econ article

MANAGEMENT INFORMATION SYSTEMS

MANAGING THE DIGITAL FIRM

SIXTEENTH EDITION

Kenneth C. Laudon New York University

Jane P. Laudon Azimuth Information Systems

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Library of Congress Cataloging-in-Publication Data

Names: Laudon, Kenneth C., author. | Laudon, Jane P. (Jane Price), author. Title: Management information systems: managing the digital firm / Kenneth C. Laudon, New York University, Jane P. Laudon, Azimuth Information Systems. Description: Sixteenth edition. | New York, NY: Pearson, [2020] | Includes bibliographical references and index. Identifiers: LCCN 2018053013| ISBN 9780135191798 | ISBN 0135191793 Subjects: LCSH: Management information systems. Classification: LCC T58.6 .L376 2020 | DDC 658.4/038011--dc23 LC record available at https://lccn.loc.gov/2018053013

ISBN 10: 0-13-519179-3 ISBN 13: 978-0-13-519179-8

iii

ABOUT THE AUTHORS

Kenneth C. Laudon is a Professor of Information Systems at New York University’s Stern School of Business. He holds a B.A. in Economics from Stanford and a Ph.D. from Columbia University. He has authored 12 books dealing with electronic commerce, information sys- tems, organizations, and society. Professor Laudon has also written more than 40 articles concerned with the social, organizational, and management impacts of information systems, privacy, ethics, and multimedia technology.

Professor Laudon’s current research is on the planning and management of large-scale in- formation systems and multimedia information technology. He has received grants from the National Science Foundation to study the evolution of national information systems at the Social Security Administration, the IRS, and the FBI. Ken’s research focuses on enterprise system implementation, computer-related organizational and occupational changes in large organizations, changes in management ideology, changes in public policy, and understand- ing productivity change in the knowledge sector.

Ken Laudon has testified as an expert before the United States Congress. He has been a researcher and consultant to the Office of Technology Assessment (United States Congress), the Department of Homeland Security, and the Office of the President, several executive branch agencies, and Congressional Committees. Professor Laudon also acts as an in-house educator for several consulting firms and as a consultant on systems planning and strategy to several Fortune 500 firms.

At NYU’s Stern School of Business, Ken Laudon teaches courses on Managing the Digital Firm, Information Technology and Corporate Strategy, Professional Responsibility (Ethics), and Electronic Commerce and Digital Markets. Ken Laudon’s hobby is sailing.

Jane Price Laudon is a management con- sultant in the information systems area and the author of seven books. Her special inter- ests include systems analysis, data manage- ment, MIS auditing, software evaluation, and teaching business professionals how to design and use information systems.

Jane received her Ph.D. from Columbia University, her M.A. from Harvard University, and her B.A. from Barnard College. She has taught at Columbia University and the New York University Graduate School of Business. She maintains a lifelong interest in the languages and civilizations of East Asia.

The Laudons have two daughters, Erica and Elisabeth, to whom this book is dedicated.

iv

BRIEF CONTENTS

PART ONE Organizations, Management, and the Networked Enterprise 1

Chapter 1 Information Systems in Global Business Today 2 Chapter 2 Global E-business and Collaboration 40 Chapter 3 Information Systems, Organizations, and Strategy 78 Chapter 4 Ethical and Social Issues in Information Systems 120

PART TWO Information Technology Infrastructure 161 Chapter 5 IT Infrastructure and Emerging Technologies 162 Chapter 6 Foundations of Business Intelligence: Databases and Information

Management 210

Chapter 7 Telecommunications, the Internet, and Wireless Technology 250 Chapter 8 Securing Information Systems 294

PART THREE Key System Applications for the Digital Age 337 Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise

Applications 338

Chapter 10 E-commerce: Digital Markets, Digital Goods 372 Chapter 11 Managing Knowledge and Artificial Intelligence 418 Chapter 12 Enhancing Decision Making 458

PART FOUR Building and Managing Systems 491 Chapter 13 Building Information Systems 492 Chapter 14 Managing Projects 532 Chapter 15 Managing Global Systems 564

Glossary G-1

Indexes I-1

v

COMPLETE CONTENTS

PART ONE Organizations, Management, and the Networked Enterprise 1

Chapter 1 Information Systems in Global Business Today 2 Opening Case: PCL Construction: The New Digital Firm 3 1-1 How are information systems transforming business, and why are they

so essential for running and managing a business today? 5 How Information Systems Are Transforming Business 6 • What’s New in Management Information Systems? 7

Interactive Session | Management Can You Run the Company with Your iPhone? 9

Globalization Challenges and Opportunities: A Flattened World 11 • The Emerging Digital Firm 12 • Strategic Business Objectives of Information Systems 13

1-2 What is an information system? How does it work? What are its management, organization, and technology components? Why are complementary assets essential for ensuring that information systems provide genuine value for organizations? 16 What Is an Information System? 16 • Dimensions of Information Systems 18

Interactive Session | Technology UPS Competes Globally with Information Technology 23

It Isn’t Just Technology: A Business Perspective on Information Systems 24 • Complementary Assets: Organizational Capital and the Right Business Model 26

1-3 What academic disciplines are used to study information systems, and how does each contribute to an understanding of information systems? 28 Technical Approach 28 • Behavioral Approach 29 • Approach of This Text: Sociotechnical Systems 29

1-4 How will MIS help my career? 30 The Company 30 • Position Description 31 • Job Requirements 31 • Interview Questions 31 • Author Tips 31

Review Summary 32 • Key Terms 33 • Review Questions 33 • Discussion Questions 34

Hands-On MIS Projects 34 Collaboration and Teamwork Project 35 Case Study: Did Information Systems Cause Deutsche Bank to Stumble? 36 References: 39

vi Contents

Chapter 2 Global E-business and Collaboration 40 Opening Case: Enterprise Social Networking Helps Sanofi Pasteur

Innovate and Improve Quality 41

2-1 What are business processes? How are they related to information systems? 43 Business Processes 43 • How Information Technology Improves Business Processes 45

2-2 How do systems serve the different management groups in a business, and how do systems that link the enterprise improve organizational performance? 45 Systems for Different Management Groups 46 • Systems for Linking the Enterprise 51

Interactive Session | Organizations Data Changes How NFL Teams Play the Game and How Fans See It 52

• E-business, E-commerce, and E-government 55

2-3 Why are systems for collaboration and social business so important, and what technologies do they use? 56 What Is Collaboration? 56 • What Is Social Business? 57 • Business Benefits of Collaboration and Social Business 58 • Building a Collaborative Culture and Business Processes 60 • Tools and Technologies for Collaboration and Social Business 60

Interactive Session | Technology Videoconferencing: Something for Everyone 62

2-4 What is the role of the information systems function in a business? 66 The Information Systems Department 66 • Organizing the Information Systems Function 68

2-5 How will MIS help my career? 68 The Company 68 • Position Description 68 • Job Requirements 69 • Interview Questions 69 • Author Tips 69

Review Summary 70 • Key Terms 71 • Review Questions 71 • Discussion Questions 72

Hands-On MIS Projects 72 Collaboration and Teamwork Project 73 Case Study: Should Companies Embrace Social Business? 74 References: 77

Chapter 3 Information Systems, Organizations, and Strategy 78 Opening Case: Technology Helps Starbucks Find Better Ways to Compete 79 3-1 Which features of organizations do managers need to know about to

build and use information systems successfully? 81 What Is an Organization? 81 • Features of Organizations 84

3-2 What is the impact of information systems on organizations? 89 Economic Impacts 89 • Organizational and Behavioral Impacts 90 • The Internet and Organizations 93 • Implications for the Design and Understanding of Information Systems 93

Contents vii

3-3 How do Porter’s competitive forces model, the value chain model, synergies, core competencies, and network economics help companies develop competitive strategies using information systems? 94 Porter’s Competitive Forces Model 94 • Information System Strategies for Dealing with Competitive Forces 96

Interactive Session | Organizations Digital Technology Helps Crayola Brighten Its Brand 98

The Internet’s Impact on Competitive Advantage 100 • The Business Value Chain Model 101

Interactive Session | Technology Smart Products—Coming Your Way 102 Synergies, Core Competencies, and Network-Based Strategies 105

3-4 What are the challenges posed by strategic information systems, and how should they be addressed? 109 Sustaining Competitive Advantage 109 • Aligning IT with Business Objectives 109 • Managing Strategic Transitions 110

3-5 How will MIS help my career? 111 The Company 111 • Position Description 111 • Job Requirements 111 • Interview Questions 112 • Author Tips 112

Review Summary 112 • Key Terms 113 • Review Questions 113 • Discussion Questions 114

Hands-On MIS Projects 114 Collaboration and Teamwork Project 115 Case Study: Grocery Wars 116 References: 118

Chapter 4 Ethical and Social Issues in Information Systems 120 Opening Case: Are Cars Becoming Big Brother on Wheels? 121 4-1 What ethical, social, and political issues are raised by information

systems? 123 A Model for Thinking about Ethical, Social, and Political Issues 124 • Five Moral Dimensions of the Information Age 126 • Key Technology Trends that Raise Ethical Issues 126

4-2 What specific principles for conduct can be used to guide ethical decisions? 129 Basic Concepts: Responsibility, Accountability, and Liability 129 • Ethical Analysis 129 • Candidate Ethical Principles 130 • Professional Codes of Conduct 131 • Some Real-World Ethical Dilemmas 131

4-3 Why do contemporary information systems technology and the Internet pose challenges to the protection of individual privacy and intellectual property? 131 Information Rights: Privacy and Freedom in the Internet Age 132 • Property Rights: Intellectual Property 138

4-4 How have information systems affected laws for establishing account- ability and liability and the quality of everyday life? 142 Computer-Related Liability Problems 142 • System Quality: Data Quality and System Errors 143 • Quality of Life: Equity, Access, and Boundaries 144

viii Contents

Interactive Session | Organizations Will Automation Kill Jobs? 148 Health Risks: RSI, CVS, and Cognitive Decline 149

Interactive Session | Technology How Harmful Are Smartphones? 151 4-5 How will MIS help my career? 152

The Company 152 • Position Description 152 • Job Requirements 152 • Interview Questions 153 • Author Tips 153

Review Summary 153 • Key Terms 154 • Review Questions 154 • Discussion Questions 155

Hands-On MIS Projects 155 Collaboration and Teamwork Project 156 Case Study: Facebook Privacy: Your Life for Sale 157 References: 160

PART TWO Information Technology Infrastructure 161

Chapter 5 IT Infrastructure and Emerging Technologies 162 Opening Case: PeroxyChem’s Cloud Computing Formula for

Success 163

5-1 What is IT infrastructure, and what are the stages and drivers of IT infrastructure evolution? 165 Defining IT Infrastructure 165 • Evolution of IT Infrastructure 167 • Technology Drivers of Infrastructure Evolution 171

5-2 What are the components of IT infrastructure? 175 Computer Hardware Platforms 176 • Operating System Platforms 178 • Enterprise Software Applications 178 • Data Management and Storage 179 • Networking/Telecommunications Platforms 179 • Internet Platforms 179 • Consulting and System Integration Services 180

5-3 What are the current trends in computer hardware platforms? 180 The Mobile Digital Platform 180 • Consumerization of IT and BYOD 180

Interactive Session | Technology Is Business Ready for Wearable Computers? 181

Quantum Computing 183 • Virtualization 183 • Cloud Computing 183

Interactive Session | Organizations Look to the Cloud 186 Edge Computing 188 • Green Computing 189 • High-Performance and Power-Saving Processors 190

5-4 What are the current computer software platforms and trends? 190 Linux and Open Source Software 190 • Software for the Web: Java, HTML, and HTML5 191 • Web Services and Service-Oriented Architecture 192 • Software Outsourcing and Cloud Services 193

5-5 What are the challenges of managing IT infrastructure and management solutions? 196 Dealing with Platform and Infrastructure Change 196 • Management and Governance 197 • Making Wise Infrastructure Investments 197

Contents ix

5-6 How will MIS help my career? 200 The Company 200 • Position Description 200 • Job Requirements 200 • Interview Questions 201 • Author Tips 201

Review Summary 201 • Key Terms 202 • Review Questions 203 • Discussion Questions 204

Hands-On MIS Projects 204 Collaboration and Teamwork Project 205 Case Study: Is BYOD Good for Business? 206 References: 209

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 210 Opening Case: Data Management Helps the Charlotte Hornets Learn More

About Their Fans 211

6-1 What are the problems of managing data resources in a traditional file environment? 213 File Organization Terms and Concepts 213 • Problems with the Traditional File Environment 214

6-2 What are the major capabilities of database management systems (DBMS), and why is a relational DBMS so powerful? 216 Database Management Systems 217 • Capabilities of Database Management Systems 219 • Designing Databases 222 • Non-relational Databases, Cloud Databases, and Blockchain 224

6-3 What are the principal tools and technologies for accessing information from databases to improve business performance and decision making? 227 The Challenge of Big Data 227 • Business Intelligence Infrastructure 228

Interactive Session | Technology Kraft Heinz Finds a New Recipe for Analyzing Its Data 230

Analytical Tools: Relationships, Patterns, Trends 231 • Databases and the Web 235

6-4 Why are information policy, data administration, and data quality assurance essential for managing the firm’s data resources? 236 Establishing an Information Policy 236 • Ensuring Data Quality 237

Interactive Session | Organizations Databases Where the Data Aren’t There 239

6-5 How will MIS help my career? 240 The Company 240 • Position Description 240 • Job Requirements 241 • Interview Questions 241 • Author Tips 241

Review Summary 241 • Key Terms 242 • Review Questions 243 • Discussion Questions 244

Hands-On MIS Projects 244 Collaboration and Teamwork Project 245 Case Study: How Reliable Is Big Data? 246 References: 248

x Contents

Chapter 7 Telecommunications, the Internet, and Wireless Technology 250 Opening Case: Tour de France Wins with Wireless Technology 251 7-1 What are the principal components of telecommunications networks

and key networking technologies? 253 Networking and Communication Trends 253 • What Is a Computer Network? 254 • Key Digital Networking Technologies 256

7-2 What are the different types of networks? 259 Signals: Digital Versus Analog 259 • Types of Networks 259 • Transmission Media and Transmission Speed 261

7-3 How do the Internet and Internet technology work, and how do they support communication and e-business? 261 What Is the Internet? 261 • Internet Addressing and Architecture 262

Interactive Session | Organizations Net Neutrality: The Battle Rages On 265 Internet Services and Communication Tools 267

Interactive Session | Management Monitoring Employees on Networks: Unethical or Good Business? 270

The Web 271

7-4 What are the principal technologies and standards for wireless networking, communication, and Internet access? 279 Cellular Systems 279 • Wireless Computer Networks and Internet Access 280 • RFID and Wireless Sensor Networks 282

7-5 How will MIS help my career? 285 The Company 285 • Position Description 285 • Job Requirements 285 • Interview Questions 286 • Author Tips 286

Review Summary 286 • Key Terms 287 • Review Questions 288 • Discussion Questions 288

Hands-On MIS Projects 288 Collaboration and Teamwork Project 289 Case Study: Google, Apple, and Facebook Battle for Your Internet

Experience 290

References: 293

Chapter 8 Securing Information Systems 294 Opening Case: Hackers Target the U.S. Presidential Election: What

Happened? 295

8-1 Why are information systems vulnerable to destruction, error, and abuse? 297 Why Systems are Vulnerable 298 • Malicious Software: Viruses, Worms, Trojan Horses, and Spyware 299 • Hackers and Computer Crime 302 • Internal Threats: Employees 306 • Software Vulnerability 307

8-2 What is the business value of security and control? 308 Legal and Regulatory Requirements for Electronic Records Management 308

Interactive Session | Technology Meltdown and Spectre Haunt the World’s Computers 309

Electronic Evidence and Computer Forensics 311

Contents xi

8-3 What are the components of an organizational framework for security and control? 312 Information Systems Controls 312 • Risk Assessment 313 • Security Policy 314 • Disaster Recovery Planning and Business Continuity Planning 315 • The Role of Auditing 315

8-4 What are the most important tools and technologies for safeguarding information resources? 316 Identity Management and Authentication 316 • Firewalls, Intrusion Detection Systems, and Anti-malware Software 318 • Securing Wireless Networks 320 • Encryption and Public Key Infrastructure 320 • Securing Transactions with Blockchain 322 • Ensuring System Availability 323 • Security Issues for Cloud Computing and the Mobile Digital Platform 323

Interactive Session | Management How Secure Is the Cloud? 324 Ensuring Software Quality 326

8-5 How will MIS help my career? 327 The Company 327 • Position Description 327 • Job Requirements 327 • Interview Questions 327 • Author Tips 328

Review Summary 328 • Key Terms 329 • Review Questions 330 • Discussion Questions 330

Hands-On MIS Projects 330 Collaboration and Teamwork Project 332 Case Study: Is the Equifax Hack the Worst Ever—and Why? 333 References: 336

PART THREE Key System Applications for the Digital Age 337

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 338 Opening Case: Avon Beautifies Its Supply Chain 339 9-1 How do enterprise systems help businesses achieve operational

excellence? 341 What are Enterprise Systems? 341 • Enterprise Software 342 • Business Value of Enterprise Systems 343

9-2 How do supply chain management systems coordinate planning, production, and logistics with suppliers? 344

Interactive Session | Management Soma Bay Prospers with ERP in the Cloud 345

The Supply Chain 346 • Information Systems and Supply Chain Management 348 • Supply Chain Management Software 349 • Global Supply Chains and the Internet 350 • Business Value of Supply Chain Management Systems 352

9-3 How do customer relationship management systems help firms achieve customer intimacy? 352 What Is Customer Relationship Management? 353 • Customer Relationship Management Software 353 • Operational and Analytical CRM 357 • Business Value of Customer Relationship Management Systems 357

xii Contents

9-4 What are the challenges that enterprise applications pose, and how are enterprise applications taking advantage of new technologies? 358 Enterprise Application Challenges 358

Interactive Session | Organizations Kenya Airways Flies High with Customer Relationship Management 359

Next-Generation Enterprise Applications 361

9-5 How will MIS help my career? 363 The Company 363 • Position Description 363 • Job Requirements 363 • Interview Questions 363 • Author Tips 364

Review Summary 364 • Key Terms 365 • Review Questions 365 • Discussion Questions 366

Hands-On MIS Projects 366 Collaboration and Teamwork Project 367 Case Study: Clemens Food Group Delivers with New Enterprise

Applications 368

References: 370

Chapter 10 E-commerce: Digital Markets, Digital Goods 372 Opening Case: Youtube Transforms the Media Landscape 373 10-1 What are the unique features of e-commerce, digital markets, and

digital goods? 375 E-commerce Today 376 • The New E-commerce: Social, Mobile, Local 377 • Why E-commerce Is Different 379 • Key Concepts in E-commerce: Digital Markets and Digital Goods in a Global Marketplace 382

10-2 What are the principal e-commerce business and revenue models? 385 Types of E-commerce 385 • E-commerce Business Models 386

Interactive Session | Organizations Uber: Digital Disruptor 389 E-commerce Revenue Models 390

10-3 How has e-commerce transformed marketing? 392 Behavioral Targeting 393 • Social E-commerce and Social Network Marketing 396

Interactive Session | Management “Socializing” with Customers 399 10-4 How has e-commerce affected business-to-business transactions? 400

Electronic Data Interchange (EDI) 401 • New Ways of B2B Buying and Selling 402

10-5 What is the role of m-commerce in business, and what are the most important m-commerce applications? 404 Location-Based Services and Applications 405 • Other Mobile Commerce Services 406

10-6 What issues must be addressed when building an e-commerce presence? 406 Develop an E-commerce Presence Map 406 • Develop a Timeline: Milestones 407

Contents xiii

10-7 How will MIS help my career? 408 The Company 408 • Job Description 408 • Job Requirements 409 • Interview Questions 409 • Author Tips 409

Review Summary 410 • Key Terms 410 • Review Questions 411 • Discussion Questions 412

Hands-On MIS Projects 412 Collaboration and Teamwork Project 413 Case Study: A Nasty Ending for Nasty Gal 414 References: 416

Chapter 11 Managing Knowledge and Artificial Intelligence 418 Opening Case: Machine Learning Helps Akershus University Hospital Make

Better Treatment Decisions 419

11-1 What is the role of knowledge management systems in business? 421 Important Dimensions of Knowledge 422 • The Knowledge Management Value Chain 423 • Types of Knowledge Management Systems 426

11-2 What are artificial intelligence (AI) and machine learning? How do businesses use AI? 427 Evolution of AI 427 • Major Types of AI 428 • Expert Systems 428 • Machine Learning 430 • Neural Networks 432 • Genetic Algorithms 435 • Natural Language Processing, Computer Vision Systems, and Robotics 436 • Intelligent Agents 437

