Management Information System Discussion

Basic concepts – understanding information

LEARNING OUTCOMES

After reading this chapter, you will be able to:

■ distinguish between data, information and knowledge;

■ describe and evaluate information quality in terms of its characteristics;

■ classify decisions by type and organisational level;

■ identify the information needed to support decisions made at different organisational levels;

■ identify some of the tools and techniques used to help make decisions.

MANAGEMENT ISSUES

The purpose of business information systems (BIS) is to produce high-quality information that can be used to support the activities of an organisation. In order to gain a good understanding of BIS, managers must fi rst understand the nature of information and how eff ective decisions are made. From a managerial perspective, this chapter addresses the following areas:

■ the importance of managing information and knowledge as a key organisational asset;

■ the transformation process from data to information of high quality;

■ the process and constraints of decision making;

■ the different kinds of decisions that managers make and how these affect the organisation.

CHAPTER AT A GLANCE

MAIN TOPICS

■ Data and information 6

■ Creating information 8

■ Qualities of information 11

■ Knowledge and wisdom 15

■ The business environment 16

■ Managerial decision making 18

FOCUS ON . . .

■ Knowledge management 27

CASE STUDIES

1.1 Technology sponsors a complementary form of capitalism 14

1.2 Dealing with the data deluge 23

CHApTER

1

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Part 1 INTRODUCTION TO BUSINESS INFORMATION SYSTEMS6

The general aim of this chapter is to introduce readers to the basic concepts needed to gain a thorough understanding of business information systems (BIS). However, before looking at BIS themselves, it is important to understand something of the nature of information. For BIS to be effective, the quality of information provided is vital. In this chapter, we look at how we can assess and improve the quality of data and information. The topics covered are intended to give readers an understanding of:

■ the nature of data, information and knowledge; ■ the value of information; ■ the characteristics that can be used to describe information quality; ■ information in the context of the e-business environment; ■ managerial decision making, including the characteristics of decisions at different

organisational levels; ■ the information needed to support decision making.

INTRODUCTION

DATA AND INFORMATION

As will be shown a little later, much of a manager’s work involves using information to make decisions and ensuring that information flows through the organisation as efficiently as possible. Increasingly, technology is used to capture, store and share information throughout the organisation and with business partners. Many organisations are keenly aware that using information – and information technology – effectively can have an impact on every aspect of their operations, from reducing running costs to dealing with competition in the marketplace. In his best-selling book, Business at the Speed of Thought, Bill Gates (2001) says ‘Information technology and business are becoming inextricably interwoven. I don’t think anybody can talk meaningfully about one without talking about the other.’ In this chapter we present an insight into the natures of data, information and knowledge to provide a foundation for learning about BIS.

Russell Ackoff ’s ‘DIKW’ model (Rowley, 2007: 176) provides a good framework for helping to understand the relationships between data, information, knowledge and wisdom. As can be seen in Figure 1.1, these concepts can be shown as a hierarchy. The hierarchy suggests three important ideas. The first is that data becomes information, information becomes knowledge and knowledge ultimately becomes wisdom. In other words, there is a progression from one level to the next. The second idea is that knowledge and wisdom are somehow more valuable, desirable or important than data and information. This is because wisdom and knowledge sit at the top of the triangle. In turn, this leads to the third idea, that data are relatively common while knowledge and wisdom are less so.

We will look at each of the levels in the hierarchy in detail throughout the rest of this chapter, starting with data in the next section.

What is meant by data?

Data are raw facts or observations that are considered to have little or no value until they have been processed and transformed into information. A single piece of data is called a datum. Unrelated items of data are considered to be essentially without meaning and are often described as ‘noise’. It is only when data have been placed in some form of context that they become meaningful to a manager.

Data

A collection of non- random facts recorded by observation or research.

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7ChaPter 1 BASIC CONCEpTS – UNDERSTANDINg INFORMATION

There are several definitions for data that are in common use:

■ a series of non-random symbols, numbers, values or words; ■ a series of facts obtained by observation or research and recorded; ■ a collection of non-random facts.

Examples of data include:

■ today’s date;

■ measurements taken on a production line;

■ records of a business transaction, such as a single visit to a web site.

Figure 1.1 The ‘DIKW’ model

Wisdom

Knowledge

Information

Data

Meaning Applicability Transferability Value Human input Structure

Computer input Programmability

Low

High

High

Low

What is information?

As with the concept of data, there are several definitions of information that are in common use:

■ data that have been processed so that they are meaningful; ■ data that have been processed for a purpose; ■ data that have been interpreted and understood by the recipient.

Information

Data that have been processed so that they are meaningful.

Data can exist naturally or can be created artificially. Naturally occurring data need only to be recorded. In business, organisations often establish procedures to make sure data are recorded properly. When a customer makes a telephone enquiry, for example, staff may be instructed to ask for up-to-date contact details and make sure they are recorded in the company’s database.

Artificial data are often produced as a by-product of a business process. Processing an organisation’s accounts, for example, might produce the number of sales made in a particular month.

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Part 1 INTRODUCTION TO BUSINESS INFORMATION SYSTEMS8

CREATING INFORMATION

Processing data is necessary to place them into a meaningful context so that they can be easily understood by the recipient. Figure 1.2 illustrates the conversion of data into information.

A number of different data processes can be used to transform data into information. Data processes are sometimes also known as ‘transformation processes’. The next section describes a range of common data processes.

Some examples of information include:

■ a bank statement;

■ a sales forecast;

■ a telephone directory;

■ graphs of trends in visitor numbers to a web site.

Three important points can be drawn from these definitions. First, there is a clear and logical process that is used to produce information. This process involves collecting data and then subjecting them to a transformation process in order to create information. The concept of a transformation process will be discussed in more detail in the next section. Secondly, information involves placing data in some form of meaningful context, so that they can be understood and acted upon. Thirdly, information is produced for a purpose, to serve an information need of some kind. The concept of an information need is described in more detail later on.

Transformation process

A transformation process is used to convert inputs into outputs.

Information need

Information is produced to meet a specific purpose or requirement.

A somewhat different view of information can be examined by introducing an additional definition:

Information acts to reduce uncertainty about a situation or event.

Although uncertainty can never be eliminated entirely, it can be reduced significantly. Information can help to eliminate some possibilities or make others seem more likely. Managerial decision making can be improved by using information to reduce uncertainty. Information is said to influence decision behaviour, the way in which people make decisions. Managerial decision making is dealt with in more detail in a later section.

To summarise the key points made in the preceding section. Information:

■ involves transforming data using a defined process; ■ involves placing data in some form of meaningful context; ■ is produced in response to an information need and therefore serves a specific purpose; ■ helps to reduce uncertainty, thereby improving decision behaviour.

Figure 1.2 Transforming data into information using a data process

Data Transformation process

Information

Data process

A process used to convert data into information. Examples include summarising, classifying and sorting.

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Data processes

Some examples of data processes include the following:

■ Classification. This involves placing data into categories, for example categorising an expense as either a fixed or a variable cost.

■ Rearranging/sorting. This involves organising data so that items are grouped together or placed into a particular order. Employee data, for example, might be sorted according to surname or payroll number.

■ Aggregating. This involves summarising data, for example by calculating averages, totals or subtotals.

■ Performing calculations. An example might be calculating an employee’s gross pay by multiplying the number of hours worked by the hourly rate of pay.

■ Selection. This involves choosing or discarding items of data based on a set of selection criteria. A sales organisation, for example, might create a list of potential customers by selecting those with incomes above a certain level.

It is worth noting that any action that serves to place data into a meaningful context can be considered a valid data process. In addition, several processes may be used in combination to produce information.

From the point of view of a student at university, which of the following might be examples of information? Which might be examples of data?

(a) the date;

(b) a bank statement;

(c) the number 1355.76;

(d) a National Insurance number;

(e) a balance sheet;

(f) a bus timetable;

(g) a car registration plate.

Data v. informationActivity 1.1

Value of information

It is often possible to measure the value of information directly. The tangible value of information is often measured in terms of financial value. An example might be the use of inventory information to improve stock control procedures. A simple calculation can be used to determine the value of a given item or collection of information:

Value of information 2 Cost of gathering information

However, in many cases, it is not possible to calculate the value of information directly. Although it is certain that the information is of benefit to the owner, it is difficult – or even impossible – to quantify its value. In such cases, the information is said to have intangible value. A good example might involve attempting to measure the extent to which information can improve decision behaviour. Such a calculation might appear as shown below:

Improvements in decision behaviour 2 Cost of gathering information

Tangible value

A value or benefit that can be measured directly, usually in monetary terms.

Intangible value

A value or benefit that is difficult or impossible to quantify.

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There can be little doubt that the ability to make better decisions can be of great value to any organisation. However, one cannot readily quantify any improvements in decision making since a large number of other factors must also be taken in account. We will see in later chapters that this makes performing a cost–benefit analysis for BIS difficult (Chapters 8 and 14).

When information is used effectively, it can bring about many of the improvements listed below. State and explain why each of the items listed illustrates a tangible or intangible value of information:

(a) improved inventory control;

(b) enhanced customer service;

(c) increased production;

(d) reduced administration costs;

(e) greater customer loyalty;

(f) enhanced public image.

Tangible and intangible informationActivity 1.2

Using the Internet as a resource, find three case studies that show the value of information in the context of a business organisation. As an example, you might locate a news story in Computer Weekly (www.computerweekly.com) describing the savings made as a result of implementing a new stock control system.

Information valueActivity 1.3

Sources of information

Information can be gathered through both formal and informal communication. Formal communications can include reports and accounting statements. Informal communications can include conversations and notes.

Formal communication

Information transmitted by formal communication tends to be presented in a consistent manner. Company reports, for example, will often use the same basic format. This allows the recipient to locate items of interest quickly and easily. Since formal communications tend to be presented in a more structured manner, they are also more likely to present a more comprehensive view of the situations or circumstances they describe. In addition, the information transmitted in this way is likely to be accurate and relevant, since it is normally created for a specific purpose.

BIS can be used to help apply a ‘house style’ for standard documents. Memos, reports and other documents are produced by making use of the templates that are found in most modern word processing packages. These templates contain the basic structure of a given document and can be compared to completing a standard form. Templates can also contain detailed instructions that specify what information should be included in the document and, more importantly, what information should be excluded.

Formal communication

Formal communication involves presenting information in a structured and consistent manner.

Informal communication

This describes less well-structured information that is transmitted by informal means, such as casual conversations between members of staff.

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However, formal communication also has several disadvantages. The structure imposed on information is often inflexible, sometimes limiting its type, form and content. In addition, formal communications often overlook information obtained by informal means. This can affect the decision-making process, reducing the quality and accuracy of any decisions made. Finally, formal communications often ignore group and social mechanisms. A formal report, for example, might marginalise or ignore staff opinions, causing offence and leading to reduced morale.

Informal communication

Informal communication is always present in an organisation, regardless of its size or nature. Information of this kind can be considered a valuable resource and one of the aims of knowledge management (described later in this chapter) is to harness it to work for the benefit of the organisation. Perhaps the most common means by which informal communication takes place is by word of mouth. This kind of communication is sometimes known as water- cooler conversation. In a sales organisation, for example, a casual conversation between a salesperson and a client might yield information that can be used to enhance a product or find new ways of making it more attractive to customers. If this information is not recorded the feedback will not be available to the new product development group.

Informal communication tends to offer a high degree of flexibility since there is more freedom to choose how information is structured and presented. Information obtained in this way also tends to be highly detailed, although it may often contain inaccuracies and may not be entirely relevant.

Consider the role of informal communication within an organisation such as a local government department or hospital.

Informal communicationActivity 1.4

The scope of information obtained in this way is often very narrow, relevant only to localised problems and situations. However, even at a local level, this can improve problem solving and decision making since it allows managers to gain a more detailed and in-depth understanding of a given situation.

One of the major disadvantages of informal communication is that it cannot deal with large volumes of information. Furthermore, as a means of communication, it is relatively slow and inefficient. Informal communication can also be highly selective, for example a person taking part in a conversation may be able to restrict what information is transmitted and who is able to receive it. Perhaps a more serious disadvantage is that informal communication is often ignored in favour of formal communication.

QUALITIES OF INFORMATION

Information can be said to have a number of different characteristics that can be used to describe its quality. The differences between ‘good’ and ‘bad’ information can be identified by considering whether or not it has some or all of the attributes of information quality.

Lucey (2005) provides a list of characteristics likely to be present in information considered to be of good quality. However, others, such as O’Brien and Marakas (2006), take a more structured approach and describe the attributes of information quality as being divided into three basic categories: time, content and form. Table 1.1 summarises information characteristics that can be used to assess quality. Note that each column is independent; reading down each column lists the attributes associated with a particular factor.

Attributes of information quality

A group of characteristics by which the quality of information can be assessed, normally grouped into categories of time, content and form.

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Time dimension

The time dimension describes the time period that the information deals with and the frequency at which the information is received.

■ Timeliness. The information should be available when needed. If information is provided too early, it may no longer be current when used. If the information is supplied too late, it will be of no use.

■ Currency. The information should reflect current circumstances when provided. One can go further and suggest that as well as being up-to-date the information should also indicate those areas or circumstances liable to change by the time the information is used.

■ Frequency. In addition to being available when needed, information should also be available as often as needed. This normally means that information should be supplied at regular intervals, for example some organisations may require weekly sales reports whilst others need only monthly reports.

■ Time period. The information should cover the correct time period. A sales forecast, for example, might include information concerning past performance, current performance and predicted performance so that the recipient has a view of past, present and future circumstances.

Content dimension

The content dimension describes the scope and contents of the information.

■ Accuracy. Information that contains errors has only limited value to an organisation. ■ Relevance. The information supplied should be relevant to a particular situation and

should meet the information needs of the recipient. Extraneous detail can compromise other attributes of information quality, such as conciseness.

■ Completeness. All of the information required to meet the information needs of the recipient should be provided. Incomplete information can compromise other attributes of information quality, such as scope and accuracy.

■ Conciseness. Only information relevant to the information needs of the recipient should be supplied. In addition, the information should be provided in the most compact form possible. As an example, sales figures are normally provided in the form of a graph or table – it would be unusual for them to be supplied as a descriptive passage of text.

■ Scope. The scope of the information supplied should be appropriate to the information needs of the recipient. The recipient’s information needs will determine whether the information should concern organisational or external situations and whether it should focus on a specific area or provide a more general overview.

Table 1.1 Summary of attributes of information quality

time Content Form additional characteristics

Timeliness Currency Frequency Time period

Accuracy Relevance Completeness Conciseness Scope

Clarity Detail Order Presentation Media

Confidence in source Reliability Formatted correctly Appropriateness Received by correct person Sent by correct channels

Time dimension

Characteristics of information quality such as timeliness, currency and frequency which are related to the time of collection and review.

Content dimension

Characteristics of information quality such as accuracy, relevance and conciseness which are related to the scope and contents of the information.

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Form dimension

The form dimension describes how the information is presented to the recipient.

■ Clarity. The information should be presented in a form that is appropriate to the intended recipient. The recipient should be able to locate specific items quickly and should be able to understand the information easily.

■ Detail. The information should contain the correct level of detail in order to meet the recipient’s information needs. For example, in some cases highly detailed information will be required whilst in others only a summary will be necessary.

