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Chapter 7: Does IT Matter?

Learning Objectives

Upon successful completion of this chapter, you will be

able to:

• define the productivity paradox and explain the

current thinking on this topic;

• evaluate Carr’s argument in “Does IT Matter?”;

• describe the components of competitive advantage;

and

• describe information systems that can provide

businesses with competitive advantage.

Introduction

For over fifty years, computing technology has been a part of

business. Organizations have spent trillions of dollars on

information technologies. But has all this investment in IT made

a difference? Have there been increases in productivity? Are

companies that invest in IT more competitive? This chapter looks

at the value IT can bring to an organization and attempts to answer

Chapter 7: Does IT Matter? | 151

these questions. Two important works in the past two decades have

attempted to address this issue.

The Productivity Paradox

In 1991, Erik Brynjolfsson wrote an article, published in

the Communications of the ACM, entitled “The Productivity Paradox

of Information Technology: Review and Assessment.” After

reviewing studies about the impact of IT investment on productivity,

Brynjolfsson concluded that the addition of information technology

to business had not improved productivity at all. He called this

the “productivity paradox.” While he did not draw any specific

conclusions from his work, 1 he did provide the following analysis.

Although it is too early to conclude that IT’s

productivity contribution has been subpar, a paradox

remains in our inability to unequivocally document

any contribution after so much effort. The various

explanations that have been proposed can be

grouped into four categories:

1) Mismeasurement of outputs and inputs 2) Lags due to learning and adjustment 3) Redistribution and dissipation of profits 4) Mismanagement of information and technology

In 1998, Brynjolfsson and Lorin Hitt published a follow-up paper

entitled “Beyond the Productivity Paradox [2] In this paper, the

authors utilized new data that had been collected and found that

IT did, indeed, provide a positive result for businesses. Further,

they found that sometimes the true advantages in using technology

1. [1]

152 | Information Systems for Business and Beyond (2019)

were not directly relatable to higher productivity, but to “softer”

measures, such as the impact on organizational structure. They also

found that the impact of information technology can vary widely

between companies.

IT Doesn’t Matter

Just as a consensus was forming about the value of IT, the Internet

stock market bubble burst. Two years later in 2003, Harvard

professor Nicholas Carr wrote his article “IT Doesn’t Matter” in

the Harvard Business Review. In this article Carr asserted that as

information technology had become ubiquitous, it has also become

less of a differentiator, much like a commodity. Products that have

the same features and are virtually indistinguishable are considered

to be commodities. Price and availability typically become the only

discriminators when selecting a source for a commodity. In Carr’s

view all information technology was the same, delivering the same

value regardless of price or supplier. Carr suggested that since IT

is essentially a commodity, it should be managed like one. Just

select the one with the lowest cost this is most easily accessible. He

went on to say IT management should see themselves as a utility

within the company and work to keep costs down. For Carr IT’s

goal is to provide the best service with minimal downtime. Carr

saw no competitive advantage to be gained through information

technology.

As you can imagine, this article caused quite an uproar, especially

from IT companies. Many articles were written in defense of IT

while others supported Carr. In 2004 Carr released a book based on

the article entitled Does IT Matter? A year later he was interviewed

by CNET on the topic “IT still doesn’t matter.” Click here to watch

the video of Carr being interviewed about his book on CNET.

Probably the best thing to come out of the article and subsequent

book were discussions on the place of IT in a business strategy, and

Chapter 7: Does IT Matter? | 153

exactly what role IT could play in competitive advantage. That is the

question to be addressed in this chapter.

Competitive Advantage

What does it mean when a company has a competitive advantage?

What are the factors that play into it? Michael Porter in his

book Competitive Advantage: Creating and Sustaining Superior

Performance. writes that a company is said to have a competitive

advantage over its rivals when it is able to sustain profits that exceed

the average for the industry. According to Porter, there are two

primary methods for obtaining competitive advantage: cost

advantage and differentiation advantage. 2 So the question for I.T.

becomes: How can information technology be a factor in one or both

of these methods?

The following sections address this question by using two of

Porter’s analysis tools: the value chain and the five forces model.

Porter’s analysis in his 2001 article “Strategy and the Internet,”

which examines the impact of the Internet on business strategy and

competitive advantage, will be used to shed further light on the role

of information technology in gaining competitive advantage. 3

2. [3]

3. [4]

154 | Information Systems for Business and Beyond (2019)

Diagram of Porter’s Value Chain (click to enlarge)

The Value Chain

In his book Competitive Advantage: Creating and Sustaining

Performance Porter describes exactly how a company can create

value and therefore profit. Value is built through the value chain: a

series of activities undertaken by the company to produce a product

or service. Each step in the value chain contributes to the overall

value of a product or service. While the value chain may not be a

perfect model for every type of company, it does provide a way to

analyze just how a company is producing value. The value chain is

made up of two sets of activities: primary activities and support

activities. An explanation of these activities and a discussion of

how information technology can play a role in creating value by

contributing to cost advantage or differentiation advantage appears

next.