11-3 What types of systems are used for enterprise-wide knowledge management, and how do they provide value for businesses? 438 Enterprise Content Management Systems 439 • Locating and Sharing Expertise 440 • Learning Management Systems 441

11-4 What are the major types of knowledge work systems, and how do they provide value for firms? 441 Knowledge Workers and Knowledge Work 441

Interactive Session | Management Sargent & Lundy Learns to Manage Employee Knowledge 442

Requirements of Knowledge Work Systems 443 • Examples of Knowledge Work Systems 444

Interactive Session | Technology The Reality of Virtual Reality 446 11-5 How will MIS help my career? 447

The Company 447 • Position Description 448 • Job Requirements 448 • Interview Questions 448 • Author Tips 448

Review Summary 449 • Key Terms 450 • Review Questions 450 • Discussion Questions 451

Hands-On MIS Projects 451 Collaboration and Teamwork Project 452 Case Study: Can Cars Drive Themselves—And Should They? 453 References: 456

xiv Contents

Chapter 12 Enhancing Decision Making 458 Opening Case: Big Data and the Internet of Things Drive Precision Agriculture 459 12-1 What are the different types of decisions, and how does the decision-

making process work? 461 Business Value of Improved Decision Making 461 • Types of Decisions 462 • The Decision-Making Process 463

12-2 How do information systems support the activities of managers and management decision making? 464 Managerial Roles 464 • Real-World Decision Making 466 • High-Velocity Automated Decision Making 467

12-3 How do business intelligence and business analytics support decision making? 468 What Is Business Intelligence? 468 • The Business Intelligence Environment 468 • Business Intelligence and Analytics Capabilities 470

Interactive Session | Technology Siemens Makes Business Processes More Visible 471

12-4 How do different decision-making constituencies in an organization use business intelligence, and what is the role of information systems in helping people working in a group make decisions more efficiently? 475 Decision Support for Operational and Middle Management 475 • Decision Support for Senior Management: Balanced Scorecard and Enterprise Performance Management Methods 478

Interactive Session | Management Anthem Benefits from More Business Intelligence 480

Group Decision-Support Systems (GDSS) 481

12-5 How will MIS help my career? 482 The Company 482 • Position Description 482 • Job Requirements 482 • Interview Questions 483 • Author Tips 483

Review Summary 483 • Key Terms 484 • Review Questions 485 • Discussion Questions 485

Hands-On MIS Projects 485 Collaboration and Teamwork Project 486 Case Study: Is Predix GE’s Future? 487 References: 489

PART FOUR Building and Managing Systems 491

Chapter 13 Building Information Systems 492 Opening Case: Cameron International Builds a New System for Financial

Reporting 493

13-1 How does building new systems produce organizational change? 495 Systems Development and Organizational Change 495

Interactive Session | Organizations Carter’s Redesigns Its Business Processes 497

Business Process Redesign 498

Contents xv

13-2 What are the core activities in the systems development process? 502 Systems Analysis 502 • Systems Design 503 • Completing the Systems Development Process 504

13-3 What are the principal methodologies for modeling and designing systems? 507 Structured Methodologies 507 • Object-Oriented Development 509 • Computer-Aided Software Engineering 511

13-4 What are alternative methods for building information systems? 511 Traditional Systems Life Cycle 511 • Prototyping 512 • End-User Development 514 • Application Software Packages, Software Services, and Outsourcing 514

13-5 What are new approaches for system building in the digital firm era? 517 Rapid Application Development (RAD), Agile Development, and DevOps 517 • Component-Based Development and Web Services 518 • Mobile Application Development: Designing for a Multiscreen World 519

13-6 How will MIS help my career? 520 The Company 520 • Position Description 520

Interactive Session | Technology Systems Development Is Different for Mobile Apps 521

Job Requirements 522 • Interview Questions 522 • Author Tips 523

Review Summary 523 • Key Terms 524 • Review Questions 525 • Discussion Questions 525

Hands-On MIS Projects 526 Collaboration and Teamwork Project 527 Case Study: Hitachi Consulting Moves Human Resources to the

Cloud 528

References: 530

Chapter 14 Managing Projects 532 Opening Case: Sound Project Management Helps Stepan Company Improve

Financial Planning and Reporting 533

14-1 What are the objectives of project management, and why is it so essential in developing information systems? 535 Runaway Projects and System Failure 535 • Project Management Objectives 536

14-2 What methods can be used for selecting and evaluating information systems projects and aligning them with the firm’s business goals? 537 Management Structure for Information Systems Projects 537 • Linking Systems Projects to the Business Plan 538 • Portfolio Analysis 540 • Scoring Models 541

14-3 How can firms assess the business value of information systems? 542 Information System Costs and Benefits 542 • Capital Budgeting for Information Systems 542 • Limitations of Financial Models 543

xvi Contents

14-4 What are the principal risk factors in information systems projects, and how can they be managed? 544 Dimensions of Project Risk 544 • Change Management and the Concept of Implementation 545 • Controlling Risk Factors 547 • Designing for the Organization 550 • Project Management Software Tools 551

Interactive Session | Management ConocoPhillips Implements a New System for Access Control 552

14-5 How will MIS help my career? 553 The Company 553

Interactive Session | Technology Arup Moves Project Management to the Cloud 554

Position Description 555 • Job Requirements 555 • Interview Questions 556 • Author Tips 556

Review Summary 556 • Key Terms 557 • Review Questions 557 • Discussion Questions 558

Hands-On MIS Projects 558 Collaboration and Teamwork Project 559 Case Study: Pennsylvania’s Unemployment Compensation Modernization

System: Unfinished Business 560

References: 562

Chapter 15 Managing Global Systems 564 Opening Case: New Systems Help Eli Lilly Standardize as a Global

Company 565

15-1 What major factors are driving the internationalization of business? 567 Developing an International Information Systems Architecture 567 • The Global Environment: Business Drivers and Challenges 569 • State of the Art 572

15-2 What are the alternative strategies for developing global businesses? 572 Global Strategies and Business Organization 573 • Global Systems to Fit the Strategy 574 • Reorganizing the Business 575

15-3 What are the challenges posed by global information systems and management solutions for these challenges? 575 A Typical Scenario: Disorganization on a Global Scale 576 • Global Systems Strategy 576 • The Management Solution: Implementation 579

15-4 What are the issues and technical alternatives to be considered when developing international information systems? 580 Computing Platforms and Systems Integration 581 • Connectivity 581 • Software Localization 582

15-5 How will MIS help my career? 583 The Company 583

Interactive Session | Technology The Global Internet Goes Multimedia 584 Position Description 585 • Job Requirements 585 • Interview Questions 585

Contents xvii

Interactive Session | Management AbbVie Builds a Global Systems Infrastructure 586

Author Tips 587

Review Summary 588 • Key Terms 588 • Review Questions 589 • Discussion Questions 589

Hands-On MIS Projects 589 Collaboration and Teamwork Project 590 Case Study: E-Commerce in China: Opportunities and Obstacles 591 References: 593

Glossary G-1

Indexes I-1

BUSINESS CASES AND INTERACTIVE SESSIONS

Here are some of the business firms you will find described in the cases and Interactive Sessions of this book:

Chapter 1: Information Systems in Global Business Today PCL Construction: The New Digital Firm Can You Run the Company with Your iPhone? UPS Competes Globally with Information Technology Did Information Systems Cause Deutsche Bank to Stumble?

Chapter 2: Global E-business and Collaboration Enterprise Social Networking Helps Sanofi Pasteur Innovate and Improve Quality Data Changes How NFL Teams Play the Game and How Fans See It Videoconferencing: Something for Everyone Should Companies Embrace Social Business?

Chapter 3: Information Systems, Organizations, and Strategy Technology Helps Starbucks Find Better Ways to Compete Digital Technology Helps Crayola Brighten Its Brand Smart Products—Coming Your Way Grocery Wars

Chapter 4: Ethical and Social Issues in Information Systems Are Cars Becoming Big Brother on Wheels? Will Automation Kill Jobs? How Harmful Are Smartphones? Facebook Privacy: Your Life for Sale

Chapter 5: IT Infrastructure and Emerging Technologies PeroxyChem’s Cloud Computing Formula for Success Is Business Ready for Wearable Computers? Look to the Cloud Is BYOD Good for Business?

Chapter 6: Foundations of Business Intelligence: Databases and Information Management Data Management Helps the Charlotte Hornets Learn More About Their Fans Kraft Heinz Finds a New Recipe for Analyzing Its Data Databases Where the Data Aren’t There How Reliable Is Big Data?

Chapter 7: Telecommunications, the Internet, and Wireless Technology Tour de France Wins with Wireless Technology Net Neutrality: The Battle Rages On Monitoring Employees on Networks: Unethical or Good Business? Google, Apple, and Facebook Battle for Your Internet Experience

Chapter 8: Securing Information Systems Hackers Target the U.S. Presidential Election: What Happened? Meltdown and Spectre Haunt the World’s Computers How Secure Is the Cloud? Is the Equifax Hack the Worst Ever—and Why?

Chapter 9: Achieving Operational Excellence and Customer Intimacy: Enterprise Applications Avon Beautifies Its Supply Chain Soma Bay Prospers with ERP in the Cloud Kenya Airways Flies High with Customer Relationship Management Clemens Food Group Delivers with New Enterprise Applications

Chapter 10: E-commerce: Digital Markets, Digital Goods Youtube Transforms the Media Landscape Uber: Digital Disruptor “Socializing” with Customers A Nasty Ending for Nasty Gal

Chapter 11: Managing Knowledge and Artificial Intelligence Machine Learning Helps Akershus University Hospital Make Better Treatment Decisions Sargent & Lundy Learns to Manage Employee Knowledge The Reality of Virtual Reality Can Cars Drive Themselves—And Should They?

Chapter 12: Enhancing Decision Making Big Data and the Internet of Things Drive Precision Agriculture Siemens Makes Business Processes More Visible Anthem Benefits from More Business Intelligence Is Predix GE’s Future?

Chapter 13: Building Information Systems Cameron International Builds a New System for Financial Reporting Carter’s Redesigns Its Business Processes Systems Development Is Different for Mobile Apps Hitachi Consulting Moves Human Resources to the Cloud

Chapter 14: Managing Projects Sound Project Management Helps Stepan Company Improve Financial Planning and Reporting ConocoPhillips Implements a New System for Access Control Arup Moves Project Management to the Cloud Pennsylvania’s Unemployment Compensation Modernization System: Unfinished Business

Chapter 15: Managing Global Systems New Systems Help Eli Lilly Standardize as a Global Company The Global Internet Goes Multimedia AbbVie Builds a Global Systems Infrastructure E-Commerce in China: Opportunities and Obstacles

xx

PREFACE

New To This Edition

Management Information Systems, 16th edition has new features and content to make your MIS course more exciting, current, and relevant.

New Features • New Career Opportunities section in each chapter, identified by ,

shows students specifically how this book can help them find a job and build their careers. The last major section of each chapter presents a description of an entry-level job for a recent college graduate based on a real-world job description. The job requirements are related to the topics covered in that chapter. The job description shows the required educa- tional background and skills, lists business-related questions that might arise during the job interview, and provides author tips for answering the questions and preparing for the interview.

• New Conceptual Videos collection includes 45 conceptual videos of 3 to 5 minutes in length. Ken Laudon walks students through three of the most important concepts in each chapter using a contemporary ani- mation platform. Available only in the MyLab MIS digital edition.

• New Video Cases collection: 36 video cases (two or more per chapter) and 10 additional instructional videos covering key concepts and experi- ences in the MIS world. The video cases illustrate how real-world cor- porations and managers are using information technology and systems. Video Cases are listed at the beginning of each chapter.

• Learning Tracks: 49 Learning Tracks in MyLab MIS for additional cov- erage of selected topics. This edition includes new Learning Tracks for case-based reasoning and fuzzy logic.

New Topics The 16th edition features all new opening, closing, and Interactive Session cases. The text, figures, tables, and cases have been updated through September 2018 with the latest sources from industry and MIS research. New topics and coverage include:

• Updated coverage of artificial intelligence (AI): Chapter 11 has been rewritten to include new coverage of machine learning, “deep learning,” natural language systems, computer vision systems, and robotics, reflecting the surging interest in business uses of AI and “intelligent” techniques.

• Big Data and the Internet of Things: In-depth coverage of big data, big data analytics, and the Internet of Things (IoT) in Chapters 1, 6, 7, and 12. Includes big data analytics, analyzing IoT data streams, Hadoop, in-memory computing, nonrelational databases, data lakes, and analytic platforms.

Preface xxi

• Cloud Computing: Updated and expanded coverage of cloud computing in Chapter 5 (IT infrastructure) with more detail on types of cloud services, private and public clouds, hybrid clouds, managing cloud services, and a new Interactive Session on using cloud services. Cloud computing also covered in Chapter 6 (databases in the cloud), Chapter 8 (cloud security), Chapter 9 (cloud-based CRM and ERP), Chapter 10 (e-commerce), and Chapter 13 (cloud-based systems development).

• Social, Mobile, Local: New e-commerce content in Chapter 10 describ- ing how social tools, mobile technology, and location-based services are transforming marketing and advertising.

• Social Business: Expanded coverage of social business, introduced in Chapter 2 and discussed throughout the text. Detailed discussions of en- terprise (internal corporate) social networking as well as social network- ing in e-commerce.

• Machine learning

• Natural language processing

• Computer vision systems

• Robotics

• “Deep learning”

• Supervised learning

• Unsupervised learning

• Edge computing

• 5G networks

• General Data Protection Regulation (GDPR)

• Mobile device management (MDM)

• Office 365

• Blockchain

• Data lake

• Distributed database

• FinTech

The CORE Laudon text and MyLab MIS provide the most up-to-date and com- prehensive overview of information systems used by business firms today. After reading this book, we expect students will be able to participate in, and even lead, management discussions of information systems for their firms and understand how to use information technology in their jobs to achieve bottom- line business results. Regardless of whether students are accounting, finance, management, operations management, marketing, or information systems ma- jors, the knowledge and information in this book will be valuable throughout their business careers.

The MyLab MIS platform provides an interactive digital environment that supports the unique strengths of our work. Our goal with Management Information Systems: Managing the Digital Firm is to provide students with an introduction to the MIS field that is authoritative, up-to-date, interactive, and engaging for students and professors. The MyLab MIS edition extends these

xxii Preface

features to a digital platform that emphasizes videos, animations, interactive quizzes, and student comprehension of concepts, theories, and issues. The MyLab MIS environment reflects the new learning styles of students, which are more social, interactive, and usable on digital devices such as smartphones and tablets.

Reach Every Student with MyLab MIS MyLab is the teaching and learning platform that empowers you to reach every student. By combining trusted authors’ content with digital tools and a flex- ible platform, MyLab MIS personalizes the learning experience and improves results for each student. And with MIS Decision-Making Sims and auto-graded Excel and Access Projects, students understand how MIS concepts will help them succeed in their future careers.

Solving Teaching and Learning Challenges

The Laudon learning package is more current, real-world, and authoritative than competitors. Laudon MIS16 and MyLab MIS help students understand MIS concepts and issues through extensive use of examples of real-world compa- nies, a wide variety of short and long text and video cases based on real-world organizations, and numerous line art illustrations, interactive animations, and hands-on software projects.

The Laudons are known for their outstanding real-world case studies, which describe how well-known business firms are using IT to solve problems and achieve objectives. Students are often asked to analyze the business problem and propose alternative solutions. The Laudons also provide hands-on MIS software and management decision-making problems in each chapter that are based on real-world companies and business scenarios.

The Laudon text and learning package now has a very strong career focus, which incentivizes students to learn by showing exactly how each chapter will help them prepare for future jobs. In addition to Career Opportunities, MyLab MIS features Career Resources, including how to incorporate MIS knowledge into resumes, cover letters, and job interviews.

The MyLab MIS edition offers unique digital interactive features that hold student attention spans longer and make learning more effective, including 45 animated conceptual learning modules that walk students through key con- cepts in each chapter; 36 online video cases, and interactive quizzes. All of this is available anytime, anywhere, on any digital device. The result is a com- prehensive learning environment that will heighten student engagement and learning in the MIS course.

The Core Text The core text provides an overview of fundamental MIS concepts using an integrated framework for describing and analyzing information systems. This framework shows information systems composed of management, organiza- tion, and technology elements and is reinforced in student projects and case studies. The core text consists of 15 chapters with hands-on projects covering the most essential topics in MIS. An important part of the core text is the Video

Preface xxiii

Case Study and Instructional Video Package: 36 video case studies (two to three per chapter) plus 10 instructional videos that illustrate business uses of infor- mation systems, explain new technologies, and explore concepts. Videos are keyed to the topics of each chapter.

Chapter Organization Each chapter contains the following elements:

• A Chapter Outline based on Learning Objectives

• Lists of all the Case Studies and Video Cases for each chapter

• A chapter-opening case describing a real-world organization to establish the theme and importance of the chapter

• A diagram analyzing the opening case in terms of the management, organization, and technology model used throughout the text

• Two Interactive Sessions with Case Study Questions • A Career Opportunities section showing students how to use the text for

job hunting and career preparation • A Review Summary keyed to the Student Learning Objectives • A list of Key Terms that students can use to review concepts • Review questions for students to test their comprehension of chapter

material • Discussion questions raised by the broader themes of the chapter • A series of Hands-on MIS Projects consisting of two Management

Decision Problems, a hands-on application software project, and a project to develop Internet skills

• A Collaboration and Teamwork Project to develop teamwork and presentation skills with options for using open source collaboration tools

• A chapter-ending case study for students to apply chapter concepts • Two assisted-graded writing questions with prebuilt grading rubrics • Chapter references

A diagram accompanying each chapter-opening case graphically illustrates how management, organization, and technology elements work together to create an information system solution to the business challenges discussed in the case.

Business Solutions

Management

Organization

Wireless Race Tracking System

Technology

Information System

Business Problem

• Vast topographically challenging location • Opportunities from new technology

• Revise race tracking process • Obtain external data

• Monitor rider progress and location

• Predict race outcome • Generate rider profiles • Generate real-time race statistics

• Increase fan involvement • Expand fan bases

• Tracking sensors • Mobile app • Cloud computing service • Data analytics • Social media

• Select race technology

xxiv Preface

Student Learning-Focused Student Learning Objectives are organized around a set of study questions to focus student attention. Each chapter concludes with a Review Summary and Review Questions organized around these study questions, and each major chapter section is based on a Learning Objective.

Key Features We have enhanced the text to make it more interactive, leading edge, and ap- pealing to both students and instructors. The features and learning tools are described in the following sections.

Business-Driven with Real-World Business Cases and Examples The text helps students see the direct connection between information systems and business performance. It describes the main business objectives driving the use of information systems and technologies in corporations all over the world: operational excellence, new products and services, customer and supplier inti- macy, improved decision making, competitive advantage, and survival. In-text examples and case studies show students how specific companies use informa- tion systems to achieve these objectives.

We use current (2018) examples from business and public organizations throughout the text to illustrate the important concepts in each chapter. All the case studies describe companies or organizations that are familiar to stu- dents, such as Uber, the NFL, Facebook, Crayola, Walmart, Amazon, Google, Starbucks, and GE.

Interactivity There’s no better way to learn about MIS than by doing MIS! We provide dif- ferent kinds of hands-on projects where students can work with real-world business scenarios and data and learn firsthand what MIS is all about. These projects heighten student involvement in this exciting subject.

• MyLab MIS Online Video Case Package. Students can watch short videos online, either in-class or at home, and then apply the concepts of the book to the analysis of the video. Every chapter contains at least two business video cases that explain how business firms and managers are using information systems and explore concepts discussed in the chap- ter. Each video case consists of one or more videos about a real-world company, a background text case, and case study questions. These video cases enhance students’ understanding of MIS topics and the relevance of MIS to the business world. In addition, there are 10 Instructional Videos that describe developments and concepts in MIS keyed to respective chapters.

• MyLab MIS Online Conceptual Videos. Forty-five video animations where the authors walk students through three concepts from each chapter.

• Interactive Sessions. Two short cases in each chapter have been redesigned as Interactive Sessions to be used in the classroom (or on Internet discussion boards) to stimulate student interest and active learning. Each case concludes with case study questions. The case study questions provide topics for class discussion, Internet discussion, or written assignments.

Preface xxv

Case Study Questions encourage students to apply chapter concepts to real-world companies in class discussions, student presentations, or writing assignments.

CASE STUDY QUESTIONS

1. Analyze Crayola’s problem. What management, organization, and technology factors contributed to the problem?

2. What competitive strategies is Crayola pursu- ing? How does digital technology support those strategies?

3. What people issues did Crayola have to address in designing its new technology-based products?

4. How has digital technology changed Crayola’s business model and the way it runs its business?

Each chapter contains two Interactive Sessions on Management, Organizations, and Technology using real- world companies to illustrate chapter concepts and issues.

