profitability, and higher rates of customer loyalty.
Supply Chain Management
Companies that excel in supply chain operations perform better in almost every financial measure of success. “The basis of competition for winning companies in today’s economy is supply chain superiority,” said Kevin O’Marah, vice president of research at Boston-based AMR Research Inc. “These companies understand that value chain performance translates to productivity and market-share leadership. They also know that supply chain leadership means more than low costs and efficiency: it requires a superior ability to shape and respond to shifts in demand with innovative products and services.” A supply chain consists of all parties involved, directly or indirectly, in the procurement of a product or raw material. Supply chain visibility is the ability to view all areas and down the supply chain. To make a supply chain work most effective-ly, organizations must create visibility in real time. Today, information technology allows additional visibility in the supply chain. Electronic information flows allow managers to view their suppliers’ and customers’ supply chains. Some organizations have completely changed the dynamics of their industries because of the competitive advantage gained from high visibility in the supply chain. Supply chain management (SCM) involves the management of information flows between and among stages in a supply chain to maximize total supply chain effectiveness and profitability. Today’s supply chain is a complex web of suppliers, assemblers, logistic firms, sales/marketing channels, and other business partners linked primarily through information networks and contractual relationships. The supply chain has three main links, as show in Figure2-17:
1. Materials flow from suppliers and their upstream suppliers at all levels.
2. Transformation of materials into semi-finished and finished products
3. Distribution of products to customers and down-stream customers at all levels.
SCM is becoming increasingly important in creating organizational efficiencies and competitive advantages. Organizations must embrace technologies that can effectively manage and oversee their supply chains. The four basic components of supply chain management include:
1. Supply chain strategy—the strategy for managing all the resources required to meet customer demand for all products and services.
2. Supply chain partners—the partners chosen to deliver finished products, raw materials, and services including pricing, delivery, and payment processes along with partner relationship monitoring metrics
3. Supply chain operation—the schedule for production activities including testing, packaging, and prepara-tion for delivery. Measurements for this component include productivity and quality.
4. Supply chain logistics—the product delivery processes and elements including orders, warehouses, carriers, defective product returns, and invoicing.
Suppliers
Suppliers’ suppliers
Manufacturer
Distributors
Retailers
Customers
Customers’ customers
Upstream
Downstream
Figure 2-17 A typical supply chain
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Dozens of steps are required to achieve and carry out each of the above components. SCM software can enable an organi-zation to generate efficiencies within these steps by automating and improving the information flows throughout and among the different supply chain components.
Information technology’s primary role in SCM is creating the integrated process and information linkages between func-tions within a firm and between firms, which allow the smooth, synchronized flow of both information and product between customers, suppliers, and logistic providers across the supply chain. Information technology integrates planning, decision-making processes, business operating processes, and information sharing for business performance management.
SCM software can be broken down into (1) supply chain planning and (2) supply chain execution. Both increase a compa-ny’s ability to compete. Supply chain planning (SCP) software uses advanced mathematical algorithms to improve the flow and efficiency of the supply chain while reducing inventory. An organization’s supply chain encompasses the facilities where raw materials, intermediate products, and finished goods are acquired, transformed, stored, and sold. Supply chain execution (SCE) software automates the different steps and stages of the supply chain.
The functionality in supply chain management systems is becoming more and more sophisticated as supply chain man-agement matures. The next stages of SCM will incorporate more functions such as marketing, customer service, and product development. This will be achieved through more advanced communication networks, adoption of more user-friendly decision support systems, and availability of shared information to all participants in the supply chain. SCM is an ongoing development as technology makes it possible to acquire information ever more accurately and frequently from all over the world, and introduces new tools to aid in the analytical processes that deal with the supply chain’s growing complexity.
New technologies such as radio frequency identification (EFID) technology are also going to improve the supply chain management. RFID will become an effective tool for tracking and monitoring inventory movement in a rel-time SCM envi-ronment. The real-time information will provide managers with an instant and accurate view of inventories within the supply chain.
Wal_Mart and Procter & Gamble (P&G) implemented a successful SCM system, which linked Wal-Mart’s distribution centers directly to P&G’s manufacturing centers. Every time a Wal-Mart customer purchases a P&G product, the system sends a message directly to the factory alerting P&G to restock the product. The system also sends an automatic alert to P&G whenever a product is running low at one of Wal-Mart’s distribution centers. This real-time information allows P&G to produce and deliver products to Wal-Mart without having to maintain large inventories in its warehouses. The SCM system saves time, reduces inventory, and decreases order-processing costs for P&G, which P&G passes on to Wal-Mart in the form of discounted price.