■ Order. Information should be provided in the correct order. As an example, management reports normally contain a brief summary at the beginning. This allows a manager to locate and understand the most important aspects of the report before examining it at a higher level of detail.

■ Presentation. The information should be presented in a form that is appropriate to the intended recipient. Different methods can be used to make information clearer and more accessible to the recipient, for example it is common to present numerical information in the form of a graph or table.

■ Media. Information should be presented using the correct medium. Formal information, for example, is often presented in the form of a printed report, whereas a presentation might make use of a video projector.

Additional characteristics

In addition to the attributes described above, one might also add several others. Of particular importance is confidence in the source of the information received. Recipients are more likely to accept and trust the information they obtain if it is received from a source that has been accurate and reliable in the past.

A further attribute of information quality is that of reliability. It can be argued that recipients should be confident that they can rely upon information being available when required and that the information will be of a consistent quality in terms of other attributes of information quality, such as accuracy and conciseness.

The widespread use of computer-based information systems raises a number of issues related to the sheer quantity of information that is freely available via sources such as the Internet. In addition, the use of computer-based information systems also raises concerns in relation to security. In view of this, one might suggest that a further attribute of information quality is that the information provided should be appropriate to the recipient’s activities. This might restrict information from being supplied if it is of a confidential nature or beyond the duties or responsibilities of a person’s role.

The past decade has also seen an increased emphasis on finding new ways to exploit the huge quantities of information available to organisations. Many of the tools and techniques developed use technology to analyse information automatically. In order to do this effectively, it is necessary to store the information in a form that makes it easy to process by machine. In this way, we can say that information often needs to be formatted correctly, according to its intended use. Data to be processed by computer often needs to be placed in a specific format – usually following one or more standards – before it can be used. We see many of these standards in use every day. On the Internet, for instance, web pages are formatted using the HTML specification. The formats and standards used by an organisation can be its own internal ones, or can follow national or international standards. Internal data formats are often described as being proprietary while national and international standards are usually defined by official agencies. In the UK, for instance,

Form dimension

Characteristics of information quality related to how the information is presented to the recipient.

proprietary

related to an owner or ownership

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Part 1 INTRODUCTION TO BUSINESS INFORMATION SYSTEMS14

official standards are usually set by the British Standards Institute (BSI). International standards are often set by the International Organisation for Standardistation (ISO).

The semantic web is often used to describe information accessible via the Internet that is meaningful to computers. This allows computers to deal with information more like human beings by understanding the meaning of the information and its associations with other pieces of information. One of the ways in which information can be made more accessible to machines is by including metadata. We can think of metadata as ‘data about data’ meaning that it is used to provide information about the content of a given item. A word processing document, for instance, will contain more than just text; it will contain additional information such as the name of the author, the date and time the document was created, comments and more.

According to the World Wide Web Consortium (W3C, 2001):

The Semantic Web is about two things. It is about common formats for integration and combination of data drawn from diverse sources, where on the original Web mainly concentrated on the interchange of documents. It is also about language for recording how the data relates to real world objects. That allows a person, or a machine, to start off in one database, and then move through an unending set of databases which are connected not by wires but by being about the same thing.

It also seems natural to suggest that some confirmation that the information has been received by the correct person is required. Unless the information has been received and acted upon, then it is of no value. Thus, it can be suggested that an additional attribute of information quality is that it can be verified that the information has been received and understood.

Finally, it can be argued that another attribute of information quality is that that information should be capable of being transmitted via the correct channels. Most organisations have formal policies and procedures for dealing with particular situations. For example, a complaint against a member of staff is normally presented in a written form and travels upwards through the management hierarchy until it is received by the correct person. If the information were to be sent in any other way, for example by word of mouth, it might not reach its destination or might become garbled during the journey.

Visit the web sites of two different online booksellers. For each example, assess whether the information provided about a particular book is of ‘good’ or ‘poor’ quality. Explain your reasoning with reference to the characteristics of information described in this chapter, and in particular Table 1.1. Can you differentiate between the offerings of the companies using the information provided?

Information qualityActivity 1.5

The foundation of modern economics is Adam Smith’s observation that an individual who aims only for his gain may still be led ‘by an invisible hand’ to make choices that bring economic benefits to others.

Last week, the Financial Times reported that a complementary view is emerging in the form of a ‘sharing economy’. Most productivity growth may still be powered by self-interest. But modern information

Technology sponsors a complementary form of capitalism

CASE STUDy 1.1

Semantic web

Refers to information accessible via the Internet that is understandable by machines. Such information has been placed in a form that allows machines to understand the meaning of the information and its associations with other pieces of information.

Metadata

Additional information used to describe the content of a given item. Metadata is often described as ‘data about data’.

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KNOWLEDGE AND WISDOM

Although there are numerous definitions of knowledge, many tend to agree that it involves harnessing a person’s unique abilities, such as his or her perceptions, experiences, intuition and analytical skills. When these abilities are combined with the information the person holds, this represents knowledge. In other words, knowledge can be thought of as the combined result of a person’s experiences and the information he or she possesses. This idea can be seen clearly in common definitions, such as this one proposed by Wang, Hjelmervik and Bremdal (2001):

Knowledge is the full utilisation of information and data, coupled with the potential of people’s skills, competencies, ideas, intuitions, commitments and motivations

Knowledge

Knowledge can be thought of as the combined result of a person’s experiences and the information they possess.

technology is helping the invisible hand become a whole lot more collaborative.

There has been too much breathless talk of how IT would revolutionise the economy, so it is useful to distinguish changes that are truly transformational from those that merely make it easier to do what one was already doing. Three broad trends assert themselves.

First, the internet makes it much cheaper for individuals to offer traditional goods and services to a larger market. Take short-term accommodation: there have always been homeowners wanting to rent out a spare room, and the hotel industry is of course of old vintage. IT does not bring fundamental innovation in this case. But – as websites such as Airbnb show – making it possible, for free, to connect with customers anywhere in the world cuts transaction costs and shrinks the advantage of scale that hotel chains hold over homey bed and breakfast operations.

A lower cost structure is not itself a shift from the pursuit of one’s self-interest to a passion for sharing. It it nonetheless significant. When it becomes profitable to occupy rooms that would previously have stayed empty, it is a boost to the efficient use of society’s resources. The same can be said for how the internet has made more personal services affordable for those outside the ranks of the super-rich. Those with more cash than time can outsource small chores to those in the opposite situation. The vehicles are sites that match tasks – from picking up the laundry to settling the utility bills – to those with time to spare.

Second, the information revolution facilitates genuine sharing in consumption. Barter – long seen as the height of inefficiency – is enjoying a revival through

house swaps, where the internet can deepen the pool of swappers, making compatible pairings more likely. Many city residents are ditching car ownership in favour of web-facilitated car sharing. Car clubs that allow down to half-hour car rentals exist in cities around the globe. Car pooling websites allow for a virtual form of hitchhiking that does away with the inefficient waiting at the roadside. In France, buzzcar. com allows ‘peer-to-peer rental’: private car owners rent out their vehicles when they do not need them.

Sharing can be a lifestyle as well as an economy. Demand is growing for consumption that offers a personal experience beyond the standardised good or service. It also reflects a change in attitude to exclusive ownership, traditionally the measure of material success.

This underpins the third, most innovative and exciting trend: sharing in production. The open-source movement in software coding, Wikipedia, and some artists’ renunciation of standard copyright show how work that is carried out voluntarily and co-ordinated spontaneously can result in economically valuable products. It is the antithesis of Taylorism.

None of these trends represents alternatives to capitalism; rather they are complements to standard practice and should be celebrated as such. Like traditional capitalism, they rely on trust and on supporting institutions for their success. These can be provided by the market itself – from the informal, such as user reviews, to the formal, such as Creative Commons licensing standards. At times state quality regulation is needed. In all cases the goal should be neither to force sharing nor to ban it, but to give those who want to share the confidence to do so.

QUESTIONS

1. Using the case study, explain how IT enables a sharing economy.

2. How does a sharing economy improve overall productivity?

Source: Comment section (2013) Technology sponsors a complementary form of capitalism. Financial Times. 11 August. © The Financial Times Limited 2013. All Rights Reserved.

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We can also see this idea in more recent definitions, such as Rainer and Cegielski’s (2011):

Knowledge consists of data and/or information that have been organised and processed to convey understanding, experience, accumulated learning, and expertise as they apply to a current business problem.

In general, knowledge can be described as explicit or tacit. It may help to think of explicit knowledge as ‘know-what’ and tacit knowledge as ‘know-how’.

Explicit knowledge is easily captured and stored within documents and other media. This type of knowledge tends to be highly detailed, formal and systematic. It is often stored in the form of manuals, documents, procedures and database files. Examples of explicit knowledge include minutes of meetings, employee handbooks and user manuals. Since explicit knowledge tends to be structured, it is easy to transmit to others.

Tacit knowledge is ‘the intangible, internal, experiential, and intuitive knowledge that is undocumented and maintained in the human mind. It is a personal knowledge contained in human experience’ (Waltz, 2003). Tacit knowledge is characterised by factors such as perceptions, beliefs, values, intuition and experience. Since a great deal of tacit knowledge may be held unconsciously, it is difficult to elicit, describe or record. Examples of tacit knowledge include skills (e.g. riding a bike), knowing how to respond in social situations and knowing how to respond to management reports.

Knowledge management (described in more detail later on) is involved with collecting (eliciting) knowledge and converting (codifying) it into a form that allows it to be shared across the organisation. A key part of this process involves gathering tacit knowledge and converting it into explicit knowledge.

For completeness, it is also worth taking a brief look at the concept of wisdom. Wisdom combines the characteristics of knowledge with the ability to apply such knowledge to new situations and problems. Wang, Hjelmervik and Bremdal (2001: 43), for instance, define wisdom as ‘sufficiently generalised approaches and values that can be applied in numerous and varied situations’. Spitzer (2007: 106) offers a fairly similar definition: ‘Wisdom is deep, rich understanding and insight that usually develops through a combination of extensive knowledge (knowing) and personal experience (doing) over time.’

A good way of thinking about wisdom involves the journey many people take as they move from being beginners to experts in many different areas. In engineering, for instance, an apprentice spends several years learning a wide range of skills before becoming a craftsman. We might argue that the difference between an apprentice and a craftsman is that the latter has greater knowledge, experience and understanding.

All business organisations operate within an environment that influences the way in which the organisation operates. Legislation, for example, will act to control some of the organisation’s activities. However, the actions of an organisation may also influence parts of the environment. For example, companies may launch an advertising campaign designed to draw customers away from a competitor.

Using the Internet, locate at least five definitions or descriptions of knowledge. What do these definitions have in common and how do they differ from each other?

What is knowledge?Activity 1.6

THE BUSINESS ENVIRONMENT

Environment

All businesses operate within an environment that includes social, political and business influences.

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Internal business resources

To operate within the business environment, organisations use a business resource base which supports their activities. The resource base consists of tangible resources (sometimes called ‘physical resources’) and intangible resources (sometimes called ‘conceptual resources’).

BIS can be applied to make best use of physical and conceptual resources to help an organisation to reduce costs, improve productivity and enhance overall efficiency.

Tangible assets (physical resource base)

Physical resources are often known as tangible assets and are normally directed towards the production of a product or service. Examples of physical resources include money, land, plant and labour power. The hardware and software making up BIS are also physical resources.

Figure 1.3 The business environment of an organisation and the main factors that influence it

Intangible assets (conceptual resource base)

Conceptual resources are often known as intangible assets and are normally used to support an organisation’s activities, for example by helping managers to make better decisions. Examples of intangible resources include experience, motivation, knowledge,

Figure 1.3 illustrates some of the elements that may influence the way in which an organisation operates. For managers, gathering and using information about the external environment is an essential part of decision making. Increasingly, information systems are needed to help collect and make sense of information about the environment.

Organisation

Competitors

Legislation

Location

Weather

Economic factors

Employee relations

S up

pl ie

rs

Te ch

no lo

gy

P ub

lic o

pi ni

on

C us

to m

er s

Physical environment

General environment

Specific environment

Business resource base

The resources that a company has available to it which are made up of physical and conceptual resources known as tangible and intangible assets.

Physical resources

Tangible assets or resources owned by a company such as land, buildings and plant.

Conceptual resources

Non-physical resources or intangible assets owned by a company, such as organisational knowledge.

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Part 1 INTRODUCTION TO BUSINESS INFORMATION SYSTEMS18

Modern organisations rely heavily upon information and communications technology (ICT) to manage internal communications with external agencies, such as customers and suppliers. This reliance upon, particularly the Internet, has given rise to the e-business concept. The European Commission describes e-business like this:

The term ‘e-business’ covers both e-commerce (buying and selling online) and the restructuring of business processes to make the best use of digital technologies.

In general, e-business is concerned with making day-to-day business activities more efficient by improving information exchanges within the organisation and between the organisation and its partners.

Intangible assets on average account for over 20 per cent of the market capitalisation of UK high-technology companies, according to a study by Taylor Johnson Garrett, a City law firm.

Source: Computer Weekly, 22 March 2001

The e-business concept

MANAGERIAL DECISION MAKING

In order for an organisation to function effectively, all activities must be planned and monitored by managers according to well-informed decisions. In this part of the chapter we review the role of BIS in supporting different aspects of managerial decision making as follows:

1. An introduction to how managers use information, including their decision behaviour. 2. The three key levels of managerial decision making – operational, tactical and strategic. 3. A description of the decision-making process, assessing how BIS can assist at different

stages of this process. 4. A section on decision-making theory, showing how structured decisions can be formally

described in order to incorporate them into BIS. 5. The final section on knowledge management, illustrating how businesses are looking to

manage information that can be used to assist less clearly structured decision making.

The information requirements of managers

Henri Fayol (1841–1925) devised a classic definition of management that is still widely used in both industry and academia. Of course, it is considered somewhat inappropriate nowadays to talk about commanding people:

To manage is to forecast and plan, to organise, to command, to coordinate and to control.

Fayol’s definition should make it clear that much of a manager’s work involves making decisions about the best way to achieve the organisation’s objectives and that there is a direct link between a manager’s decision-making and planning activities. A forecast, for example, is created to help managers decide what actions are necessary to prepare the organisation for the future. The success of all of the activities described in Fayol’s definition

ideas and judgement. The data and information that are part of a BIS can be thought of as a valuable intangible resource.

Electronic business (e-business)

The use of information and communication technologies, particularly the Internet, to support day-to-day business activities.

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19ChaPter 1 BASIC CONCEpTS – UNDERSTANDINg INFORMATION

depends upon access to high-quality information. It is here that BIS have a role, as a means of supporting the manager’s work by providing the information he or she needs. The next sections discuss managerial decision making in more detail.

Max Weber’s (1864–1920) view of a bureaucratic form of organisation suggests that as an organisation grows in size and complexity, it becomes more difficult to control. For Weber, an ideal organisation displayed a number of characteristics, such as well-defined hierarchy or legitimate authority, the division of labour based on functional specialism and the existence of rules and procedures to deal with all situations and decisions. Large organisations, such as public utilities, often adopt some or all of the characteristics of a bureaucracy.

As organisations grow in size or complexity, the importance of effective and efficient management increases. In turn, greater reliance is placed upon the BIS used by the organisation. Put simply, as an organisation becomes larger, effective information systems become critical to continued survival.

Decision behaviour

The way in which managers make decisions, and the factors that influence those decisions, are often described as decision behaviour.