Primary activities are the functions that directly impact the

creation of a product or service. The goal of a primary activity is to

add value that is greater than the cost of that activity. The primary

activities are:

• Inbound logistics. These are the processes that bring in raw materials and other needed inputs. Information technology

can be used to make these processes more efficient, such as

with supply-chain management systems which allow the

suppliers to manage their own inventory.

• Operations. Any part of a business that converts the raw materials into a final product or service is a part of operations.

Chapter 7: Does IT Matter? | 155

From manufacturing to business process management

(covered in Chapter 8), information technology can be used to

provide more efficient processes and increase innovation

through flows of information.

• Outbound logistics. These are the functions required to get the product out to the customer. As with inbound logistics, IT

can be used here to improve processes, such as allowing for

real-time inventory checks. IT can also be a delivery

mechanism itself.

• Sales/Marketing. The functions that will entice buyers to purchase the products are part of sales and marketing.

Information technology is used in almost all aspects of this

activity. From online advertising to online surveys, IT can be

used to innovate product design and reach customers as never

before. The company website can be a sales channel itself.

• Service. Service activity involves the functions a business performs after the product has been purchased to maintain

and enhance the product’s value. Service can be enhanced via

technology as well, including support services through

websites and knowledge bases.

The support activities are the functions in an organization that

support all of the primary activities. Support activities can be

considered indirect costs to the organization. The support activities

are:

• Firm infrastructure. An organization’s infrastructure includes finance, accounting, ERP systems (covered in Chapter 9) and

quality control. All of these depend on information technology

and represent functions where I.T. can have a positive impact.

• Human Resource Management Human Resource Management (HRM) consists of recruiting, hiring, and other services needed

to attract and retain employees. Using the Internet, HR

departments can increase their reach when looking for

candidates. I.T. also allows employees to use technology for a

156 | Information Systems for Business and Beyond (2019)

Porter’s Five Forces (click to enlarge)

more flexible work environment.

• Technology development. Technology development provides innovation that supports primary activities. These advances

are integrated across the firm to add value in a variety of

departments. Information technology is the primary generator

of value in this support activity.

• Procurement. Procurement focuses on the acquisition of raw materials used in the creation of products. Business-to-

business e-commerce can be used to improve the acquisition

of materials.

This analysis of the value chain provides some insight into how

information technology can lead to competitive advantage. Another

important concept from Porter is the “Five Forces Model.”

Porter’s Five Forces

Porter developed the Five

Forces model as a framework

for industry analysis. This

model can be used to help

understand the degree of

competition in an industry and

analyze its strengths and

weaknesses. The model

consists of five elements, each of which plays a role in determining

the average profitability of an industry. In 2001 Porter wrote an

article entitled ”Strategy and the Internet,” in which he takes this

model and looks at how the Internet impacts the profitability of an

industry. Below is a quick summary of each of the Five Forces and

the impact of the Internet.

• Threat of substitute products or services. The first force

Chapter 7: Does IT Matter? | 157

challenges the user to consider the likelihood of another

produce or service replacing the product or service you offer.

The more types of products or services there are that can meet

a particular need, the less profitability there will be in an

industry. In the communications industry, the smartphone has

largely replaced the pager. In some construction projects,

metal studs have replaced wooden studs for framing. The

Internet has made people more aware of substitute products,

driving down industry profits in those industries in which

substitution occurs. Please notice that substitution refers to a

product being replaced by a similar product for the purpose of

accomplishing the same task. It does not mean dissimilar

products or services such as flying to a destination rather than

traveling by rail.

• Bargaining power of suppliers. A supplier’s bargaining power is strong when there are few suppliers from which your

company can obtain a needed product or service. Conversely,

when they are many suppliers their bargaining power is lower

since your company would have many sources from which to

source a product. When your company has several suppliers to

choose from, you can negotiate a lower price. When a sole

supplier exists, then your company is at the mercy of the

supplier. For example, if only one company makes the

controller chip for a car engine, that company can control the

price, at least to some extent. The Internet has given

companies access to more suppliers, driving down prices.

• Bargaining power of customers. A customer’s bargaining power is strong when your company along with your

competitors is attempting to provide the same product to this

customer. In this instance the customer has many sources

from which to source a product so they can approach your

company and seek a price reduction. If there are few suppliers

in your industry, then the customer’s bargaining power is

considered low.

• Barriers to entry. The easier it is to enter an industry, the

158 | Information Systems for Business and Beyond (2019)

more challenging it will be to make a profit in that industry.

Imagine you are considering starting a lawn mowing business.

The entry barrier is very low since all you need is a law mower.

No special skills or licenses are required. However, this means

your neighbor next door may decide to start mowing lawns

also, resulting in increased competition. In contrast a highly

technical industry such as manufacturing of medical devices

has numerous barriers to entry. You would need to find

numerous suppliers for various components, hire a variety of

highly skilled engineers, and work closely with the Food and

Drug Administration to secure approval for the sale of your

products. In this example the barriers to entry are very high so

you should expect few competitors.

• Rivalry among existing competitors: Rivalry among existing competitors helps you evaluate your entry into the market.

When rivalry is fierce, each competitor is attempting to gain

additional market share from the others. This can result in

aggressive pricing, increasing customer support, or other

factors which might lure a customer away from a competitor.