98 Part One Organizations, Management, and the Networked Enterprise

INTERACTIVE SESSION ORGANIZATIONS

Digital Technology Helps Crayola Brighten Its Brand Crayola is one of the world’s most beloved brands for children and their parents. The Easton, Pennsylvania–based company has been noted for high-quality, non-toxic crayons, markers, pencils, modeling clay, creative toys, and innovative art tools that have inspired artistic creativity in children for more than one hundred years. You can nd Cray- ola products nearly everywhere, including schools, ofces, supermarkets, drug stores, hospitals, theme parks, airports, gas stations, and restaurants.

The Crayola crayon box became part of the col- lective history and experiences of generations of Americans, and a symbol of the color and fun of childhood. But today, that Crayola crayon box is not as iconic as in the past. The popularity of Crayola crayons is under assault—not by Crayola’s traditional competitors (Faber-Castelli, DixonTiconderoga, and MEGA Brands), but by changing times.

There has been a profound technological and cultural shift in how children play. Children and their families are being bombarded with increasingly sophisticated forms of entertainment, many of them digitally based. Digital products are starting to sup- plant physical ones in the world of children’s play as well as in other areas of work and everyday life. With the advent of computers and web-based learning, chil- dren are leaving behind hand-held art supplies at an increasingly younger age. The phenomenon is called KGOY, standing for “Kids Growing Older Younger.” As children reach the age of 4 or 5, when they become old enough to play with a computer, they become less interested in toys and crayons and prefer electronics

help children learn and play in colorful ways. The question they asked was not, how can we sell more crayons? Instead they asked, what kinds of experi- ences and technologies should Crayola embrace? Crayola has reframed its business model, introduced a new innovation process for product development, and created new products and revenue streams. The company has been transformed from a manufacturer of crayons and art tools into a trusted source of tools and experiences for creative play.

Crayola is using digital technology, but not to re- place its core crayon business. Instead, it’s integrat- ing the old and the new. The company now offers a new range of products like the iMarker, an all-in-one digital pen, crayon, and pencil, designed for use with the Color Studio HD iPad app. It’s like a traditional coloring book, but includes new interactive sounds and motion. Lights, Camera, Color! is another digital application that allows kids to turn their favorite pho- tos into digital coloring book pages. Tech toys such as the Digital Light Designer, a 360-degree domed draw- ing surface, encourage imaginations to run wild with colored LED lights. Children can play updated ver- sions of their favorite games or animate and save up to

- ents are looking for toys that are less messy than tra- ditional markers or ngerpaints. These digital toys are “100 percent mess-proof,” and technology has helped Crayola make its other products less messy as well.

In designing new digital products and experiences, Crayola has drawn on its extensive knowledge of child development. It understands how digital tech-

• Hands-On MIS Projects. Every chapter concludes with a Hands-On MIS Projects section containing three types of projects: two Manage- ment Decision Problems; a hands-on application software exercise using Microsoft Excel, Access, or web page and blog creation tools; and a project that develops Internet business skills. A Dirt Bikes USA run- ning case in MyLab MIS provides additional hands-on projects for each chapter.

• Collaboration and Teamwork Projects. Each chapter features a col- laborative project that encourages students working in teams to use Google Drive, Google Docs, or other open source collaboration tools. The first team project in Chapter 1 asks students to build a collaborative Google site.

xxvi Preface

Chapter Learning Tracks

Chapter 1: Information Systems in Global Business Today

How Much Does IT Matter? Information Systems and Your Career The Mobile Digital Platform

Chapter 2: Global E-business and Collaboration

Systems from a Functional Perspective IT Enables Collaboration and Teamwork Challenges of Using Business Information Systems Organizing the Information Systems Function Occupational and Career Outlook for Information Systems Majors 2014–2020

Chapter 3: Information Systems, Organizations, and Strategy

The Changing Business Environment for IT

Chapter 4: Ethical and Social Issues in Information Systems

Developing a Corporate Code of Ethics for IT

Chapter 5: IT Infrastructure and Emerging Technologies

How Computer Hardware Works How Computer Software Works Service Level Agreements The Open Source Software Initiative Comparing Stages in IT Infrastructure Evolution Cloud Computing

Students practice using software in real-world settings for achieving operational excellence and enhancing decision making.

Improving Decision Making: Using Web Tools to Configure and Price an Automobile

Software skills: Internet-based software Business skills: Researching product information and pricing

3-11 In this exercise, you will use software at car websites to �nd product information about a car of your choice and use that information to make an important purchase decision. You will also evaluate two of these sites as selling tools. You are interested in purchasing a new Ford Escape (or some other car of your choice). Go to the website

of CarsDirect (www.carsdirect.com) and begin your investigation. Locate the Ford Escape. Research the vari- ous Escape models, and choose one you prefer in terms of price, features, and safety ratings. Locate and read at least two reviews. Surf the website of the manufacturer, in this case Ford (www.ford.com). Compare the infor- mation available on Ford’s website with that of CarsDirect for the Ford Escape. Try to locate the lowest price for the car you want in a local dealer’s inventory. Suggest improvements for CarsDirect.com and Ford.com.

Each chapter features a project to develop Internet skills for accessing informa- tion, conducting research, and performing online calculations and analysis.

Customization and Flexibility Our Learning Tracks and Video Cases in MyLab MIS give instructors the flexibil- ity to provide in-depth coverage of the topics and additional cases they choose. Video Cases and Instructional Videos are listed at the beginning of each chapter as well as in the Preface.

Learning Tracks There are 49 Learning Tracks in MyLab MIS available to instructors and students. This supplementary content takes students deeper into MIS topics, concepts, and debates and reviews basic technology concepts in hardware, software, database design, telecommunications, and other areas.

Preface xxvii

Chapter Learning Tracks

Chapter 6: Foundations of Business Intelligence: Databases and Information Management

Database Design, Normalization, and Entity-Relationship Diagramming Introduction to SQL Hierarchical and Network Data Models

Chapter 7: Telecommunications, the Internet, and Wireless Technology

Broadband Network Services and Technologies Cellular System Generations Wireless Applications for Customer Relationship Management, Supply Chain Management, and Healthcare Introduction to Web 2.0 LAN Topologies

Chapter 8: Securing Information Systems

The Booming Job Market in IT Security The Sarbanes-Oxley Act Computer Forensics General and Application Controls for Information Systems Management Challenges of Security and Control Software Vulnerability and Reliability

Chapter 9: Achieving Opera- tional Excellence and Customer Intimacy: Enterprise Applications

SAP Business Process Map Business Processes in Supply Chain Management and Supply Chain Metrics Best-Practice Business Processes in CRM Software

Chapter 10: E-commerce: Digital Markets, Digital Goods

E-commerce Challenges: The Story of Online Groceries Build an E-commerce Business Plan Hot New Careers in E-Commerce E-commerce Payment Systems Building an E-commerce Website

Chapter 11: Managing Knowledge and Artificial Intelligence

Challenges of Knowledge Management Systems Case-Based Reasoning Fuzzy Logic

Chapter 12: Enhancing Decision Making

Building and Using Pivot Tables

Chapter 13: Building Information Systems

Unified Modeling Language Primer on Business Process Design and Documentation Primer on Business Process Management Fourth-Generation Languages

Chapter 14: Managing Projects Capital Budgeting Methods for Information Systems Investments Enterprise Analysis (Business Systems Planning) and Critical Success Factors Information Technology Investments and Productivity

Video Cases and Instructional Videos Instructors can download step-by-step instructions for accessing the video cases from the Instructor Resources Center.

Chapter Video

Chapter 1: Information Systems in Global Business Today

Business in the Cloud: Facebook, Google, and eBay Data Centers UPS Global Operations with the DIAD and Worldport Instructional Video: Tour IBM’s Raleigh Data Center

Chapter 2: Global E-business and Collaboration

Walmart’s Retail Link Supply Chain CEMEX: Becoming a Social Business Instructional Video: US Foodservice Grows Market with Oracle CRM on Demand

Chapter 3: Information Systems, Organizations, and Strategy

GE Becomes a Digital Firm: The Emerging Industrial Internet National Basketball Association: Competing on Global Delivery with Akamai OS Streaming

Chapter 4: Ethical and Social Issues in Information Systems

What Net Neutrality Means for You Facebook and Google Privacy: What Privacy? The United States vs. Terrorism: Data Mining for Terrorists and Innocents Instructional Video: Viktor Mayer Schönberger on the Right to Be Forgotten

Chapter 5: IT Infrastructure and Emerging Technologies

Rockwell Automation Fuels the Oil and Gas Industry with the Internet of Things (IoT) ESPN.com: The Future of Sports Coverage in the Cloud Netflix: Building a Business in the Cloud

xxviii Preface

Chapter Video

Chapter 6: Foundations of Business Intelligence: Databases and Information Management

Dubuque Uses Cloud Computing and Sensors to Build a Smarter City Brooks Brothers Closes in on Omnichannel Retail Maruti Suzuki Business Intelligence and Enterprise Databases

Chapter 7: Telecommunications, the Internet, and Wireless Technology

Telepresence Moves out of the Boardroom and into the Field Virtual Collaboration with IBM Sametime

Chapter 8: Securing Information Systems Stuxnet and Cyberwarfare Cyberespionage: The Chinese Threat Instructional Video: Sony PlayStation Hacked; Data Stolen from 77 Million Users Instructional Video: Meet the Hackers: Anonymous Statement on Hacking SONY

Chapter 9: Achieving Operational Excellence and Customer Intimacy: Enterprise Applications

Life Time Fitness Gets in Shape with Salesforce CRM Instructional Video: GSMS Protects Products and Patients by Serializing Every Bottle of Drugs

Chapter 10: E-commerce: Digital Markets, Digital Goods

Walmart Takes on Amazon: A Battle of IT and Management Systems Groupon: Deals Galore Etsy: A Marketplace and Community Instructional Video: Walmart’s eCommerce Fulfillment Center Network Instructional Video: Behind the Scenes of an Amazon Warehouse

Chapter 11: Managing Knowledge and Artificial Intelligence

How IBM's Watson Became a Jeopardy Champion Alfresco: Open Source Document Management and Collaboration

Chapter 12: Enhancing Decision Making PSEG Leverages Big Data and Business Analytics Using GE’s Predix Platform FreshDirect Uses Business Intelligence to Manage Its Online Grocery Business Intelligence Helps the Cincinnati Zoo Work Smarter

Chapter 13: Building Information Systems IBM: Business Process Management in a SaaS Environment IBM Helps the City of Madrid with Real-Time BPM Software Instructional Video: Workflow Management Visualized Instructional Video: BPM: Business Process Management Customer Story

Chapter 14: Managing Projects Blue Cross Blue Shield Smarter Computing Project NASA Project Management Challenges

Chapter 15: Managing Global Systems Daum Runs Oracle Apps on Linux Lean Manufacturing and Global ERP: Humanetics and Global Shop

Developing Career Skills

For students to succeed in a rapidly changing job market, they should be aware of their career options and how to go about developing a variety of skills. With MyLab MIS and Management Information Systems: Managing the Digital Firm, we focus on developing these skills in the following ways.

Career Opportunities and Resources Every student who reads this text wants to know: How will this book help my ca- reer? Our new Career Opportunities feature shows how to use this text and MyLab MIS as tools for job-hunting and career-building. Job interviewers will typically ask about why you want the job, along with your ability to communicate, multi- task, work in a team, show leadership, solve problems, and meet goals. These are general skills and behaviors you’ll need to succeed in any job, and you should be prepared to provide examples from your course work and job experiences that demonstrate these skills. But there are also business knowledge and professional skills that employers will ask you about. Career Opportunities will show you how to use what you have learned in this text to demonstrate these skills.

Video Cases and Instructional Videos (Continued)

Preface xxix

Chapter Career Opportunity Job Description 1. Business Information Systems in Your Career Financial Client Support and Sales Assistant

2. Global E-business and Collaboration Entry Level Sales Support Specialist

3. Information Systems, Organizations, and Strategy Entry Level Business Development Representative

4. Ethical and Social Issues in Information Systems Junior Privacy Analyst

5. IT Infrastructure and Emerging Technologies Entry Level IT Consultant

6. Foundations of Business Intelligence: Databases and Information Management

Entry Level Data Analyst

7. Telecommunications, the Internet, and Wireless Technology Automotive Digital Advisor

8. Securing Information Systems Entry Level Identity Access and Management Support Specialist

9. Achieving Operational Excellence and Customer Intimacy: Enterprise Applications

Manufacturing Management Trainee

10. E-Commerce: Digital Markets, Digital Goods Junior E-Commerce Data Analyst

11. Managing Knowledge and Artificial Intelligence AI Technology Sales Assistant

12. Improving Decision Making Entry Level Data Analyst

13. Building Information Systems Entry Level Junior Business Systems Analyst

14. Managing Projects IT Project Management Assistant

15. Managing Global Systems Global Data Services Sales and Marketing Trainee

The Career Opportunities section, identified by this icon is the last major section of each chapter under the heading “How will MIS help my ca- reer?”. There you will find a description of an entry-level job for a recent college graduate based on a real-world job description from major online job sites related to the topics covered in that chapter. The name of the company offering the job and its location have been changed. Each chapter’s job post- ing describes the required educational background and specific job skills, and suggests some of the business-related questions that might arise during the job interview. The authors provide tips for answering the questions and pre- paring for the interview. Career Opportunities also show where students can find out more information about the technical and business knowledge re- quired for the job in this text and on the web and social media.

Below are the job descriptions used in this edition based on postings from both large and small businesses. A few of these jobs call for an MIS major, others for MIS course work, but many postings are not that specific. Some require some previous internship or job experience, but many are entry-level positions suitable for new college graduates, and some of these positions provide on-the-job training. However, all require knowledge of business information systems and applications and the ability to work in a digital environment.

Students can use Career Opportunities to shape their resumes and career plans as well as to prepare for interviews. For instructors, Career Opportunities are po- tential projects for student research and in-class discussion.

In MyLab MIS we have provided additional Career Resources, including job- hunting guides and instructions on how to build a Digital Portfolio demonstrating the business knowledge, application software proficiency, and Internet skills ac- quired from using the text. The portfolio can be included in a resume or job appli- cation or used as a learning assessment tool for instructors.

xxx Preface

Instructor Teaching Resources

Chapter Title

Chapter 1 Information Systems in Global Business Today

Chapter 2 Global E-Business and Collaboration

Chapter 3 Information Systems, Organizations, and Strategy

Chapter 4 Ethical and Social Issues in Information Systems

Chapter 5 IT Infrastructure and Emerging Technologies

Chapter 6 Foundations of Business Intelligence: Databases and Information Management

Chapter 7 Telecommunications, the Internet, and Wireless Technology

Chapter 8 Securing Information Systems

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications

Chapter 10 E-Commerce: Digital Markets, Digital Goods

Chapter 11 Managing Knowledge and Artificial Intelligence

Chapter 12 Enhancing Decision Making

Chapter 13 Building Systems

Chapter 14 Managing Projects

Chapter 15 Managing Global Systems

Supplements available to instructors at www.pearsonhighered.com/laudon

Features of the Supplement

Instructor’s Manual • Chapter-by-chapter summaries • Examples and activities not in the main book • Teaching outlines • Teaching tips • Solutions to all questions and problems in the book

Test Bank authored by Professor Kenneth Laudon, New York University

The authors have worked closely with skilled test item writers to ensure that higher-level cognitive skills are tested. Test bank multiple-choice questions include questions on content but also include many questions that require analysis, synthesis, and evaluation skills.

AACSB Assessment Guidelines As a part of its accreditation activities, the AACSB has developed an Assurance of Learning Program designed to ensure that schools do in fact teach students what they promise. Schools are required to state a clear mission, develop a coherent business program, identify student learning objectives, and then prove that students do in fact achieve the objectives.

We have attempted in this book to support AACSB efforts to encourage assessment-based education. The end papers of this edition identify student learning objectives and anticipated outcomes for our Hands-On MIS projects. The authors will provide custom advice on how to use this text in colleges with different missions and assessment needs. Please e-mail the authors or contact your local Pearson representative for contact information.

Computerized TestGen TestGen allows instructors to: • Customize, save, and generate classroom tests • Edit, add, or delete questions from the Test Item Files • Analyze test results • Organize a database of tests and student results

Table of Contents Overview

Preface xxxi

Supplements available to instructors at www.pearsonhighered.com/laudon

Features of the Supplement

PowerPoints authored by Professor Kenneth Laudon, New York University

The authors have prepared a comprehensive collection of 50 PowerPoint slides for each chapter to be used in your lectures. Many of these slides are the same as used by Ken Laudon in his MIS classes and executive education presenta- tions. Each of the slides is annotated with teaching suggestions for asking students questions, developing in-class lists that illustrate key concepts, and recommending other firms as examples in addition to those provided in the text. The annotations are like an Instructor’s Manual built into the slides and make it easier to teach the course effectively.

PowerPoints meet accessibility standards for students with disabilities. Features include but are not limited to: • Keyboard and Screen Reader access • Alternative text for images • High color contrast between background and foreground colors

Acknowledgments

The production of any book involves valued contributions from a number of persons. We would like to thank all of our editors for encouragement, insight, and strong support for many years. We thank our editor, Samantha McAfee Lewis and Content Producer, Faraz Sharique Ali for their role in managing the project.

Our special thanks go to our supplement authors for their work, including the following MyLab MIS content contributors: Roberta M. Roth, University of Northern Iowa; Gipsi Sera, Indiana University; Robert J. Mills, Utah State University; and John Hupp, Columbus State University. We are indebted to Erica Laudon for her contributions to Career Opportunities and to Megan Miller for her help during production.

Special thanks to colleagues at the Stern School of Business at New York University; to Professor Werner Schenk, Simon School of Business, University of Rochester; to Professor Mark Gillenson, Fogelman College of Business and Economics, University of Memphis; to Robert Kostrubanic, Indiana-Purdue University Fort Wayne; to Professor Ethné Swartz, Department of Information Management and Business Analytics, Feliciano School of Business; to Professor Detlef Schoder of the University of Cologne; to Professor Walter Brenner of the University of St. Gallen; to Professor Lutz Kolbe of the University of Gottingen; and to Professor Donald Marchand of the International Institute for Management Development who provided ad- ditional suggestions for improvement. Thank you to Professor Ken Kraemer, University of California at Irvine, and Professor John King, University of Michigan, for more than a decade-long discussion of information systems and organizations. And a special remembrance and dedication to Professor Rob Kling, University of Indiana, for being our friend and colleague over so many years.

We also want to especially thank all our reviewers whose suggestions helped improve our texts. Reviewers for recent editions include:

Brad Allen, Plymouth State University Wanda Curtsinger, Texas A&M University Dawit Demissie, University of Albany Anne Formalarie, Plymouth State University Bin Gu,University of Texas–Austin

xxxii Preface

Essia Hamouda, University of California–Riverside Linda Lau, Longwood University Kimberly L. Merritt, Oklahoma Christian University James W. Miller, Dominican University Fiona Nah, University of Nebraska–Lincoln M. K. Raja, University of Texas Arlington Thomas Schambach, Illinois State University Shawn Weisfeld, Florida Institute of Technology

1

Organizations, Management, and the Networked Enterprise

PART ONE introduces the major themes of this book, raising a series of important questions:

What is an information system, and what are its management, organization, and technology

dimensions? Why are information systems so essential in businesses today? Why are sys-

tems for collaboration and social business so important? How can information systems help

businesses become more competitive? What broader ethical and social issues are raised by

widespread use of information systems?

PART ONE

CHAPTER 1

Information Systems in Global Business Today

CHAPTER 2

Global E-business and Collaboration

CHAPTER 3

Information Systems, Organizations, and Strategy

CHAPTER 4

Ethical and Social Issues in Information Systems

2

MyLab MIS Discussion Questions: 1-4, 1-5, 1-6; Hands-on MIS Projects: 1-7, 1-8, 1-9, 1-10; Writing Assignments: 1-16, 1-17; eText with Conceptual Animations

LEARNING OBJECTIVES After reading this chapter, you will be able to answer the following questions:

1-1 How are information systems transforming business, and why are they so essential for running and managing a business today?

1-2 What is an information system? How does it work? What are its management, organization, and technology components? Why are complementary assets essential for ensuring that information systems provide genuine value for organizations?

1-3 What academic disciplines are used to study information systems, and how does each contribute to an understanding of information systems?

1-4 How will MIS help my career?

CHAPTER CASES PCL Construction: The New Digital Firm Can You Run the Company with Your iPhone? UPS Competes Globally with Information

Technology Did Information Systems Cause Deutsche

Bank to Stumble?

