Section 1.

1: Bullet Text Study Guide The Role of Information Systems in Business Today

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Information technology and systems have revolutionized firms and industries, becoming the largest component of capital investment in the U.S. and many industrialized societies. Investment in information technology accounts for approximately 50 percent of all capital invested in the United States. Figure 1-1

FIGURE 1-1 INFORMATION TECHNOLOGY CAPITAL INVESTMENT Information technology capital investment, defined as hardware, software, and communications equipment, grew from 34% to 50% between 1980 and 2004. Source: Based on data in U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts, 2006. Information systems are transforming business and the visible results of this include the increased use of cell phones and wireless telecommunications devices, a massive shift toward online news and information, booming e-commerce and Internet advertising, and new federal security and accounting laws that address issues raised by the exponential growth of digital information. The Internet has also drastically reduced the costs of businesses operating on a global scale.

These changes have led to the emergence of the digital firm, a firm in which: Most of the firm's significant business relationships with customers, suppliers, and employees are digitally enabled and mediated. Core business processes, or logically related business tasks, are accomplished through digital networks. Key corporate assets (intellectual property, core competencies, and financial and human assets) are managed through digital means Business responses to changes in their environment are enhanced through digital communications, allowing for time shifting (business being conducted 24x7) and space shifting (business being conducted globally or beyond traditional geographic boundaries). Information systems are essential for conducting day-to-day business in the U.S. and most other advanced countries, as well as achieving strategic business objectives. Some firms, such as Amazon and E*Trade, would be nonexistent without information systems. Some service industries, such as finance, insurance, and real estate industries, could not operate without information systems. The ability of a firm to use IT is becoming intertwined with the firm's ability to implement corporate strategy. Figure 1-2

FIGURE 1-2 THE INTERDEPENDENCE BETWEEN ORGANIZATIONS AND INFORMATION SYSTEMS There is a growing interdependence between a firms information systems and its business capabilities. Changes in strategy, rules, and business processes increasingly require changes

in hardware, software, databases, and telecommunications. Often, what the organization would like to do depends on what its systems will permit it to do. Business firms invest heavily in information systems to achieve six strategic business objectives: 1. Operational excellence: Efficiency, productivity, and improved changes in business practices and management behavior 2. New products, services, and business models: A business model describes how a company produces, delivers, and sells a product or service to create wealth. Information systems and technologies create opportunities for products, services, and new ways to engage in business. 3. Customer and supplier intimacy: Improved communication with and service to customers raises revenues, and improved communication with suppliers lowers costs. 4. Improved decision making: Without accurate and timely information, business managers must make decisions based on forecasts, best guesses, and luck, a process that results in over and under-production of goods, raising costs, and the loss of customers. 5. Competitive advantage: Implementing effective and efficient information systems can allow a company to charge less for superior products, adding up to higher sales and profits than their competitors. 6. Survival: Information systems can also be a necessity of doing business. A necessity may be driven by industry-level changes, as in the implementation of ATMs in the retail banking industry. A necessity may also be driven by governmental regulations, such as federal or state statutes requiring a business to retain data and report specific information. Section 1.2: Bullet Text Study Guide Perspectives on Information Systems An information system is a set of interrelated components that collect or retrieve, process, store, and distribute information to support decision making and control in an organization. Information systems can also be used to analyze problems, visualize complex subjects, and create new products. Information is data, or raw facts, shaped into useful form for humans. Figure 1-3
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FIGURE 1-3 DATA AND INFORMATION Raw data from a supermarket checkout counter can be processed and organized to produce meaningful information, such as the total unit sales of dish detergent or the total sales revenue from dish detergent for a specific store or sales territory. Input, processing, and output are the three activities in an information system that produce the information an organization needs. Input captures or collects raw data from within the organization or from its external environment. Processing converts this raw input into a meaningful form. Output transfers the processed information to the people who will use it or to the activities for which it will be used. Information systems also require feedback, which is output that is returned to appropriate members of the organization to help them evaluate or correct the input stage. Figure 1-4

FIGURE 1-4 FUNCTIONS OF AN INFORMATION SYSTEM An information system contains information about an organization and its surrounding environment. Three basic activitiesinput, processing, and outputproduce the information organizations need. Feedback is output returned to appropriate people or activities in the organization to evaluate and refine the input. Environmental actors, such as customers, suppliers, competitors, stockholders, and regulatory agencies, interact with the organization and its information systems. It is important to distinguish information systems, which are designed to produce information and solve organizational problems, from the computer technology and software that is typically used to create and manage information systems. Computer literacy focuses primarily on knowledge of information technology. Information systems literacy, the understanding of information systems, includes a behavioral and technical approach to understanding the broader organization, management, and information technology dimension of systems and their power to provide solutions. The field of management information systems (MIS) tries to achieve this broader information systems literacy. Figure 1-5