Decisions can be classed as structured or unstructured (sometimes referred to as ‘programmable’ and ‘non-programmable’ decisions). In reality, however, many decisions fall somewhere in between the two extremes and are known as semi-structured decisions.

Structured decisions tend to involve situations where the rules and constraints governing the decision are known. They tend to involve routine or repetitive situations where the number of possible courses of action is relatively small. A good example involves stock control. The decision to reorder a given item will be governed by a fairly simple set of rules and constraints. When the amount of stock held falls below a certain point, a fixed quantity of new stock will be ordered. Structured decisions are often described as programmable, meaning that they are easily automated.

Unstructured decisions tend to involve more complex situations, where the rules governing the decision are complicated or unknown. Such decisions tend to be made infrequently and rely heavily on the experience, judgement and knowledge of the decision maker. A good example of an unstructured decision might be whether or not an organisation should open a new branch in a particular area.

The behaviour of a manager will influence the way in which he or she absorbs information and reaches a decision. This is often referred to as a person’s cognitive style. A manager’s cognitive style will fall between analytical and intuitive styles.

The analytical manager typically displays a high level of analytical thought and is able to provide detailed justifications for any decisions made. He or she tends to prefer quantitative information as the basis for a decision and will often overlook any qualitative information received. This type of manager examines situations in fine detail and often overlooks the wider issues that might influence a decision.

Decision behaviour

The way in which managers make decisions.

Structured decisions

Situations where the rules and constraints governing the decision are known.

Unstructured decisions

Complex situations, where the rules governing the decision are complicated or unknown.

Cognitive style

This describes the way in which a manager absorbs information and reaches decisions. A manager’s cognitive style will fall between analytical and intuitive styles.

Data are often described as ‘hard data’ or ‘soft data’. Hard data, also known as quantitative data, tend to make use of figures, such as

statistics. Hard data are often collected in order to measure or quantify an object or situation.

Qualitative data

Describe without the use of figures, the qualities or characteristics of an object or situation. Also known as soft data.

Soft data, often known as qualitative data, tend to focus on describing the qualities or characteristics of an object or situation. Interviews, for example, are often used to collect qualitative data related to a person’s opinions or beliefs.

Quantitative data

Includes use of figures, such as statistics. Also known as hard data, often collected in order to measure or quantify an object or situation.

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Part 1 INTRODUCTION TO BUSINESS INFORMATION SYSTEMS20

Levels of managerial decision making

The characteristics of the decisions taken in an organisation vary according to the level at which they are taken. Figure 1.4 shows the distribution of managerial responsibility within a typical organisation. As can be seen, the largest proportion of managers tends to be located at the operational level of the organisation. The smallest proportion of managers, typically less than 10 per cent, is located at the strategic level.

■ At the strategic level, managers are largely concerned with long-term organisational planning. Decisions tend to be unstructured and are made infrequently. However, the decisions made at this level are likely to have a large impact on the organisation as a whole and cannot be reversed easily. An example of a decision taken at the strategic level might be a choice of new markets to move into.

■ At the tactical level managers are largely concerned with medium-term planning. Managers monitor the performance of the organisation, control budgets, allocate resources and set policies. Decisions taken at this level are used to set medium-term goals that form stages leading to the accomplishment of the organisation’s strategic objectives. An example of a decision taken at the tactical level might be setting a departmental budget.

■ At the operational level managers deal with short-term planning and the day-to-day control of the organisation’s activities. The decisions taken at this level direct the organisation’s efforts towards meeting the medium-term goals, abiding by the budgets, policies and procedures set at the tactical level. Operational decisions tend to be highly structured and have little impact on the organisation as a whole. An example of a decision taken at the operational level might be setting a daily or weekly production schedule.

Figure 1.4 Levels of managerial decision making

Operational

Strategic

Tactical

The intuitive manager relies heavily on prior experience, judgement and intuition. He or she tends to examine situations as a whole, adopting a holistic view that takes into account the wide range of factors that might influence a decision. This kind of manager will also be more willing to accept qualitative information when making a decision.

It should be evident that a manager with an analytical cognitive style is likely to be most effective when making structured decisions. Intuitive managers are likely to be most effective when making unstructured decisions. Systems to assist in decision making are described in Chapter 6.

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21ChaPter 1 BASIC CONCEpTS – UNDERSTANDINg INFORMATION

A direct relationship exists between the management level at which a decision is taken and the characteristics of the information required to support decision making. Tables 1.2 and 1.3 illustrate how the characteristics of the information needed by managers change according to the type of decision being made.

Example of decision types

Structured decisions: operational planning ■ How should we process a sales order?

■ What level of discount shall we give our customer on this order?

Semi-structured decision: tactical planning ■ How do we target our most profitable customers and what are their characteristics?

■ Which foreign markets should we target?

■ What is the best pricing structure for this product?

Unstructured decision: strategic planning ■ Which business area should the organisation be in?

■ How should the organisation be structured?

■ What should our distribution channels be?

Classify the following decisions by type (structured, semi-structured, unstructured) and organisational level (strategic, tactical, operational). In addition, determine whether or not the decision-making process could be automated, and if possible describe the name or type of BIS used.

(a) At what level should we set the budget for next year?

(b) Does this customer qualify for a discount on a large order?

(c) How should we deal with a takeover bid?

(d) Should we employ more staff to cope with an urgent order?

(e) Should we expand abroad?

(f) Should we launch an advertising campaign?

(g) Should we take a short-term loan to help our current cash flow position?

(h) What new markets should we move into?

(i) What should we do about a faulty machine?

Organisation-level decisionsActivity 1.7

Table 1.2 Decision characteristics and management level

Management level Decision

type of decision

timescale Impact on organisation

Frequency of decisions

Strategic Unstructured Long Large Infrequent

Tactical ↔ Medium Medium ↔

Operational Structured Short Small Frequent

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Part 1 INTRODUCTION TO BUSINESS INFORMATION SYSTEMS22

The decision-making process

The work of H. Simon (1977) provides a framework from which to examine the way in which managerial decisions are made. Although presented in a modified form, this framework can be used to show how the act of making a decision involves moving through five stages. Each stage must be completed before it is possible to move on to the next. As you read about each stage, consider how BIS might be used to support it. Table 1.4 provides an overview of the decision-making process.

The intelligence stage involves gathering information concerning the decision to be made. It recognises that managers must be made aware that a problem exists before any action can be taken. Once a problem has been identified, information is collected in order to achieve a thorough understanding of the problem and the circumstances in which it arose. Unless this understanding is achieved, managers may take an inappropriate approach to the problem, resulting in a less efficient or even ineffective solution.

In the design stage, as many as possible of the potential solutions to the problem are identified and evaluated. At this point, the decision maker will begin to discard unsatisfactory solutions in order to reduce the number of alternatives as far as possible. The solution that will be implemented is then chosen during the choice stage.

Having made a decision, the action required to achieve a resolution to the problem is taken in the implementation stage. Following implementation, the evaluation stage considers how successful the solution has been. If further action is required, the decision maker returns to the intelligence stage and examines the problem again.

Table 1.3 Information characteristics for decisions by management levels

Management level

Information

time period

Frequency Source Certainty Scope Detail

Strategic Wide Infrequent External Less certain Wide Summarised

Tactical ↔ ↔ ↔ ↔ ↔ ↔

Operational Narrow Frequent Internal More certain Narrow Detailed

Later (in Chapter 2, Figure 2.7 and in Chapter 6) we consider how particular types of BIS are used to support activities at the three different levels of operational, tactical and strategic.

Table 1.4 A model of decision making

Stage activities

Intelligence ■ Awareness that a problem exists

■ Awareness that a decision must be made

Design ■ Identify all possible solutions

■ Examine possible solutions

■ Examine implications of all possible solutions

Choice ■ Select best solution

Implementation ■ Implement solution

Evaluation ■ Evaluate effectiveness or success of decision

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23ChaPter 1 BASIC CONCEpTS – UNDERSTANDINg INFORMATION

This model can be used to highlight two important points. First, it is important to recognise that information plays a critical part in arriving at an effective and successful decision. In the design stage, for example, it is essential to examine the implications of each possible solution. Unless the decision maker has access to adequate information, he or she may reject or accept possible solutions for the wrong reasons.

Secondly, the information required to support the decision-making process is determined by the decision itself. In other words, decision needs determine information needs.

Information need

The object of producing information is to meet a specific purpose or requirement.

At the turn of the millennium, many pundits described the 20th century as one of physics-based innovation and anticipated the 21st as the century of biology. Now, 13 years in, it looks increasingly as though we are living in the century of data.

Though research in biology and medicine continues to make exciting progress in the lab, it has yet to make much difference to the lives of most people. By far the biggest changes so far this century are due to the processing and communication of data (in the broad sense) from mass participation in the internet and associated social media to the digital takeover of writing, music and photography.

The issue of ‘big data’ – how to make the most of the truly gigantic deluge of data to emerge – is exercising the minds of many scientists and engineers. Trillions of bits of information are pouring out from billions of sources. Besides conventional websites, we have social networks leaving behind ‘digital crumbs’ for us to study, and the sensors embedded in everything from cars to cameras, creating the ‘internet of things’. This data is largely unstructured.

Shirley Ann Jackson, president of Rensselaer Polytechnic Institute, New York, and a prominent figure in US science policy for two decades, is one of those considering this issue. I caught up with her on a visit to London to deliver a speech at the Royal Academy of Engineering.

‘One could say that, concerning big data, we are still pre-web,’ Jackson says. ‘The world wide web is one huge ‘library’ but it has not yet provided uniform access to data. In a word, there is no Google for all data.’

Recovering information is difficult because there is no consistent system for tagging data to identify its origins, history, context, rights and so on. ‘We need better means to take what may be implicit in the data,

and obvious in context, and make that explicit in its description,’ Jackson says. ‘We also need to improve the credibility of information by automating processes that cross-reference and cross-check.’

One remedy is the ‘semantic web’, a collaborative move- ment led by the World Wide Web Consortium to promote common data formats. The goal is to have a global mesh of information linked in a way that is easily processed by computers. The approach is based on semantic technol- ogy that encodes meanings separately from data in con- tent files. This will allow intelligent software agents to search for connections among different data, by ‘seman- tic inference’. ‘One only can imagine what the impact will be, once this work is completed,’ Jackson observes.

Jackson boasts several firsts as an African-American woman, including being the first elected to the US National Academy of Engineering and the first to lead a top research-orientated university. She is a passionate advocate of interdisciplinary working as the way to draw more power from the data deluge.

It is fashionable now to talk about the need to knock down academic silos and collaborate across all disciplines. But Jackson has been putting that approach into practice at Rensselaer since becoming president in 1999.

In Britain the term polytechnic has somewhat unfor- tunate associations of two-tier academic institutions, but Jackson has a much more positive view – and indeed advocates the ‘new polytechnic’ as an umbrella term to encompass multidisciplinary working to tackle the problems and opportunities of big data. ‘I define the new polytechnic as an entirely fresh collaborative endeavour merging across a multiplicity of disciplines, sectors and global regions,’ she says. ‘It is animated by new technologies and tools – high-performance

Dealing with the data deluge By Clive Cookson

CASE STUDy 1.2

➨

An information need can be thought of as a specific requirement for information. As an example, when a student sits an examination, he or she is asked to meet an information need by providing answers (information) to a series of specific questions.

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Part 1 INTRODUCTION TO BUSINESS INFORMATION SYSTEMS24

Decision-making theory

As mentioned earlier, structured decisions involve situations where the rules and constraints are known and where information needs can be clearly defined. These characteristics allow structured decisions to be automated by incorporating them within a business information system. Decision-making theory provides a framework for presenting structured decisions in a formal and systematic way.

A key concept associated with decision-making theory is that of the business rule. A business rule describes the actions that will be taken when a particular situation arises. Business rules are made up of three parts: an event that triggers the rule, a condition to test and the action(s) to be taken according to the outcome of the test. As an example, a bank might use a business rule that specifies only customers who have held an account for three or more years can be considered for a loan.

Since the business rules governing a particular situation can be complicated, various tools are used to make sure they applied in a logical and consistent way. Diagrams and tables, for instance, provide a standardised way of presenting rules that makes them easier to understand and follow. These tools also make it easier to implement business rules within computer programs. Although there are a number of different ways to present business rules, the example given earlier might be represented like this:

computing is an example – applied in new ways, with input from big data, amplified by new platforms such as the semantic web, probed by advanced analytics, and guided by societal concerns and ethics.’

We can look forward to many benefits from tackling big data in this way, in fields from climate change to genomic medicine. It will also be important to understand the effects of pervasive computing and communications technology itself on human behaviour.

Source: Cookson, C. (2013) Dealing with the data deluge. Financial Times. 1 February. © The Financial Times Limited 2013. All Rights Reserved.

How is the age of big data and pervasive information affecting us as people? Are we becoming more or less moral? If we can look anything up immediately on a mobile device, what will happen to our memories and our ability to learn? How will cognition respond to frequent and lengthy immersion in virtual reality? No one knows – and, as Jackson says, only by engaging the arts, humanities and social sciences are we likely to find out.

Business rule

A rule describing what action the organisation should take when a particular situation arises. As an example, a bank might have a rule specifying that customers applying for a loan will only be considered if they have held an account for three years or more.

1 2 3 4

Name of event Condition Possible results Possible actions

Loan enquiry Held account for 3+ years? Yes or no Yes: allow application No: refuse application

As this example shows, the need to make a decision is usually triggered when an event occurs. In this case, the decision is triggered when the customer makes an enquiry about a loan. The condition governing the outcome of the business rule is usually expressed as a question. In this example the question is this: has the customer held an account for three or more years? If the result is ‘no’, the customer is not allowed to make a loan application, otherwise he or she is invited to apply.

This example has only a single condition with only two possible actions. However, more complex business rules may involve several questions and numerous actions. In these cases, it is common to use decision trees and decision tables to analyse a given situation. In general, a decision tree is drawn first, a decision table is then constructed using the decision tree as a basis.

Decision tree

A diagram showing the events, conditions and outcomes associated with making a business decision. The decision tree is a graphical representation of the decision-making process.

Decision table

A means of representing the logic of a decision. A matrix is used to show all contingencies and the actions to be taken for each.

QUESTION

Explain the social and technical issues involved in extracting personal information from the web.

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25ChaPter 1 BASIC CONCEpTS – UNDERSTANDINg INFORMATION

A decision tree is a diagram showing the events, conditions and outcomes associated with making a business decision. Diagrams are produced using flowchart notation. Figure 1.5 shows a simple decision tree for the loan application example.

A decision table breaks down a business process into a table that shows all the possible outcomes of the process. A matrix is used to show the different components of the decision and what outcomes will occur depending on the conditions governing the decision. Typically, the decision table uses the format shown in Figure 1.6.

A more detailed example may help to make the use of decision trees and decision tables clearer. Imagine the case of a customer applying for credit from a bank. The bank only offers loans to customers who have held an account for three or more years and who are in full-time employment or can offer some form of security. A simple decision tree is shown in Figure 1.7.

The process begins when the customer makes an enquiry at the bank. The first question asked is: has the customer held an account for three or more years? If so, the next question is whether or not the customer is in full-time employment. If they are, they can be offered credit. If they are not in full-time employment, they can still be offered credit if they are able to offer some other form of security. Otherwise, their application will be rejected.