VIDEO CASES Business in the Cloud: Facebook, Google,

and eBay Data Centers UPS Global Operations with the DIAD and

Worldport

Instructional Video: Tour IBM’s Raleigh Data Center

C H

A P

T E

R 1 Information Systems in Global Business Today

3

Many people think the most widely used tool in a construction project is a hammer, but it is more likely a filing cabinet or fax machine. The construction industry has traditionally been very paper-intensive and manual. A complex project such as a large building requires hundreds of archi- tectural drawings and design documents, which can change daily. Costly delays because of difficulty locating and accessing the documents and other project information could make or break a project. Now that’s changing, and PCL Con- struction is at the forefront. Information technology has transformed the way this business works, and it is a prime example of the new digital firm.

PCL is a group of independent general contracting construction companies, with over 4,400 employees in the United States, Canada, and Australia. The organization is active in the commercial, institu- tional, multifamily residential, renewable energy, heavy industrial, historical restoration, and civil construction sectors. PCL has corporate headquar- ters in Edmonton, Alberta, Canada and a United States head office in Denver, Colorado.

At a PCL job site, you’ll now see employees using mobile devices, including smartphones, tablets, and laptops, to access important information from PCL systems or input data. Electronic touch-screen kiosks throughout the job site and electronic plan rooms provide access to digitized, updated blueprints so team members don’t have to waste time tracking down paper versions.

In the past, on-site trailers used to house large paper blueprints for a project. Each time a project team member wanted to view plans, that person had to visit a trailer. With up to 800 active construction projects running simul- taneously, PCL had trouble keeping project documentation up to date. Informa- tion on paper forms to track small changes to project specifications or work requirements might not reach project decision makers until 30–40 days from the time it was recorded. By then, it was too late—decisions were made “from the gut” rather than based on facts.

PCL Construction plans are now in digital form, or the paper versions are scanned for digital storage. Digitized plans can be revised much more rapidly. By performing much of the design and planning work on the computer, PCL is able to identify and resolve conflicts and constructability issues early in the construction process to help keep projects ahead of schedule and within budget.

PCL Construction: The New Digital Firm

© Ndoeljindoel/123RF

4 Part One Organizations, Management, and the Networked Enterprise

PCL implemented Project Document Controls (PDC) to facilitate collabora- tion among project team members. A secure project-based website provides real-time storage and management of information in a single shared accessible location. Construction contractors, subcontractors, consultants, suppliers, and clients can work from the same documents wherever they are. PCL uses its own proprietary project management system for budgeting, costing, forecast- ing, subcontractor tracking, production, and reporting. The project manage- ment system is linked to other PCL systems, including the People and Projects database, client management and accounting systems, and the BEST Estimat- ing system. BEST Estimating is PCL’s in-house estimating program for creating lump sum and unit price estimates and providing accurate resource and cost information.

PCL started moving its computing work to Microsoft Azure Cloud, which hosts the hardware and software for running some of PCL’s applications in remote computing centers managed by Microsoft. Staff working on PCL projects can access information from cloud-based systems at any time and location using mobile devices as well as conventional desktop machines and an Internet con- nection. PCL saves 80 percent of the cost of backing up its corporate data by using the Azure platform. Azure Cloud also hosts a real-time analytics dashboard to monitor project performance in terms of quality, safety, schedule, and cost. The data are displayed visually as bar graphs or pie charts to construction field staff, project managers, and executives, and colors ranging from red to orange to green display performance ratings.

Sources: “Technology and Innovation,” pcl.com, accessed February 9, 2018; “PCL: Capitalizing on the Cloud,” itworldcanada.com, accessed February 9, 2018; Brian Jackson, “PCL Construc- tors Reach New Heights with Real-time Analytics Solution in the Cloud,” IT World Canada, November 9, 2017.

PCL Construction’s experience shows how essential information systems are today. PCL operates construction projects in numerous distributed locations in an industry that has been traditionally very paper-intensive. Processing and accessing the large number of documents and other information required by construction projects was excessively costly and time-consuming, driving up costs. PCL used leading-edge information technology to digitize documents and streamline business processes for documenting, tracking, and analyzing projects. The information flows that drive PCL’s business have become largely digital, making use of mobile tools and a cloud computing infrastructure. PCL Construc- tion has become a leading example of a digital firm.

The chapter-opening diagram calls attention to important points raised by this case and this chapter. To reduce time and costs and improve customer service in a heavily paper-based industry, PCL management chose to use information technology to increase the precision and efficiency of key business activities for designing, costing, budgeting, and monitoring a construction project. These tech- nologies include mobile devices (phones, tablets, laptops), touch screen kiosks, cloud computing services, the Internet, and software for creating models, man- aging documents, monitoring project progress, budgeting, estimating costs, and

Chapter 1 Information Systems in Global Business Today 5

displaying key project performance indicators on a digital dashboard. The use of leading-edge digital technologies to drive business operations and management decisions is a key topic today in the MIS world and will be discussed throughout this text.

It is also important to note that deploying information technology has changed the way PCL Construction runs its business. To effectively use all of its new digi- tal tools, PCL had to redesign jobs and procedures for gathering, inputting, and accessing information, for designing, budgeting, and calculating costs, and for monitoring project progress. These changes had to be carefully planned to make sure they enhanced efficiency, service, and profitability.

Here are some questions to think about: How did information technology change operations at PCL construction? What was the role of mobile technology and cloud computing?

1-1 How are information systems transforming business, and why are they so essential for running and managing a business today?

It’s not business as usual in the United States or the rest of the global economy anymore. In 2017, American businesses spent nearly $1 trillion on informa- tion systems hardware, software, and telecommunications equipment. In addi- tion, they spent another $143 billion on business and management consulting and services—much of which involves redesigning firms’ business operations to take advantage of these new technologies. In fact, most of the business value of IT investment derives from these organizational, management, and cultural changes inside firms (Saunders and Brynjolfsson, 2016). Figure 1.1 shows that between 1999 and 2017, private business investment in information technology consisting of hardware, software, and communications equipment grew from 21 to 33 percent of all invested capital.

Business Solutions

Management

Organization

Technology

Information System

Business Challenges

• Widespread operations • Paper-intensive processes

• Revise job functions • Revise business processes

• Mobile devices • Touch screen kiosks • Microsoft Azure Cloud • Virtual design and project management software • Analytics dashboard

Project Management System • Support budgeting, costing, forecasting, subcontractor tracking, and production

• Monitor project performance

Virtual Design • Create digital models of structures Analytics Dashboard

• Reduce costs • Improve service

• Devise technology strategy • Monitor projects

6 Part One Organizations, Management, and the Networked Enterprise

As managers, most of you will work for firms that are intensively using information systems and making large investments in information technol- ogy. You will certainly want to know how to invest this money wisely. If you make wise choices, your firm can outperform competitors. If you make poor choices, you will be wasting valuable capital. This book is dedicated to help- ing you make wise decisions about information technology and information systems.

How Information Systems Are Transforming Business You can see the results of this large-scale spending around you every day by observing how people conduct business. Changes in technology and new innova- tive business models have transformed social life and business practices. More than 269 million Americans have mobile phones (81 percent of the population), and 230 million of these people access the Internet using smartphones and tab- lets. Fifty-five percent of the entire population now uses tablet computers, whose sales have soared. Two hundred million Americans use online social networks; 175 million use Facebook, while 54 million use Twitter. Smartphones, social networking, texting, e-mailing, and webinars have all become essential tools of business because that’s where your customers, suppliers, and colleagues can be found (eMarketer, 2018).

By June 2017, more than 140 million businesses worldwide had dot-com Inter- net sites registered. Today, 220 million Americans shop online, and 190 million will purchase online. In 2017, FedEx moved about 16 million packages daily in 220 countries and territories around the world, mostly overnight, and the United Parcel Service (UPS) moved more than 28 million packages daily. Businesses are using information technology to sense and respond to rapidly changing customer demand, reduce inventories to the lowest possible levels, and achieve higher

FIGURE 1.1 INFORMATION TECHNOLOGY CAPITAL INVESTMENT Information technology capital investment, defined as hardware, software, and communications equipment, grew from 21 to 33 percent of all invested capital between 1999 and 2017. Source: Based on data in U.S. Department of Commerce, Bureau of Economic Analysis, National Income and Product Accounts, Table 5.3.6. Real Private Fixed Investment by Type, Chained Dollars (2018).

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Chapter 1 Information Systems in Global Business Today 7

levels of operational efficiency. Supply chains have become more fast-paced, with companies of all sizes depending on just-in-time inventory to reduce their overhead costs and get to market faster.

As newspaper print readership continues to decline, in 2017 more than 180 million people read a newspaper online, and millions more read other news sites. Online digital newspaper readership is growing at 10 percent annually, about twice as fast as the Internet itself. About 128 million people watch a video online every day, 85 million read a blog, and 30 million post to blogs, creating an explosion of new writers and new forms of customer feedback that did not exist five years ago (eMarketer, 2018). Social networking site Facebook attracted 214 million monthly visitors in 2018 in the United States and more than 2 billion worldwide. Businesses are using social networking tools to connect their employees, customers, and managers worldwide. Most Fortune 500 companies now have Facebook pages, Twitter accounts, and Tum- blr sites.

E-commerce and Internet advertising continue to expand. Google’s U.S. online ad revenues surpassed $32 billion in 2017, and Internet advertising continues to grow at more than 20 percent a year in the United States, reaching more than $107 billion in revenues in 2018 (eMarketer, 2018).

New federal security and accounting laws requiring many businesses to keep e-mail messages for five years, coupled with existing occupational and health laws requiring firms to store employee chemical exposure data for up to 60 years, are spurring the annual growth of digital information at the estimated rate of 5 exabytes annually, equivalent to 37,000 new Libraries of Congress.

What’s New in Management Information Systems? Plenty. In fact, there’s a whole new world of doing business using new tech- nologies for managing and organizing. What makes the MIS field the most exciting area of study in schools of business is the continuous change in tech- nology, management, and business processes. Five changes are of paramount importance.

IT Innovations. A continuing stream of information technology innovations is transforming the traditional business world. Examples include the emergence of cloud computing, the growth of a mobile digital business platform based on smartphones and tablet computers, big data and the Internet of Things (IoT), business analytics, machine learning systems, and the use of social networks by managers to achieve business objec- tives. Most of these changes have occurred in the past few years. These innovations are enabling entrepreneurs and innovative traditional firms to create new products and services, develop new business models, and transform the day-to-day conduct of business. In the process, some old businesses, even industries, are being destroyed while new businesses are springing up.

New Business Models. For instance, the emergence of online video ser- vices for streaming or downloading, such as Netflix, Apple iTunes, and Amazon, has forever changed how premium video is distributed and even created. Netflix in 2018 attracted more than 125 million subscribers world- wide to what it calls the “Internet TV revolution.” Netflix has moved into premium TV show production with nearly 1,000 original shows such as American Vandal, Suburra, The Crown, Friends From College, No Country For Old Men, House of Cards, and Orange Is the New Black, challenging cable

8 Part One Organizations, Management, and the Networked Enterprise

and broadcast producers of TV shows, and potentially disrupting cable network dominance of TV show production. Apple’s iTunes now accounts for 67 percent of movie and TV show downloads and has struck deals with major Hollywood studios for recent movies and TV shows. A growing trickle of viewers are unplugging from cable and using only the Internet for entertainment.

E-commerce Expansion. E-commerce generated about $700 billion in revenues in 2017 and is estimated to grow to nearly $950 billion by 2020. E-commerce is changing how firms design, produce, and deliver their prod- ucts and services. E-commerce has reinvented itself again, disrupting the traditional marketing and advertising industry and putting major media and content firms in jeopardy. Facebook and other social networking sites such as YouTube, Twitter, and Tumblr, along with Netflix, Apple Music, and many other media firms, exemplify the new face of e-commerce in the twenty-first century. They sell services. When we think of e-commerce, we tend to think of selling physical products. While this iconic vision of e-commerce is still very powerful and the fastest-growing form of retail in the United States, growing up alongside is a whole new value stream based on selling services, not goods. It’s a services model of e-commerce. Growth in social commerce is spurred by powerful growth of the mobile platform: 85 percent of Face- book’s users access the service from mobile phones and tablets. Informa- tion systems and technologies are the foundation of this new services-based e-commerce. Mobile e-commerce hit $229 billion in 2017 and is growing at 30 percent a year.

Management Changes. The management of business firms has changed: With new mobile smartphones, high-speed wireless Wi-Fi networks, and tablets, remote salespeople on the road are only seconds away from their managers’ questions and oversight. Management is going mobile. Manag- ers on the move are in direct, continuous contact with their employees. The growth of enterprise-wide information systems with extraordinarily rich data means that managers no longer operate in a fog of confusion but instead have online, nearly instant access to the really important informa- tion they need for accurate and timely decisions. In addition to their pub- lic uses on the web, social networking tools, wikis, and blogs are becoming important corporate tools for communication, collaboration, and information sharing.

Changes in Firms and Organizations. Compared to industrial organiza- tions of the previous century, new fast-growing twenty-first-century business firms put less emphasis on hierarchy and structure and more emphasis on employees taking on multiple roles and tasks and collaborating with others on a team. They put greater emphasis on competency and skills rather than posi- tion in the hierarchy. They emphasize higher-speed and more-accurate deci- sion making based on data and analysis. They are more aware of changes in technology, consumer attitudes, and culture. They use social media to enter into conversations with consumers and demonstrate a greater willingness to listen to consumers, in part because they have no choice. They show better understanding of the importance of information technology in creating and managing business firms and other organizations. To the extent organizations and business firms demonstrate these characteristics, they are twenty-first- century digital firms.

You can see some of these trends at work in the Interactive Session on Man- agement. Millions of managers rely heavily on the mobile digital platform to coordinate suppliers and shipments, satisfy customers, and manage their employees. A business day without these mobile devices or Internet access would be unthinkable.

9 Part Two Information Technology Infrastructure Chapter 1 Information Systems in Global Business Today 9

Can you run the company just by using your iPhone? Perhaps not entirely, but there are many business functions today that can be performed using an iPhone, iPad, or Android mobile device. Smartphones and tablets have become all-in-one tools that help managers and employees work more efficiently, packing a powerful, networked computer into a pocket-size device. With a tap or flick of a finger, these mobile devices can access the Internet or serve as a telephone, camera, music or video player, an e-mail and messaging machine, and, increasingly, a gateway into corporate systems. New software appli- cations for document sharing, collaboration, sales, order processing, inventory management, schedul- ing, and production monitoring make these devices even more versatile business tools.

Network Rail runs, maintains, and develops the rail tracks, signaling, bridges, tunnels, level cross- ings, and many key stations for most of the rail network in England, Scotland, and Wales. Keeping trains running on time is one of its top priorities. To maintain 20,000 miles of track safely and efficiently, skilled workers must be equipped with appropriate tools and work across thousands of sites throughout the rail network, 24 hours a day. Network Rail uses a group of custom apps for its 22,000 iPhone and iPad devices to streamline maintenance operations, quickly capture incident data, and immediately share critical information.

Several apps help Network Rail improve railway per- formance and safety. The Close Call app helps employ- ees report hazards as they are found so problems can be addressed quickly. The MyWork app gives mainte- nance teams all the information they need to start and complete repair tasks. The Sentinel app allows field managers to electronically scan ID cards to verify that workers are qualified to perform specific tasks.

The iPhone and iPad apps provide maintenance technicians with current technical data, GPS loca- tions, and streamlined reports, replacing cumber- some reference books and rain-soaked paperwork that slowed the repair process. Many service calls start with hazardous conditions reported by Network Rail employees themselves. Rather than waiting hours to fill out a report at the depot, workers can take pictures of dangerous situations right away,

using the Close Call app to describe situations and upload photos to the call center. Once provided with the hazard’s GPS coordinates, the call center will usually schedule repairs within 24 hours.

MyWork gives maintenance workers a simple overview of all of the jobs each team needs to com- plete during a specific shift. This mobile app clusters jobs by location, skills required, and opening and closing times. Using precise map coordinates, work- ers can find sites easily and finish jobs more quickly. By electronically delivering daily job schedules to over 14,000 maintenance staff members, MyWork has enabled them to complete over a half a million work orders to date while minimizing interruptions.

British Airways is the largest airline in the United Kingdom, with operations in more than 200 airports worldwide. The airline has found many ways to use the iPad to improve customer service and operational efficiency. The airline has created more than 40 cus- tom apps for over 17,000 iPads for its workforce that have transformed the way it does business.

Unforeseen disruptions can create long lines of passengers seeking flight information and rebooking. The FlightReact app used by British Airways mobi- lizes agents to scan a boarding pass, review the cus- tomer’s booking, look up alternate flight options, and rebook and reticket passengers—all within four min- utes. iBanner allows agents to identify passengers transferring onto a specific flight, while iTranslate enables staff to communicate easily with travelers speaking any language.

Inside the airport, iPads and iPhones communi- cate with low-energy wireless Bluetooth signals from iBeacon, notifying customers of Wi-Fi access, gate locations, and flight updates. Beyond the terminal, mobile apps are helping British Airways to improve the aircraft turnaround process. British Airways has more than 70 planes at London Heathrow Terminal, five turning around at once, and each requiring a team of around 30 people. To shorten and streamline this process can generate huge business benefits.

Loading luggage and cargo onto an aircraft is one of the most complex parts of the turnaround pro- cess, requiring detailed communications between the turnaround manager (TRM), who coordinates and manages the services around the aircraft during

INTERACTIVE SESSION MANAGEMENT

Can You Run the Company with Your iPhone?

departure and arrival, the offsite Centralized Load Control (CLC) team, and the pilot. With iPads run- ning the iLoad Direct app, turnaround managers are able to monitor the aircraft loading process and share data with pilots and back-office staff in real time. TRMs can receive and input real-time data about the aircraft load’s contents, weight, and distribution. These data are essential to help the pilot calculate the right amount of fuel and position the plane for take-off. By streamlining communications between the ground crew, the CLC team, and the pilot, iLoad Direct and iPad speed up the pace at which aircraft become airborne. These mobile tools have helped British Airways achieve an industry-leading bench- mark for aircraft turnaround.

CASE STUDY QUESTIONS

1. What kinds of applications are described here? What business functions do they support? How do they improve operational efficiency and decision making?

2. Identify the problems that the business in this case study solved by using mobile digital devices.

In addition to facilitating managerial work, mobile devices are helping rank-and-file employees man- age their work lives more effectively. Shyft is one of several smartphone apps that allow workers to share information, make schedule changes, and report labor violations. Thousands of employees at chains like Starbucks and Old Navy are using these apps to view their schedules and swap shifts when they’ve got a scheduling conflict or need extra work.

Sources: “British Airways: Transforming the Travel Experience from Start to Finish,” Apple at Work, www.apple.com, accessed February 7, 2018; www.networkrail.co.uk,accessed September 2, 2018; “Network Rail,” iPhone in Business, www.apple.com, accessed January 4, 2017; and Lauren Weber, “Apps Empower Employees, Ease Scheduling,” Wall Street Journal, January 3, 2017.

3. What kinds of businesses are most likely to benefit from equipping their employees with mobile digi- tal devices such as iPhones and iPads?

4. One company deploying iPhones has stated, “The iPhone is not a game changer, it’s an industry changer. It changes the way that you can interact with your customers” and “with your suppliers.” Discuss the implications of this statement.

10 Part One Organizations, Management, and the Networked Enterprise

iPhone and iPad Applications for Business

1. Salesforce

2. Cisco WebEx Meetings

3. SAP Business One

4. iWork

5. Evernote

6. Adobe Acrobat Reader

7. Oracle Business Intelligence Mobile

8. Dropbox

Whether it’s attending an online meeting, checking orders, working with files and documents, or obtaining business intelligence, Apple's iPhone and iPad offer unlimited possibilities for business users. A stunning multitouch display, full Internet browsing, and capabilities for messaging, video and audio transmission, and document management make each an all-purpose platform for mobile computing.

© Mama_mia/Shutterstock

Chapter 1 Information Systems in Global Business Today 11

Globalization Challenges and Opportunities: A Flattened World In 1492, Columbus reaffirmed what astronomers were long saying: the world was round and the seas could be safely sailed. As it turned out, the world was populated by peoples and languages living in isolation from one another, with great disparities in economic and scientific development. The world trade that ensued after Columbus’s voyages has brought these peoples and cultures closer. The “industrial revolution” was really a worldwide phenomenon energized by expansion of trade among nations and the emergence of the first global economy.

In 2005, journalist Thomas Friedman wrote an influential book declaring the world was now “flat,” by which he meant that the Internet and global communi- cations had greatly reduced the economic and cultural advantages of developed countries. Friedman argued that the United States and European countries were in a fight for their economic lives, competing for jobs, markets, resources, and even ideas with highly educated, motivated populations in low-wage areas in the less-developed world (Friedman, 2007). This “globalization” presents both challenges and opportunities for business firms.