Markets in which rivalry is low may be easier to enter and

become profitable sooner because all of the competitors are

accepting of each other’s presence.

Porter’s five forces are used to analyze an industry to determine

the average profitability of a company within that industry. Adding

in Porter’s analysis of the Internet to his Five Forces results in the

realization that technology has lowered overall profitability. 4

4. [5]

Chapter 7: Does IT Matter? | 159

Using Information Systems for Competitive Advantage

Having learned about Porter’s Five Forces and their impact on a

firm’s ability to generate a competitive advantage, it is time to look

at some examples of competitive advantage. A strategic information

system is designed specifically to implement an organizational

strategy meant to provide a competitive advantage. These types of

information systems began popping up in the 1980s, as noted in a

paper by Charles Wiseman entitled “Creating Competitive Weapons

From Information Systems.” 5

A strategic information system attempts to do one or more of the

following:

• Deliver a product or a service at a lower cost;

• Deliver a product or service that is differentiated;

• Help an organization focus on a specific market segment;

• Enable innovation.

Here are some examples of information systems that fall into this

category.

Business Process Management Systems

In their book, IT Doesn’t Matter – Business Processes Do, Howard

Smith and Peter Fingar argue that it is the integration of information

systems with business processes that leads to competitive

advantage. The authors state that Carr’s article is dangerous

because it gave CEOs and IT managers approval to start cutting

5. [6]

160 | Information Systems for Business and Beyond (2019)

Comparison of process with and without EDI (click to enlarge)

their technology budgets, putting their companies in peril. True

competitive advantage can be found with information systems that

support business processes. Chapter 8 focuses on the use of

business processes for competitive advantage.

Electronic Data Interchange

Electronic Data Interchange (EDI) provides a competitive advantage

through integrating the supply chain electronically. EDI can be

thought of as the computer-to-computer exchange of business

documents in a standard electronic format between business

partners. By integrating suppliers and distributors via EDI, a

company can vastly reduce the resources required to manage the

relevant information. Instead of manually ordering supplies, the

company can simply place an order via the computer and the

products are ordered.

Chapter 7: Does IT Matter? | 161

Collaborative Systems

As organizations began to implement networking technologies,

information systems emerged that allowed employees to begin

collaborating in different ways. These systems allowed users to

brainstorm ideas together without the necessity of physical, face-

to-face meetings. Tools such as video conferencing with Skype or

WebEx, collaboration and document sharing with Microsoft

SharePoint, and project management with SAP’s Project System

make collaboration possible in a variety of endeavors.

Broadly speaking, any software that allows multiple users to

interact on a document or topic could be considered collaborative.

Electronic mail, a shared Word document, and social networks fall

into this broad definition. However, many software tools have been

created that are designed specifically for collaborative purposes.

These tools offer a broad spectrum of collaborative functions. Here

is just a short list of some collaborative tools available for businesses

today:

• Google Drive. Google Drive offers a suite of office applications

(such as a word processor, spreadsheet, drawing, presentation)

that can be shared between individuals. Multiple users can edit

the documents at the same time and the threaded comments

option is available.

• Microsoft SharePoint. SharePoint integrates with Microsoft

Office and allows for collaboration using tools most office

workers are familiar with. SharePoint was covered in greater

detail in chapter 5.

• Cisco WebEx. WebEx combines video and audio

communications and allows participants to interact with each

other’s computer desktops. WebEx also provides a shared

whiteboard and the capability for text-based chat to be going

on during the sessions, along with many other features. Mobile

editions of WebEx allow for full participation using

162 | Information Systems for Business and Beyond (2019)

smartphones and tablets.

• GitHub. Programmers/developers use GitHub for web-based

team development of computer software.

Decision Support Systems

A decision support system (DSS) helps an organization make a

specific decision or set of decisions. DSSs can exist at different

levels of decision-making within the organization, from the CEO

to first level managers. These systems are designed to take inputs

regarding a known (or partially-known) decision making process

and provide the information necessary to make a decision. DSSs

generally assist a management level person in the decision-making

process, though some can be designed to automate decision-

making.

An organization has a wide variety of decisions to make, ranging

from highly structured decisions to unstructured decisions. A

structured decision is usually one that is made quite often, and one

in which the decision is based directly on the inputs. With

structured decisions, once you know the necessary information you

also know the decision that needs to be made. For example,

inventory reorder levels can be structured decisions. Once your

inventory of widgets gets below a specific threshold, automatically

reorder ten more. Structured decisions are good candidates for

automation, but decision-support systems are generally not built

for them.

An unstructured decision involves a lot of unknowns. Many times

unstructured decisions are made for the first time. An information

system can support these types of decisions by providing the

decision makers with information gathering tools and collaborative

capabilities. An example of an unstructured decision might be

Chapter 7: Does IT Matter? | 163

dealing with a labor issue or setting policy for the implementation

of a new technology.

Decision support systems work best when the decision makers

are having to make semi-structured decisions. A semi-structured

decision is one in which most of the factors needed for making the

decision are known but human experience and other outside factors

may still impact the decision. A good example of an semi-structured

decision would be diagnosing a medical condition (see sidebar).