Collaboration Systems
To be successful, an organization often will create and utilize teams, partnerships, and alliances because the expertise needed is beyond the scope of a single individual or organization. These teams, partnerships, and alliances can be formed internally among a company’s employees or externally with other organizations. The core competency of an organization is its key strength, a business function that it does better than any of its competitors. A core competency strategy is one in which an organization chooses to focus specifically on what it does best (its core competency) and forms partnerships and alliances with other specialist organizations to handle nonstrategic business processes. Strategic alliances enable businesses to gain competi-tive advantages through access to a partner’s resources, including markets, technologies, and people. Information technology makes such business partnership and alliances easier to establish and manage.
A collaboration system is an IT-based set of tools that supports the work of teams by facilitating the sharing and flow of information. Collaboration solves specific business tasks such as telecommuting, online meetings, deploying applications, and remote project and sales management. Collaboration systems allow people, teams, and organizations to leverage and build upon the ideas and talents of staff, suppliers, customers, and business partners. Collaboration systems fall into one of two categories:
1. Unstructured collaboration (or information collaboration) includes document exchange, shared whiteboards, discussion forums, and e-mail. These functions can improve personal productivity, reducing the time spent searching for information or chasing answers.
2. Structured collaboration (or process collaboration) involves shared participation in business processes, such as workflow, in which knowledge is hard-coded as rules. This is beneficial in terms of improving automation and the routing of infor-mation.
Teams of employees who work together from any different locations around the world need tools to support workgroup collaboration. Some of collaboration and communication systems include Internet-based collaboration environments, e-mail and instant messaging, cell phones and wireless handhelds, social networking, wikis, and virtual worlds. These tools provide storage space for team documents, a space separate from corporate e-mail for team communications, group calendars, and an audio-visual environment where members can “meet” in a live video conference. Groupware products such as IBM’s Lotus
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Notes Collaboration Suite and Microsoft Office Groove provide these capabilities. In the past, these collaboration and commu-nication systems were not considered an essential part of the information systems filed. Today, this has changed, and our view of information systems is extended to include these vital management tools.
Knowledge Management Systems
Knowledge can be a real competitive advantage for an organization. Knowledge management (KM) involves capturing, classifying, evaluating, retrieving, and sharing information assets in a way that provides context for effective decisions and actions. Information technology can distribute an organization’s knowledge base by interconnecting people and digitally gathering their expertise. The primary objective of knowledge management is to be sure that a company’s knowledge of facts, sources of information and solutions are readily available to all employees whenever it is needed. A knowledge management system (KMS) supports the capturing, organization, and dissemination of knowledge (i.e., know-how) throughout an organiza-tion. It is up to the organization to determine what information qualifies as knowledge.
In general, intellectual and knowledge-based assets fall into one of two categories: explicit or tacit. As a rule, explicit knowledge consists of anything that can be documented, archived, and codified, often with the help of IT. Examples of explicit knowledge are assets such as patents, trademarks, business plans, marketing research, and customer lists. Tacit knowledge is the knowledge contained in people’s heads. The challenge inherent in tacit knowledge is figuring out how to recognize, generate, share, and manage knowledge that resides in people’s heads.
KM is not a purely technology-based concept. Organizations that implement a centralized database system, electronic message board, Web portal, or any other collaborative tool in the hope that they have established a KMS are wasting both their time and money. However, although tools don’t make a KMS, such a system does need tools, from standard, off-the-shelf email packages to sophisticated collaboration tools designed specifically to support community building and identity.
Content Management Systems
A content management system provides tools to manage the creation, storage, editing, and publication of information in a collaborative environment. Three primary types of content management system include:
1. Document management system (DMS): DMS supports the electronic capturing, storage, distribution, archiving, and accessing of documents. A DMS provides a document repository with information about other information. The system tracks the editorial history of each document and its relationships with other documents. A variety of search and navigation methods are available to make document retrieval easy.
2. Digital asset management system (DAM): DAM generally works with binary rather than text files. DAM places emphasis on allowing file manipulation and conversion, for example, converting GIF files to JPEG.
3. Web content management system (WCM): WCM adds an additional layer to document and digital asset management that enables publishing content both to intranets and to public Web sites. In addition to maintaining the content itself, WCM system often integrate content with online processes like e-business systems.