FIGURE 1-5 INFORMATION SYSTEMS ARE MORE THAN COMPUTERS Using information systems effectively requires an understanding of the organization, management, and information technology shaping the systems. An information system creates value for the firm as an organizational and management solution to challenges posed by the environment. The dimensions of information systems include organizations, management, and information technology. The key elements of an organization are its people, structure, business processes, politics, and culture. An organization coordinates work through a structured hierarchy and formal standard operating procedures. Managerial, professional, and technical employees form the upper levels of the organization's hierarchy while lower levels consist of operational personnel. Figure 1-6

FIGURE 1-6 LEVELS IN A FIRM Business organizations are hierarchies consisting of three principal levels: senior management, middle management, and operational management. Information systems serve each of these levels. Scientists and knowledge workers often work with middle management. Senior management makes long-range strategic decisions and ensures the firm's financial performance. Middle management carries out the plans of senior management and operational management monitors the firm's daily activities. Knowledge workers such as engineers and scientists design products and create and distribute new knowledge for the organization. Data workers such as secretaries process the organization's paperwork. Production or service workers produce the products or services. Experts are employed for the major business functions: the specialized tasks performed by organizations, which consist of sales and marketing, manufacturing and production, finance and accounting, and human resources. An organization coordinates work through its hierarchy and business processes. These processes may be documented and formal, or informal, unwritten work processes, such as how to handle a telephone call. Each organization has a unique culture, or fundamental set of assumptions, values, and ways of doing things, that are accepted by most of its members. Parts of an organization's culture can be found in its information systems. For example, UPS's organizational focus on customer service can be found in the package tracking system available to customers. Information systems may also reflect the organizational politics or conflicts that result from differing views and opinions in an organization. Information systems are also a key component in the ability of management to make sense of the challenges facing a company and in management's ability to create new products and services, manage the company, and even re-create the organization from time to time.

Information technology is one of the many tools used by management to cope with change. A firm's information technology (IT) infrastructure is a technology platform or foundation on which a firm can build its information systems. IT infrastructure consists of: Computer hardware: The physical equipment and computing devices used for input, storage, processing, output, and telecommunications Computer software: The detailed, preprogrammed instructions that control and coordinate the computer hardware components Data management software: The software governing the organization of data on physical storage media Networking and telecommunications technology: Hardware and software used to link the various pieces of hardware and transfer data from one physical location to another; a computer network links two or more computers together to share data, such as files, images, sounds, video, or share resources, such as a printer. The Internet is the world's largest and most widely used network. The Internet is a global network that uses universal technology standards to connect many private and public networks. The universal standards and technologies used in the Internet are also used in systems and networks within the firm. Intranets are internal corporate networks based on Internet technology, and extranets are corporate networks extended to authorized users outside of the firm. The World Wide Web is a service provided by the Internet that uses universally accepted standards for storing, retrieving, formatting, and displaying information in a page format on the Internet. Web pages contain text, graphics, animations, sound, and video and are linked to other Web pages. The Web can serve as the foundation for new kinds of information systems such as UPS's Web-based package tracking system From a business perspective, an information system is an important instrument for creating value for the firm. Information systems enable the firm to increase its revenue or decrease its costs by providing information that helps managers make better decisions or that improves the execution of business processes. Every business has an information value chain in which raw data is systematically acquired and then transformed through various stages that add value to that information. The value of an information system to a business, as well as the decision to invest in any new information system, is, in large part, determined by the extent to which the system will lead to better management decisions, more efficient business processes, and higher firm profitability. Figure 1-7

FIGURE 1-7 THE BUSINESS INFORMATION VALUE CHAIN From a business perspective, information systems are part of a series of value-adding activities for acquiring, transforming, and distributing information that managers can use to improve decision making, enhance organizational performance, and ultimately increase firm profitability. The business perspective calls attention to the organizational and managerial nature of information systems. An information system represents an organizational and management solution based on information technology to a challenge or problem posed by the environment. Some firms achieve better results from their information systems than others. Studies of returns from information technology investments show that there is considerable variation in the returns firms receive. Reasons for lower return on investment include failure to adopt the right business model that suits the new technology or seeking to preserve an old business model that is doomed by new technology. Figure 1-8

FIGURE 1-8 VARIATION IN RETURNS ON INFORMATION TECHNOLOGY INVESTMENT Although, on average, investments in information technology produce returns far above those returned by other investments, there is considerable variation across firms. Source: Erik Brynjolfsson and Lorin M. Hitt, "Beyond Computation: Information Technology, Organizational Transformation and Business Performance." Journal of Economic Perspectives14, no. 4 (Fall 2000). Information technology investments cannot make organizations and managers more effective unless they are accompanied by complementary assets: assets required to derive value from a primary investment. For instance, to realize value from automobiles requires complementary investments in highways, roads, gasoline stations, repair facilities, and a legal regulatory structure to set standards and control drivers. Complementary investments include: Organizational assets: These include a supportive business culture that values efficiency and effectiveness, an appropriate business model, efficient business processes, decentralization of authority, highly distributed decision rights, and a strong information system (IS) development team. Managerial assets: These include strong senior management support for change, incentive systems that monitor and reward individual innovation, an emphasis on teamwork and collaboration, training programs, and a management culture that values flexibility and knowledge. Social assets: These are not made by the firm but by the society at large, other firms, governments, and other key market actors, such as the Internet, educational systems, network and computing standards, regulations and laws, and the presence of technology