As with collaborative systems, DSSs can come in many different

formats. A nicely designed spreadsheet that allows for input of

specific variables and then calculates required outputs could be

considered a DSS. Another DSS might be one that assists in

determining which products a company should develop. Input into

the system could include market research on the product,

competitor information, and product development costs. The

system would then analyze these inputs based on the specific rules

and concepts programmed into it. The system would report its

results with recommendations and/or key indicators to be used in

making a decision. A DSS can be looked at as a tool for competitive

advantage because it can give an organization a mechanism to make

wise decisions about products and innovations.

164 | Information Systems for Business and Beyond (2019)

Isabel screen shot

Sidebar: Isabel – A Health Care DSS

A discussed in the text, DSSs

are best applied to semi-

structured decisions, in which

most of the needed inputs are

known but human experience

and environmental factors also

play a role. A good example for

today is Isabel, a health care

DSS. The creators of Isabel

explain how it works:

Isabel uses the information routinely captured

during your workup, whether free text or structured

data, and instantaneously provides a diagnosis

checklist for review. The checklist contains a list of

possible diagnoses with critical “Don’t Miss

Diagnoses” flagged. When integrated into your

Electronic Medical Records (EMR) system, Isabel can

provide “one click” seamless diagnosis support with

no additional data entry. 6

Investing in IT for Competitive Advantage

In 2008, Brynjolfsson and McAfee published a study in the Harvard

Business Review on the role of IT in competitive advantage, entitled

6. [7]

Chapter 7: Does IT Matter? | 165

“Investing in the IT That Makes a Competitive Difference.” Their

study confirmed that IT can play a role in competitive advantage if

deployed wisely. In their study, they drew three conclusions 7 :

• First, the data show that IT has sharpened differences

among companies instead of reducing them. This

reflects the fact that while companies have always

varied widely in their ability to select, adopt, and exploit

innovations, technology has accelerated and amplified

these differences.

• Second, good management matters. Highly qualified

vendors, consultants, and IT departments might be

necessary for the successful implementation of

enterprise technologies themselves, but the real value

comes from the process innovations that can now be

delivered on those platforms. Fostering the right

innovations and propagating them widely are both

executive responsibilities – ones that can’t be delegated.

• Finally, the competitive shakeup brought on by IT is not

nearly complete, even in the IT-intensive US economy.

You can expect to see these altered competitive

dynamics in other countries, as well, as their IT

investments grow.

Information systems can be used for competitive advantage, but

they must be used strategically. Organizations must understand

how they want to differentiate themselves and then use all the

elements of information systems (hardware, software, data, people,

and process) to accomplish that differentiation.

7. [8]

166 | Information Systems for Business and Beyond (2019)

Summary

Information systems are integrated into all components of business

today, but can they bring competitive advantage? Over the years,

there have been many answers to this question. Early research

could not draw any connections between IT and profitability, but

later studies have shown that the impact can be positive. IT is

not a panacea. Just purchasing and installing the latest technology

will not by itself make a company more successful. Instead, the

combination of the right technologies and good management will

give a company the best chance for a positive result.

Study Questions

1. What is the productivity paradox?

2. Summarize Carr’s argument in “Does IT Matter.”

3. How is the 2008 study by Brynjolfsson and McAfee different

from previous studies? How is it the same?

4. What does it mean for a business to have a competitive

advantage?

5. What are the primary activities and support activities of the

value chain?

6. What has been the overall impact of the Internet on industry

profitability? Who has been the true winner?

7. How does EDI work?

8. Give an example of a semi-structured decision and explain

what inputs would be necessary to provide assistance in

making the decision.

9. What does a collaborative information system do?

10. How can IT play a role in competitive advantage, according to

Chapter 7: Does IT Matter? | 167

the 2008 article by Brynjolfsson and McAfee?

Exercises

1. Analyze Carr’s position in regards to PC vs. Mac, Open Office

vs. Microsoft Office, and Microsoft Powerpoint vs. Tableau.

2. Do some independent research on Nicholas Carr (the author of

“IT Doesn’t Matter”) and explain his current position on the

ability of IT to provide competitive advantage.

3. Review the WebEx website. What features of WebEx would

contribute to good collaboration? Compare WebEx with other

collaboration tools such as Skype or Google Hangouts?

Lab

1. Think of a semi-structured decision that you make in your

daily life and build your own DSS using a spreadsheet that

would help you make that decision.