A significant percentage of the economy of the United States and other advanced industrial countries in Europe and Asia depends on imports and exports. In 2017, about 30 percent of the $20 trillion U.S. economy resulted from foreign trade, both imports and exports. In Europe and Asia, the number exceeded 50 percent. Many Fortune 500 U.S. firms derive more than half their revenues from foreign operations. Tech companies are particularly dependent on offshore revenue: 80 percent of Intel’s revenues in 2017 came from overseas sales of its microprocessors, while Apple got 60 percent of its revenue outside of the United States. Eighty percent of the toys sold in the United States are manufactured in China, while about 90 percent of the PCs manufactured in China use American-made Intel or Advanced Micro Design (AMD) chips. The microprocessor chips are shipped from the United States to China for assembly into devices.

It’s not just goods that move across borders. So too do jobs, some of them high-level jobs that pay well and require a college degree. In the past decade, the United States lost 7 million manufacturing jobs to offshore, low-wage pro- ducers. But manufacturing is now a very small part of U.S. employment (less than 12 percent of the labor force and declining). In a normal year, about 300,000 service jobs move offshore to lower-wage countries. Many of the jobs are in less-skilled information system occupations, but some are “tradable ser- vice” jobs in architecture, financial services, customer call centers, consulting, engineering, and even radiology. Yet at the same time the United States has lost so many jobs, it has added 33 million new service jobs.

The U.S. economy creates more than 3.5 million new jobs in a normal, non-recessionary year. Although only 1.1 million private sector jobs were created in 2011 due to slow economic recovery, by 2017, the U.S. economy was adding more than 2 million new jobs annually for the third straight year. Employment in information systems and the other service occupations is expanding rapidly, and wages are stable. Outsourcing may have accelerated the development of new systems worldwide, as these systems could be maintained and developed in low- wage countries. In part this explains why the job market for MIS and computer science graduates is growing rapidly in the United States.

The challenge for you as a business student is to develop high-level skills through education and on-the-job experience that cannot be outsourced.

12 Part One Organizations, Management, and the Networked Enterprise

The challenge for your business is to avoid markets for goods and services that can be produced offshore much less expensively. The opportunities are equally immense. Throughout this book you will find examples of companies and indi- viduals who either failed or succeeded in using information systems to adapt to this new global environment.

What does globalization have to do with management information systems? That’s simple: everything. The emergence of the Internet into a full-blown inter- national communications system has drastically reduced the costs of operating and transacting on a global scale. Communication between a factory floor in Shanghai and a distribution center in Rapid City, South Dakota, is now instant and virtually free. Customers can now shop in a worldwide marketplace, obtain- ing price and quality information reliably 24 hours a day. Firms producing goods and services on a global scale achieve extraordinary cost reductions by find- ing low-cost suppliers and managing production facilities in other countries. Internet service firms, such as Google and eBay, are able to replicate their busi- ness models and services in multiple countries without having to redesign their expensive fixed-cost information systems infrastructure. Briefly, information systems enable globalization.

The Emerging Digital Firm All of the changes we have just described, coupled with equally significant orga- nizational redesign, have created the conditions for a fully digital firm. A digital firm can be defined along several dimensions. A digital firm is one in which nearly all of the organization’s significant business relationships with customers, suppliers, and employees are digitally enabled and mediated. Core business pro- cesses are accomplished through digital networks spanning the entire organiza- tion or linking multiple organizations.

Business processes refer to the set of logically related tasks and behaviors that organizations develop over time to produce specific business results and the unique manner in which these activities are organized and coordinated. Devel- oping a new product, generating and fulfilling an order, creating a marketing plan, and hiring an employee are examples of business processes, and the ways organizations accomplish their business processes can be a source of competitive strength. (A detailed discussion of business processes can be found in Chapter 2.)

Key corporate assets—intellectual property, core competencies, and financial and human assets—are managed through digital means. In a digital firm, any piece of information required to support key business decisions is available at any time and anywhere in the firm.

Digital firms sense and respond to their environments far more rapidly than traditional firms, giving them more flexibility to survive in turbulent times. Digi- tal firms offer extraordinary opportunities for more-flexible global organization and management. In digital firms, both time shifting and space shifting are the norm. Time shifting refers to business being conducted continuously, 24/7, rather than in narrow “work day” time bands of 9 a.m. to 5 p.m. Space shifting means that work takes place in a global workshop as well as within national boundaries. Work is accomplished physically wherever in the world it is best accomplished.

Many firms, such as Cisco Systems, 3M, and GE (see the Chapter 12 ending case), are close to becoming digital firms, using the Internet to drive every aspect of their business. Most other companies are not fully digital, but they are moving toward close digital integration with suppliers, customers, and employees.

Chapter 1 Information Systems in Global Business Today 13

Strategic Business Objectives of Information Systems What makes information systems so essential today? Why are businesses invest- ing so much in information systems and technologies? In the United States, more than 25 million business and financial managers, and 36 million professional workers in the labor force rely on information systems to conduct business. Information systems are essential for conducting day-to-day business in the United States and most other advanced countries as well as achieving strategic business objectives.

Entire sectors of the economy are nearly inconceivable without substan- tial investments in information systems. E-commerce firms such as Amazon, eBay, Google, and E*Trade simply would not exist. Today’s service industries— finance, insurance, and real estate as well as personal services such as travel, medicine, and education—could not operate without information systems. Similarly, retail firms such as Walmart and Target and manufacturing firms such as General Motors and GE require information systems to survive and prosper. Just as offices, telephones, filing cabinets, and efficient tall buildings with elevators were once the foundations of business in the twentieth cen- tury, information technology is a foundation for business in the twenty-first century.

There is a growing interdependence between a firm’s ability to use informa- tion technology and its ability to implement corporate strategies and achieve corporate goals (see Figure 1.2). What a business would like to do in five years often depends on what its systems will be able to do. Increasing market share, becoming the high-quality or low-cost producer, developing new products, and increasing employee productivity depend more and more on the kinds and qual- ity of information systems in the organization. The more you understand about this relationship, the more valuable you will be as a manager.

Specifically, business firms invest heavily in information systems to achieve six strategic business objectives: operational excellence; new products, services,

FIGURE 1.2 THE INTERDEPENDENCE BETWEEN ORGANIZATIONS AND INFORMATION SYSTEMS

In contemporary systems, there is a growing interdependence between a firm’s information systems and its business capabilities. Changes in strategy, rules, and business processes increasingly require changes in hardware, software, databases, and telecommunications. Often, what the organization would like to do depends on what its systems will permit it to do.

Hardware

Information System

Business Firm

Software

Business Strategic Objectives

Business Processes Data Management

Telecommunications

14 Part One Organizations, Management, and the Networked Enterprise

and business models; customer and supplier intimacy; improved decision mak- ing; competitive advantage; and survival.

Operational Excellence Businesses continuously seek to improve the efficiency of their operations in order to achieve higher profitability. Information systems and technologies are some of the most important tools available to managers for achieving higher levels of efficiency and productivity in business operations, especially when coupled with changes in business practices and management behavior.

Walmart, the largest retailer on earth, exemplifies the power of informa- tion systems coupled with state-of-the-art business practices and supportive management to achieve world-class operational efficiency. In fiscal year 2018, Walmart achieved over $500 billion in sales—nearly one-tenth of retail sales in the United States—in large part because of its Retail Link system, which digitally links its suppliers to every one of Walmart’s stores. As soon as a customer pur- chases an item, the supplier monitoring the item knows to ship a replacement to the shelf. Walmart is the most efficient retail store in the industry, achieving sales of more than $600 per square foot, compared with its closest competitor, Target, at $425 per square foot and other large general merchandise retail firms producing less than $200 per square foot.

New Products, Services, and Business Models Information systems and technologies are a major enabling tool for firms to create new products and services as well as entirely new business models. A business model describes how a company produces, delivers, and sells a prod- uct or service to create wealth.

Today’s music industry is vastly different from the industry a decade ago. Apple Inc. transformed an old business model of music distribution based on vinyl records, tapes, and CDs into an online, legal distribution model based on its own iPod technology platform. Apple has prospered from a continuing stream of innovations, including the iTunes music service, the iPad, and the iPhone.

Customer and Supplier Intimacy When a business really knows its customers and serves them well, the custom- ers generally respond by returning and purchasing more. This raises revenues and profits. Likewise with suppliers, the more a business engages its suppli- ers, the better the suppliers can provide vital inputs. This lowers costs. How to really know your customers or suppliers is a central problem for businesses with millions of offline and online customers.

The Mandarin Oriental in Manhattan and other high-end hotels exemplify the use of information systems and technologies to achieve customer inti- macy. These hotels use computers to keep track of guests’ preferences, such as their preferred room temperature, check-in time, frequently dialed telephone numbers, and television programs, and store these data in a large data reposi- tory. Individual rooms in the hotels are networked to a central network server computer so that they can be remotely monitored and controlled. When a customer arrives at one of these hotels, the system automatically changes the room conditions, such as dimming the lights, setting the room temperature, or selecting appropriate music, based on the customer’s digital profile. The hotels also analyze their customer data to identify their best customers and to develop individualized marketing campaigns based on customers’ preferences.

JCPenney exemplifies the benefits of information systems–enabled sup- plier intimacy. Every time a dress shirt is bought at a JCPenney store in the

Chapter 1 Information Systems in Global Business Today 15

United States, the record of the sale appears immediately on computers in Hong Kong at the TAL Apparel Ltd. supplier, a contract manufacturer that pro- duces one in eight dress shirts sold in the United States. TAL runs the numbers through a computer model it developed and then decides how many replace- ment shirts to make and in what styles, colors, and sizes. TAL then sends the shirts to each JCPenney store, bypassing completely the retailer’s warehouses. In other words, JCPenney’s shirt inventory is near zero, as is the cost of storing it.

Improved Decision Making Many business managers operate in an information fog bank, never really having the right information at the right time to make an informed decision. Instead, managers rely on forecasts, best guesses, and luck. The result is over- or under- production of goods and services, misallocation of resources, and poor response times. These poor outcomes raise costs and lose customers. In the past decade, information systems and technologies have made it possible for managers to use real-time data from the marketplace when making decisions.

For instance, Verizon Corporation, one of the largest telecommunications companies in the United States, uses a web-based digital dashboard to provide managers with precise real-time information on customer complaints, network performance for each locality served, and line outages or storm-damaged lines. Using this information, managers can immediately allocate repair resources to affected areas, inform consumers of repair efforts, and restore service fast.

Competitive Advantage When firms achieve one or more of these business objectives—operational excellence; new products, services, and business models; customer/supplier intimacy; and improved decision making—chances are they have already achieved a competitive advantage. Doing things better than your competitors, charging less for superior products, and responding to customers and suppliers in real time all add up to higher sales and higher profits that your competitors cannot match. Apple Inc., Walmart, and UPS, described later in this chapter, are industry leaders because they know how to use information systems for this purpose.

Survival Business firms also invest in information systems and technologies because they are necessities of doing business. Sometimes these “necessities” are driven by industry-level changes. For instance, after Citibank introduced the first automated teller machines (ATMs) in the New York region in 1977 to attract customers through higher service levels, its competitors rushed to provide ATMs to their customers to keep up with Citibank. Today, virtually all banks in the United States have regional ATMs and link to national and international ATM networks, such as CIRRUS. Providing ATM services to retail banking cus- tomers is simply a requirement of being in and surviving in the retail banking business.

There are many federal and state statutes and regulations that create a legal duty for companies and their employees to retain records, including digital records. For instance, the Toxic Substances Control Act (1976), which regulates the exposure of U.S. workers to more than 75,000 toxic chemicals, requires firms to retain records on employee exposure for 30 years. The Sarbanes-Oxley Act (2002), which was intended to improve the accountability of public firms and their auditors, requires certified public accounting firms that audit public com- panies to retain audit working papers and records, including all e-mails, for five

16 Part One Organizations, Management, and the Networked Enterprise

years. The Dodd-Frank Wall Street Reform and Consumer Protection Act (2010), which was intended to strengthen regulation of the banking industry, requires firms to retain all records for 10 years. Many other pieces of federal and state legislation in health care, financial services, education, and privacy protection impose significant information retention and reporting requirements on U.S. businesses. Firms turn to information systems and technologies to provide the capability to respond to these challenges.

1-2 What is an information system? How does it work? What are its management, organization, and technology components? Why are complementary assets essential for ensuring that information systems provide genuine value for organizations?

So far we’ve used information systems and technologies informally without defin- ing the terms. Information technology (IT) consists of all the hardware and software that a firm needs to use in order to achieve its business objectives. This includes not only computer machines, storage devices, and handheld mobile devices but also software, such as the Windows or Linux operating systems, the Microsoft Office desktop productivity suite, and the many thousands of com- puter programs that can be found in a typical large firm. “Information systems” are more complex and can be best understood by looking at them from both a technology and a business perspective.

What Is an Information System? An information system can be defined technically as a set of interrelated components that collect (or retrieve), process, store, and distribute information to support decision making and control in an organization. In addition to sup- porting decision making, coordination, and control, information systems may also help managers and workers analyze problems, visualize complex subjects, and create new products.

Information systems contain information about significant people, places, and things within the organization or in the environment surrounding it. By information we mean data that have been shaped into a form that is meaning- ful and useful to human beings. Data, in contrast, are streams of raw facts rep- resenting events occurring in organizations or the physical environment before they have been organized and arranged into a form that people can understand and use.

A brief example contrasting information and data may prove useful. Super- market checkout counters scan millions of pieces of data from bar codes, which describe each product. Such pieces of data can be totaled and analyzed to provide meaningful information, such as the total number of bottles of dish detergent sold at a particular store, which brands of dish detergent were selling the most rapidly at that store or sales territory, or the total amount spent on that brand of dish detergent at that store or sales region (see Figure 1.3).

Three activities in an information system produce the information that orga- nizations need to make decisions, control operations, analyze problems, and

Chapter 1 Information Systems in Global Business Today 17

FIGURE 1.3 DATA AND INFORMATION Raw data from a supermarket checkout counter can be processed and organized to produce meaningful information, such as the total unit sales of dish detergent or the total sales revenue from dish detergent for a specific store or sales territory.

Data Info

rma tion

Sales Region: Northwest Store: Superstore #122

331

$9,231.24

ITEM NO. DESCRIPTION Brite Dish Soap 7,156

UNITS SOLD

YTD SALES

331 Brite Dish Soap 1.29 863 BL Hill Coffee 4.69 173 Meow Cat .79 331 Brite Dish Soap 1.29 663 Country Ham 3.29 524 Fiery Mustard 1.49 113 Ginger Root .85 331 Brite Dish Soap 1.29 . . .

Information System

create new products or services. These activities are input, processing, and out- put (see Figure 1.4). Input captures or collects raw data from within the organi- zation or from its external environment. Processing converts this raw input into a meaningful form. Output transfers the processed information to the people who will use it or to the activities for which it will be used. Information systems also require feedback, which is output that is returned to appropriate members of the organization to help them evaluate or correct the input stage.

In PCL’s project management system, input includes the names and addresses of contractors and subcontractors, project names and identification numbers, project activities, labor costs, materials costs, and start and completion dates for project activities. Computers store these data and process them to calculate how much each project activity and the entire project will cost and estimated completion time. The system provides meaningful information such as the size, cost, and duration of all projects under PCL management, projects over and under budget, and projects and project activities that are late or on time.

Although computer-based information systems use computer technology to process raw data into meaningful information, there is a sharp distinction between a computer and a computer program on the one hand and an infor- mation system on the other. Computers and related software programs are the technical foundation, the tools and materials, of modern information systems. Computers provide the equipment for storing and processing information. Com- puter programs, or software, are sets of operating instructions that direct and control computer processing. Knowing how computers and computer programs work is important in designing solutions to organizational problems, but comput- ers are only part of an information system.

A house is an appropriate analogy. Houses are built with hammers, nails, and wood, but these do not make a house. The architecture, design, setting, land- scaping, and all of the decisions that lead to the creation of these features are part of the house and are crucial for solving the problem of putting a roof over one’s head. Computers and programs are the hammers, nails, and lumber of computer-based information systems, but alone they cannot produce the infor- mation a particular organization needs. To understand information systems, you

18 Part One Organizations, Management, and the Networked Enterprise

must understand the problems they are designed to solve, their architectural and design elements, and the organizational processes that lead to the solutions.

Dimensions of Information Systems To fully understand information systems, you must understand the broader orga- nization, management, and information technology dimensions of systems (see Figure 1.5) and their power to provide solutions to challenges and problems in the business environment. We refer to this broader understanding of informa- tion systems, which encompasses an understanding of the management and organizational dimensions of systems as well as the technical dimensions of systems, as information systems literacy. Computer literacy, in contrast, focuses primarily on knowledge of information technology.

The field of management information systems (MIS) tries to achieve this broader information systems literacy. MIS deals with behavioral issues as well as technical issues surrounding the development, use, and impact of information systems used by managers and employees in the firm.

Let’s examine each of the dimensions of information systems—organizations, management, and information technology.

Organizations Information systems are an integral part of organizations. Indeed, for some com- panies, such as credit reporting firms, there would be no business without an information system. The key elements of an organization are its people, structure,

FIGURE 1.4 FUNCTIONS OF AN INFORMATION SYSTEM An information system contains information about an organization and its surrounding environment. Three basic activities—input, processing, and output—produce the information organizations need. Feedback is output returned to appropriate people or activities in the organization to evaluate and refine the input. Environmental actors, such as customers, suppliers, competitors, stockholders, and regulatory agencies, interact with the organization and its information systems.

ENVIRONMENT

Feedback

INFORMATION SYSTEM

Suppliers Customers

Stockholders CompetitorsRegulatory Agencies

ORGANIZATION

Input Output

Processing Classify Arrange

Calculate

Chapter 1 Information Systems in Global Business Today 19

business processes, politics, and culture. We introduce these components of organizations here and describe them in greater detail in Chapters 2 and 3.

Organizations have a structure that is composed of different levels and spe- cialties. Their structures reveal a clear-cut division of labor. Authority and responsibility in a business firm are organized as a hierarchy, or a pyramid structure. The upper levels of the hierarchy consist of managerial, profes- sional, and technical employees, whereas the lower levels consist of opera- tional personnel.

Senior management makes long-range strategic decisions about products and services as well as ensures financial performance of the firm. Middle management carries out the programs and plans of senior management, and operational management is responsible for monitoring the daily activities of the business. Knowledge workers, such as engineers, scientists, or architects, design products or services and create new knowledge for the firm, whereas data workers, such as secretaries or clerks, assist with scheduling and com- munications at all levels of the firm. Production or service workers actually produce the product and deliver the service (see Figure 1.6).

Experts are employed and trained for different business functions. The major business functions, or specialized tasks performed by business organizations, consist of sales and marketing, manufacturing and production, finance and accounting, and human resources (see Table 1.1). Chapter 2 provides more detail on these business functions and the ways in which they are supported by infor- mation systems.

An organization coordinates work through its hierarchy and through its business processes. Most organizations’ business processes include formal rules that have been developed over a long time for accomplishing tasks. These rules guide employees in a variety of procedures, from writing an invoice to respond- ing to customer complaints. Some of these business processes have been written down, but others are informal work practices, such as a requirement to return telephone calls from coworkers or customers, that are not formally documented. Information systems automate many business processes. For instance, how a

FIGURE 1.5 INFORMATION SYSTEMS ARE MORE THAN COMPUTERS Using information systems effectively requires an understanding of the organization, management, and information technology shaping the systems. An information system creates value for the firm as an organizational and management solution to challenges posed by the environment.

Organizations Technology

Information Systems

Management

20 Part One Organizations, Management, and the Networked Enterprise

customer receives credit or how a customer is billed is often determined by an information system that incorporates a set of formal business processes.

Each organization has a unique culture, or fundamental set of assumptions, values, and ways of doing things, that has been accepted by most of its members. You can see organizational culture at work by looking around your university or college. Some bedrock assumptions of university life are that professors know more than students, that the reason students attend college is to learn, and that classes follow a regular schedule.

Parts of an organization’s culture can always be found embedded in its infor- mation systems. For instance, UPS’s first priority is customer service, which is an aspect of its organizational culture that can be found in the company’s package tracking systems, which we describe in this section.

Different levels and specialties in an organization create different interests and points of view. These views often conflict over how the company should be run and how resources and rewards should be distributed. Conflict is the basis for organizational politics. Information systems come out of this cauldron of differing perspectives, conflicts, compromises, and agreements that are a

FIGURE 1.6 LEVELS IN A FIRM Business organizations are hierarchies consisting of three principal levels: senior management, middle management, and operational management. Information systems serve each of these levels. Scientists and knowledge workers often work with middle management.