and service firms. Research indicates that firms that support their technology investments with investments in complementary assets, such as new business processes or training, receive superior returns. These investments in organization and management are also known as organizational and management capital. Section 1.3: Bullet Text Study Guide Contemporary Approaches to Information Systems Information systems are sociotechnical systems. Although they are composed of machines, devices, and "hard" physical technology, they require substantial social, organizational, and intellectual investments to make them work properly. Since problems with information systemsand their solutionsare rarely all technical or behavioral, a multidisciplinary approach is needed. Figure 1-9 Chapter Contents

FIGURE 1-9 CONTEMPORARY APPROACHES TO INFORMATION SYSTEMS The study of information systems deals with issues and insights contributed from technical and behavioral disciplines. The technical approach emphasizes mathematically based, normative models to study information systems, as well as the physical technology and formal capabilities of these systems. The behavioral approach, a growing part of the information systems field, does not ignore technology, but tends to focus on non-technical solutions concentrating instead on changes in attitudes, management and organizational policy, and behavior.

MIS combines the work of computer science, management science, and operations research with a practical orientation toward developing system solutions to real-world problems and managing information technology resources. It is also concerned with behavioral issues surrounding the development, use, and impact of information systems, which are typically discussed in the fields of sociology, economics, and psychology In the sociotechnical view of systems, optimal organizational performance is achieved by jointly optimizing both the social and technical systems used in production. Adopting a sociotechnical systems perspective helps to avoid a purely technological approach to information systems. Technology must be changed and designed, sometimes even "de-optimized," to fit organizational and individual needs. Organizations and individuals must also be changed through training, learning, and planned organizational change to allow technology to operate and prosper. Figure 1-10

FIGURE 1-10 A SOCIOTECHNICAL PERSPECTIVE ON INFORMATION SYSTEMS In a sociotechnical perspective, the performance of a system is optimized when both the technology and the organization mutually adjust to one another until a satisfactory fit is obtained. Section 2.1: Bullet Text Study Guide Business Processes and Information Systems Business processes refer to the manner in which work is organized, coordinated, and focused to produce a valuable product or service. Business processes also refer to the unique ways in which organizations coordinate work, information, and knowledge, and the ways in which
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management chooses to coordinate work. Every business can be seen as a collection of business processes. To a large extent, the performance of a business firm depends on how well its business processes are designed and coordinated. Many business processes are tied to a specific functional area, such as sales and marketing, while others cross many different functional areas and require coordination across departments. Figure 2-1

FIGURE 2-1 THE ORDER FULFILLMENT PROCESS Fulfilling a customer order involves a complex set of steps that requires the close coordination of the sales, accounting, and manufacturing functions. Information systems enhance business processes in primarily two ways: 1. Increasing the efficiency of existing processes 2. Enabling entirely new processes that are capable of transforming the business Section 2.2: Bullet Text Study Guide Types of Business Information Systems No single system can provide all the information an organization needs. Even small firms have a collection of different systems: e-mail systems, sales tracking systems, etc. Different systems can be described through:
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A functional perspective: Identifying systems by their major business function A constituency perspective: Identifying systems in terms of the major organizational groups that they serve There are four main types of information systems that serve different functional systems: 1. Sales and marketing information systems help the firm with marketing business processes (identifying customers for the firm's products or services, developing products and services to meet their needs, promoting products and services) and sales processes (selling the products and services, taking orders, contacting customers, and providing customer support). Figure 2-2

FIGURE 2-2 EXAMPLE OF A SALES INFORMATION SYSTEM This system captures sales data at the moment the sale takes place to help the business monitor sales transactions and to provide information to help management analyze sales trends and the effectiveness of marketing campaigns.

2. Manufacturing and production information systems deal with the planning, development, and production of products and services, and controlling the flow of production. Figure 2-3

FIGURE 2-3 OVERVIEW OF AN INVENTORY SYSTEM This system provides information about the number of items available in inventory to support manufacturing and production activities. 3. Finance and accounting information systems keep track of the firm's financial assets and fund flows. Figure 2-4

FIGURE 2-4 AN ACCOUNTS RECEIVABLE SYSTEM An accounts receivable system tracks and stores important customer data, such as payment history, credit rating, and billing history. 4. Human resources information systems maintain employee records, track employee skills, job performance and training, and support planning for employee compensation and career development. Figure 2-5

FIGURE 2-5 AN EMPLOYEE RECORD KEEPING SYSTEM This system maintains data on the firms employees to support the human resources function. There are four main categories of systems from a constituency perspective. 1. Transaction processing systems (TPS) are basic business systems that serve the operational level of the organization by recording the daily routine transactions required to conduct business, such as payroll and sales receipts. 2. Management information systems (MIS) serve middle managers' interests by providing current and historical performance information to aid in planning, controlling, and decision making at the management level. MIS typically compress TPS data to present regular reports on the company's basic operations. Figure 2-6, Figure 2-7

FIGURE 2-6 HOW MANAGEMENT INFORMATION SYSTEMS OBTAIN THEIR DATA FROM THE ORGANIZATIONS TPS In the system illustrated by this diagram, three TPS supply summarized transaction data to the MIS reporting system at the end of the time period. Managers gain access to the organizational data through the MIS, which provides them with the appropriate reports.