Figure 1.8 shows the decision table for this example. The four rules correspond to the outcomes shown at the end of each branch in the decision tree in Figure 1.7. The upper part of the table shows the test conditions and all of the possible outcomes. The lower part of the table shows the possible actions to be taken according to the results of the test conditions. A dash signifies that the result of the test is unimportant. In the case of the first rule, for example, if the customer has not held an account for three or more years, their

Figure 1.5 Decision tree notation for checking loan application

Held account 31

years?

Loan enquiry

No Yes

Refuse application

Allow application

Figure 1.6 Framework for a decision table

Condition alternatives

Action entries

Conditions

Actions

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Part 1 INTRODUCTION TO BUSINESS INFORMATION SYSTEMS26

Figure 1.7 Decision tree for the loan application example

Employed?

Rule 4 O�er credit

No Yes

No Yes

Credit application received

Held account 31

years?

Rule 1 Refuse credit

Rule 2 Refuse credit

Rule 3 O�er credit

Has security?

YesNo

Figure 1.8 Decision table for Figure 1.7

Rules

1 2 3 4

N Y Y Y

2 N N Y

2 N Y 2

X X

X X

Account 31years

Employed

Security

O�er credit

Refuse credit

Conditions

Actions

application will be rejected regardless of their employment status or whether they are able to offer security.

As the example shows, decision tables provide clear and concise summaries of even the most complex business rules. A decision table can also help software developers incorporate the underlying logic of a business rule within an information system. For instance, it is fairly simple to translate a decision table into Structured English (also known as pseudocode) and from pseudocode into program code. Pseudocode is a simple but effective way of designing computer programs. Figure 1.9 shows the Structured English for the decision table in Figure 1.8.

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27ChaPter 1 BASIC CONCEpTS – UNDERSTANDINg INFORMATION

In this chapter we have shown that much of a manager’s work involves making decisions about the best way to achieve the organisation’s objectives. In addition, the quality of a manager’s decisions depends upon the quality of the information he or she has access to. Since information influences almost every activity within an organisation, it is an important asset and must be treated accordingly.

Knowledge management is a fairly new term that describes a range of activities intended to make sure an organisation uses its information resources as effectively as possible. Bergeron (2003), defines knowledge management like this:

Knowledge Management (KM) is a deliberate, systematic business optimisation strategy that selects, distils, stores, organises, packages, and communicates information essential to the business of a company in a manner that improves employee performance and corporate competitiveness.

In many countries there has been a general shift away from traditional industries, such as manufacturing, towards what has been termed the ‘knowledge economy’. In the knowledge economy, companies exploit their knowledge and skills in order to generate profits. Many organisations have adapted to the knowledge economy by adopting new structures and by creating new roles for managers. The term knowledge worker describes a person whose role is based around creating, using, sharing and applying knowledge. Similarly, the work of a knowledge engineer focuses on eliciting knowledge from experts so that it can be recorded and shared with others within the organisation.

Although knowledge management is important within any organisation, it is of particular value in situations where organisations rely upon the knowledge and skills of individual staff. In such cases, the loss of a key person can cause significant disruption until an appropriate replacement can be found. Knowledge management aims to capture the knowledge and experience of key personnel, placing it in a form where it will remain accessible to the organisation at all times.

Many organisations have been enthusiastic about adopting knowledge management because of the potential benefits it brings. For example, CIO’s online magazine suggests that an effective knowledge management programme will bring about one or more of the following benefits (Levinson, 2007):

■ foster innovation by encouraging the free flow of ideas; ■ improve customer service by streamlining response time;

Figure 1.9 Structured English program code for implementing the decision table shown in Figure 1.7

IF Held Account 3+ Years THEN IF Employed THEN Accept Application (Rule 4)

ELSE IF Can Offer Security THEN Accept Application (Rule 3)

ELSE Decline Application (Rule 2) ENDIF

ENDIF ELSE Decline Application (Rule 1)

ENDIF

KNOWLEDGE MANAGEMENTFOCUS ON…

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Part 1 INTRODUCTION TO BUSINESS INFORMATION SYSTEMS28

■ boost revenues by getting products and services to market faster; ■ enhance employee retention rates by recognising the value of employees’ knowledge and

rewarding them for it; ■ streamline operations and reduce costs by eliminating redundant or unnecessary

processes.

Other writers, such as Bixler (2005) and Bergeron (2003) supply long lists of additional tangible and intangible benefits associated with effective KM programmes. We can summarise some of these benefits like this:

■ an improved ability to sustain competitive advantage, leading to increased market share and market leadership;

■ increased profit margins leading to increased shareholder satisfaction; ■ the ability to identify best practices and better approaches towards problem solving; ■ formalised system for transferring knowledge, allowing knowledge to be transferred

between employees more easily and more efficiently; ■ increased collaboration with customers; ■ increased customer satisfaction, loyalty and retention; ■ reduced costs through streamlining of internal processes and improved efficiency; ■ higher staff morale and satisfaction, leading to lower staff turnover, increased innovation

and greater productivity; ■ increased organisational stability.

Applications of knowledge management are described in more detail later (in Chapters 4 and 6). They include:

■ Business intelligence (BI). BI is a general term that describes a range of techniques and technologies used to gather, store and analyse information from a variety of sources in order to improve decision making within an organisation. More information on business intelligence is covered later (in Chapter 4).

■ Document image processing (DIP). DIP involves converting printed documents into an electronic format that is more easily stored, searched and managed. The Portable Document Format (PDF) used by products such as Adobe Acrobat is an example of a common electronic format used to store documents. Documents stored as PDF files require very little storage space, can be searched quickly and are easy to manage.

■ Data mining. This involves searching organisational databases in order to uncover hidden patterns or relationships in groups of data. Data mining software attempts to represent information in new ways so that previously unseen patterns or trends can be identified. An important feature of data mining is that it maximises the use of data the organisation already holds, making it relatively simple and inexpensive to perform. Uncovering patterns or trends in data can result in a number of important benefits, such as suggesting ideas for new products and services.

As these examples suggest, many of the activities associated with knowledge management are dependent upon the use of technology. DIP, for instance, would be impossible without the ability to digitise documents and convert them into their electronic equivalents. However, using technology effectively requires a firm grasp of elementary business concepts. As an example, before we can improve the way decisions are made within an organisation, we must first develop an understanding of decision theory. (Chapter 2 builds upon some of the concepts discussed here by introducing the topics of systems theory and competitive advantage.)

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29ChaPter 1 BASIC CONCEpTS – UNDERSTANDINg INFORMATION

Competitive intelligence

Competitive intelligence (CI) is a typical example of knowledge management. As mentioned earlier, CI involves gathering information from a range of sources with the aim of maintaining or increasing competitive advantage. Although there are a number of definitions of competitive intelligence, most share some common elements. As an example, consider the definition given by the Institute for Competitive Intelligence (www.institute- for-competitive-intelligence.com).

‘Competitive Intelligence’ (CI) can be described as a systematic process of information retrieval and analysis, in which fragmented (raw) information on markets, competitors and technologies can be transformed into a vivid understanding of the corporate environment for the decision maker.

Compare this with the definition given in the Competitive Intelligence Handbook (www .combsinc.com/handbook.htm):

Competitor intelligence is the analytical process that transforms disaggregated competitor intelligence into relevant, accurate and usable strategic knowledge about competitors, position, performance, capabilities and intentions.

As both definitions show, CI involves collecting data from a number of disparate sources and converting it into useful information about an organisation’s competitors. The information gathered is used to support decision making within the organisation, allowing it to respond more effectively to competition.

CI is sometimes confused with activities such as industrial espionage. However, it is worth pointing out that CI is both legal and ethical; information is gathered lawfully, often openly, and usually from sources that are publicly accessible. This is echoed within the Competitive Intelligence Handbook:

The objective of competitor intelligence is not to steal a competitor’s trade secrets or other proprietary property, but rather to gather in a systematic, overt (i.e., legal) manner a wide range of information that when collated and analysed provides a fuller understanding of a competitor firm’s structure, culture, behaviour, capabilities and weaknesses.

To read more about competitive intelligence visit the web sites listed at the end of the chapter.

1. Data can be described as a collection of non-random facts obtained by observation or research.

2. Information can be described as data that have been processed so that they are meaningful. An alternative view of information suggests that it acts to reduce uncertainty about a situation or event.

3. Information can have tangible or intangible value. One view suggests that the value of information can be measured in terms of the improvements it brings to managerial decision making.

SUMMARy

1. What are the three dimensions of information quality?

2. How can the value of information be measured?

EXERCISES

Self-assessment exercises

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3. What are the functions of management?

4. What are the stages involved in making a decision?

5. How will a manager’s cognitive style affect the decisions he or she makes?

6. Explain how the concept of knowledge management relates to data and information.

7. What differences in perspective about managerial decision making are introduced by the e-business concept?

8. In brief, what is knowledge?

Discussion questions

1. Some people argue that employees should be restricted in terms of the information they have access to in the course of their duties. Others argue that they are able to work more efficiently if they have access to all of an organisation’s information resources. Using relevant examples, make a case for one side of this argument.

2. It has been said that decision needs should determine information needs. Is this always true or is there a case for an organisation gathering all available data and information?

3. Select an article of your choice from a newspaper, journal or magazine. Analyse the information contained within the article using concepts related to the attributes of information quality. Use the web links provided at the end of this chapter to locate suitable articles.

4. ‘Knowledge management is nothing new, it is merely a repackaging of existing information management techniques.’ Discuss.

Essay questions

1. Select an organisation you are familiar with. Identify at least one major decision that the organisation has taken recently. Describe the decision-making process that took place, paying particular attention to the following points:

(a) describe how managers became aware that a problem existed and that a decision was required;

(b) describe what information was gathered so that managers could achieve a good understanding of the problem;

(c) provide examples of any alternative solutions that were considered and explain why these were eventually rejected;

(d) explain why the final solution was selected and describe how it was implemented; (e) discuss how the solution was evaluated and whether or not it was successful.

2. The survival of a large organisation depends upon access to high-quality information. Discuss this statement, providing relevant examples where necessary.

3. The Microsoft Corporation is arguably one the most successful company’s in the world. Conduct any research necessary to complete the following tasks:

(a) Provide an overview of the company and its activities. (b) Selecting appropriate examples, describe the company’s physical and conceptual

resource bases. (c) Identify and describe some of the factors in the company’s business environment.

Provide examples of factors that act either to support or obstruct the company’s activities.

4. Write a report on how knowledge management could enhance an organisation of your choice.

30 Part 1 INTRODUCTION TO BUSINESS INFORMATION SYSTEMS

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31ChaPter 1 BASIC CONCEpTS – UNDERSTANDINg INFORMATION

1. It is generally agreed that one of the key functions of management is decision making. Using specific examples, you are required to:

(a) describe the types of decisions that managers are required to take; (b) explain the stages involved in making a decision; (c) describe the characteristics of decisions taken at different levels in an organisation.

2. An understanding of the nature of information is fundamental to the study of information systems. Using specific examples, you are required to:

(a) define information; (b) describe the characteristics that will be present in information of high quality; (c) describe how the value of information can be determined.

3. Information can be transmitted via formal and informal means. Using specific examples, you are required to:

(a) describe the advantages and disadvantages of each method; (b) discuss each method in terms of the attributes of information quality that are likely to

be present.

4. In relation to the concept of knowledge management:

(a) explain how knowledge differs from information; (b) describe two ways of classifying knowledge; (c) give an example of a business application for each of your answers in (b).

Examination questions

Bergeron, B. (2003) Essentials of Knowledge Management, John Wiley, Hoboken, NJ

Bixler, C. (2005) Developing a foundation for a successful knowledge management system in M. Stankosky (ed.) Creating the Discipline of Knowledge Management, Elsevier Butterworth–Heinemann, Oxford, pp. 51–65

Gates, B. (2001) Business at the Speed of Thought: Succeeding in the Digital Economy, penguin, London

Levinson, M. (2007) ABC: An Introduction to Knowledge Management (KM) [online], CIO.com, Framingham, MA. Available at: www.cio.com/article/40343/40343/2#4

Lucey, T. (2005) Management Information Systems, 9th edition, Thomson Learning, London

O’Brien, J.A. and Marakas, G. (2010) Introduction to Information Systems, 15th edition, Mcgraw-Hill, New York

Rainer, K. and Cegielski, C. (2011) Introduction to Information Systems: Enabling and Transforming Business, 3rd edition, John Wiley & Sons, Hoboken, NJ

Rowley, J. (2007) ‘The wisdom hierarchy: representations of the DIKW hierarchy’, Journal of Information Science, 33, 2, 163–80

Simon, H. (1977) The New Science of Management Decision, prentice-Hall, Englewood Cliffs, NJ

W3C (2001). W3C Semantic Web Activity. Available at: http://www.w3.org/2001/sw/

Waltz, E. (2003) Knowledge Management in the Intelligence Enterprise, Artech House, Boston, MA

Wang, K., Hjelmervik, O. and Bremdal, B. (2001) Introduction to Knowledge Management: Principles and Practice, Tapir Academic press, Trondheim, Norway

References

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Part 1 INTRODUCTION TO BUSINESS INFORMATION SYSTEMS32

Laudon, K. and Laudon, J. (2013) Management Information Systems: Managing the Digital Firm, 13th edition, prentice-Hall, Upper Saddle River, NJ. Chapters 11 and 12 deal with topics such as knowledge management and managerial decision making.

Turban, E., Rainer, R. and Potter, R. (2004) Introduction to Information Technology, 3rd edition, John Wiley, New York. Although lacking depth in some areas, this text is colourful and easy to read. Chapters 1 and 2 discuss basic concepts.

Further reading

Web links

News sources for finding case studies about organisations

www.findarticles.com FindArticles provides searching through many newspapers, business magazines and some journals.

www.moreover.com Moreover provides searching through the world’s newspapers. particularly good for recent stories.

www.ft.com The Financial Times web site provides access to news stories from some 3000 publications. The searchable archive of news stories is a wonderful resource for a wide range of research activities.

www.guardian.co.uk The Guardian web site provides excellent news coverage and a wide variety of additional services.

www.reuters.com The official site for Reuters. provides coverage of international news and financial information.

www.worldnews.com News stories from around the world. Major stories are categorised by city, e.g. New York, London. Some stories are accompanied by multi-media, such as Real Audio sound files. The site can be searched for items of interest.

http://news.bbc.co.uk The highly respected news service of the BBC. Coverage includes multi-media elements, such as sound and video.

www.infobeat.com Allows the creation of a personalised newspaper. Although the content received cannot be customised to a great extent, it nevertheless demonstrates the concept of delivering up-to-date, personalised information via the Internet.

www.mindtools.com/page2.html The Mind Tools site provides a series of brief articles that describe common approaches to problem solving in plain language.

www.eb.co.uk The Encyclopaedia Britannica web site.

Knowledge management and competitive intelligence

www.sveiby.com Karl-Erik Sveiby operates a web site containing a selection of well-written articles on knowledge management, including a regularly updated definition of different views of knowledge management. At the site, use the ‘library’ tag to locate articles of interest.

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LINKS TO OTHER CHAPTERS

Chapter 1 provides an introduction to concepts related to data, information and managerial decision making.

Chapter 6 describes how BIS support the functional areas of business.

Chapter 13 looks in more detail at developing a company strategy for introducing and using information systems effectively.