1. Brynjolfsson, E. (1994). The Productivity Paradox of Information

Technology: Review and Assessment. Center for Coordination

Science MIT Sloan School of Management: Cambridge,

Massachusetts.↵

2. Brynjolfsson, E. and Hitt, L. (1998). Beyond the Productivity

Paradox. Communications of the ACM, 41, 49–55. ↵

3. Porter, M. (1985). Competitive Advantage: Creating and

Sustaining Superior Performance. New York: The Free Press. ↵

4. Porter, M. (2001, March). Strategy and the Internet. Harvard

168 | Information Systems for Business and Beyond (2019)

Business Review, 79 ,3. Retrieved from http://hbswk.hbs.edu/

item/2165.html ↵

5. Porter, M. (2001, March). Strategy and the Internet. Harvard

Business Review, 79, 3. Retrieved from http://hbswk.hbs.edu/

item/2165.html↵

6. Wiseman, C. and MacMillan, I. C. (1984). Creating Competitive

Weapons From Information Systems. Journal Of Business

Strategy, 5(2)., 42.↵

7. Isabel. (n.d.). Broaden Your Differential Diagnosis. Retrieved

from http://www.isabelhealthcare.com/home/ourmission. ↵

8. McAfee, A. and Brynjolfsson, E. (2008, July-August). Investing in

the IT That Makes a Competitive Difference. Harvard Business

Review.↵

Chapter 7: Does IT Matter? | 169

Chapter 8: Business Processes

Learning Objectives

Upon successful completion of this chapter, you will be

able to:

• define the term business process;

• understand the tools of documentation of business

processes;

• identify the different systems needed to support

business processes in an organization;

• explain the value of an enterprise resource

planning (ERP) system;

• explain how business process management and

business process reengineering work; and

• understand how information technology combined

with business processes can bring an organization

competitive advantage.

Introduction

The fourth component of information systems is process. But what is

a process and how does it tie into information systems? And in what

170 | Chapter 8: Business Processes

ways do processes have a role in business? This chapter looks to

answer those questions and also describe how business processes

can be used for strategic advantage.

What Is a Business Process?

We have all heard the term process before, but what exactly does

it mean? A process is a series of tasks that are completed in order to

accomplish a goal. A business process, therefore, is a process that is

focused on achieving a goal for a business. Processes are something

that businesses go through every day in order to accomplish their

mission. The better their processes, the more effective the business.

Some businesses see their processes as a strategy for achieving

competitive advantage. A process that achieves its goal in a unique

way can set a company apart. A process that eliminates costs can

allow a company to lower its prices (or retain more profit). If you

have worked in a business setting, you have participated in a

business process. Anything from a simple process for making a

sandwich at Subway to building a space shuttle utilizes one or more

business processes. In the context of information systems, a

business process is a set of business activities performed by human

actors and/or the information system to accomplish a specific

outcome.

Documenting a Process

Every day each of us will perform many processes without even

thinking about them such as getting ready for work, using an ATM,

texting a friend, etc. As processes grow more complex, documenting

becomes necessary. It is essential for businesses to do this because

it allows them to ensure control over how activities are undertaken

Chapter 8: Business Processes | 171

in their organization. It also allows for standardization. For example,

McDonald’s has the same process for building a Big Mac in all of its

restaurants.

The simplest way to document a process is to just create a list.

The list shows each step in the process. Each step can be checked

off upon completion. A simple process such as how to create an

account on gmail might look like this:

1. Go to gmail.com.

2. Click “Create account.”

3. Enter your contact information in the “Create your Google

Account” form.

4. Choose your username and password.

5. Agree to User Agreement and Privacy Policy by clicking on

“Submit.”

For processes that are not so straightforward, documenting all of

the steps as a checklist may not be sufficient. For example, here

is the process for determining if an article for a term needs to be

added to Wikipedia:

1. Search Wikipedia to determine if the term already exists.

2. If the term is found, then an article is already written, so you

must think of another term. Go to step 1.

3. If the term is not found, then look to see if there is a related

term.

4. If there is a related term, then create a redirect.

5. If there is not a related term, then create a new article.

This procedure is relatively simple. In fact it has the same number

of steps as the previous example, but because it has some decision

points, it is more difficult to track as a simple list. In these cases it

may make more sense to use a diagram to document the process.

172 | Information Systems for Business and Beyond (2019)

Diagram of an example business process (click to enlarge)

Business Process Modeling Notation

A diagramming tool for

documentation of business

process is a formalized visual

language that provides systems

analysts with the ability to describe the business processes

unambiguously, to visualize the business processes for systematic

understanding, and to communicate the business process for

business process management. Natural languages (e.g., English) are

incapable to explain complex business processes. Diagrams have

been used as tools for business process modeling in the information

systems field. There have been many types of business process

diagramming tools, and each of them has its own style and syntax to

serve its particular purpose. The most commonly used business

process diagramming tools are Business Process Modeling Notation

(BPMN), Data Flow Diagram (DFD), and the Unified Modeling

Language (UML).

BPMN is an extension of the traditional flowchart method by

adding more diagramming elements for descriptions of business

process. The objective of BPMN is to support business process

documentation by providing intuitive notations for business rules.

The flowchart style diagrams in BPMN can provide detailed

specifications business processes from start to end. However,

BPMN is short of the ability of system decomposition for large

information systems.

DFD has served as a foundation of many other tools of

documentation of business process. The central concept of DFD is

a top-down approach to understanding a system. The top-down

approach is consistent with the system concept that views a system

Chapter 8: Business Processes | 173

in a holistic manner and concerns an understanding of a system

by examining the components and their interactions within the

system. More importantly, while describing a business process by

using DFD, the data stores used in the process and generated data

flows in the process are also defined. We will provide an example

of DFD in the Sidebar section of this chapter to illustrate the

integration of data and business tasks in documenting a business

process.