FIGURE 2-7 SAMPLE MIS REPORT This report showing summarized annual sales data was produced by the MIS in Figure 2-6.

3. Decision support systems (DSS), or business intelligence systems, help managers with non-routine decisions that are unique, rapidly changing, and not easily specified in advance. DSS are more analytical than MIS, using a variety of models to analyze internal and external data or condense large amounts of data for analysis. Figure 2-8

FIGURE 2-8 VOYAGE-ESTIMATING DECISION-SUPPORT SYSTEM This DSS operates on a powerful PC. It is used daily by managers who must develop bids on shipping contracts. 4. Executive support systems (ESS) provide a generalized computing and communications environment that help senior managers address strategic issues and identify long-term trends in the firm and its environment. ESS address nonroutine decisions requiring judgment, evaluation, and insight because there is no agreed-on procedure for arriving at a solution. ESS present graphs and data from many internal and external sources through an interface that is easy for senior managers to use. Often the information is delivered to senior executives through a portal, which uses a Web interface to present integrated personalized business content. Figure 2-9

FIGURE 2-9 MODEL OF AN EXECUTIVE SUPPORT SYSTEM This system pools data from diverse internal and external sources and makes them available to executives in an easy-to-use form. Ideally, these constituency-based systems are interrelated. TPS are typically a major source of data for other systems, whereas ESS are primarily a recipient of data from lower-level systems and external sources. Figure 2-10

FIGURE 2-10 INTERRELATIONSHIPS AMONG SYSTEMS The various types of systems in the organization have interdependencies. TPS are major producers of information that is required by many other systems in the firm, which, in turn, produce information for other systems. These different types of systems are loosely coupled in most business firms, but increasingly firms are using new technologies to integrate information that resides in many different systems. Section 2.3: Bullet Text Study Guide Systems that Span the Enterprise Enterprise applications are systems that span functional areas, focus on executing business processes across the business firm, and include all levels of management. Enterprise applications help businesses become more flexible and productive by coordinating their business processes more closely. There are four major enterprise applications: 1. Enterprise systems 2. Supply chain management systems 3. Customer relationship management systems 4. Knowledge management systems Each of these enterprise applications integrates a related set of functions and business processes to enhance the performance of the organization as a whole. Chapter Contents

Figure 2-11

FIGURE 2-11 ENTERPRISE APPLICATION ARCHITECTURE Enterprise applications automate processes that span multiple business functions and organizational levels and may extend outside the organization. Enterprise systems, or enterprise resource planning (ERP) systems, model and automate many business processes, such as filling an order or scheduling a shipment, with the goal of integrating information across the entire company and eliminating complex, expensive links between computer systems in different areas of the business. Information that was previously fragmented in different systems can seamlessly flow throughout the organization so that it can be shared by business processes in manufacturing, accounting, human resources, and other areas of the firm. Discrete business processes from sales, production, finance, and logistics can be integrated into company-wide business processes that flow across organizational levels and functions.

The enterprise system collects data from various key business processes and stores the data in a single comprehensive data repository where they can be used by other parts of the business. Managers emerge with more precise and timely information for coordinating the daily operations of the business and a firm-wide view of business processes and information flows. Figure 2-12

FIGURE 2-12 ENTERPRISE SYSTEMS Enterprise systems integrate the key business processes of an entire firm into a single software system that enables information to flow seamlessly throughout the organization. These systems focus primarily on internal processes but may include transactions with customers and vendors. Supply chain management (SCM) systems help businesses manage relationships with their suppliers. These systems provide information to help suppliers, purchasing firms, distributors, and logistics companies share information about orders, production, inventory levels, and delivery of products and services so that they can source, produce, and deliver goods and services efficiently. SCM systems increase firm profitability by lowering the costs of moving and making products and by enabling managers to make better decisions about how to organize and schedule sourcing, production, and distribution. Supply chain management systems are one type of interorganizational system because they automate the flow of information across organizational boundaries. Firms that skillfully manage their supply chains get the right amount of products from their source to point of