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cHapter

2 Basic concepts: an introduction to

business information systems

LEARNING OUTCOMES

After reading this chapter, you will be able to:

■ identify systems and their components;

■ identify and describe the behaviour of systems;

■ identify types of BIS, distinguishing them by category and the organisational level at which they are used;

■ describe e-business, e-commerce and ERP and evaluate their relevance to the organisation;

■ identify basic strategies and methods used to gain competitive advantage through the use of BIS.

MANAGEMENT ISSUES

Systems theory is a powerful tool that can be used to analyse systems at a high level of detail. It can be applied to a range of situations, from examining an organisation as a whole to analysing a specific task carried out by an individual employee. From a managerial perspective, this chapter addresses the following areas:

■ how systems theory is used as a means of defining problems and situations so that they can be understood more easily and BIS can be developed to support them;

■ how managers can maximise an organisation’s use of technology by understanding BIS;

■ how BIS can help achieve competitive advantage.

CHAPTER AT A GLANCE

MAIN TOPICS

■ Introduction to systems 36

■ Different types of systems 41

■ Business information systems 42

■ Resources that support BIS 43

■ Categories of business information system 46

■ E-business systems 46

■ Enterprise systems 49

■ BIS and strategic advantage 50

CASE STUDIES

2.1 PayPal eyes in-store retail customers 51

2.2 Corporate IT falling short of potential 57

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Part 1 IntroductIon to BusIness InformatIon systems36

INTRODUCTION

This chapter builds upon the concepts introduced earlier (see Chapter 1) and introduces concepts related to the features of systems and competitive advantage. The topics covered are intended to give readers an understanding of:

■ the basic characteristics of systems; ■ the behaviour of systems; ■ types of information systems; ■ applications for information systems; ■ the use of e-business and e-commerce; ■ applying information systems for competitive advantage.

INTRODUCTION TO SYSTEMS

Systems theory provides a powerful means of analysing and improving business processes. It can be applied to a wide variety of different areas and is fundamental to gaining a good understanding of the managerial application of BIS.

Systems theory

the study of the behaviour and interactions within and between systems.

What is a system?

A system can be defined as a collection of interrelated components that work together towards a collective goal. The function of a system is to receive inputs and transform these into outputs. Figure 2.1 illustrates the organisation of the input–process–output model. Note that though natural systems such as the solar system may not have an obvious goal, business systems often have multiple goals such as profit or improving the quality of a product. The overall goal of a business is often described within a mission statement.

An example will help to illustrate this concept and aid understanding. Earlier (in Chapter 1), the concept of a transformation process was used to explain how data can be converted into information. Using the model shown in the diagram, it can be said that data are used as the input for a process that creates information as an output.

However, this model illustrates a system that is essentially static. The performance of the system cannot be adjusted and there are no checks to ensure that it works correctly. In order to monitor the performance of the system, some kind of feedback mechanism is required. In addition, control must be exerted to correct any problems that occur and ensure that the system is fulfilling its purpose.

If these additional components are added to the basic model of the system, it can be illustrated as shown in Figure 2.2. The model shown in the diagram is sometimes referred to as an adaptive system, in order to signify that it has the ability to monitor and regulate its own performance.

System

a collection of interrelated components that work together towards a collective goal.

Mission statement

a statement intended to encapsulate the overall goal(s) of an organisation.

Adaptive system

a system with the ability to monitor and regulate its own performance.

Figure 2.1 A basic model of a transformation process

ProcessInput Output

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37ChaPter 2 BasIc concepts: an IntroductIon to BusIness InformatIon systems

Figure 2.2 A generic model of a system

Process

Control

Feedback

OutputInput

At this point, it can now be argued that a generic system includes five components: input, process, output, feedback and control. Each of these components can now be described in more detail.

■ The input to a system can be thought of as the raw materials for a process that will produce a particular output. Inputs can take many forms and are not necessarily purely physical in nature. Examples of inputs might include data, knowledge, raw materials, machinery and premises.

■ Inputs are turned into outputs by subjecting them to a transformation process. The concept of a transformation process was described earlier (in Chapter 1).

■ The output is the finished product created by the system. Again, the outputs produced by a system can take many forms. Examples might include information, products and services.

■ Information on the performance of the system is gathered by a feedback mechanism (sometimes known as a ‘feedback loop’). Measurements taken on a production line, or customer feedback on a web site are examples of feedback mechanisms.

■ If alterations are needed to the system, adjustments are made by some form of control mechanism. In general, control is exerted as the result of feedback information regarding the performance of the system. The function of the control component is to ensure that the system is working to fulfil its objective (which is normally the creation of a specific output). Control tends to be exerted by adjusting the process and input components of the system until the correct output is achieved.

System components

Input

the raw materials for a process that will produce a particular output.

Process

Inputs are turned into outputs by a transformation process.

Output

a product that is created by a system.

Feedback mechanism

provides information on the performance of a system which can be used to adjust its behaviour.

Control mechanism

If alterations are needed to the system, adjustments are made by a control mechanism.

Other system characteristics

All systems share these characteristics:

1. The components of a system work towards a collective goal. This is known as the system’s objective. The objective of a system is normally very specific and can often be expressed in a single sentence. As an example, the objective of a car might be expressed simply as: to transport people and goods to a specified location.

2. Systems do not operate in complete isolation. They are contained within an environment that contains other systems and external agencies. The scope of a system is defined by

System objective

all components of a system should be related to one another by a common objective.

Environment

the surroundings of a system, beyond its boundary.

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its boundary. Everything outside of the boundary is part of the system’s environment, everything within the boundary forms part of the system itself. The boundary also marks the interface between a system and its environment. The interface describes exchanges between a system and the environment or other systems.

3. Systems can be complex and can be made up of other smaller systems. These are known as subsystems. Systems composed of one or more subsystems are sometimes referred to as suprasystems. The objective of a subsystem is to support the larger objective of the suprasystem. For an organisation the subsystems such as marketing and finance would lie within the system’s boundary while the following elements would lie outside as part of the business environment:

■ customers; ■ sales channel/distributors; ■ suppliers; ■ competitors; ■ partners; ■ government and legislation; ■ the economy.

An organisation will interact with all these elements which are beyond the system boundary in the environment. Systems that have a high degree of interaction with the environment are called open systems. Open systems are influenced by changes in the environment and can also influence the environment itself. Most information systems are open systems because they accept inputs and react to them. Totally closed systems which do not interact with their environment are unusual.

4. Subsystems in an information system interact by exchanging information. This is known as the interface between systems. For information systems and business systems, having clearly defined interfaces is important to an efficient organisation. For example, sales orders must be passed from the sales subsystem to the finance subsystem and the distribution subsystem in a clear, repeatable way. If this does not happen orders may be lost or delayed and customer service will be affected.

5. The linkage or coupling between subsystems varies. The degree of coupling defines how closely linked different subsystems are. It is a fundamental principle of systems theory and BIS design that subsystems should be loosely coupled.

Systems or subsystems that are highly dependent on one another are known as close- coupled systems. In such cases, the outputs of one system are the direct inputs of another. As an example, consider the way in which an examination system might operate. The letter that confirms a student’s grade could be said to be the result of two subsystems working together very closely. One subsystem ensures that all examination scripts are marked and that a list of final results is produced. The second subsystem produces the letter of confirmation as its output. However, the letter of confirmation can only be produced once all marks have been confirmed and recorded. Thus, the output of the marking subsystem becomes the input to the subsystem that creates the confirmation letter.

The ‘just-in-time’ method used by a number of manufacturing organisations also illustrates a close-coupled system well. This method involves holding as few parts or raw materials as possible. In order to ensure that production is not halted, parts must be supplied ‘just in time’ to be used in the manufacturing process. Unless the manufacturing organisation has very close links with its suppliers, this approach cannot work effectively.

Decoupled systems (or subsystems) are less dependent on one another than coupled systems and so are more able to deal with unexpected situations or events. Such systems tend to have higher levels of autonomy, being allowed more freedom to plan and control their activities. Although decoupled systems are more flexible and adaptive than close-coupled systems, this very flexibility increases the possibility that inefficiencies

Boundary

the interface between a system and its environment.

Interface

defines exchanges between a system and its environment, or other systems.

Subsystem

Large systems can be composed of one or more smaller systems known as subsystems.

Suprasystem

a larger system made up of one or more smaller systems (subsystems).

Open system

Interaction occurs with elements beyond the system boundary.

Closed system

no or limited interaction occurs with the environment.

Coupling

defines how closely linked different subsystems are. Loose coupling means that subsystems are not closely linked. close- coupled systems are highly dependent on each other.

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39ChaPter 2 BasIc concepts: an IntroductIon to BusIness InformatIon systems

might occur. The traditional method of production where material is held ‘in-hand’ as inventory is decoupled. In this arrangement it is not necessary for production to match sales so closely, but this results in higher costs of holding inventory.

6. Systems are hierarchical. Systems are made up of subsystems that may themselves be made up of other subsystems. From this, one should realise that the parts of a system are dependent on one another in some way. This interdependence means that a change to one part of a system leads to or results from changes to one or more other parts.

Figure 2.3 Business information systems as an organisational control mechanism

Control mechanism

Input Process Output

Management

Information system

System environment

Interdependence

Interdependence means that a change to one part of a system leads to or results from changes to one or more other parts. Control in organisational systems

Figure 2.3 shows the relationship between different parts of an organisation and how they are related according to systems theory. The control mechanism is indicated by the arrowed line from the output back to the input.

The role of an information system is to support managers in making decisions that will help the organisation to function properly and achieve its objectives. Control is being exercised correctly if the organisation – including all subsystems – is moving towards its objectives as efficiently as possible.

Open-loop control systems in business

Figure 2.4 shows a generic open-loop system. An open-loop control system is one in which there is an attempt to reach the system objective, but no action is taken to modify the process or its input to achieve the targets once the process has begun. Open-loop systems have no mechanism for ensuring goals are met once the process is under way. As an example, an electronics manufacturer might predict a huge demand for its new product and decide to produce a large quantity of items. Once production begins, no changes will be made to the production plan even in response to, say, the launch of a similar product from a competitor.

Open-loop systems are inadequate in an organisational context because of the complexity of organisational systems and their environments. In other words, open-loop systems would only be successful in attaining the system objectives in cases where we could plan with certainty the events that would take place during the system’s process.

Open-loop control system

an open-loop control system is one in which there is an attempt to reach the system objective, but no control action to modify the inputs or process is taken once the process has begun.

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Part 1 IntroductIon to BusIness InformatIon systems40

Figure 2.4 A generic open-loop system

System environment

OutputInput Process

Closed-loop control systems in business

Two types of control mechanism that can be employed in this situation are feedback control and feedforward control. Feedback control responds to changes in the system or its environment after they have taken place, while feedforward control attempts to predict likely changes so that any delays before taking action are minimised.

Feedback control systems generally provide a relatively cheap method of reactive control and provide an effective method of bringing a system back under control. In a manufacturing company, for example, measurements taken on the production line can help to indicate when equipment needs to be adjusted. Figure 2.5 shows a generic closed-loop system.

Feedforward systems (Figure 2.6) provide a pro-active way of overcoming the timing delays associated with feedback systems but depend upon the accuracy of the plans on which they are based. Feedforward control systems attempt to overcome the overcorrection and time-delay disadvantages of feedback systems by incorporating a prediction element in the control feedback loop. Feedforward systems are not as common as feedback systems in business settings. Examples include inventory control systems which work to a planned sales level or material usage rate. Elements of project management can also be seen as feedforward control where plans are made for resource requirements over time.

Feedback control

the output achieved is monitored and compared to the desired output and corrective action is taken if a deviation exists.

Feedforward control

the environment and system process are both monitored in order to provide corrective action if it is likely that the system goal will not be met.

Figure 2.5 A generic closed-loop feedback control system

System environment

Input Process Output

Control mechanism

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41ChaPter 2 BasIc concepts: an IntroductIon to BusIness InformatIon systems

Figure 2.6 A generic closed-loop feedforward control system

System environment

Input Process Output

Control mechanism

Negative feedback is used to describe the act of reversing any discrepancy between desired and actual output. In a business setting, for example, a budget overspend in one area might be corrected by cutting spending in others.

An example of positive feedback might involve a company experiencing rapid sales growth, leading to increased production and higher sales levels. In general, a situation of positive feedback is unsustainable and some corrective action arising either from within the system or from the environment will occur. For example, if sales and production are increased, the company may experience cashflow problems caused by expanding too quickly.

The major difficulty with negative feedback systems is the potential for delays in the feedback control loop. In other words, the effect of a change in inputs to bring about a change in output may not be seen until after a period of time. This can lead to an output level that oscillates around the desired output because of overcorrection of input values during the feedback delay period. For example, the delay between the setting of interest rates and their effect on the output goal of a level of inflation can lead to a situation of overcompensation in either direction.

Positive and negative feedback

Positive and negative feedback

negative feedback is used to describe the act of reversing any discrepancy between desired and actual output. positive feedback responds to a variance between desired and actual output by increasing that variance.

DIFFERENT TYPES OF SYSTEMS

In this final section on systems theory, we introduce some common terms for describing types of systems which you may encounter in business.

Deterministic and probabilistic systems

In a deterministic system (sometimes known as mechanistic), all of the system’s outputs can be predicted by examining its inputs. An example of a deterministic system is an electronic calculator, where the results of carrying out a calculation can be predicted with complete accuracy.

In a probabilistic system (sometimes known as stochastic), the outputs of the system cannot be predicted with complete accuracy. An example of a probabilistic system is a

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Part 1 IntroductIon to BusIness InformatIon systems42

production planning system used to schedule work. Although the system can predict how long the production run is likely to take, it cannot provide a precise figure. An example of an information system of this type is a sales forecasting system.

Adaptive system

In general, an adaptive system has the ability to monitor and regulate its own performance. In many cases, an adaptive system will be able to respond fully to changes in its environment by modifying its behaviour.

Adaptive systems

An adaptive system (sometimes known as ‘self-organising’ or ‘cybernetic’) responds to changes in the environment and modifies its operation accordingly. The outputs obtained from the system are sometimes uncertain since the system may respond to the same stimuli in a different way. Examples of adaptive systems include human beings, plants and business organisations.

Hard and soft systems

A hard system has an explicit objective and is governed by fixed rules and procedures such as those encountered for structured decision making (Chapter 1). The conditions in the system’s environment tend to be stable and therefore more predictable. In turn, the system’s outputs can be predicted more easily and its performance can be measured objectively. An example of a hard system is a production line.

A soft system operates in a relatively unpredictable environment where conditions may be uncertain or liable to rapid change. Soft systems usually involve people or socio-technical situations.

BUSINESS INFORMATION SYSTEMS

In this section, we introduce the concept of a business information system and consider the characteristics of computer-based information systems.

What is a business information system?

Having examined concepts related to information, systems theory and decision making, it is possible to combine these to suggest a basic definition of a business information system:

A business information system is a group of interrelated components that work collectively to carry out input, processing, output, storage and control actions in order to convert data into information products that can be used to support forecasting, planning, control, coordination, decision making and operational activities in an organisation.

It should be noted that alternative definitions exist and it is worth taking a brief look at some aspects of these definitions.

Many definitions refer to ‘data resources’ that are converted into ‘information products’. This underlines the notion that data form part of an organisation’s intangible resource base and that the information derived from them is provided in a finished, useful form. The importance of information as a business resource is highlighted by John Talburt from the University of Arkansas at Little Rock, who says ‘As modern society becomes increasingly information driven, the capability and maturity of an organization to manage the quality of its information can mean the difference between success and failure’ (Al Hakim, 2007).