The Unified Modeling Language (UML) is a general-purpose

modeling tool in the field of software engineering for constructing

all types of computerized systems. UML includes a set of various

types of diagrams with different subjects of modeling and

diversified graphics styles. The diversified diagrams in UML can

provide detailed specifications for software engineering in many

perspectives for construction of information systems, but could

be too complicated for documenting business processes from the

perspective of business process management.

Managing Business Process Documentation

As organizations begin to document their processes, it becomes an

administrative responsibility to keep track of them. As processes

change and improve, it is important to know which processes are

the most recent. It is also important to manage the process so

that it can be easily updated. The requirement to manage process

documentation has been one of the driving forces behind the

creation of the document management system. A document

management system stores and tracks documents and supports the

following functions.

• Versions and timestamps. The document management system will keep multiple versions of documents. The most recent

version of a document is easy to identify and will be

174 | Information Systems for Business and Beyond (2019)

An ERP System (click to enlarge)

considered the default.

• Approvals and workflows. When a process needs to be changed, the system will manage both access to the

documents for editing and the routing of the document for

approval.

• Communication. When a process changes, those who implement the process need to be made aware of the changes.

The document management system will notify the appropriate

people when a change to a document has been approved.

Of course, document management systems are not only used for

managing business process documentation. Many other types of

documents are managed in these systems, such as legal documents

or design documents.

ERP Systems

An Enterprise Resource Planning (ERP) system is software with a

centralized database that can be used to run an entire company.

Here are some of the main components of an ERP system.

Computer program. The system is a computer program,

which means that it has been

developed with specific logic

and rules behind it. It is

customized and installed to

work specifically for an

individual organization.

• Centralized database. All data in an ERP system is stored in a

single, central database.

Centralization is key to the success of an ERP. Data entered in

Chapter 8: Business Processes | 175

one part of the company can be immediately available to other

parts of the company.

• Used to run an entire company. An ERP can be used to manage an entire organization’s operations. Companies can

purchase modules for an ERP that represent different

functions within the organization such as finance,

manufacturing, and sales. Some companies choose to purchase

many modules, others choose a subset of the modules.

An ERP system not only centralizes an organization’s data, but

the processes it enforces are the processes the organization has

adopted. When an ERP vendor designs a module, it has to

implement the rules for the associated business processes. Best

practices can be built into the ERP – a major selling point for ERP. In

other words, when an organization implements an ERP, it also gets

improved best practices as part of the deal.

For many organizations the implementation of an ERP system is

an excellent opportunity to improve their business practices and

upgrade their software at the same time. But for others an ERP

brings a challenge. Is the process embedded in the ERP really better

than the process they are currently utilizing? And if they implement

this ERP and it happens to be the same one that all of their

competitors have, will they simply become more like them, making

it much more difficult to differentiate themselves? A large

organization may have one version of the ERP, then acquire a

subsidiary which has a more recent version. Imagine the challenge

of requiring the subsidiary to change back to the earlier version.

One of the criticisms of ERP systems has been that they

commoditize business processes, driving all businesses to use the

same processes and thereby lose their uniqueness. The good news

is that ERP systems also have the capability to be configured with

custom processes. For organizations that want to continue using

their own processes or even design new ones, ERP systems offer

customization so the ERP is unique to the organization.

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Registered Trademark of SAP

There is a drawback to customizing an ERP system. Namely,

organizations have to maintain the changes themselves. Whenever

an update to the ERP system comes out, any organization that

has created a custom process will be required to add that change

to their new ERP version. This requires someone to maintain a

listing of these changes as well as re-testing the system every time

an upgrade is made. Organizations will have to wrestle with this

decision. When should they go ahead and accept the best-practice

processes built into the ERP system and when should they spend

the resources to develop their own processes?

Some of the best-known ERP vendors are SAP, Microsoft, and

Oracle.

Business Process Management

Organizations that are serious about improving their business

processes will also create structures to manage those

processes. Business process management (BPM) can be thought of

as an intentional effort to plan, document, implement, and

distribute an organization’s business processes with the support of

information technology.

BPM is more than just automating some simple steps. While

automation can make a business more efficient, it cannot be used to

Chapter 8: Business Processes | 177

provide a competitive advantage. BPM, on the other hand, can be an

integral part of creating that advantage.

Not all of an organization’s processes should be managed this way.

An organization should look for processes that are essential to the

functioning of the business and those that may be used to bring a

competitive advantage. The best processes to look at are those that

include employees from multiple departments, those that require

decision-making that cannot be easily automated, and processes

that change based on circumstances. Here is an example.

Suppose a large clothing retailer is looking to gain a competitive

advantage through superior customer service. A task force is

created to develop a state-of-the-art returns policy that allows

customers to return any article of clothing, no questions asked. The

organization also decides that, in order to protect the competitive

advantage that this returns policy will bring, they will develop their

own customization to their ERP system to implement this returns

policy. In preparation for the rollout of the system, all customer

service employees are trained, showing how to use the new system

and specifically how to process returns. Once the updated returns

process is implemented, the organization will be able to measure

several key indicators about returns that will allow them to adjust

the policy as needed. For example, if it is determined that many

women are returning their high-end dresses after wearing them

once, they could implement a change to the process that limits

the return period to 14 days from the original purchase date. As

changes to the returns policy are made, the changes are rolled out

via internal communications and updates to the returns processing

on the system are made.