consumption with the least amount of time and the lowest cost. Figure 2-13

FIGURE 2-13 EXAMPLE OF A SUPPLY CHAIN MANAGEMENT SYSTEM Customer orders, shipping notifications, optimized shipping plans, and other supply chain information flow among Haworths Warehouse Management System (WMS), Transportation Management System (TMS), and its back-end corporate systems. Customer relationship management (CRM) systems focus on coordinating the business processes surrounding a firm's interactions with its customers in sales, marketing, and service to optimize revenue, customer satisfaction, and customer retention. They consolidate customer data from multiple sources and communication channels to help firms identify profitable customers, acquire new customers, improve service and support, and target products and services more precisely to customer preferences. The value of a firm's products and services is based not only on its physical resources but also on intangible knowledge assets. Some firms perform better than others because they have better knowledge about how to create, produce, and deliver products and services. Knowledge management systems support processes for discovering and codifying, sharing, and distributing knowledge, as well as processes for creating new knowledge and integrating external sources of knowledge. Companies that do not have the resources to invest in enterprise applications can still achieve some measure of information integration by using intranets and extranets. Intranets typically present information to employees through a private portal that provides a single point of access to information from several different systems and to documents using a Web interface. Corporate portals often feature e-mail, collaboration tools, and tools for searching for internal corporate systems and documents.

Companies can connect their intranets to internal company transaction systems, enabling employees to take actions central to a company's operations, such as checking the status of an order or granting a customer credit. Extranets expedite the flow of information between the firm and its suppliers and customers. They can allow different firms to work collaboratively on product design, marketing, and production. Enterprise applications and technologies are transforming firms' relationships with customers, employees, suppliers, and logistic partners into digital relationships using networks and the Internet. Electronic business, or e-business, refers to the use of digital technology and the Internet to execute the major business processes in the enterprise. E-business includes activities for the internal management of the firm and for coordination with suppliers and other business partners. It also includes electronic commerce, or e-commerce. E-commerce is the part of ebusiness that deals with the buying and selling of goods and services over the Internet. It encompasses activities supporting those market transactions, such as advertising, marketing, customer support, security, delivery, and payment. E-government refers to the application of the Internet and networking technologies to digitally enable government and public sector agencies' relationships with citizens, businesses, and other arms of government. In addition to improving delivery of government services, egovernment can make government operations more efficient and also empower citizens by giving them easier access to information Section 2.4: Bullet Text Study Guide Chapter Contents The Information Systems Function in Business

In all but the smallest of firms, the information systems department is the formal organizational unit responsible for information technology services. The information systems department is responsible for maintaining the hardware, software, data storage, and networks that comprise the firm's IT infrastructure. The information systems department suggests new business strategies and new information-based products and services, and coordinates both the development of the technology and the planned changes in the organization. The information systems department consists of specialists, such as: Programmers: technical specialists who write the software instructions for computers Systems analysts: the principal liaisons between the information systems groups and the rest of the organization Information systems managers: leaders of teams of programmers and analysts,

project managers, physical facility managers, telecommunications managers, or database specialists In many companies, the information systems department is headed by a chief information officer (CIO), a senior manager who oversees the use of information technology in the firm. End users are representatives of departments outside of the information systems group for whom applications are developed. Small companies may not have a formal information systems group. Larger companies will have a separate information systems department, which may be organized along several different lines, depending on the nature and interests of the firm, such as: Decentralized arrangement: Each functional area of the business has its own information systems department and management that typically reports to a senior manager or chief information officer. Separate department: In this arrangement, the information systems function operates as a separate department similar to the other functional departments with a large staff, a group of middle managers, and a senior management group. Divisional groups: Very large "Fortune 1,000"-size firms with multiple divisions and product lines might allow each division (such as the Consumer Products Division or the Chemicals and Additives Division) to have its own information systems group. All of these divisional information systems groups report to a high-level central information systems group and CIO. Section 3.1: Bullet Text Study Guide Organizations and Information Systems Organizations and information systems have a mutual influence on each other. The information needs of an organization affect the design of information systems and an organization must be open itself to the influences of information systems in order to more fully benefit from new technologies. The organization's environment, culture, structure, standard operating procedures, politics and management decisions are mediating factors that influence the interaction between information technology and organizations. Figure 3-1 Chapter Contents

FIGURE 3-1 THE TWO-WAY RELATIONSHIP BETWEEN ORGANIZATIONS AND INFORMATION TECHNOLOGY This complex two-way relationship is mediated by many factors, not the least of which are the decisions madeor not madeby managers. Other factors mediating the relationship include the organizational culture, structure, politics, business processes, and environment. From a technical view, an organization is a formal, legal, social structure that processes resources, or inputs, to produce outputs. The firm is seen as infinitely malleable, with capital and labor substituting for each other quite easily. Figure 3-2

FIGURE 3-2 THE TECHNICAL MICROECONOMIC DEFINITION OF THE ORGANIZATION

In the microeconomic definition of organizations, capital and labor (the primary production factors provided by the environment) are transformed by the firm through the production process into products and services (outputs to the environment). The products and services are consumed by the environment, which supplies additional capital and labor as inputs in the feedback loop. A behavioral definition of an organization is that it is a collection of rights, privileges, obligations, and responsibilities that is balanced over time through conflict and conflict resolution. This definition suggests that building new information systems or rebuilding old ones involves much more than a technical rearrangement of machines or workers. Technological change requires changes in who owns and controls information, who has the right to access and update that information, and who makes decisions about whom, when, and how. Figure 3-3