Senior Management

Middle Management Scientists and knowledge workers

Operational Management Production and service workers

Data workers

TABLE 1.1 MAJOR BUSINESS FUNCTIONS

FUNCTION PURPOSE

Sales and marketing Selling the organization’s products and services

Manufacturing and production Producing and delivering products and services

Finance and accounting Managing the organization’s financial assets and maintaining the organization’s financial records

Human resources Attracting, developing, and maintaining the organization’s labor force; maintaining employee records

Chapter 1 Information Systems in Global Business Today 21

natural part of all organizations. In Chapter 3, we examine these features of organizations and their role in the development of information systems in greater detail.

Management Management’s job is to make sense out of the many situations faced by orga- nizations, make decisions, and formulate action plans to solve organizational problems. Managers perceive business challenges in the environment, they set the organizational strategy for responding to those challenges, and they allocate the human and financial resources to coordinate the work and achieve success. Throughout, they must exercise responsible leadership. The business informa- tion systems described in this book reflect the hopes, dreams, and realities of real-world managers.

But managers must do more than manage what already exists. They must also create new products and services and even re-create the organization from time to time. A substantial part of management responsibility is creative work driven by new knowledge and information. Information technology can play a power- ful role in helping managers design and deliver new products and services and redirecting and redesigning their organizations. Chapter 12 treats management decision making in detail.

Information Technology Information technology is one of many tools managers use to cope with change. Computer hardware is the physical equipment used for input, processing, and output activities in an information system. It consists of the following: comput- ers of various sizes and shapes (including mobile handheld devices); various input, output, and storage devices; and telecommunications devices that link computers together.

Computer software consists of the detailed, preprogrammed instructions that control and coordinate the computer hardware components in an infor- mation system. Chapter 5 describes the contemporary software and hardware platforms used by firms today in greater detail.

Data management technology consists of the software governing the orga- nization of data on physical storage media. More detail on data organization and access methods can be found in Chapter 6.

Networking and telecommunications technology, consisting of both phys- ical devices and software, links the various pieces of hardware and transfers data from one physical location to another. Computers and communications equip- ment can be connected in networks for sharing voice, data, images, sound, and video. A network links two or more computers to share data or resources, such as a printer.

The world’s largest and most widely used network is the Internet. The Inter- net is a global “network of networks” that uses universal standards (described in Chapter 7) to connect millions of networks in more than 230 countries around the world.

The Internet has created a new “universal” technology platform on which to build new products, services, strategies, and business models. This same tech- nology platform has internal uses, providing the connectivity to link different systems and networks within the firm. Internal corporate networks based on Internet technology are called intranets. Private intranets extended to autho- rized users outside the organization are called extranets, and firms use such networks to coordinate their activities with other firms for making purchases, collaborating on design, and other interorganizational work. For most business

22 Part One Organizations, Management, and the Networked Enterprise

firms today, using Internet technology is both a business necessity and a com- petitive advantage.

The World Wide Web is a service provided by the Internet that uses uni- versally accepted standards for storing, retrieving, formatting, and display- ing information in a page format on the Internet. Web pages contain text, graphics, animations, sound, and video and are linked to other web pages. By clicking on highlighted words or buttons on a web page, you can link to related pages to find additional information and links to other locations on the web. The web can serve as the foundation for new kinds of information systems such as UPS’s web-based package tracking system described in the Interactive Session.

All of these technologies, along with the people required to run and man- age them, represent resources that can be shared throughout the organization and constitute the firm’s information technology (IT) infrastructure. The IT infrastructure provides the foundation, or platform, on which the firm can build its specific information systems. Each organization must carefully design and manage its IT infrastructure so that it has the set of technology services it needs for the work it wants to accomplish with information systems. Chapters 5 through 8 of this book examine each major technology component of informa- tion technology infrastructure and show how they all work together to create the technology platform for the organization.

The Interactive Session on Technology describes some of the typical tech- nologies used in computer-based information systems today. UPS invests heav- ily in information systems technology to make its business more efficient and customer oriented. It uses an array of information technologies, including bar code scanning systems, wireless networks, large mainframe computers, hand- held computers, the Internet, and many different pieces of software for track- ing packages, calculating fees, maintaining customer accounts, and managing logistics.

Let’s identify the organization, management, and technology elements in the UPS package tracking system we have just described. The organization element anchors the package tracking system in UPS’s sales and production functions (the main product of UPS is a service—package delivery). It speci- fies the required procedures for identifying packages with both sender and recipient information, taking inventory, tracking the packages en route, and providing package status reports for UPS customers and customer service representatives.

The system must also provide information to satisfy the needs of managers and workers. UPS drivers need to be trained in both package pickup and delivery procedures and in how to use the package tracking system so that they can work efficiently and effectively. UPS customers may need some training to use UPS in-house package tracking software or the UPS website.

UPS’s management is responsible for monitoring service levels and costs and for promoting the company’s strategy of combining low cost and superior ser- vice. Management decided to use computer systems to increase the ease of sending a package using UPS and of checking its delivery status, thereby reduc- ing delivery costs and increasing sales revenues.

The technology supporting this system consists of handheld computers, bar code scanners, desktop computers, wired and wireless communications networks, UPS’s data center, storage technology for the package delivery data, UPS in-house package tracking software, and software to access the World Wide Web. The result is an information system solution to the business challenge

Chapter 5 IT Infrastructure and Emerging Technologies 23 Chapter 1 Information Systems in Global Business Today 23

Acquisition Device (DIAD), which can access a wire- less cell phone network. As soon as the driver logs on, his or her day’s route is downloaded onto the handheld. The DIAD also automatically captures customers’ signatures along with pickup and delivery information. Package tracking information is then transmitted to UPS’s computer network for storage and processing. From there, the information can be accessed worldwide to provide proof of delivery to customers or to respond to customer queries. It usu- ally takes less than 60 seconds from the time a driver presses “complete” on the DIAD for the new informa- tion to be available on the web.

Through its automated package tracking system, UPS can monitor and even reroute packages through- out the delivery process. At various points along the route from sender to receiver, bar code devices scan shipping information on the package label and feed data about the progress of the package into the cen- tral computer. Customer service representatives are able to check the status of any package from desk- top computers linked to the central computers and respond immediately to inquiries from customers. UPS customers can also access this information from the company’s website using their own computers or mobile phones. UPS now has mobile apps and a mobile website for iPhone, BlackBerry, and Android smartphone users.

Anyone with a package to ship can access the UPS website to track packages, check delivery routes, cal- culate shipping rates, determine time in transit, print labels, and schedule a pickup. The data collected at the UPS website are transmitted to the UPS central computer and then back to the customer after pro- cessing. UPS also provides tools that enable custom- ers, such Cisco Systems, to embed UPS functions, such as tracking and cost calculations, into their own websites so that they can track shipments without visiting the UPS site.

UPS is now leveraging its decades of expertise managing its own global delivery network to manage logistics and supply chain activities for other companies. It created a UPS Supply Chain Solutions division that provides a complete bundle of standard- ized services to subscribing companies at a fraction of what it would cost to build their own systems and infrastructure. These services include supply chain design and management, freight forwarding, customs

United Parcel Service (UPS) started out in 1907 in a closet-sized basement office. Jim Casey and Claude Ryan—two teenagers from Seattle with two bicycles and one phone—promised the “best service and lowest rates.” UPS has used this formula successfully for more than a century to become the world’s largest ground and air package-delivery company. It’s a global enterprise with more than 454,000 employees, over 112,000 vehicles, and the world’s ninth-largest airline.

Today, UPS delivers 5.1 billion packages and docu- ments in more than 220 countries and territories. The firm has been able to maintain leadership in small-package delivery services despite stiff competi- tion from FedEx and the U.S. Postal Service by invest- ing heavily in advanced information technology. UPS spends more than $1 billion each year to maintain a high level of customer service while keeping costs low and streamlining its overall operations.

It all starts with the scannable bar-coded label attached to a package, which contains detailed infor- mation about the sender, the destination, and when the package should arrive. Customers can download and print their own labels using special software pro- vided by UPS or by accessing the UPS website. Before the package is even picked up, information from the “smart” label is transmitted to one of UPS’s computer centers in Mahwah, New Jersey, or Alpharetta, Geor- gia, and sent to the distribution center nearest its final destination.

Dispatchers at this center download the label data and use special routing software called ORION to create the most efficient delivery route for each driver that considers traffic, weather conditions, and the location of each stop. Each UPS driver makes an average of 100 stops per day. In a network with 55,000 routes in the United States alone, shaving even one mile off each driver’s daily route translates into big savings: $50 million per year. These savings are critical as UPS tries to boost earnings growth as more of its business shifts to less-profitable e-commerce deliveries. UPS drivers who used to drop off several heavy packages a day at one retailer now make many stops scattered across residential neigh- borhoods, delivering one lightweight package per household. The shift requires more fuel and more time, increasing the cost to deliver each package.

The first thing a UPS driver picks up each day is a handheld computer called a Delivery Information

INTERACTIVE SESSION TECHNOLOGY

UPS Competes Globally with Information Technology

brokerage, mail services, multimodal transportation, and financial services in addition to logistics services. CandleScience, based in Durham, North Carolina, is an industry leader in the candle and soap supply industry, providing raw materials such as waxes, wicks, and fragrances to candle makers around the world. UPS worked with CandleScience to accurately model shipping rates for the company and its cus- tomers and to add a freight shipping option capabil- ity to its website. UPS also helped CandleScience identify the optimal location for a new warehouse for its West Coast customers. The new West Coast warehouse in Sparks, Nevada lets the company reach some of its largest customers faster, more efficiently and less expensively.

CASE STUDY QUESTIONS

3. What strategic business objectives do UPS’s information systems address?

4. What would happen if UPS’s information systems were not available?

1. What are the inputs, processing, and outputs of UPS’s package tracking system?

2. What technologies are used by UPS? How are these technologies related to UPS’s business strategy?

of providing a high level of service with low prices in the face of mounting competition.

It Isn’t Just Technology: A Business Perspective on Information Systems Managers and business firms invest in information technology and systems because they provide real economic value to the business. The decision to build or maintain an information system assumes that the returns on this investment will be superior to other investments in buildings, machines, or other assets. These superior returns will be expressed as increases in productivity, as increases in revenues (which will increase the firm’s stock market value), or perhaps as superior long-term strategic positioning of the firm in certain markets (which will produce superior revenues in the future).

We can see that from a business perspective, an information system is an important instrument for creating value for the firm. Information systems enable the firm to increase its revenue or decrease its costs by providing information that helps managers make better decisions or that improves the execution of business processes. For example, the information system for analyzing super- market checkout data illustrated in Figure 1.3 can increase firm profitability by helping managers make better decisions as to which products to stock and promote in retail supermarkets.

Every business has an information value chain, illustrated in Figure 1.7, in which raw information is systematically acquired and then transformed

Sources: Paul Ziobro, “UPS’s $20 Billion Problem: Operations Stuck in the 20th Century,” Wall Street Journal, June 15, 2018; www.ups.com, accessed February 7, 2018; “Igniting Growth with CandleScience,” UPS Compass, May 2017; and “Stars and Stripes Flying High,” UPS Com- pass, December 2017.

UPS provides both financial and shipping advice and services to Flags of Valor, a small business based in Ashton, Virginia, which sells hundreds of hand-crafted wooden flags each day to online customers. Using UPS Quantum View Manage® technology, the staff can view and monitor outbound packages and immedi- ately respond to customer questions about order sta- tus. UPS Capital®, the financial service division of UPS, showed the company how to protect its cash flow and assets by moving to a comprehensive insurance plan.

24 Part One Organizations, Management, and the Networked Enterprise

Chapter 1 Information Systems in Global Business Today 25

through various stages that add value to that information. The value of an information system to a business, as well as the decision to invest in any new information system, is, in large part, determined by the extent to which the system will lead to better management decisions, more efficient business processes, and higher firm profitability. Although there are other reasons why  systems are built, their primary purpose is to contribute to corporate value.

The business perspective calls attention to the organizational and managerial nature of information systems. An information system represents an organiza- tional and management solution, based on information technology, to a challenge or problem posed by the environment. Every chapter in this book begins with a short case study that illustrates this concept. A diagram at the beginning of each chapter illustrates the relationship between a business challenge and resulting management and organizational decisions to use IT as a solution to challenges generated by the business environment. You can use this diagram as a starting point for analyzing any information system or information system problem you encounter.

Review the diagram at the beginning of this chapter. The diagram shows how PCL’s systems solved the business problem of inefficiencies created by a far-flung, highly paper-intensive business. These systems provided a solution that takes advantage of opportunities provided by new wireless digital technol- ogy and the Internet. PCL digitally enabled its key business processes for plan- ning, designing, and monitoring its construction projects. These systems have been essential in improving PCL’s overall business performance. The diagram also illustrates how management, technology, and organizational elements work together to create the systems.

FIGURE 1.7 THE BUSINESS INFORMATION VALUE CHAIN From a business perspective, information systems are part of a series of value-adding activities for acquiring, transforming, and distributing information that managers can use to improve decision making, enhance organizational performance, and, ultimately, increase firm profitability.

Business Processes

Information Processing Activities

Business Value

Management Activities

Supply Chain Management

Enterprise Management

Customer Management

Knowledge Management

Coordinating

Firm Profitability

and Strategic PositionTransfor-

mation into Business Systems

Data Collection and Storage

Dissemination

Planning Controlling Modeling and Decision Making

26 Part One Organizations, Management, and the Networked Enterprise

Complementary Assets: Organizational Capital and the Right Business Model Awareness of the organizational and managerial dimensions of information systems can help us understand why some firms achieve better results from their informa- tion systems than others. Studies of returns from information technology invest- ments show that there is considerable variation in the returns firms receive (see Figure 1.8). Some firms invest a great deal and receive a great deal (quadrant 2); others invest an equal amount and receive few returns (quadrant 4). Still other firms invest little and receive much (quadrant 1), whereas others invest little and receive little (quadrant 3). This suggests that investing in information technology does not by itself guarantee good returns. What accounts for this variation among firms?

The answer lies in the concept of complementary assets. Information technol- ogy investments alone cannot make organizations and managers more effective unless they are accompanied by supportive values, structures, and behavior pat- terns in the organization and other complementary assets. Business firms need to change how they do business before they can really reap the advantages of new information technologies.

Complementary assets are those assets required to derive value from a pri- mary investment (Teece, 1998). For instance, to realize value from automobiles requires substantial complementary investments in highways, roads, gasoline stations, repair facilities, and a legal regulatory structure to set standards and control drivers.

Research indicates that firms that support their technology investments with investments in complementary assets, such as new business models, new business processes, management behavior, organizational culture, or training, receive superior returns, whereas those firms failing to make these comple- mentary investments receive less or no returns on their information technology investments (Brynjolfsson, 2005; Brynjolfsson and Hitt, 2000; Laudon, 1974). These  investments in organization and management are also known as organizational and management capital.

FIGURE 1.8 VARIATION IN RETURNS ON INFORMATION TECHNOLOGY INVESTMENT

Although, on average, investments in information technology produce returns far above those returned by other investments, there is considerable variation across firms. Source: Brynjolfsson, Erik and Lorin M. Hitt. “Beyond Computation: Information Technology, Organizational Transformation, and Business Performance.” Journal of Economic Perspectives 14, No. 4 (2000).

IT Capital Stock (relative to industry average)

Productivity (relative to industry average)

.25

.12 .25 1.0 4.0 8.0

.5

1.0

2.0

4.0 1 2

3 4

Chapter 1 Information Systems in Global Business Today 27

Table 1.2 lists the major complementary investments that firms need to make to realize value from their information technology investments. Some of this investment involves tangible assets, such as buildings, machinery, and tools. However, the value of investments in information technology depends to a large extent on complementary investments in management and organization.

Key organizational complementary investments are a supportive business culture that values efficiency and effectiveness, an appropriate business model, efficient business processes, decentralization of authority, highly distributed decision rights, and a strong information system (IS) development team.

Important managerial complementary assets are strong senior management support for change, incentive systems that monitor and reward individual inno- vation, an emphasis on teamwork and collaboration, training programs, and a management culture that values flexibility and knowledge.

Important social investments (not made by the firm but by the society at large, other firms, governments, and other key market actors) are the Internet and the supporting Internet culture, educational systems, network and com- puting standards, regulations and laws, and the presence of technology and service firms.

Throughout the book, we emphasize a framework of analysis that consid- ers technology, management, and organizational assets and their interactions. Perhaps the single most important theme in the book, reflected in case stud- ies and exercises, is that managers need to consider the broader organization and management dimensions of information systems to understand current problems as well as to derive substantial above-average returns from their infor- mation technology investments. As you will see throughout the text, firms that

TABLE 1.2 COMPLEMENTARY SOCIAL, MANAGERIAL, AND ORGANIZATIONAL ASSETS REQUIRED TO OPTIMIZE RETURNS FROM INFORMATION TECHNOLOGY INVESTMENTS

Organizational assets Supportive organizational culture that values efficiency and effectiveness

Appropriate business model

Efficient business processes

Decentralized authority

Distributed decision-making rights

Strong IS development team

Managerial assets Strong senior management support for technology investment and change

Incentives for management innovation

Teamwork and collaborative work environments

Training programs to enhance management decision skills

Management culture that values flexibility and knowledge-based decision making.

Social assets The Internet and telecommunications infrastructure

IT-enriched educational programs raising labor force computer literacy

Standards (both government and private sector)

Laws and regulations creating fair, stable market environments

Technology and service firms in adjacent markets to assist implementation

28 Part One Organizations, Management, and the Networked Enterprise

can address these related dimensions of the IT investment are, on average, richly rewarded.

1-3 What academic disciplines are used to study information systems, and how does each contribute to an understanding of information systems?

The study of information systems is a multidisciplinary field. No single theory or perspective dominates. Figure 1.9 illustrates the major disciplines that con- tribute problems, issues, and solutions in the study of information systems. In general, the field can be divided into technical and behavioral approaches. Information systems are sociotechnical systems. Though they are composed of machines, devices, and “hard” physical technology, they require substan- tial social, organizational, and intellectual investments to make them work properly.

Technical Approach The technical approach to information systems emphasizes mathematically based models to study information systems as well as the physical technology and for- mal capabilities of these systems. The disciplines that contribute to the technical approach are computer science, management science, and operations research.

Computer science is concerned with establishing theories of computability, methods of computation, and methods of efficient data storage and access. Man- agement science emphasizes the development of models for decision-making and management practices. Operations research focuses on mathematical tech- niques for optimizing selected parameters of organizations, such as transporta- tion, inventory control, and transaction costs.

FIGURE 1.9 CONTEMPORARY APPROACHES TO INFORMATION SYSTEMS The study of information systems deals with issues and insights contributed from technical and behavioral disciplines.

MIS

Operations Research

Sociology

Psychology Economics

Management Science

Computer Science

Technical Approaches

Behavioral Approaches

Chapter 1 Information Systems in Global Business Today 29

Behavioral Approach An important part of the information systems field is concerned with behavioral issues that arise in the development and long-term maintenance of information systems. Issues such as strategic business integration, design, implementation, utilization, and management cannot be explored usefully with the models used in the technical approach. Other behavioral disciplines contribute important concepts and methods.

For instance, sociologists study information systems with an eye toward how groups and organizations shape the development of systems and also how systems affect individuals, groups, and organizations. Psychologists study infor- mation systems with an interest in how human decision makers perceive and use formal information. Economists study information systems with an interest in understanding the production of digital goods, the dynamics of digital markets, and how new information systems change the control and cost structures within the firm.

The behavioral approach does not ignore technology. Indeed, information systems technology is often the stimulus for a behavioral problem or issue. But the focus of this approach is generally not on technical solutions. Instead, it concentrates on changes in attitudes, management and organizational policy, and behavior.

Approach of This Text: Sociotechnical Systems Throughout this book, you will find a rich story with four main actors: sup- pliers of hardware and software (the technologists); business firms making investments and seeking to obtain value from the technology; managers and employees seeking to achieve business value (and other goals); and the contemporary legal, social, and cultural context (the firm’s environ- ment). Together these actors produce what we call management information systems.

The study of management information systems (MIS) arose to focus on the use of computer-based information systems in business firms and government agencies. MIS combines the work of computer science, management science, and operations research with a practical orientation toward developing system solu- tions to real-world problems and managing information technology resources. It is also concerned with behavioral issues surrounding the development, use, and impact of information systems, which are typically discussed in the fields of sociology, economics, and psychology.

Our experience as academics and practitioners leads us to believe that no single approach effectively captures the reality of information systems. The successes and failures of information systems are rarely all technical or all behavioral. Our best advice to students is to understand the perspectives of many disciplines. Indeed, the challenge and excitement of the information sys- tems field are that it requires an appreciation and tolerance of many different approaches.