Ubiquitous Computing
Ubiquitous computing is the emerging computing paradigm for the next decades. Many see ubiquitous computing as the next wave of information and communications technology to follow the era of the internetworked personal computer. What differentiates ubiquitous computing from previous paradigms is the fact that computation and communications capability is embedded into objects and locations. In this way, it becomes possible to interact freely with digital resources at any time and everywhere rather than only through purpose-build information processing devices. According to the ubiquitous computing vision, access to information systems deeply embedded into the environment is mediated by objects or simply through the observation of users and the reflexive interpretation of their intentions by the system. Thus, computing devices become invisible and interaction is directly with the human sensory and affector systems.
At the core of this computational paradigm are mechanisms that make the physical and the digital worlds intimately related, and indeed to mirror each other. Every object in the world we live in has a digital representation that follows the situation of its real self. For example, the supermarket shelf that is aware of the quantity, the price, and the brand of the cans of cola it holds. This unique linking of physical world and digital world opens up numerous possibilities for new computing interactions.
Building ubiquitous computing systems has become possible because of several recent technological breakthroughs, in-cluding the miniaturization of electronics components, the massive reduction in their production and operation costs, and their ability to communicate untethered over a global ubiquitous networks, often without the need for wires. These new capabilities are complemented by mature techniques developed in more traditional areas of computing, notably engineering mobile software systems, autonomic systems and network management, low-power wireless, machine learning, and information management. Ubiquitous computing combines these techniques into systems that provide context-awareness and new interac-tion modalities often referred to as ambient intelligence.
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This new computing paradigm has considerable implications for business. Perhaps the area where most of the benefits have been observed is in forming dynamic relationships with trading partners as witnessed in marketplaces and integrated supply chains. Despite the benefits of the networked business model there are still significant discontinuities in the information flows within and across businesses that prevent a fully integrated network model. To a great extent, such data fault lines are due to the separation of digital and physical artifacts and thus the need for manual data entry, which is prone to error and consumes considerable resources at high cost. Ubiquitous computing, then, offers the opportunity to bridge this gap by providing unique information sources. For example, automatic identification of product items can fuel production planning applications: stocking and inventory control is automated and does not require human intervention since assets identify themselves and their location. Subsequently, this information can be used to optimize enterprise resource planning. Moreover, collected data can move between trading partners mirroring the flow of products, which would allow for collaborative planning and forecasting. This physical/digital integration can transform the relationship between business and customer, including marketing, after sales support, replenishment, and payment options.
Today, the best established use of ubiquitous computing is in supply chain applications, which benefit from the wider availability at very low cost of passive Radio Frequency Identification (RFID) tags. RFID tags are computational devices that are small enough to be embedded in objects and living organisms can transmit the identity of the object. A typical RFID tag consists of a microchip—which contains the object identifier and other associated information but can also carry out simple computational tasks—attached to a radio antenna. Data stored on an RFID tag require a reader to be retrieved. A reader is a device that employs an antenna to emit energy over radio waves and then receive signals back from the tag. When an RFID tag comes within the range of the reader, the tag is activated and starts sending data. The reader captures these data, decodes them, and sends them back over a wired or wireless network to a host computer for further processing (see Figure 2-18). Both RFID tags and antennas come in a variety of shapes and sizes.
Wireless sensor networks (WSN) are networks of interconnected wireless devices that are embedded into the physical environment to provide measurements of many points over large spaces. These devices have built-in processing, storage, and radio frequency sensors and antennas. They are linked into an interconnected network that routes the data they capture to a computer for analysis. These networks range from hundreds to thousands of nodes. Because wireless sensor devices are placed in the field for years at time without any maintenance or human intervention, they must have very low power requirements and batteries capable of lasting for years. WSNs are valuable in areas such as monitoring environmental changes; monitoring traffic or military activity; protecting property; efficiently operating and managing machinery and vehicles; establishing security perimeters; monitoring supply chain management; and detecting chemical, biological, and radiological material.
Ubiquitous computing technologies offer companies the opportunity to improve processes, to enhance products by making them smart, and to develop new services. As ubiquitous computing technologies become mature, commercial applications gradually become feasible, and the applications based on these technologies become creating value for businesses.
RFID tags
RFID reader RFID reader RFID tags
Host computer
Figure 2-18 RFID tags and readers
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