FIGURE 3-3 THE BEHAVIORAL VIEW OF ORGANIZATIONS The behavioral view of organizations emphasizes group relationships, values, and structures. The technical and behavioral views of organizations complement one another. The technical definition describes how thousands of firms in competitive markets combine capital and labor with information technology, whereas the behavioral model describes how technology affects the organization's inner workings. All modern organizations can be seen as bureaucracies which share some essential characteristics: clear division of labor, hierarchy, explicit rules and procedures, impartial

judgments, technical qualifications for positions, and maximum organizational efficiency. Additionally, all organizations develop routines and business procedures, politics, and cultures. Business processes are collections of routines, or standard operating procedures (SOPs), which enable a firm's efficiency. Figure 3-4

FIGURE 3-4 ROUTINES, BUSINESS PROCESSES, AND FIRMS All organizations are composed of individual routines and behaviors, a collection of which make up a business process. A collection of business processes make up the business firm. New information system applications require that individual routines and business processes change to achieve high levels of organizational performance. Organizational politics reflects the political struggles due to divergent concerns and

perspectives of individuals and groups within the organization. Political resistance is one of the great difficulties of bringing about organizational change. Organizational culture is the set of fundamental assumptions about what products the organization should produce, how it should produce them, where, and for whom. Organizational culture is a powerful unifying force that restrains political conflict. However, technological change that threatens commonly held cultural assumptions usually meets great resistance. No two organizations are identical. Organizations have different structures, goals, constituencies, leadership styles, tasks, and surrounding environments. Differences in these characteristics will affect the type of information systems used by the organization. Organizations have different social and physical environments, which exert a powerful influence on the organization's structure. Information systems help organizations respond to their surrounding environments, from which they draw resources and to which they supply goods and services. Information systems are key tools for environmental scanning, helping managers identify external changes that might require an organizational response. Figure 3-5

FIGURE 3-5 ENVIRONMENTS AND ORGANIZATIONS HAVE RECIPROCAL RELATIONSHIPS Environments shape what organizations can do, but organizations can influence their

environments and decide to change environments altogether. Information technology plays a critical role in helping organizations perceive environmental change and in helping organizations act on their environment. The Mintzberg classification of organizations includes five categories: 1. Entrepreneurial structure: Young, small firm, such as a small startup business, in a fast-changing environment. It has a simple business structure and is managed by an entrepreneur serving as its single chief executive officer. 2. Machine bureaucracy: Large bureaucracy, such as a midsize manufacturing firm, existing in a slowly changing environment, producing standard products. It is dominated by a centralized management team and centralized decision making. 3. Divisionalized bureaucracy: Combination of multiple machine bureaucracies, such as a Fortune 500 firm, each producing a different product or service, all topped by one central headquarters. 4. Professional bureaucracy: Knowledge-based organization (such as law firms, school systems, hospitals) where goods and services depend on the expertise and knowledge of professionals. Dominated by department heads with weak centralized authority. 5. Adhocracy: Task force organization (such as a consulting firm) that must respond to rapidly changing environments. Consists of large groups of specialists organized into short-lived multidisciplinary teams and has weak central management. Organizations also differ in their ultimate goals, the types of power used to achieve them, the groups and constituencies they serve, the nature of leadership within the organization, the tasks performed, and the technology used. Section 3.2: Bullet Text Study Guide
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How Information Systems Impact Organizations and Business Firms From an economic point of view, information systems technology can be seen as a factor of production that can be freely substituted for capital and labor. As information systems technology automates the production process, less capital and labor are required to produce a specified output. Transaction cost theory states that organizations grow in size because they can obtain certain products or services internally at lower cost than by using external firms in the marketplace. By lowering the cost of market participation (transaction costs) information technology allows firms to obtain goods and services more cheaply from outside sources than through internal means. Information systems

can thus help firms increase revenue while shrinking in size. Figure 3-6

FIGURE 3-6 THE TRANSACTION COST THEORY OF THE IMPACT OF INFORMATION TECHNOLOGY ON THE ORGANIZATION Firms traditionally grew in size to reduce transaction costs. IT potentially reduces the costs for a given size, shifting the transaction cost curve inward, opening up the possibility of revenue growth without increasing size, or even revenue growth accompanied by shrinking size. Agency theory views the firm as a nexus of contracts among self- interested individuals, who must be carefully supervised to ensure they pursue the interests of the organization. Information technology can help reduce agency costs, the costs of coordinating many different people and activities, so that each manager can oversee a larger number of employees. Figure 3-7

FIGURE 3-7 THE AGENCY COST THEORY OF THE IMPACT OF INFORMATION TECHNOLOGY ON THE ORGANIZATION As firms grow in size and complexity, traditionally they experience rising agency costs. IT shifts the agency cost curve down and to the right, enabling firms to increase size while lowering agency costs. Behavioral researchers have theorized that information technology facilitates flattening of hierarchies by broadening the distribution of information to empower lower-level employees and increase management efficiency. Figure 3-8

FIGURE 3-8 FLATTENING ORGANIZATIONS Information systems can reduce the number of levels in an organization by providing managers with information to supervise larger numbers of workers and by giving lower-level employees more decision-making authority. Postindustrial theories also support the idea that IT should flatten hierarchies by allowing professionals to be self-managing, by decentralizing decision making, and by encouraging formation of ad-hoc, temporary "task forces" that address specific tasks. Because information systems potentially change an organization's structure, culture, business processes, and strategy, there is often considerable resistance to them when they are introduced. In one model describing organizational resistance, the only way to bring about change is to change the technology, tasks, structure, and people simultaneously. Figure 3-9.