Business information systems

this describes information systems used to support the functional areas of business. for example, an organisation might use specialised information systems to support sales, marketing and human resource management activities.

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43ChaPter 2 BasIc concepts: an IntroductIon to BusIness InformatIon systems

■ Many definitions also specify that information systems involve the use of information technology. However, this can be disputed since it is possible to provide many examples of information systems that do not involve information technology at all. A simple example of such a ‘manual’ information system is a set of accounting ledgers.

■ Some definitions specify that information systems are used only to support decision making. Again, this can be disputed since it is apparent that managers make use of information in a number of other ways, for example as feedback on various aspects of a company’s performance.

■ Although some definitions refer to organisations in general, others specify that they are concerned only with business organisations. However, it can be argued that it is sometimes very difficult to distinguish between profit-making and non-profit-making organisations.

RESOURCES THAT SUPPORT BIS

BIS typically rely on five basic resources: people, hardware, software, communications and data.

1. People resources. People resources include the users of an information system and those who develop, maintain and operate the system. Examples of people resources might include managers, data entry clerks and technical support staff.

2. Hardware resources. The term ‘hardware resources’ refers to all types of machines, not just computer hardware. Telephones, fax machines, switchboards are all valid examples of hardware. The term also covers any media used by these machines, such as compact discs or paper. (These resources are described in Chapter 3.)

3. Software resources. In the same way, the term ‘software resources’ does not only refer to computer programs and the media on which they are stored. The term can also be used to describe the procedures used by people. Within this context, examples of software include instruction manuals and company policies. (These resources are described in Chapter 4.)

4. Communications resources. Resources are also required to enable different systems to transfer data. These include networks and the hardware and software needed to support them. (These resources are described in Chapter 5.)

5. Data resources. ‘Data resources’ describes all of the data that an organisation has access to, regardless of its form. Computer databases, paper files and measurements taken by sensors on a production line are all examples of data resources.

What information systems might be found in your newsagent’s? For each system identified, list the people, hardware, communications, software and data resources involved.

Example of information systemsActivity 2.1

Information technology

The terms ‘information systems’ (IS) and ‘information technology’ (IT) are often used interchangeably. This is an error, because the scope of the terms is different. The stress in IT is on the technology while IS not only refers to the technology, but also incorporates how it is applied and managed to contribute to the business. For this reason, we refer to

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BIS throughout this book. Approaches to management of IS and IT as part of BIS strategy development are discussed in more detail later (see Chapter 13).

Computer-based information system

an information system that makes use of information technology in order to create management information.

Computer-based information systems

In modern organisations, most BIS make extensive use of information technology, such as personal computers. The reasons why computerised BIS have become widespread are evident in their advantages.

Some advantages of processing by computer

■ Speed. Computers can process millions of instructions each second, allowing them to complete a given task in a very short time.

■ Accuracy. The result of a calculation carried out by a computer is likely to be completely accurate. In addition, errors that a human might make, such as a typing error, can be reduced or eliminated entirely.

■ Reliability. In many organisations, computer-based information systems operate for 24 hours a day and are only ever halted for repairs or routine maintenance.

■ Programmability. Although most computer-based information systems are created to fulfil a particular function, the ability to modify the software that controls them provides a high degree of flexibility. Even the simplest personal computer, for example, can be used to create letters, produce cash flow forecasts or manipulate databases.

■ Repetitive tasks. Computer-based information systems are suited to highly repetitive tasks that might result in boredom or fatigue in people. The use of technology can help to reduce errors and free employees to carry out other tasks.

These advantages combine to give major benefits to a business, as described in the section on using information systems for strategic advantage later in this chapter. There are, however, some disadvantages to computer-based BIS:

■ Judgement/experience. Despite advances in artificial intelligence techniques and expert systems, computer-based information systems are considered incapable of solving problems using their own judgement and experience.

■ Improvisation/flexibility. In general, computer-based information systems are unable to react to unexpected situations and events. Additionally, since most systems are created to fulfil a particular function, it can be difficult to modify them to meet new or changed requirements.

■ Innovation. Computers lack the creativity of a human being. They are unable to think in the abstract and are therefore restricted in their ability to discover new ways of improving processes or solving problems.

■ Intuition. Human intuition can play an important part in certain social situations. For example, one might use intuition to gauge the emotional state of a person before deciding whether or not to give them bad news. BIS cannot use intuition in this way and are therefore unsuitable for certain kinds of situations.

■ Qualitative information. Managers often make unstructured decisions based on the recommendations of others. Their confidence in the person they are dealing with often has a major influence on the decision itself. Once again, BIS cannot act upon qualitative information of this kind.

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45ChaPter 2 BasIc concepts: an IntroductIon to BusIness InformatIon systems

Figure 2.7 Usage and applications of computer-based information systems by organisational level (shading denotes usage of BIS)

Competitor analysis

Cashflow forecast

Sales order invoice

Executive information systems Decision support systems Information reporting systems

O�ce automation systems Transaction processing systems Process control systems

Strategic

Tactical

Operational

TRANSACTION PROCESSING

Business applications of BIS

Earlier (in Chapter 1), it was shown how the characteristics of the decisions taken by managers vary according to organisational level from operational to strategic. The problems and decisions dealt with at the operational level of an organisation tend to have a high degree of structure. Frequent access to highly detailed information is often required to support the decision-making process. Since BIS are well suited to such situations, they are more common at this organisational level than at the strategic level where unstructured decision making based on qualitative data is more common.

Figure 2.7 illustrates areas of applications for BIS in a typical organisation. Note that there will be fewer applications and therefore lower levels of usage at the strategic level. A need for higher levels of automation and the structure of the tasks carried out mean that highest levels of usage will be at the operational level.

The key operational activities referred to in Figure 2.7 include data processing or handling the large volumes of data that arise from an organisation’s daily activities. Although ‘data processing’ describes a wide range of activities, the most common are transaction processing and process control.

Transaction processing involves dealing with the sales and purchase transactions that an organisation carries out in the course of its normal activities. Banks, for example, handle millions of deposits and withdrawals each day. Process control systems deal with the large volume of data generated by production processes. As an example, a machine producing a precision component might take hundreds of measurements and use these to adjust the manufacturing process. (These types of system are described in more detail in Chapter 6.)

The speed, accuracy and reliability of computer-based information systems mean that they are able to handle repetitive tasks involving large volumes of data. Furthermore, they are best used in situations governed by clear, logical rules. This makes them ideally suited to transaction processing or process control applications. From this, it is reasonable to suggest that the widest use of computer-based information systems will be at the operational level of an organisation.

Data processing

Handling the large volumes of data that arise from an organisation’s daily activities is described as data processing.

Transaction processing

processing the sales and purchase transactions that an organisation carries out in the course of its normal activities.

Process control systems

systems which manage manufacturing and other production processes.

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CATEGORIES OF BUSINESS INFORMATION SYSTEM

Information systems are commonly divided into two broad categories: systems that support an organisation’s business activities and systems that support managerial decision making.

■ Operations information systems are generally concerned with process control, transaction processing, communications (internal and external) and productivity.

■ Management information systems provide feedback on organisational activities and help to support managerial decision making. Managerial decision making can occur at the operational, tactical and strategic levels of an organisation.

Operations information systems

systems required for the day-to-day activities of a business such as process control, transaction processing, communications (internal and external) and productivity.

Management information systems

systems providing feedback on organisational activities and supporting managerial decision making.

Using the Internet as a resource, locate at least two examples of the use of online processing systems in business. As an example, both Sainsbury’s and Boots use incentive programmes based around loyalty cards, where customers can redeem points against purchases using interactive kiosks.

Online processing systemsActivity 2.2

As shown in Table 2.1, both of these broader categories can be subdivided into a number of additional categories. The following sections introduce these types of system. They are described in more detail later (in Chapter 6). Figure 2.7 also illustrates the typical use of each category of computer-based information system by management level.

Note that the categories given here represent a traditional view of computer-based information systems and tend to downplay the growing importance of new and emerging types of information systems, many of which might not fit neatly into the table. As an example, some people feel that systems based around the use of the Internet should be given their own category. The next section considers the concepts of e-business and e-commerce.

Operations information systems Management information systems

Transaction processing systems Decision support systems

Process control systems Information reporting systems

Office automation systems Executive information systems

Table 2.1 Categories of computer-based information systems

E-BUSINESS SYSTEMS

E-business

The term e-business is credited to former IBM CEO Lou Gerstner, who is said to have coined the term in 1997. E-business can be described as using ICT, especially the Internet, to conduct business. IBM defines e-business like this:

The process of using Web technology to help businesses streamline processes, improve productivity and increase efficiencies. Enables companies to easily communicate with partners, vendors and customers, connect back-end data systems and transact commerce in a secure manner.

E-business

the use of Ict, especially the Internet, to conduct business.

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47ChaPter 2 BasIc concepts: an IntroductIon to BusIness InformatIon systems

As this definition shows, e-business involves several key activities: improving business processes, enhancing communications and providing the means to carry out business trans- actions securely. Three areas of business are enhanced by adopting an e-business approach. These are:

■ Production processes – including procurement, ordering stock, payment processing, links with suppliers and production control.

■ Customer-focused processes – including marketing, selling via the Internet, customer support and processing of customer orders and payments.

■ Internal management processes – including training, recruitment, internal information sharing and other employee services.

E-business is part of a broader Internet economy which encompasses all of the activities involved in using the Internet for commerce. The CREC (Center for Research and Electronic Commerce) at the University of Texas has developed a conceptual framework for how the Internet economy works (http://cism.mccombs.utexas.edu). The Internet economy is made up of four layers:

1. Internet infrastructure. Companies that provide the hardware, software and other equipment for the Internet. Examples: ISPs, networking companies and manufacturers of PCs and servers.

2. Internet applications infrastructure. Companies that provide software facilitating Internet transactions. Also, companies that provide web development, design and consulting services. Examples: producers of web development software, web-enabled databases and search engines.

3. Internet intermediaries. Companies that link buyers and sellers, for example by providing content or by creating marketplaces where business can be transacted. Examples: travel agents, content providers and online brokerages.

4. Internet commerce. Companies that sell products and services to consumers or other companies. Examples: online retailers, subscription or fee-based services and manufacturers selling directly to the public.

Internet economy

this encompasses all of the activities involved in using the Internet for commerce.

Consider the framework of the Internet economy developed by the CREC (Center for Research and Electronic Commerce) at the University of Texas. Give at least three examples of companies for each layer in the framework.

The Internet economyActivity 2.3

A common activity associated with e-business is electronic commerce (e-commerce), which can be described as using technology to conduct business transactions, such as buying and selling goods and services. However, e-commerce involves more than merely conducting electronic transactions; it also encompasses a wide range of associated activities, such as after-sales support and even logistics.

The importance of e-commerce can be illustrated by looking at the rapid growth of online sales. In 2010 Forrester Research (www.forrester.com), for instance, predicted that online sales in the UK will grow at the rate of 10 per cent each year for the next five years. Online retail will reach 40 billion by 2014 and the number of online shoppers will grow from 31 million to 40 million over the same period. The UK has the largest proportion of consumers who make monthly online purchases: around 48 per cent, compared with a European average of 32 per cent.

E-commerce

E-commerce

using technology to conduct business transactions, such as buying and selling goods and services.

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In Western Europe, online retailing will grow at a rate of approximately 11 per cent each year, reaching 114 million by 2014. The number of Europeans who shop online will grow from 141 million to 190 million over the same period.

In the United States, online retail sales will grow to $249 billion by 2014, accounting for 8 per cent of all retail sales.

E-commerce activities can be broken down into five basic types:

1. Business-to-business (B2B). Transactions take place between companies. Approximately 80 per cent of all e-commerce is of this type.

2. Business-to-consumer (B2C). Companies sell products directly to consumers. B2C can involve activities such as product research (where consumers gather information and compare prices) and electronic delivery (where information products are delivered to consumers via e-mail or other means).

3. Business-to-government (B2G). Transactions take place between companies and public- sector organisations.

4. Consumer-to-consumer (C2C). Transactions take place between private individuals. Perhaps the best examples of C2C commerce are online auction sites and peer-to-peer systems.

5. Mobile commerce (m-commerce). M-commerce is a relatively new development and involves selling goods or services via wireless technology, especially mobile phones and PDAs. A report from Juniper Research has found that annual retail payments on mobile handsets and tablets are expected to reach $707 billion by 2018, representing 30 per cent of all eRetail by that time. This compares with mobile retail spend of $182 billion in 2013, when mobile accounted for around 15 per cent of eRetail (www .juniperresearch.com).

There are many new types of e-commerce activity starting to appear or growing in popularity. As an example, exchanges between governments and citizens, employees and businesses are often described using the term e-government. These exchanges are also described using abbreviations like G2C (government-to-citizen), C2G (citizen-to- government), G2E (government-to-employee) or G2B (government-to-business).

How many new or emerging types of e-commerce can you locate using the Internet? Which of these do you think will become most significant in the future?

E-commerce typesActivity 2.4

Benefits of e-business

In general, the benefits of e-business include reduced costs, improved efficiency and access to larger markets.

By automating many of the administrative tasks associated with ordering, supplying and delivering goods or services, the cost of a typical business transaction can be reduced significantly. As an example, the NHS is the largest single healthcare delivery organisation in the world, with net planned expenditure for 2013–14 of £109.956 billion. E-procurement is used to reduce administrative costs and purchase goods at lower prices. Using e-procurement, it is possible to reduce the cost of making a purchase from £30 to just £4.

It was mentioned earlier that adopting an e-business approach could help to enhance three main areas of business: production processes, customer-focused processes and internal

M-commerce

describes selling goods or services via wireless technology, especially mobile phones and pdas.

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49ChaPter 2 BasIc concepts: an IntroductIon to BusIness InformatIon systems

management processes. In terms of customer-focused processes, for example, the efficiency of customer services can be improved through the introduction of a help desk on the company’s web site. Such a facility can be used to provide customers with help, information and advice on a 24-hour, 365-day basis. As well as helping customers, such a facility can also act to reduce costs by reducing pressure on other support services, such as telephone helplines.

Finally, the adoption of an e-business approach can help companies to reach a larger, global market. This is often one of the benefits of restructuring the relationship between manufacturer, retailers and customers. In a conventional business relationship, consumers buy products and services from a retailer and have little or no contact with the producer. However, the Internet provides access to a global marketplace, allowing manufacturers to sell to customers directly (called e-tailing) or form business relationships with retailers located anywhere in the world. Customers also benefit by being given a greater choice of products at more competitive prices.

The approaches used by companies such as Argos, Dell and eBay restructure the relationship between manufacturer, retailer and customer to the benefit of all involved. Discuss this statement with reference to the e-business and e-commerce concepts described in this section.