The view we adopt in this book is best characterized as the sociotech- nical view of systems. In this view, optimal organizational performance is achieved by jointly optimizing both the social and technical systems used in production.

Adopting a sociotechnical systems perspective helps to avoid a purely technological approach to information systems. For instance, the fact that infor- mation technology is rapidly declining in cost and growing in power does not

30 Part One Organizations, Management, and the Networked Enterprise

necessarily or easily translate into productivity enhancement or bottom-line profits. The fact that a firm has recently installed an enterprise-wide finan- cial reporting system does not necessarily mean that it will be used, or used effectively. Likewise, the fact that a firm has recently introduced new business procedures and processes does not necessarily mean employees will be more productive in the absence of investments in new information systems to enable those processes.

In this book, we stress the need to optimize the firm’s performance as a whole. Both the technical and behavioral components need attention. This means that technology must be changed and designed in such a way as to fit organizational and individual needs. Sometimes, the technology may have to be “de-optimized” to accomplish this fit. For instance, mobile phone users adapt this technology to their personal needs, and as a result manufacturers quickly seek to adjust the technology to conform to user expectations. Organi- zations and individuals must also be changed through training, learning, and planned organizational change to allow the technology to operate and prosper. Figure 1.10 illustrates this process of mutual adjustment in a sociotechnical system.

1-4 How will MIS help my career? Here is how Chapter 1 and this text can help you find an entry-level job as a financial client support and sales assistant.

The Company Power Financial Analytics Data Services, a data and software company serving the financial industry with offices in New York City, Atlanta, Los Angeles, and Chicago, is looking to fill an entry-level position for a financial client support and sales assistant. The company has 1,600 employees, many of whom are consultants showing clients how to work with its powerful financial analytics software and data products.

FIGURE 1.10 A SOCIOTECHNICAL PERSPECTIVE ON INFORMATION SYSTEMS

In a sociotechnical perspective, the performance of a system is optimized when both the technology and the organization mutually adjust to one another until a satisfactory fit is obtained.

TECHNOLOGY ORGANIZATION

Final Design of

Organization

Final Design of

Technology

Alternative 3

Alternative 3

Alternative 2

Alternative 2

Alternative 1

Alternative 1

Chapter 1 Information Systems in Global Business Today 31

Position Description The financial client support and sales assistant will be part of a team in the company’s consulting services. Consulting teams combine a thorough under- standing of finance and technology with specific expertise in Power Finan- cial Analytics Data Services software and assist clients in a variety of ways. The company provides on-the-job training in its software and consulting meth- ods. Job responsibilities include:

• Supporting Financial Analytics Data Services applications.

• Helping the team create custom models and screens.

• Training clients in their offices and at seminars.

• Providing expert consultation to clients by telephone and on-site.

Job Requirements • Recent college graduate or investment professional with one to two years

of experience. Applicants with backgrounds in finance, MIS, economics, accounting, business administration, and mathematics are preferred

• Knowledge of or interest in learning about financial markets

• Sound working knowledge of spreadsheets

• Very strong communication and interpersonal skills

• Strong desire to learn in rapidly changing environment

Interview Questions 1. What is your background in finance? What courses did you take? Have you

ever worked in the financial industry? What did you do there?

2. What is your proficiency level with spreadsheet software? What work have you done with Excel spreadsheets? Can you show examples of your work?

3. Are you able to discuss current trends in the financial industry and how they impact Power Financial’s business model and client base?

4. Did you ever work with clients? Can you give examples of how you provided client service or support?

5. Can you give us an example of a finance-related problem or other business problem that you helped solve? Did you do any writing and analysis? Can you provide examples?

Author Tips 1. Use the web to learn about financial markets and the financial industry.

2. Use the web to research the company, its financial products, and the tools and services it offers customers. Learn what you can about its consulting services. Additionally, examine the company’s social medial channels, such as LinkedIn and Facebook, for trends and themes.

3. Inquire exactly how you would be using spreadsheets for this job. Provide examples of how you used spreadsheets to solve problems in the class- room or for a job assignment. Show the spreadsheet work you did in finance.

4. Bring examples of your writing (including some from your Digital Portfolio described in MyLab MIS) demonstrating your analytical skills and project experience. Be prepared to discuss how you helped customers solve a business problem or the business problem solving you did for your courses.

32 Part One Organizations, Management, and the Networked Enterprise

REVIEW SUMMARY

1-1 How are information systems transforming business, and why are they so essential for running and managing a business today?

E-mail, online conferencing, smartphones, and tablet computers have become essential tools for conducting business. Information systems are the foundation of fast-paced supply chains. The Internet allows many businesses to buy, sell, advertise, and solicit customer feedback online. Organizations are trying to become more competitive and efficient by digitally enabling their core business processes and evolving into digital firms. The Internet has stimulated globalization by dramatically reducing the costs of producing, buying, and selling goods on a global scale. New information system trends include the emerging mobile digital platform, big data, and cloud computing.

Information systems are a foundation for conducting business today. In many industries, survival and the ability to achieve strategic business goals are difficult without extensive use of information technology. Businesses today use information systems to achieve six major objectives: operational excel- lence; new products, services, and business models; customer/supplier intimacy; improved decision making; competitive advantage; and day-to-day survival.

1-2 What is an information system? How does it work? What are its management, organization, and technology components? Why are complementary assets essential for ensuring that information systems provide genuine value for organizations?

From a technical perspective, an information system collects, stores, and disseminates information from an organization’s environment and internal operations to support organizational functions and decision making, communication, coordination, control, analysis, and visualization. Information sys- tems transform raw data into useful information through three basic activities: input, processing, and output.

From a business perspective, an information system provides a solution to a problem or challenge facing a firm and represents a combination of management, organization, and technology elements. The management dimension of information systems involves issues such as leadership, strategy, and management behavior. The technology dimension consists of computer hardware, software, data man- agement technology, and networking/telecommunications technology (including the Internet). The organization dimension of information systems involves issues such as the organization’s hierarchy, functional specialties, business processes, culture, and political interest groups.

In order to obtain meaningful value from information systems, organizations must support their technology investments with appropriate complementary investments in organizations and manage- ment. These complementary assets include new business models and business processes, supportive organizational culture and management behavior, and appropriate technology standards, regulations, and laws. New information technology investments are unlikely to produce high returns unless busi- nesses make the appropriate managerial and organizational changes to support the technology.

1-3 What academic disciplines are used to study information systems, and how does each contribute to an understanding of information systems?

The study of information systems deals with issues and insights contributed from technical and behavioral disciplines. The disciplines that contribute to the technical approach focusing on formal mod- els and capabilities of systems are computer science, management science, and operations research. The disciplines contributing to the behavioral approach focusing on the design, implementation, man- agement, and business impact of systems are psychology, sociology, and economics. A sociotechnical view of systems considers both technical and social features of systems and solutions that represent the best fit between them.

Chapter 1 Information Systems in Global Business Today 33

Key Terms Business functions, 19 Business model, 14 Business processes, 12 Complementary assets, 26 Computer hardware, 21 Computer literacy, 18 Computer software, 21 Culture, 20 Data, 16 Data management technology, 21 Data workers, 19 Digital firm, 12 Extranets, 21 Feedback, 17 Information, 16 Information system, 16 Information systems literacy, 18 Information technology (IT), 16

Information technology (IT) infrastructure, 22 Input, 17 Internet, 21 Intranets, 21 Knowledge workers, 19 Management information systems (MIS), 18 Middle management, 19 Network, 21 Networking and telecommunications

technology, 21 Operational management, 19 Organizational and management capital, 26 Output, 17 Processing, 17 Production or service workers, 19 Senior management, 19 Sociotechnical view, 29 World Wide Web, 22

MyLab MIS To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.

Review Questions 1-1 How are information systems transforming

business, and why are they so essential for running and managing a business today?

• Describe how information systems have changed the way businesses operate and their products and services.

• Identify three major new information system trends.

• Describe the characteristics of a digital firm.

• Describe the challenges and opportunities of globalization in a “flattened” world.

• List and describe six reasons why informa- tion systems are so important for business today.

1-2 What is an information system? How does it work? What are its management, organization, and tech- nology components? Why are complementary assets essential for ensuring that information sys- tems provide genuine value for organizations?

• Define an information system and describe the activities it performs.

• List and describe the organizational, manage- ment, and technology dimensions of infor- mation systems.

• Distinguish between data and information and between information systems literacy and computer literacy.

• Explain how the Internet and the World Wide Web are related to the other technology com- ponents of information systems.

• Define complementary assets and describe their relationship to information technology.

• Describe the complementary social, mana- gerial, and organizational assets required to optimize returns from information technol- ogy investments.

1-3 What academic disciplines are used to study information systems, and how does each contribute to an understanding of information systems?

• List and describe each discipline that contributes to a technical approach to information systems.

• List and describe each discipline that contrib- utes to a behavioral approach to information systems.

• Describe the sociotechnical perspective on information systems.

34 Part One Organizations, Management, and the Networked Enterprise

Discussion Questions 1-4 Information systems are too important to be

left to computer specialists. Do you agree? Why or why not?

1-5 If you were setting up the website for a Major League Baseball team, what manage- ment, organization, and technology issues might you encounter?

1-6 What are some of the organizational, managerial, and social complementary assets that help make UPS’s information systems so successful?

Hands-On MIS Projects The projects in this section give you hands-on experience in analyzing financial reporting and inventory manage- ment problems, using data management software to improve management decision making about increasing sales, and using Internet software for researching job requirements. Visit MyLab MIS to access this chapter’s Hands-On MIS Projects.

Management Decision Problems

1-7 Snyders of Hanover, which sells about 80 million bags of pretzels, snack chips, and organic snack items each year, had its financial department use spreadsheets and manual processes for much of its data gathering and reporting. Snyder’s financial analyst would spend the entire final week of every month collecting spreadsheets from the heads of more than 50 departments worldwide. She would then consolidate and reenter all the data into another spreadsheet, which would serve as the com- pany’s monthly profit-and-loss statement. If a department needed to update its data after submitting the spreadsheet to the main office, the analyst had to return the original spreadsheet, then wait for the department to resubmit its data before finally submitting the updated data in the consolidated document. Assess the impact of this situation on business performance and management decision making.

1-8 Dollar General Corporation operates deep-discount stores offering housewares, cleaning supplies, clothing, health and beauty aids, and packaged food, with most items selling for $1. Its business model calls for keeping costs as low as possible. The company has no automated method for keeping track of inventory at each store. Managers know approximately how many cases of a particular product the store is supposed to receive when a delivery truck arrives, but the stores lack technology for scanning the cases or verifying the item count inside the cases. Merchandise losses from theft or other mishaps have been rising and now represent more than 3 percent of total sales. What decisions have to be made before investing in an information system solution?

Improving Decision Making: Using Databases to Analyze Sales Trends

Software skills: Database querying and reporting Business skills: Sales trend analysis

1-9 In this project, you will start out with raw transactional sales data and use Microsoft Access database software to develop queries and reports that help managers make better decisions about product pricing, sales promotions, and inventory replenishment. In MyLab MIS, you can find a Store and Regional Sales Database developed in Microsoft Access. The database contains raw data on weekly store sales of com- puter equipment in various sales regions. The database includes fields for store identification number, sales region, item number, item description, unit price, units sold, and the weekly sales period when the sales were made. Use Access to develop some reports and queries to make this information more useful for running the business. Sales and production managers want answers to the following questions:

• Which products should be restocked?

• Which stores and sales regions would benefit from a promotional campaign and additional marketing?

• When (what time of year) should products be offered at full price, and when should discounts be used?

You can easily modify the database table to find and report your answers. Print your reports and results of queries.

MyLab MIS

MyLab MIS

MyLab MIS

Chapter 1 Information Systems in Global Business Today 35

Improving Decision Making: Using the Internet to Locate Jobs Requiring Information Systems Knowledge

Software skills: Internet-based software Business skills: Job searching

1-10 Visit a job-posting website such as Monster.com. Spend some time at the site examining jobs for accounting, finance, sales, marketing, and human resources. Find two or three descriptions of jobs that require some information systems knowledge. What information systems knowledge do these jobs require? What do you need to do to prepare for these jobs? Write a one- to two-page report summarizing your findings.

Collaboration and Teamwork Project Selecting Team Collaboration Tools

1-11 Form a team with three or four classmates and review the capabilities of Google Drive and Google Sites for your team collaboration work. Compare the capabilities of these two tools for storing team documents, project announcements, source materials, work assignments, illustrations, electronic presentations, and web pages of interest. Learn how each works with Google Docs. Explain why Google Drive or Google Sites is more appropriate for your team. If possible, use Google Docs to brainstorm and develop a presentation of your findings for the class. Organize and store your presentation using the Google tool you have selected.

Deutsche Bank AG, founded in 1870, is one of the world’s top financial companies, with 2,425 branches worldwide. It offers a range of financial products and services, including retail and commercial banking, foreign exchange, and services for mergers and acquisitions. The bank provides products for mortgages, consumer finance, credit cards, life insurance, and corporate pension plans; financing for international trade; and customized wealth management services for wealthy private clients. Deutsche Bank is also the largest bank in Germany, and plays a central role in German economic life. In many ways, Deutsche Bank is the embodiment of the global financial system.

Deutsche Bank has the world’s largest portfolio of derivatives, valued at about $46 trillion. A finan- cial derivative is a contract between two or more parties whose value is dependent upon or derived from one or more underlying assets, such as stocks, bonds, commodities, currencies, and interest rates. Although Deutsche Bank had survived the 2008 banking crisis, which was partly triggered by flawed derivatives, it is now struggling with seismic changes in the banking industry, including recent regulatory change. The bank was forced to pay $7.2 billion to resolve U.S. regulator complaints about its sale of toxic mortgage securities that contributed to the 2008 financial crisis.

In addition, the Commodity Futures Trading Commission (CFTC) charged that Deutsche Bank submitted incomplete and untimely credit default swap data, failed to properly supervise employees responsible for swap data reporting, and lacked an adequate business continuity and disaster recov- ery plan. (A credit default swap is a type of credit insurance contract in which an insurer promises to compensate an insured party [such as a bank] for losses incurred when a debtor [such as a corpora- tion] defaults on a debt and that can be purchased or sold by either party on the financial market. Credit default swaps are very complex financial instruments.)

The CFTC complained that on April 16, 2016, Deutsche Bank’s swap data reporting system expe- rienced a system outage that prevented Deutsche Bank from reporting any swap data for multiple

asset classes for approximately five days. Deutsche Bank’s subsequent efforts to end the system outage repeatedly exacerbated existing reporting problems and led to the discovery and creation of new report- ing problems.

For example, Deutsche Bank’s swap data reported before and after the system outage revealed persistent problems with the integrity of certain data fields, including numerous invalid legal entity identifiers. (A legal entity identifier [LEI] is an identification code to uniquely iden- tify all legal entities that are parties to financial transactions.) The CFTC complaint alleged that a number of these reporting problems persist today, affecting market data that is made avail- able to the public as well as data that is used by the CFTC to evaluate systemic risk throughout the swaps markets. The CFTC complaint also alleged that Deutsche Bank’s system outage and subse- quent reporting problems occurred in part because Deutsche Bank failed to have an adequate business continuity and disaster recovery plan and other appropriate supervisory systems in place.

In addition to incurring high costs associated with coping with regulators and paying fines, Deutsche Bank was a very unwieldy and expensive bank to operate. U.S. regulators have identified Deutsche Bank’s antiquated technology as one reason why the bank was not always able to provide the correct information for running its business properly and responding to regulators. Poor information systems may have even contributed to the 2008 financial cri- sis. Banks often had trouble untangling the complex financial products they had bought and sold to deter- mine their underlying value.

Banks, including Deutsche Bank, are intensive users of information technology, and they rely on technology to spot misconduct. If Deutsche Bank was such an important player in the German and world financial systems, why were its systems not up to the job?

It turns out that Deutsche Bank, like other leading global financial companies, had undergone decades of mergers and expansion. When these banks merged or acquired other financial companies, they often did not make the requisite (and often far-reaching) changes to integrate their information systems with

Did Information Systems Cause Deutsche Bank to Stumble?

CASE STUDY

36 Part One Organizations, Management, and the Networked Enterprise

Chapter 1 Information Systems in Global Business Today 37

those of their acquisitions. The effort and costs required for this integration, including coordination across many management teams, were too great. So the banks left many old systems in place to handle the workload for each of their businesses. This cre- ated what experts call “spaghetti balls” of overlapping and often incompatible technology platforms and software programs. These antiquated legacy systems were designed to handle large numbers of transac- tions and sums of money, but they were not well suited to managing large bank operations. They often did not allow information to be shared easily among departments or provide senior management with a coherent overview of bank operations.

Deutsche Bank had more than 100 different book- ing systems for trades in London alone and no com- mon set of codes for identifying clients in each of these systems. Each of these systems might use a different number or code for identifying the same client, so it would be extremely difficult or impos- sible to show how the same client was treated in all of these systems. Individual teams and traders each had their own incompatible platforms. The bank had employed a deliberate strategy of pitting teams against each other to spur them on, but this further encouraged the use of different systems because competing traders and teams were reluctant to share their data. Yet the bank ultimately had to reconcile the data from these disparate systems, often by hand, before trades could be processed and recorded.

This situation has made it very difficult for banks to undertake ambitious technology projects for the systems that they need today or to comply with regulatory requirements. U.S. regulators criticized Deutsche Bank for its inability to provide essential information because of its antiquated technology. Regulators are demanding that financial institutions improve the way they manage risk. The banks are under pressure to make their aging computer systems comply, but the IT infrastructures at many traditional financial institutions are failing to keep up with these regulatory pressures or with changing consumer expectations. Deutsche Bank and its peers must also adapt to new innovative technology competitors such as Apple that are muscling into banking services.

In July 2015, John Cryan became Deutsche Bank’s CEO. He tried to reduce costs and improve efficiency, laying off thousands of employees. He focused on overhauling Deutsche Bank’s fragmented, antiquated information systems, which are a major impediment to controlling costs and finding new

sources of profit and growth. Cryan noted that the bank’s cost base was swollen by poor and ineffective business processes, inadequate technology, and too many tasks being handled manually. He has called for standardizing the bank’s systems and procedures, eliminating legacy software, standardizing and enhancing data, and improving reporting.

Cryan appointed technology specialist Kim Hammonds as chief operating officer to oversee reengineering the bank’s information systems and operations. Hammonds had been Deutsche Bank’s global chief information officer and, before that, chief information officer at Boeing. Hammonds observed that Deutsche Bank’s information systems operated by trial and error, as if her former employer Boeing launched aircraft into the sky, watched them crash, and then tried to learn from the mistakes.

In February 2015, Deutsche Bank announced a 10-year, multibillion-dollar deal with Hewlett-Packard (HP) to standardize and simplify its IT infrastructure, reduce costs, and create a more modern and agile technology platform for launching new products and services. Deutsche Bank would migrate to a cloud computing infrastructure where it would run its information systems in HP’s remote computer cen- ters. HP would provide computing services, hosting, and storage. Deutsche Bank would still be in charge of application development and information security technologies, which it considers as proprietary and crucial for competitive differentiation.

Deutsche Bank is withdrawing from high-risk cli- ent relationships, improving its control framework, and automating manual reconciliations. To modern- ize its IT infrastructure, the bank is reducing the number of its individual operating systems that control the way a computer works from 45 to four, replacing scores of outdated computers, and replacing antiquated software applications. Thousands of appli- cations and functions will be shifted from Deutsche Bank’s mainframes to HP’s cloud computing services. Automating manual processes will promote efficiency and better control. These improvements are expected to reduce “run the bank” costs by 800 million euros. Eliminating 6,000 contractors will create total savings of 1 billion euros. Deutsche Bank has also opened four technology centers to work with financial tech- nology startups to improve its technology.

Despite all of these efforts, Deutsche Bank has struggled to regain profitability and stability. In early April 2018 the bank’s supervisory board replaced Cryan with Christian Sewing, a longtime

insider who had been in charge of the bank’s wealth management division and its branch network in Germany. During his tenure, Cryan was unable to restore profitability. In February 2018 the bank reported a loss of €735 million, or about $900 mil- lion, for 2017, which represented its third consecu- tive annual loss.

Deutsche Bank has not been the only major bank to be hampered by system problems. IT shortcom- ings were one reason Banco Santander’s U.S. unit in 2016 failed the U.S. Federal Reserve’s annual “stress tests,” which gauge how big banks would fare in a new financial crisis. A 2015 Accenture consultants’ report found that only 6 percent of board of direc- tor members and 3 percent of CEOs at the world’s largest banks had professional technology experi- ence. Financial technology innovations, security, IT resilience, and technology implications of regu- latory changes are now all critical issues for bank boards of directors, but many lack the knowledge to assess these issues and make informed decisions about strategy, investment, and how best to allocate technology resources.