FIGURE 3-9 ORGANIZATIONAL RESISTANCE AND THE MUTUALLY ADJUSTING RELATIONSHIP BETWEEN TECHNOLOGY AND THE ORGANIZATION Implementing information systems has consequences for task arrangements, structures, and people. According to this model, to implement change, all four components must be changed simultaneously. Source: Leavitt (1965). The Internet and World Wide Web are increasing the accessibility, storage, and distribution of information and knowledge for organizations, dramatically lowering transaction and agency costs. Businesses are rapidly rebuilding some key business processes based on Internet technology. To deliver genuine benefits, information systems must be built with a clear understanding of the organization in which they will be used, and consideration of the firm's environment, structure, culture, politics, organization and leadership, business processes, as well as the principle interest groups affected by the system. Section 3.3: Bullet Text Study Guide Chapter Contents Using Information Systems to Achieve Competitive Advantage Firms with a competitive advantage over others typically have access to special resources that others do not or are able to use resources more efficiently, resulting in higher revenue growth, profitability, or productivity growth (efficiency), all of which ultimately in the long run translate into higher stock market valuations than their competitors. Michael Porter's competitive forces model describes five competitive forces that shape the fate of the firm.

1. Traditional competitors: Existing firms that share a firm's market space 2. New market entrants: New companies have certain advantages, such as not being locked into old equipment and high motivation, as well as disadvantages, such as less expertise and little brand recognition. Some industries have lower barriers to entry, ie: cost less for a new company to enter the field. 3. Substitute products and services: These are substitutes that your customers might use if your prices become too high. For example, Internet telephone service can substitute for traditional telephone service. The more substitute products and services in your industry, the less you can control pricing and raise your profit margins. 4. Customers: The power of customers grows if they can easily switch to a competitor's products and services, or if they can force a business and its competitors to compete on price alone in a transparent marketplace where there is little product differentiation and all prices are known instantly (such as on the Internet). 5. Suppliers: The more different suppliers a firm has, the greater control it can exercise over suppliers in terms of price, quality, and delivery schedules. Figure 3-10

FIGURE 3-10 PORTERS COMPETITIVE FORCES MODEL In Porters competitive forces model, the strategic position of the firm and its strategies are determined not only by competition with its traditional direct competitors but also by four forces in the industrys environment: new market entrants, substitute products, customers, and suppliers.

There are four generic strategies used to manage competitive forces, each of which often is enabled by using information technology and systems: 1. Low-cost leadership: Use information systems to achieve the lowest operational costs and the lowest prices. For example, a supply chain management system can incorporate an efficient customer response system to directly link consumer behavior to distribution and production and supply chains, helping lower inventory and distribution costs. 2. Product differentiation: Use information systems to enable new products and services, or greatly change the customer convenience in using your existing products and services. For instance, Land's End uses mass customization, offering individually tailored products or services using the same production resources as mass production, to custom-tailor clothing to individual customer specifications. 3. Focus on market niche: Use information systems to enable a specific market focus and serve this narrow target market better than competitors. Information systems support this strategy by producing and analyzing data for finely tuned sales and marketing techniques. Hilton Hotels uses a customer information system with detailed data about active guests to provide tailored services and reward profitable customers with extra privileges and attention. 4. Strengthen customer and supplier intimacy: Use information systems to tighten linkages with suppliers and develop intimacy with customers. Chrysler Corporation uses information systems to facilitate direct access from suppliers to production schedules, and even permits suppliers to decide how and when to ship suppliers to Chrysler factories. This allows suppliers more lead time in producing goods. Strong linkages to customers and suppliers increase switching costs (the cost of switching from one product to a competing product) and loyalty to your firm. The Internet has nearly destroyed some industries and has severely threatened more. The Internet has also created entirely new markets and formed the basis for thousands of new businesses. Because of the Internet, the traditional competitive forces are still at work, but competitive rivalry has become much more intense. Internet technology is based on universal standards, making it easy for rivals to compete on price alone and for new competitors to enter the market. Because information is available to everyone, the Internet raises the bargaining power of customers, who can quickly find the lowest-cost provider on the Web. Some industries, such as the travel industry and the financial services industry, have been more impacted than others. However, the Internet also creates new opportunities for building brands and building very large and loyal customer bases, such as Yahoo!, eBay, and Google.