If done properly, business process management will provide

several key benefits to an organization, which can be used to

contribute to competitive advantage. These benefits include:

• Empowering employees. When a business process is designed correctly and supported with information technology,

employees will be able to implement it on their own authority.

178 | Information Systems for Business and Beyond (2019)

In the returns policy example, an employee would be able to

accept returns made before fourteen days or use the system to

make determinations on what returns would be allowed after

fourteen days.

• Built-in reporting. By building measurement into the programming, the organization can stay current on key

metrics regarding their processes. In this example, these can

be used to improve the returns process and also, ideally, to

reduce returns.

• Enforcing best practices. As an organization implements processes supported by information systems, it can work to

implement the best practices for that class of business process.

In this example, the organization may want to require that all

customers returning a product without a receipt show a legal

ID. This requirement can be built into the system so that the

return will not be processed unless a valid ID number is

entered.

• Enforcing consistency. By creating a process and enforcing it with information technology, it is possible to create

consistency across the entire organization. In this example, all

stores in the retail chain can enforce the same returns policy. If

the returns policy changes, the change can be instantly

enforced across the entire chain.

Business Process Re-engineering

As organizations look to manage their processes to gain a

competitive advantage, it is also important to understand that

existing ways of doing things may not be the most effective or

efficient. A process developed in the 1950s is not going to be better

just because it is now supported by technology.

In 1990 Michael Hammer published an article in the Harvard

Business Review entitled “Reengineering Work: Don’t Automate,

Obliterate.” This article suggested that simply automating a bad

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process does not make it better. Instead, companies should “blow

up” their existing processes and develop new processes that take

advantage of the new technologies and concepts. He states in the

introduction to the article:

Many of our job designs, work flows, control mechanisms,

and organizational structures came of age in a different

competitive environment and before the advent of the

computer. They are geared towards greater efficiency and

control. Yet the watchwords of the new decade are

innovation and speed, service, and quality.

It is time to stop paving the cow paths. Instead of

embedding outdated processes in silicon and software, we

should obliterate them and start over. We should “re-

engineer” our businesses: use the power of modern

information technology to radically redesign our business

processes in order to achieve dramatic improvements in

their performance. 1

Business Process Re-engineering (BPR) is not just taking an existing

process and automating it. BPR is fully understanding the goals of a

process and then dramatically redesigning it from the ground up to

achieve dramatic improvements in productivity and quality. But this

is easier said than done. Most people think in terms of how to do

small, local improvements to a process. Complete redesign requires

thinking on a larger scale. Hammer provides some guidelines for

how to go about doing business process re-engineering:

• Organize around outcomes, not tasks. This simply means design the process so that, if possible, one person performs all

the steps. Instead of passing the task on to numerous people,

one person does the entire process, resulting in greater speed

1. [1]

180 | Information Systems for Business and Beyond (2019)

and customer responsiveness.

• Have those who use the outcomes of the process perform the process. With the use of information technology many simple tasks are now automated so the person who needs the

outcome should be empowered to perform it. Hammer

provides the following example. Instead of having every

department in the company use a purchasing department to

order supplies, have the supplies ordered directly by those

who need the supplies using an information system.

• Merge information processing work into the real work that produces the information. When one part of the company creates information, such as sales information or payment

information, it should be processed by that same department.

There is no need for one part of the company to process

information created in another part of the company.

• Treat geographically dispersed resources as though they were centralized. With the communications technologies available today, it becomes easier than ever to focus on

physical location. A multinational organization does not need

separate support departments (such as IT, purchasing, etc.) for

each location anymore.

• Link parallel activities instead of integrating their results. Departments that work in parallel should be sharing data and

communicating with each other during a process instead of

waiting until each group is done and then comparing notes.

The outdated concept of only linking outcomes results in re-

work, increased costs, and delays.

• Put the decision points where the work is performed, and build controls into the process. The people who do the work should have decision making authority and the process itself

should have built-in controls using information

technology. Today’s workforce is more educated and

knowledgeable than in the past so providing workers with

information technology can result in the employees controlling

their processes.

Chapter 8: Business Processes | 181

• Capture information at the source. Requiring information to be entered more than once causes delays and errors. With

information technology, an organization can capture it once

and then make it available whenever needed.

These principles may seem like common sense today, but in 1990

they took the business world by storm. Hammer gives example after

example of how organizations improved their business processes

by many orders of magnitude without adding any new employees,

simply by changing how they did things (see sidebar).

Unfortunately, business process re-engineering got a bad name in

many organizations. This was because it was used as an excuse for

cost cutting that really had nothing to do with BPR. For example,

many companies simply used it as a reason for laying off part of

their workforce. However, today many of the principles of BPR have

been integrated into businesses and are considered part of good

business-process management.

Sidebar: Reengineering the College Bookstore

The process of purchasing the correct textbooks in a timely manner

for college classes has always been problematic. Now with online

bookstores competing directly with the college bookstore for

students’ purchases, the college bookstore is under pressure to

justify its existence.