Benefits of e-businessActivity 2.5

Enterprise systems aim to support the business processes of an organisation across any functional boundaries that exist within that organisation. They use Internet technology to integrate information within the business and with external stakeholders such as customers, suppliers and partners. The main elements of an enterprise system are enterprise resource planning (ERP) which is concerned with internal production, distribution and financial processes, customer relationship management (CRM) which is concerned with marketing and sales processes, supply chain management (SCM) which is concerned with the flow of materials, information and customers through the supply chain and supplier relationship management (SRM) which is concerned with sourcing, purchasing and the warehousing of goods and services. Other elements may include product lifecycle management (PLM), financial management and human capital management. Enterprise systems provide a single solution from a single supplier with integrated functions for major business functions from across the value chain such as production, distribution, sales, finance and human resources management. They are normally purchased as an off-the-shelf package which is then tailored. The main reason for implementing an enterprise system is explained by Figure 2.8. It compares an enterprise application with the previous company arrangement of separate data silos and applications (sometimes known as ‘information islands’) in different parts of the company. The problem of information silos arose as decentralisation of BIS selection became devolved, with the end-users in individual departments making their own purchasing decisions. This often led to separate applications from different vendors in different departments, often with poor data transfer between applications. (Enterprise systems are covered in detail in Chapter 6.)

ENTERPRISE SYSTEMS

Enterprise systems

enterprise systems aim to support the business processes of an organisation across any functional boundaries that exist within that organisation.

E-tailing

the use of the Internet by manufacturers to sell goods directly to customers.

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Figure 2.8 Enterprise system in comparison to separate functional applications

Manufacture

System 3: MRPII

Distribution

System 4: Oracle

HRM

System 5: SAP

Finance

System 2: Coda

Marketing

System 1: Informix

System 1 from SAP, Oracle or infor

Old

New

Enterprise system

In order to survive and grow in a competitive environment, organisations must seek to gain strategic advantage (or competitive advantage) over their competitors. BIS play a crucial part in gaining and sustaining a competitive edge over other organisations operating in the same industry.

This section introduces the concept of strategic advantage. Later (in Chapter 13) we describe how IS strategy can be developed in more detail. We also look at how a company reviews the benefits of a specific new system when assessing its feasibility (in Chapter 8).

BIS AND STRATEGIC ADVANTAGE

Strategic advantage

organisations gain benefits through developing distinctive competencies.

Competitive strategies

In order to gain or maintain competitive advantage, organisations can adopt three basic strategies: cost leadership, differentiation or innovation.

Cost leadership

Cost leadership means simply providing goods or services at the lowest possible cost. In most cases this is achieved by reducing the organisation’s costs in producing goods or providing services, for example by automating parts of the production process. However, cost leadership can also be achieved by helping suppliers and customers to reduce costs, usually by forming alliances and linkages that benefit all of the parties involved. In some cases, cost leadership is achieved by causing a competitor’s costs to increase, for example by introducing new product features that will be expensive for a competitor to duplicate. Using Internet technologies for e-business can assist in achieving cost leadership by helping to reduce transaction costs. All business transactions have a variety of expenses associated

Transaction costs

the costs associated with a business transaction, such as selling a product, or ordering stock.

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51ChaPter 2 BasIc concepts: an IntroductIon to BusIness InformatIon systems

with them, such as the cost of advertising products, processing orders and so on. For many organisations, the largest transaction costs arise from the sale of goods or services. In recent years, companies have sought to reduce operating expenses by moving towards increased automation and by passing on transaction costs to customers. Sometimes this has been done directly, perhaps by imposing a small booking or order fee. In other cases, it has been done by encouraging customers to select, order and pay for goods themselves via the Internet. Such a move tends to result in significant savings since the company no longer needs to maintain expensive premises, such as showrooms, and can start to reduce staffing levels. easyJet is a good example of a company that has been able to reduce operating costs using this approach. By transferring over 90 per cent of its ticketing online, the company has been able to reduce staff costs dramatically.

Product differentiation

Differentiation involves creating a distinction between the organisation’s products and those of its competitors. In many cases, differentiation is used to concentrate on a specific niche in the market so that the company can focus on particular goods and services. A car manufacturer, such as Rolls-Royce, provides a good example of product differentiation. The cars produced by Rolls-Royce are perceived as luxury items that indicate status and importance in society. They are considered far superior to standard production models in terms of quality, reliability and comfort. By creating this image, Rolls-Royce has succeeded in differentiating its products from those of its competitors.

Innovation

Innovation is concerned with finding new ways to approach an organisation’s activities. Examples of innovation include improving existing products or creating new ones, forging strategic linkages, improving production processes and entering new markets. It is possible for companies operating in the same market to use entirely different competitive strategies. Large companies may also need to select different strategies for customers located in different regions.

Between the various charts and bar graphs projected on the screen at eBay’s analyst day on Thursday was a cartoon of a woman in a shoe store.

Surrounded by dozens of pairs of pumps and dishevelled shoeboxes, a weary store clerk kneels before her, cradling her foot. ‘This pair is so perfect,’ she says. ‘I can’t wait to buy them cheaper online somewhere. What’s your WiFi password?’

Don Kingsborough, vice president of retail for eBay- owned PayPal, said the scenario plays out every day in retail stores. The hundreds of retail executives he had spoken with in the last two years were all trying to figure out how to get the shoppers like the one in the cartoon to buy from them and not from online

behemoths like Amazon. Mr Kingsborough said PayPal wants to win those customers.

‘Commerce is no longer about location, location, location,’ he said. ‘New commerce is about engagement, engagement, engagement.’

His team described various applications PayPal was developing to keep smartphone-obsessed shoppers buying at bricks and mortar stores, from loyalty programmes that offer discounts when people enter stores to ordering apps that allow people to place and pay for food orders over their phones then pick them up in the store without waiting in line.

The financial benefits would come not just to the retailers, but to PayPal, too, executives said. After

PayPal eyes in-store retail customers By April Dembosky in San Jose and California

CASE STUDY 2.1

➨

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Value chain analysis

Michael Porter’s work (Porter, 1980) includes the concept of a value chain: a series of connected activities that add value to an organisation’s products or services. An analysis of an organisation’s value chain can indicate which areas might provide the organisation with a competitive advantage.

To understand value chain analysis we need also to consider an organisation’s supply chain. Supply chain management (SCM) is the coordination of all supply activities of an organisation from its suppliers through to production of goods and services and their delivery to its customers. The value chain is a related concept that describes the different value-adding activities that connect a company’s supply side with its demand side. We can identify both an internal value chain within the boundaries of an organisation and an external value chain where these activities are performed by partners. Traditional value chain analysis (Figure 2.9) distinguishes between primary activities that contribute directly to getting goods and services to the customer (such as inbound logistics, including procurement, manufacturing, marketing and delivery to buyers, support and servicing after sale) and support activities which provide the inputs and infrastructure that allow the primary activities to take place. Support activities include finance, human resources and information systems.

Supply chain management (SCM)

the coordination of all supply activities of an organisation from its suppliers and partners to its customers.

Value chain

a model for analysis of how supply chain activities can add value to products and services delivered to the customer.

doubling revenues in the last three years, the online and mobile payment company is expecting to double revenues again by 2015, up to $10.5bn.

Overall revenues for the company are projected to grow 50 per cent to $21.5bn in 2015, up from $14.1bn in 2012. Profits will grow between 15 and 19 per cent, according to Bob Swan, chief financial officer.

The focus of eBay’s analyst day was how the company planned to work ‘with retailers, not against them’ in a world where people’s shopping habits increasingly blend the online and offline worlds.

‘It’s an anti-Amazon play,’ said one analyst, who believed retailers would find the various eBay technology offerings compelling in their quest to defend themselves against the e-commerce giant.

Shares in eBay rose more than 4 per cent on Thursday, closing at $54.22, then rose further in after-hours trading.

Analyst saw the most potential for growth in PayPal. They said its strong foundation in digital payments and its global reach position it well for taking advantage of the ‘new commerce’.

‘Building a payments business globally is really, really, really hard,’ said David Marcus, president of PayPal. He took a slight dig at competitors in the financial services industry or technology industry who are competing with PayPal in building a digital wallet, including Visa and Google.

‘They don’t have the reach, scale, or innovation,’ he said. ‘It’s easy to create buzz, but only a handful have been able to scale and build a large payments business globally.’

PayPal now has 125m digital wallets, he said.

Several analysts raised questions, however, about whether the company’s investment in new technology and its move into the retail world would ultimately lower margins. Concerns have been growing that credit card companies will eventually follow the lead set by MasterCard in February and begin charging PayPal fees for using their networks in digital wallet transactions.

Mr Swan said no. He said analysts have been asking the broader question about margins for seven years, but the details have evolved – from PayPal’s move toward working with larger retailers several years ago, through the regulations of the Dodd-Frank Act in 2011, to potential network fees today. But he predicted core transaction margins would in fact go up, from 60 per cent or more to 62 per cent or more.

John Donahoe, chief executive of eBay, concluded the day by calling the technological changes in consumer shopping and merchant offerings a ‘commerce revolution’ for large and small businesses alike.

‘Retailers are beginning to fight back,’ he said. ‘Retail is not dead.’

QUESTION

How are Paypal assisting bricks and mortar stores to compete against online-based retailers such as Amazon?

Source: Dembosky, A. (2013) PayPal eyes in-store retail customers. Financial Times. 28 March. © The Financial Times Limited 2013. All Rights Reserved.

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53ChaPter 2 BasIc concepts: an IntroductIon to BusIness InformatIon systems

The preceding material should make it clear that Porter’s value chain is largely concerned with business activities surrounding the production and supply of physical products. However, today’s modern marketplace sees many companies concerned with producing and marketing non-physical products, such as subscription-based services. In these new industries, primary and secondary activities may be so transformed as to be virtually unrecognisable. As an example, delivering a digital product – such as a music track, movie or ring tone – to buyers may involve little more than sending an automated e-mail or text message.

Porter’s work also overlooks the fact that as technology has developed, the information it can supply to managers has become essential to the operation of most businesses. This is understandable given that much of Porter’s work was carried out in the 1970s and 1980s, well before personal computers became popular and affordable. The information supplied by modern BIS affects both primary and secondary activities by changing the activities themselves or by allowing the value chain to be configured differently. The Internet, for example, has transformed the way in which some products are marketed and delivered.

All of this raises two important questions. First, what is the role of information within the value chain? Second, can Porter’s value chain be applied to a modern businesses that operates across the Internet or that markets virtual products and services?

For some people, information supports processes that add value, but is not a source of value itself. For others, information is a source of value because it can create competitive advantage when viewed from the right perspective and if applied correctly. As an example, Rayport and Sviokla (1995) state:

The value chain model model treats information as a supporting element in the value-adding process, not as a source of value in itself. Managers often use information they capture on inventory, production, or logistics to help monitor or control those processes, for instance, but they rarely use information itself to create new value for the customer.

Rayport and Sviokla have suggested the concept of the virtual value chain (VVC) to explain how information can help to create competitive advantage. In doing this, they refer to the physical marketplace and its virtual counterpart, the marketspace. They suggest that companies adopting a virtual value chain tend to go through three phases. In each phase, companies have the opportunity to reduce costs, improve efficiency or find new ways of doing things:

1. Visibility. Companies use information to examine the physical value chain more closely. Technology is used to manage activities in the physical value chain more efficiently.

Figure 2.9 The value chain model

Inbound logistics

Production

Human resources

Primary value chain activities

Secondary value chain activities

Finance

Information systems

Outbound logistics

Sales and

marketing

The virtual value chain

Virtual value chain (VVC)

the virtual value chain allows value chain analysis to be extended to modern businesses that operate across the Internet or market virtual products and services. In the VVc, physical processes are replaced by virtual ones and the marketplace is replaced by a virtual marketspace.

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Part 1 IntroductIon to BusIness InformatIon systems54

2. Mirroring capability. Physical processes start to be replaced by virtual processes. A parallel value chain is created in the marketspace. Put more simply, activities are moved from the marketplace to the marketspace.

3. New customer relationships. Information drawn from the virtual value chain is used to create new customer relationships by delivering value in new ways.

The VVC provides many ways for companies to increase their competitiveness. As an example, the act of replacing a physical process with a virtual one may reveal that too many unnecessary people or stages are involved, allowing the process to be made more efficient. In addition, many companies have built new customer relationships by establishing web sites or making use of social media, such as social networking sites.

BIS can be also used to counter the five competitive forces of their environment described by Porter (1980). Examples of how this can be achieved are given later (in Chapter 13). The five forces are:

1. the threat of new entrants; 2. the bargaining power of suppliers; 3. the bargaining power of customers; 4. the threat of substitute products or services; 5. rivalry among existing competitors.

Porter’s work can also be used to identify a number of ways in which BIS can be used to achieve competitive advantage. These include:

■ improving operational efficiency; ■ raising barriers to entry; ■ locking in customers and suppliers; ■ promoting business innovation; ■ increasing switching costs; ■ leverage.

Figure 2.10 summarises the main ways in which computer-based information systems can be used to achieve competitive advantage.

Improving operational efficiency

One of the most common ways of using computer-based information systems to achieve competitive advantage is by using them to improve operational efficiency. As an example, consider a typical manufacturing company wishing to adopt a cost leadership strategy. In a primary activity, such as production, an inventory control system might be used to manage stock levels, reducing storage and transportation costs. In addition, support activities, such as management and administration, might achieve higher levels of productivity through the introduction of office automation systems. The organisation might also realise additional benefits from this kind of approach, such as improved customer service.

Barriers to entry

In many industries, organisations have improved operational efficiency by investing heavily in BIS. Often, the systems employed are extremely complex and require ongoing

Using information systems for strategic advantage

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55ChaPter 2 BasIc concepts: an IntroductIon to BusIness InformatIon systems

maintenance and development. This means that newcomers to the industry must be prepared to make a large initial expenditure so that they can acquire the computer-based information systems they need to be able to compete effectively. The level of expenditure needed may be so high that an entry barrier is created that deters or prevents the new competitor from entering the industry. Investing heavily in computer-based information systems may also deter existing competitors, since they too must invest in their information systems in order to maintain or improve their position in the industry. New technologies can decrease barriers to entry. For example, electronic banking removed the requirement for a branch network, leading to the establishment of Internet-only banks, such as Smile. However, entry barriers were so high that most required the backing of a major high-street bank or building society.

Locking in customers and suppliers

Linking an organisation’s computer-based information systems to those of its customers and suppliers can help to strengthen business relationships. As an example, computer-based information systems can be used to provide higher levels of customer service, thereby encouraging clients to remain loyal to the company.

Close integration with a supplier’s information systems can result in a number of business benefits, which include:

■ the availability of raw materials or parts is more certain; ■ cost savings can be realised through reduced administration overheads; ■ suppliers are less likely to abandon the business relationship; ■ the organisation can negotiate favourable terms and prices; ■ competitors are excluded from the business relationship.

However, it should be noted that achieving high levels of integration can also have some significant disadvantages. Perhaps the single largest disadvantage is that the organisation may come to rely upon a relatively small number of suppliers. This reliance might lead to some suppliers’ taking advantage of the relationship, for example by raising prices. The organisation may also find it difficult to maintain normal operations if the supplier goes out of business or experiences other problems.

Figure 2.10 Applying computer-based information systems for competitive advantage

Leverage

Promote business innovation

Organisation Im

prove operational

e� ciency

In cr

ea se

sw itc

hi ng

c os

ts

R ai

se e

nt ry

ba rri

er s

Lock in custom ers

and suppliers

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Promoting business innovation

Investing in computer-based information systems often helps to stimulate business innovation. Introducing a new process control system, for example, might ultimately result in the development of new product features or new product lines.