The value chain model highlights specific activities in the business where competitive strategies can best be applied and where information systems are most likely to have a strategic impact. The value chain model views the firm as a series or chain of basic activities that add a margin of value to a firm's products or services. These activities can be categorized as either primary activities or support activities. Primary activities are most directly related to the production and distribution of the firm's products and services, which create value for the customer. Primary activities include inbound logistics, operations, outbound logistics, sales and marketing, and service. Support activities make the delivery of the primary activities possible and consist of organization infrastructure (administration and management), human resources (employee recruiting, hiring, and training), technology (improving products and the production process), and procurement (purchasing input). Figure 3-11

FIGURE 3-11 THE VALUE CHAIN MODEL This figure provides examples of systems for both primary and support activities of a firm and of its value partners that can add a margin of value to a firms products or services. You can use the business value chain model to identify areas where information systems will improve business processes. You can also benchmark your business processes against your competitors or others in related industries, and identify and implement industry best practices. Benchmarking involves comparing the efficiency and effectiveness of your business processes against strict standards and then measuring performance against those standards. Industry best practices are usually identified by consulting companies, research

organizations, government agencies, and industry associations as the most successful solutions or problem-solving methods for consistently and effectively achieving a business objective. A firm's value chain is linked to the value chains of its suppliers, distributors, and customers. Information systems can be used to achieve strategic advantage at the industry level by working with other firms to develop industry-wide standards for exchanging information or business transactions electronically, which force all market participants to subscribe to similar standards. Such efforts increase efficiency, making product substitution less likely and perhaps raising entry costs., Internet technology has made it possible to create highly synchronized industry value chains called value webs. A value web is a collection of independent firms that use information technology to coordinate their value chains to produce a product or service for a market collectively. It is more customer-driven and operates in a less linear fashion than the traditional value chain. Figure 3-12

FIGURE 3-12 THE VALUE WEB The value web is a networked system that can synchronize the value chains of business partners within an industry to respond rapidly to changes in supply and demand. A large corporation is typically a collection of businesses. Information systems can improve the overall performance of these business units by promoting synergies and core competencies. In synergies, the output of some units can be used as inputs to other units, or two organizations pool markets and expertise, and these relationships lower costs and generate profits. A core competency is an activity for which a firm is a world-class leader, such as being the world's best miniature parts designer. A core competency relies on knowledge that is gained through experience as well as incorporating new, external knowledge. Any information system that encourages the sharing of knowledge across business units enhances competency.

Business models based on a network may help firms strategically by taking advantage of network economics. In network economics, the marginal costs of adding another participant or creating another product are negligible, whereas the marginal gain is much larger. For example, the more people offering products on eBay, the more valuable the eBay site is to everyone because more products are listed, and more competition among suppliers lowers prices. Another network-based strategy is the virtual company, or virtual organization, which uses networks to link people, assets, and ideas, enabling it to ally with other companies to create and distribute products and services without being limited by traditional organizational boundaries or physical locations. One company can use the capabilities of another company without being physically tied to that company. The traditional Porter model of competitive forces assumes a relatively static industry environment; relatively clear-cut industry boundaries; and a relatively stable set of suppliers, substitutes, and customers. With the emergence of the digital firm and the Internet, some modifications to the original competitive forces model are needed. Some of today's firms are much more aware that they participate in business ecosystems, loosely coupled but interdependent networks of suppliers, distributors, outsourcing firms, transportation service firms, and technology manufacturers. In a business ecosystem, cooperation takes place across many industries rather than many firms. Figure 3-13

FIGURE 3-13 AN ECOSYSTEM STRATEGIC MODEL The digital firm era requires a more dynamic view of the boundaries among industries, firms, customers, and suppliers, with competition occurring among industry sets in a

business ecosystem. In the ecosystem model, multiple industries work together to deliver value to the customer. IT plays an important role in enabling a dense network of interactions among the participating firms. Business ecosystems can be characterized as having one or a few keystone firms that dominate the ecosystem and create the platforms used by other niche firms. Keystone firms in the Microsoft ecosystem include Microsoft and technology producers such as Intel and IBM. Niche firms include thousands of software application firms, software developers, service firms, networking firms, and consulting firms that both support and rely on the Microsoft products. Chapter Contents Section 3.4: Bullet Text Study Guide Using Systems for Competitive Advantage: Management Issues

Because competitors can retaliate and copy strategic information systems, competitive advantage is not always sustainable. Managers interested in using information systems for competitive advantage will need to perform a strategic systems analysis, asking questions such as What is the structure of the industry in which the firm is located? What are the competitive forces, and how is the industry changing and using information systems? What are the business, firm, and industry value chains for this industry? How does the firm create value, manage its business processes, and leverage its core competencies? Adopting the kinds of strategic systems described in this chapter generally requires changes in business goals, relationships with customers and suppliers, and business processes. These sociotechnical changes, affecting both social and technical elements of the organization, can be considered strategic transitionsmovement between levels of sociotechnical systems. Managers will need to devise new business processes for coordinating their firms' activities with those of customers, suppliers, and other organizations.