But college bookstores have one big advantage over their

competitors, namely they have access to students’ data. Once a

student has registered for classes, the bookstore knows exactly

what books that student will need for the upcoming term. To

leverage this advantage and take advantage of new technologies,

182 | Information Systems for Business and Beyond (2019)

College Bookstore Redesign

the bookstore wants to implement a new process that will make

purchasing books through the bookstore advantageous to students.

Though they may not be able to compete on price, they can provide

other advantages such as reducing the time it takes to find the

books and the ability to guarantee that the book is the correct

one for the class. In order to do this, the bookstore will need to

undertake a process redesign.

The goal of the process redesign is simple. Capture a higher

percentage of students as customers of the bookstore. After

diagramming the existing process and meeting with student focus

groups, the bookstore comes up with a new process. In the new

process the bookstore utilizes information technology to reduce the

amount of work the students need to do in order to get their books.

In this new process the bookstore sends the students an e-mail

with a list of all the books required for their upcoming classes. By

clicking a link in this e-mail the students can log into the bookstore,

confirm their books, and complete the purchase. The bookstore will

then deliver the books to the students. And there is an additional

benefit to the faculty: Professors are no longer asked to delay start

of semester assignments while students wait for books to arrive in

the mail. Instead, students can be expected to promptly complete

their assignments and the course proceeds on schedule.

Chapter 8: Business Processes | 183

College bookstore data flow diagram (original) (Click to enlarge)

College bookstore data flow diagram (redesigned) (Click to enlarge)

Here are the changes to this process shown as data flow diagrams:

184 | Information Systems for Business and Beyond (2019)

Sidebar: ISO Certification

Many organizations now claim that they are using best practices

when it comes to business processes. In order to set themselves

apart and prove to their customers, and potential customers, that

they are indeed doing this, these organizations are seeking out

an ISO 9000 certification. ISO is an acronym for International

Standards Organization (website here). This body defines quality

standards that organizations can implement to show that they are,

indeed, managing business processes in an effective way. The ISO

9000 certification is focused on quality management.

In order to receive ISO certification, an organization must be

audited and found to meet specific criteria. In its most simple form,

the auditors perform the following review.

• Tell me what you do (describe the business process).

• Show me where it says that (reference the process

documentation).

• Prove that this is what happened (exhibit evidence in

documented records).

Chapter 8: Business Processes | 185

Over the years, this certification has evolved and many branches

of the certification now exist. ISO certification is one way to

separate an organization from others. You can find out more about

the ISO 9000 standard here.

Summary

The advent of information technologies has had a huge impact on

how organizations design, implement, and support business

processes. From document management systems to ERP systems,

information systems are tied into organizational processes. Using

business process management, organizations can empower

employees and leverage their processes for competitive advantage.

Using business process reengineering, organizations can vastly

improve their effectiveness and the quality of their products and

services. Integrating information technology with business

processes is one way that information systems can bring an

organization lasting competitive advantage.

Study Questions

1. What does the term business process mean?

2. What are three examples of business process from a job you

have had or an organization you have observed?

3. What is the value in documenting a business process?

4. What is an ERP system? How does an ERP system enforce best

practices for an organization?

186 | Information Systems for Business and Beyond (2019)

5. What is one of the criticisms of ERP systems?

6. What is business process re-engineering? How is it different

from incrementally improving a process?

7. Why did BPR get a bad name?

8. List the guidelines for redesigning a business process.

9. What is business process management? What role does it play

in allowing a company to differentiate itself?

10. What does ISO certification signify?

Exercises

1. Think of a business process that you have had to perform in

the past. How would you document this process? Would a

diagram make more sense than a checklist? Document the

process both as a checklist and as a diagram.

2. Review the return policies at your favorite retailer, then answer

this question. What information systems do you think would

need to be in place to support their return policy?

3. If you were implementing an ERP system, in which cases would

you be more inclined to modify the ERP to match your

business processes? What are the drawbacks of doing this?

4. Which ERP is the best? Do some original research and

compare three leading ERP systems to each other. Write a

two- to three-page paper that compares their features.

Labs

1. Visit a fast food restaurant of your choice. Observe the

Chapter 8: Business Processes | 187

processes used in taking an order, filling the order, and

receiving payment. Create a flowchart showing the steps used.

Then create a second flowchart indicating where you would

recommend improvements to the processes.

2. Virginia Mason Medical Center, located in Seattle, Washington,

needed to radically change some of their business processes.

Download the case study. Then read the case study and

respond to the following items.

1. Number of campuses

2. Number of employees

3. Number of physicians

4. Nature of the issue at Virginia Mason

5. “You cannot improve a process until…”

6. Discuss staff walking distance and inventory levels

7. How were patient spaces redesigned?

8. What happened to walking distance after this redesign?

9. Inventory was reduced by what percent?

10. Total cost savings =

1. Hammer, M. (1990). Reengineering work: don’t automate,

obliterate. Harvard Business Review 68.4, 104–112.↵

188 | Information Systems for Business and Beyond (2019)