Organisations that have invested in building effective computer-based information systems are well placed to support business innovation. Such organisations are likely to have established a resource base that can be drawn upon to develop new ideas.

On the other hand, an organisation that has failed to invest adequately in its information systems may lack essential resources, such as hardware, software and trained personnel, and be unable to explore new methods.

Increasing switching costs

In general, an organisation that has invested time, money and effort in developing a computer-based information system will be reluctant to bear the switching costs of moving to a new system. In addition to the cost of new hardware and software, a range of other costs can be incurred. These might include costs connected with:

■ converting data for use with the new system; ■ training staff; ■ interruptions to the company’s operations; ■ lost opportunities to gain new business.

When an organisation links its information systems to those of its suppliers or customers, it will often ensure that switching costs are as high as possible. In this way, the supplier or customer is discouraged from switching to a competitor’s system and competitors are excluded from the business relationship.

Leverage

Access to a resource base of this kind can provide a number of other benefits to an organisation as well as innovation. First, the organisation is equipped so that it can take advantage of any opportunities that arise in the business environment. Second, the organisation can begin to develop new products and services by maximising its use of existing resources. An example of leverage is when a travel agent creates a mailing list from its customer database so that it can offer customers new products or services, such as travel insurance or car rental.

Finally, the organisation may use its resources to gain competitive advantage through information leadership. Information leadership involves enhancing a product or service with an organisation’s specialised information or expertise.

In some cases, organisations achieve information leadership by selling information or expertise in the form of a separate product. A good example might be selling a mailing list created from an organisation’s customer database.

Leverage

a way of increasing returns without increasing investment, usually by maximising the use of existing resources.

Information leadership

enhancing a product or service using an organisation’s specialised information or expertise.

As products become commoditised, it is often said that how companies use information is the key to competing successfully in the marketplace. Dave Buch, director at Capital One, has said: ‘Back in 1987 we figured that our business is nothing to do about credit cards, it’s about information. Capital One is now a $14 billion company with 12 million customers.’

Capital One develops information leadershipMini case study

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57ChaPter 2 BasIc concepts: an IntroductIon to BusIness InformatIon systems

A global survey of more than 2,000 company IT leaders published this week by Gartner, the IT market research firm, shows that, on average, enterprises are realising only 43 per cent of technology’s business potential.

I asked Mark McDonald, group vice-president and Gartner Fellow, what chief information officers can do to address this issue and make better use of IT in 2013.

Q. The CIO Agenda 2013 survey reveals that chief information officers believe that their enterprises have realised less than half of technology’s potential. How has this come about?

There are two reasons behind this: the past and the future.

For the past 10 years, IT has endured a decade of CIO IT budget devaluation because tending to current concerns and costs have limited IT’s strategic relevance, resources and skills. This led many CIOs to believe that surviving meant keeping IT focused on muddling through with current operations and responsibilities. That approach in turn reduces the good business reasons for investing in technology.

This approach worked so long because there were no really new technologies to invest in. During these same 10 years there was something of a desert of technology and business innovation on the horizon, providing another reason why technology has been underused in the enterprise. But all of that has changed now.

The economic, competitive and customer context have all reduced the potential of existing technologies, par- ticularly when a context change is not accompanied by a technology change. The digital future further acceler- ates these changes, as CIOs see mobile, information and cloud as reversing this trend. So now we have a new context, new technologies that reduce the potential of current technology operations and investment.

If executives, including the CIO, want to raise this number, then they will need to change the strategic relevance, resources and skills assigned to technology. This number cannot increase by repeating a past of ‘doing more with less’ if they expect to create value in the future.

Q. Can IT realise its full potential and support the enterprise going forward?

The answer is yes, but to fill such a big gap, CIOs cannot merely work harder, especially when they consider the factors that have changed the enterprise. Over the last 18 months, digital technologies have reached a tipping point with business executives. CIOs have little choice but to increase technology’s potential in the enterprise,

and this means evolving IT’s strategies, priorities and plans beyond tending to the usual concerns.

This means finding answers to a new central question: ‘how will technology support growth?’ This question replaces the prior one of ‘how to control IT cost?’

Q. Will IT budgets be boosted in 2013 to allow CIOs to do this?

Without a change in context, this is unlikely. The survey showed that CIO IT budgets have been flat to negative ever since the dotcom bust of 2002. For 2013, IT budgets are projected to be slightly down, with a weighted global average decline of 0.5 per cent.

However, it is not appropriate to think that CIO’s have to re-slice the IT budget pie to make room for digital technology investments. That is a ‘more with less’ view that is ultimately self-defeating.

The bottom line is that the CIO cannot expect to secure additional funding without assuming new responsibilities or producing new results. CIOs can get money to do new things; they just can’t get more money to do the same old things.

Q. What are the top CIO priorities in 2013?

Digital technologies dominate CIO technology priorities for 2013. The top 10 global technology priorities revealed by the survey reflect a greater emphasis on externally oriented digital technologies, as opposed to traditional IT/operationally oriented systems.

Data and analytics were ranked as the key priority for CIOs in 2013, followed by mobile computing, cloud computing and collaboration technologies. CIOs see these technologies as disrupting business fundamentally over the next 10 years.

When asked which digital technologies would be most disruptive, 70 per cent of CIOs cited mobile technologies, followed by big data/analytics at 55 per cent, social media at 54 per cent and public cloud at 51 per cent. The disruptiveness of each of these technologies is real, but CIOs see their greatest disruptive power coming in combination, rather than in isolation.

Q. So what will corporate IT leaders be doing differently in 2013?

Digital technologies will certainly provide a platform to achieve results, but only if CIOs adopt new roles and behaviours to find digital value. CIOs require a new agenda that incorporates hunting for new digital innovations and opportunities, and harvesting value from products, services and operations.

Corporate IT falling short of potential By Paul Taylor

CASE STUDY 2.2

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1. A system is composed of a group of interrelated components that work towards a common goal. These components include inputs, processes, outputs, feedback and control. A system also has a boundary that separates it from the environment. Systems can be made up of one or more smaller subsystems.

2. An information system converts data into information products. This information is used to support the activities of managers. Information systems make use of people resources, hardware resources, software resources and data resources.

3. Computer-based information systems take advantage of the benefits of information technology and are often grouped into two broad categories. Operations information systems are concerned with process control, transaction processing and productivity. Management information systems provide feedback on organisational activities and support managerial decision making. Computer-based information systems are referred to as ‘information systems’ in the remainder of the book for simplicity.

4. Operations information systems include transaction processing systems, process control systems and office automation systems.

5. Management information systems include information reporting systems, decision support systems and executive information systems.

6. Other categories of computer-based information systems include expert systems, business information systems, end-user computing systems and strategic information systems.

7. ‘Electronic business’ is a broader term referring to how technology can benefit all internal business processes and interactions with third parties. This includes buy-side and sell-side e-commerce.

8. Electronic commerce traditionally refers to electronically mediated buying and selling.

9. Sell-side e-commerce involves all electronic business transactions between an organisation and its customers, while buy-side e-commerce involves transactions between an organisation and its suppliers.

10. In large companies, applications functional areas are gradually being replaced by enterprise resource planning applications that provide functionality applicable across the organisation. In

SUMMARY

However, IT needs new tools in order to find technology- intensive innovation and harvest raised business performance from transformed IT infrastructure, operations and applications. Without change, CIOs and IT will consign themselves to tending a garden of legacy assets and responsibilities.

Q. Will the CIO’s role change as a result?

It should and for many it has. Sixty seven per cent of CIOs today have significant leadership responsibilities outside of traditional IT, ranging from chief process officer to business strategy to customer care.

Almost a fifth of CIOs now act as their enterprise’s chief digital officer, leading digital commerce and channels. Though this nascent role varies in scope and style, it normally includes championing the digital vision for

the business – that is ensuring that the business is evolving optimally in the new digital context.

The 2013 CIO Agenda focused on recognising these challenges and developing plans to win in a digital world. CIOs who merely stick to their current job in this quiet crisis are setting themselves up to lose that job in the future.

IT is not going away; it just needs to change – not because it is wrong, but because the world has changed and enterprises are realising only a fraction of technology’s potential. That is why we have titled the 2013 CIO agenda ‘Hunting and Harvesting in a Digital World.’

Mark McDonald is a group vice-president and Gartner Fellow. He is head of research in Gartner Executive Programs.

Source: Taylor, P. (2013) Corporate IT falling short of potential. Financial Times. 18 January. © The Financial Times Limited 2013. All Rights Reserved.

QUESTION

Explain why organisations are only realising less than half of information technology’s potential.

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59ChaPter 2 BasIc concepts: an IntroductIon to BusIness InformatIon systems

smaller companies, accounting systems are being extended to use in other areas such as payroll, purchase ordering and inventory management.

11. In order to gain strategic advantage, companies will often adopt one of three basic competitive strategies: cost leadership, product differentiation or business innovation. BIS and e-business systems can be used to support attempts to gain competitive advantage through a number of different approaches. These include improving operational efficiency, raising entry barriers, creating high switching costs and gaining information leadership.

1. Answer the following questions in relation to your college or university:

(a) What are the institution’s objectives? (b) Identify a range of typical inputs, processes and outputs. (c) What feedback mechanisms are in place and what kinds of information do they

produce? (d) What control mechanisms exist?

2. In what ways can information systems support a manager’s activities?

3. How can computer-based information systems help an organisation to achieve a strategic advantage over its competitors?

4. Match each term to the correct statement.

ExERCISES

Self-assessment exercises

Discussion questions

1. Can each of the following be described as a system? For each item, try to identify at least two inputs, processes and outputs. In addition, what feedback and control mechanisms exist?

■ a human being; ■ a plant; ■ a house; ■ a country; ■ a computer.

(a) input 1. provides information concerning the performance of a system (b) process 2. describes exchanges between the system and its environment (c) output 3. converts raw materials into a finished product (d) feedback 4. contains everything outside of the system (e) control 5. defines the scope of the system (f) boundary 6. examples include raw materials, energy and labour power (g) environment 7. examples include information, a product and service (h) interface 8. adjusts the performance of the system

5. What is the virtual value chain?

6. What are transaction costs?

7. Explain the reasons for the adoption of enterprise resource planning systems by organisations.

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2. A small company is considering the purchase of a computer and accounting software to help it keep track of its finances. In general, what are the benefits of processing by computer? What other benefits might the company gain by taking this step?

3. Locate an annual report or article that describes a large organisation, such as a supermarket chain. From the information contained in the annual report, identify and describe the information systems that the company might use.

4. Discuss the following statement with reference to how an organisation should react to the Internet. ‘Is the Internet a typhoon force, a ten times force, or is it a bit of wind? Or is it a force that fundamentally alters our business?’ (Andy Grove, Chairman of Intel).

5. ‘Enterprise resource planning software is likely to replace packages used in a single area of the organisation, such as accounting, logistics, production and marketing.’ Discuss.

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Essay questions

1. Use the Internet to research the SABRE system produced by American Airlines. This system demonstrates how BIS can be used to gain strategic advantage. Provide an analysis of this system. Your response should include discussion of the following areas:

(a) Describe how the overall approach adopted by American Airlines incorporated the basic competitive strategies of cost leadership, innovation and product differentiation.

(b) In what ways did SABRE provide American Airlines with a competitive advantage? Your analysis should refer to concepts related to the strategic use of information systems, for example entry barriers.

(c) Although SABRE was undoubtedly successful, American Airlines was not able to maintain its competitive advantage beyond the late 1980s. What factors played a part in the erosion of the company’s lead over its competitors and how did the company react?

2. Select an organisation you are familiar with. You may choose a department within a large organisation, if you wish. Analyse the structure and behaviour of the organisation using systems concepts. Your response should include the following elements:

(a) Identify and describe at least two examples of the following: inputs, processes, outputs, feedback and control.

(b) Identify and describe two decisions that will be taken at the strategic, tactical and operational levels of the organisation.

(c) For each of the decisions described, identify at least two items of information that may be required. Describe some of the characteristics that each item of information will have.

3. Draw a diagram illustrating the subsystems occurring in a hospital. Label the inputs and outputs of each subsystem. Which subsystems are most closely coupled?

4. Do you believe that the advantages of enterprise resource planning applications outweigh their disadvantages? Illustrate your answer with reference to company examples.

Examination questions

1. Information systems play a critical part in supporting a company’s activities. Using specific examples, you are required to:

(a) define an information system; (b) describe the categories of computer-based information systems, providing relevant

business examples for each category identified;

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(c) explain how computer-based information systems can support managers at each level of an organisation.

2. Computer-based information systems are critical to an organisation’s survival in the modern competitive environment. Discuss this statement with reference to the following:

(a) Porter’s competitive forces model and the basic competitive strategies that can be used to gain advantage;

(b) how computer-based information systems can support these strategies; (c) how an organisation’s information resources can be used to create information

leadership.

3. Large retail organisations employ a wide variety of computer-based information systems in order to support their activities. Considering a large supermarket chain, such as Sainsbury’s, you are required to:

(a) define the term ‘computer-based information system’; (b) identify the types of computer-based information systems that are likely to be found

within a typical branch. Your response should describe the function of each system identified and the category to which it belongs.

(c) selecting one of the systems identified in (a), describe the system in more detail, identifying the hardware, software, data and people resources it employs.

4. Draw a diagram illustrating the main components of a generic system.

5. Explain why feedback and control are important in business information systems.

6. Define an enterprise resource planning application. Name two main disadvantages of this type of approach.

References

Al Hakim, L. (2007) Information Quality Management: Theory and Applications, Idea Group publishing, London

Porter, M. (1980) Competitive Strategy, free press, new york

Rayport, J. and Sviokla, J. (1995) exploiting the virtual value chain, Harvard Business Review, 73, 6, november/december, 75–85

Further reading

Laudon, K.C. and Laudon, J.P. (2013) Management Information Systems: Managing the Digital Firm, 13th edition, prentice-Hall, upper saddle river, nJ. although some might find this book a little dense and difficult to read, it is detailed and comprehensive in its coverage. chapters 1 and 2 cover some basic concepts related to information systems, whilst chapter 3 looks at areas such as decision making, competitive advantage, and so on.

O’Brien, J. and Marakas, G. (2011) Management Information Systems, 10th edition, mcGraw- Hill, Boston. chapter 1 deals with basic concepts such as systems theory and types of systems, whilst chapter 2 deals with topics such as competitive advantage.

Turban, E., Rainer, R. and Potter, R. (2004) Introduction to Information Technology, 3rd edition, John Wiley, new york. although lacking depth in some areas, this text is colourful and easy to read. chapters 1, 2 and 11 deal with basic topics, such as the concept of an information system, data, knowledge, decision making and decision support.

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Web links

E-business

www.e-consultancy.com e-consultancy.com is an excellent online digest of consultant and analyst reports.

www.revolutionmagazine.com revolution magazine has a web site for monthly uK magazine on new media – mainly sell-side e-commerce.

Competitive advantage

http://encyclopedia.thefreedictionary.com the free dictionary provides access to a series of brief, easy-to-read articles that summarise key ideas and concepts. a search for ‘competitive advantage’, for example, brings up a concise summary with links to additional, related articles.

www.optimizemag.com Optimize is a free magazine dedicated to business strategy. a search for ‘competitive advantage’ locates a number of interesting articles and case studies.

www.gartner.com Gartner’s advanced search facility allows you to locate survey information on a huge range of topics. a great deal of content is free, although you must register to access the information.

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