Sources: Jack Ewing, “Deutsche Bank Replaces CEO Amid Losses and Lack of Direction,” New York Times, April 8, 2018; Charles Riley, “Deutsche Bank Hasn’t Made a Profit in Three Years,” CNN Money, February 2, 2018; Anna Irrera, “Deutsche Bank Launches Tech Startup Lab in New York City,” Reuters, March 21, 2017; Geoffrey Smith, “Things You Should Know About the

Deutsche Bank Train Wreck,” Fortune, September 28, 2016; Hayley McDowell, “System Outage Sees Deutsche Bank Charged over Reporting Failures,” The Trade News, August 19, 2016; Derek du Preez, “US Regulator Charges Deutsche Bank over Mul- tiple Systems Failures,” Diginomica, August 19, 2016; Kat Hall, “Deutsche Bank’s Creaking IT Systems Nervously Eyeing Bins,” The Register, October 27, 2015; Martin Arnold and Tom Braith- waite, “Banks’ Ageing IT Systems Buckle Under Strain,” Financial Times, June 18, 2015; Martin Arnold, “Deutsche Bank to Rip Out IT Systems Blamed for Problems,” Financial Times, October 26, 2015; Ben Moshinsky, “Deutsche Bank Has a Technology Prob- lem,” Business Insider, October 20, 2015; Edward Robinson and Nicholas Comfort, “Cryan’s Shakeup at Deutsche Bank Sees Tech Restart,” Bloomberg, December 20, 2015; and Accenture, “Bank Boardrooms Lack Technology Experience, Accenture Global Research Finds,” October 28, 2015.

CASE STUDY QUESTIONS 1-12 Identify the problem described in this case

study. What management, organization, and technology factors contributed to this problem?

1-13 What was the role of information technology at Deutsche Bank? How was IT related to the bank’s operational efficiency, decision-making capability, and business strategy?

1-14 Was Deutsche Bank using technology effectively to pursue its business strategy? Explain your answer.

1-15 What solution for Deutsche Bank was proposed? How effective do you think it will be? Explain your answer.

MyLab MIS Go to the Assignments section of MyLab MIS to complete these writing exercises.

1-16 What are the strategic objectives that firms try to achieve by investing in information systems and technologies? For each strategic objective, give an example of how a firm could use information systems to achieve that objective.

1-17 Describe the complementary assets that firms need in order to optimize returns from their information system investments. For each type of complementary asset, give an example of a specific asset a firm should have.

38 Part One Organizations, Management, and the Networked Enterprise

Chapter 1 Information Systems in Global Business Today 39

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U.S. Bureau of Labor Statistics. Occupational Outlook Handbook. 2018–2019 (April 19, 2018).

40

MyLab MIS Discussion Questions: 2-5, 2-6, 2-7; Hands-on MIS Projects: 2-8, 2-9, 2-10, 2-11; Writing Assignments: 2-16, 2-17; eText with Conceptual Animations

CHAPTER CASES Enterprise Social Networking Helps Sanofi

Pasteur Innovate and Improve Quality Data Changes How NFL Teams Play the

Game and How Fans See It Videoconferencing: Something for Everyone Should Companies Embrace Social Business?

VIDEO CASES Walmart’s Retail Link Supply Chain CEMEX: Becoming a Social Business

Instructional Video: U.S. Foodservice Grows Market with Oracle

CRM on Demand

LEARNING OBJECTIVES After reading this chapter, you will be able to answer the following questions:

2-1 What are business processes? How are they related to information systems?

2-2 How do systems serve the different management groups in a business, and how do systems that link the enterprise improve organizational performance?

2-3 Why are systems for collaboration and social business so important, and what technologies do they use?

2-4 What is the role of the information systems function in a business?

2-5 How will MIS help my career?

Global E-business and Collaboration2CHAPTER

41

Sanofi Pasteur is the vaccines division of the multinational pharmaceutical company Sanofi and the largest company in the world devoted entirely to vaccines. It is headquartered in Lyon, France, has nearly 15,000 em- ployees worldwide, and produces more than 1 billion doses of vaccine per year to inoculate more than 500 million people around the globe. Sanofi Pasteur’s corporate vision is to work toward a world where no one suffers or dies from a vaccine-preventable disease. Every day the company invests more than € 1 million in research and development. Collaboration, sharing information, ongo- ing innovation, and rigorous pursuit of quality are essential for Sanofi Pasteur’s business success and commitment to improving the health of the world’s population.

Until recently, the company lacked appropri- ate tools to encourage staff to have dialogues, share ideas, and work with other members of the company, including people that they might not know. As a large, centralized firm with a tradi- tional hierarchical culture, initiatives were pri- marily driven from the top down. The company wanted to give employees more opportunities to experiment and innovate on their own, and adopted Microsoft Yammer as the platform for this change. Ideas for improvement can come from anywhere in the organization and through Yammer can be shared everywhere.

Microsoft Yammer is an enterprise social net- working platform for internal business uses, although it can also create external networks linking to suppliers, customers, and others outside the organization. Yammer enables employees to create groups to collaborate on projects and share and edit documents, and includes a news feed to find out what’s happening within the company. A People Directory provides a searchable database of contact in- formation, skills, and expertise. Yammer can be accessed through the web using desktop and mobile devices, and can be integrated with other Microsoft tools such as SharePoint and Office 365, to make other applications more “social.” (SharePoint is Microsoft’s platform for collaboration, document sharing, and document management. Office 365 is Microsoft’s online service for its desktop productivity applications such as word processing, spreadsheet, electronic pre- sentations, and data management.)

How has Sanofi Pasteur benefited from becoming more “social”? Employees are using Yammer to share updates, ask for feedback, and connect volunteers to improvement initiatives. A recent project involving Yammer resulted in

Enterprise Social Networking Helps Sanofi Pasteur Innovate and Improve Quality

© Rawpixel.com/Shutterstock

42 Part One Organizations, Management, and the Networked Enterprise

a 60 percent simplification of a key quality process at one manufacturing site, saving the company thousands of Euros, and reducing overall end-to- end process time. Through Yammer, employees spread the word about this improvement to other locations around the globe.

Using Yammer, Sanofi employees set up activist networks for change in large manufacturing sites. Each group has attracted more than 1,000 people. These networks help create a more collegial, personal culture that helps people feel comfortable about making suggestions for improvements and working with other groups across the globe. They also provide management with observa- tions about policies and procedures across departments and hierarchies that can be used to redesign the firm’s manufacturing and business processes to increase quality and cost-effectiveness. For example, a building operator shared his ideas about how to reduce waste when managing a specific material in his production facility. The new procedure for handling the material saved his fa- cility more than 100,000 Euros per year and became a global best practice at all Sanofi Pasteur production sites. Yammer-powered communities raised aware- ness of health, safety, and attention to detail, and more attention to these issues helped reduce human errors by 91 percent.

Sources: “Yammer Collaboration Helps Sanofi Pasteur Improve Quality, Make More Life- Saving Vaccines,” www.microsoft.com, January 24, 2017; www.sanofipasteur.us, accessed February 4, 2018; and Jacob Morgan, “Three Ways Sanofi Pasteur Encourages Collaboration,” Forbes, October 20, 2015.

Sanofi Pasteur’s experience illustrates how much organizations today rely on information systems to improve their performance and remain competitive. It also shows how much systems supporting collaboration and teamwork make a difference in an organization’s ability to innovate, execute, grow profits, and, in this case, provide important social benefits.

The chapter-opening diagram calls attention to important points raised by this case and this chapter. Sanofi Pasteur is a knowledge-intensive company that prizes innovation, but it was hampered by hierarchical top-down processes that prevented employees and managers from freely sharing information and innovating. This impacted the company’s ability to create and deliver new leading-edge products and maintain its high quality standards.

Sanofi Pasteur management found that the best solution was to deploy new technology to move from a hierarchical corporate knowledge and work envi- ronment to one that actively engaged employees and enabled them to obtain more knowledge from colleagues. The company took advantage of Microsoft Yammer’s social tools to increase employee collaboration and engagement. There is more effective sharing of employee knowledge, and the company has become more innovative and cost-efficient.

New technology alone would not have solved Sanofi Pasteur’s problem. To make the solution effective, Sanofi Pasteur had to change its organizational culture and business processes for knowledge dissemination and collaborative work, and the new technology made these changes possible.

Chapter 2 Global E-business and Collaboration 43

Management

Organization

Technology

Enterprise Social Networking

• Hierarchical top-down processes • Large geographically dispersed

workforce

• Redesign knowledge and collaboration processes

• Change organizational culture

• MIcrosoft Yammer

• Provide new channels for knowledge acquisition, innovation, and collaboration

• Improve productivity • Reduce costs • Increase innovation • Improve quality

• Develop knowledge- sharing strategy and goals

Information System

Business Problem

Business Solutions

Here are some questions to think about: How are collaboration and employee engagement keeping Sanofi Pasteur competitive and quality-conscious? How did using Yammer change the way work was performed at Sanofi Pasteur?

2-1 What are business processes? How are they related to information systems?

In order to operate, businesses must deal with many different pieces of infor- mation about suppliers, customers, employees, invoices, and payments, and of course their products and services. They must organize work activities that use this information to operate efficiently and enhance the overall performance of the firm. Information systems make it possible for firms to manage all their in- formation, make better decisions, and improve the execution of their business processes.

Business Processes Business processes, which we introduced in Chapter 1, refer to the manner in which work is organized, coordinated, and focused to produce a valuable product or service. Business processes are the collection of activities required to produce a product or service. These activities are supported by flows of mate- rial, information, and knowledge among the participants in business processes. Business processes also refer to the unique ways in which organizations coor- dinate work, information, and knowledge, and the ways in which management chooses to coordinate work.

To a large extent, the performance of a business firm depends on how well its business processes are designed and coordinated. A company’s business pro- cesses can be a source of competitive strength if they enable the company to innovate or to execute better than its rivals. Business processes can also be liabilities if they are based on inefficient ways of working that impede organi- zational responsiveness and efficiency. The chapter-opening case describing Sanofi Pasteur’s improvements in knowledge-sharing processes clearly illus- trates these points, as do many of the other cases in this text.

44 Part One Organizations, Management, and the Networked Enterprise

Every business can be seen as a collection of business processes, some of which are part of larger encompassing processes. For instance, uses of mentor- ing, wikis, blogs, and videos are all part of the overall knowledge management process. Many business processes are tied to a specific functional area. For example, the sales and marketing function is responsible for identifying cus- tomers, and the human resources function is responsible for hiring employees. Table 2.1 describes some typical business processes for each of the functional areas of business.

Other business processes cross many different functional areas and require coordination across departments. For instance, consider the seemingly simple business process of fulfilling a customer order (see Figure 2.1). Initially, the sales department receives a sales order. The order passes first to accounting to ensure the customer can pay for the order either by a credit verification or request for immediate payment prior to shipping. Once the customer credit is

TABLE 2.1 EXAMPLES OF FUNCTIONAL BUSINESS PROCESSES

FUNCTIONAL AREA BUSINESS PROCESS

Manufacturing and production Assembling the product Checking for quality Producing bills of materials

Sales and marketing Identifying customers Making customers aware of the product Selling the product

Finance and accounting Paying creditors Creating financial statements Managing cash accounts

Human resources Hiring employees Evaluating employees’ job performance Enrolling employees in benefits plans

Generate order

Assemble product

Ship product

Manufacturing and

Production

Accounting

Sales

Generate invoice

Check credit

Submit order

Approve credit

FIGURE 2.1 THE ORDER FULFILLMENT PROCESS Fulfilling a customer order involves a complex set of steps that requires the close coordination of the sales, accounting, and manufacturing functions.

Chapter 2 Global E-business and Collaboration 45

established, the production department pulls the product from inventory or pro- duces the product. Then the product is shipped (and this may require working with a logistics firm, such as UPS or FedEx). A bill or invoice is generated by the accounting department, and a notice is sent to the customer indicating that the product has shipped. The sales department is notified of the shipment and pre- pares to support the customer by answering calls or fulfilling warranty claims.

What at first appears to be a simple process, fulfilling an order, turns out to be a very complicated series of business processes that require the close coordina- tion of major functional groups in a firm. Moreover, to efficiently perform all these steps in the order fulfillment process requires a great deal of information. The required information must flow rapidly within the firm from one decision maker to another; with business partners, such as delivery firms; and with the customer. Computer-based information systems make this possible.

How Information Technology Improves Business Processes Exactly how do information systems improve business processes? Information systems automate many steps in business processes that were formerly per- formed manually, such as checking a client’s credit or generating an invoice and shipping order. But today, information technology can do much more. New technology can actually change the flow of information, making it possible for many more people to access and share information, replacing sequential steps with tasks that can be performed simultaneously, and eliminating delays in de- cision making. New information technology frequently changes the way a busi- ness works and supports entirely new business models. Downloading a Kindle e-book from Amazon, buying a computer online at Best Buy, and download- ing a music track from iTunes are entirely new business processes based on new business models that would be inconceivable without today’s information technology.

That’s why it’s so important to pay close attention to business processes, both in your information systems course and in your future career. By analyzing business processes, you can achieve a very clear understanding of how a busi- ness actually works. Moreover, by conducting a business process analysis, you will also begin to understand how to change the business by improving its pro- cesses to make it more efficient or effective. Throughout this book, we examine business processes with a view to understanding how they might be improved by using information technology to achieve greater efficiency, innovation, and customer service.

2-2 How do systems serve the different management groups in a business, and how do systems that link the enterprise improve organizational performance?

Now that you understand business processes, it is time to look more closely at how information systems support the business processes of a firm. Because there are different interests, specialties, and levels in an organization, there are different kinds of systems. No single system can provide all the information an organization needs.

46 Part One Organizations, Management, and the Networked Enterprise

A typical business organization has systems supporting processes for each of the major business functions—sales and marketing, manufacturing and pro- duction, finance and accounting, and human resources. You can find exam- ples of systems for each of these business functions in the Learning Tracks for this chapter. Functional systems that operate independently of each other are becoming a thing of the past because they cannot easily share informa- tion to support cross-functional business processes. Many have been replaced with large-scale cross-functional systems that integrate the activities of related business processes and organizational units. We describe these integrated cross- functional applications later in this section.

A typical firm also has different systems supporting the decision-making needs of each of the main management groups we described in Chapter 1. Operational management, middle management, and senior management each use systems to support the decisions they must make to run the company. Let’s look at these systems and the types of decisions they support.

Systems for Different Management Groups A business firm has systems to support different groups or levels of manage- ment. These systems include transaction processing systems and systems for business intelligence.

Transaction Processing Systems Operational managers need systems that keep track of the elementary activi- ties and transactions of the organization, such as sales, receipts, cash deposits, payroll, credit decisions, and the flow of materials in a factory. Transaction processing systems (TPS) provide this kind of information. A transaction pro- cessing system is a computerized system that performs and records the daily routine transactions necessary to conduct business, such as sales order entry, hotel reservations, payroll, employee record keeping, and shipping.

The principal purpose of systems at this level is to answer routine questions and to track the flow of transactions through the organization. How many parts are in inventory? What happened to Mr. Smith’s payment? To answer these kinds of questions, information generally must be easily available, current, and accurate.

At the operational level, tasks, resources, and goals are predefined and highly structured. The decision to grant credit to a customer, for instance, is made by a lower-level supervisor according to predefined criteria. All that must be deter- mined is whether the customer meets the criteria.

Figure 2.2 illustrates a TPS for payroll processing. A payroll system keeps track of money paid to employees. An employee time sheet with the employ- ee’s name, social security number, and number of hours worked per week rep- resents a single transaction for this system. Once this transaction is input into the system, it updates the system’s master file (or database—see Chapter 6) that permanently maintains employee information for the organization. The data in the system are combined in different ways to create reports of interest to management and government agencies and to send paychecks to employees.

Managers need TPS to monitor the status of internal operations and the firm’s relations with the external environment. TPS are also major producers of information for the other systems and business functions. For example, the payroll system illustrated in Figure 2.2, along with other accounting TPS, supplies data to the company’s general ledger system, which is responsible for maintaining records of the firm’s income and expenses and for producing

Chapter 2 Global E-business and Collaboration 47

reports such as income statements and balance sheets. It also supplies em- ployee payment history data for insurance, pension, and other benefits calcu- lations to the firm’s human resources function and employee payment data to government agencies such as the U.S. Internal Revenue Service and Social Security Administration.

Transaction processing systems are often so central to a business that TPS failure for a few hours can lead to a firm’s demise and perhaps that of other firms linked to it. Imagine what would happen to UPS if its package tracking system was not working! What would the airlines do without their computer- ized reservation systems?

Systems for Business Intelligence Firms also have business intelligence systems that focus on delivering in- formation to support management decision making. Business intelligence is a contemporary term for data and software tools for organizing, analyz- ing, and providing access to data to help managers and other enterprise users make more informed decisions. Business intelligence addresses the decision-making needs of all levels of management. This section provides a brief introduction to business intelligence. You’ll learn more about this topic in Chapters 6 and 12.

Business intelligence systems for middle management help with monitoring, controlling, decision-making, and administrative activities. In Chapter 1, we defined management information systems as the study of information systems in business and management. The term management information systems (MIS) also designates a specific category of information systems serving middle

Employee Data To General Ledger

To government agencies

Employee paychecks

Employee/File Database

Payroll System

Management reports

Online queries

Employee Number Name Address Pay rate Gross pay Federal tax FICA Medicare State tax Net pay Earnings (YTD)

Payroll data on master file

FIGURE 2.2 A PAYROLL TPS A TPS for payroll processing captures employee payment transaction data (such as a time card). System outputs include online and hard-copy reports for management and employee paychecks.

48 Part One Organizations, Management, and the Networked Enterprise

management. MIS provide middle managers with reports on the organization’s current performance. This information is used to monitor and control the busi- ness and predict future performance.

MIS summarize and report on the company’s basic operations using data supplied by transaction processing systems. The basic transaction data from TPS are compressed and usually presented in reports that are produced on a regular schedule. Today, many of these reports are delivered online. Figure 2.3 shows how a typical MIS transforms transaction-level data from inventory, pro- duction, and accounting into MIS files that are used to provide managers with reports. Figure 2.4 shows a sample report from this system.

Transaction Processing Systems Management Information Systems

Order file

Production master

file

Accounting files

Managers

MIS FILES

Sales data

Unit product cost data

Product change data

Expense data

Reports

Order processing

system

Materials resource planning system

General ledger system

MIS

Online Displays and Dashboards

FIGURE 2.3 HOW MANAGEMENT INFORMATION SYSTEMS OBTAIN THEIR DATA FROM THE ORGANIZATION’S TPS

In the system illustrated by this diagram, three TPS supply summarized transaction data to the MIS reporting system at the end of the time period. Managers gain access to the organizational data through the MIS, which provides them with the appropriate reports.

PRODUCT CODE

PRODUCT DESCRIPTION

SALES REGION

Carpet Cleaner

TOTAL

Northeast South Midwest West

4469

Consolidated Consumer Products Corporation Sales by Product and Sales Region: 2019

ACTUAL SALES

4,066,700 3,778,112 4,867,001 4,003,440

16,715,253

PLANNED

4,800,000 3,750,000 4,600,000 4,400,000

17,550,000

ACTUAL versus

PLANNED

0.85 1.01 1.06 0.91

0.95

Room Freshener

TOTAL

Northeast South Midwest West

5674 3,676,700 5,608,112 4,711,001 4,563,440

18,559,253

3,900,000 4,700,000 4,200,000 4,900,000

17,700,000

0.94 1.19 1.12 0.93

1.05

FIGURE 2.4 SAMPLE MIS REPORT This report, showing summarized annual sales data, was produced by the MIS in Figure 2.3.

Chapter 2 Global E-business and Collaboration 49

MIS typically provide answers to routine questions that have been specified in advance and have a predefined procedure for answering them. For instance, MIS reports might list the total pounds of lettuce used this quarter by a fast- food chain or, as illustrated in Figure 2.4, compare total annual sales figures for specific products to planned targets. These systems generally are not flexible and have little analytical capability. Most MIS use simple routines, such as sum- maries and comparisons, as opposed to sophisticated mathematical models or statistical techniques.

Other types of business intelligence systems support more non-routine de- cision making. Decision-support systems (DSS) focus on problems that are unique and rapidly changing, for which the procedure for arriving at a solution may not be fully predefined in advance. They try to answer questions such as these: What would be the impact on production schedules if we were to double sales in the month of December? What would happen to our return on invest- ment if a factory schedule were delayed for six months?

Although DSS use internal information from TPS and MIS, they often bring in information from external sources, such as current stock prices or product prices of competitors. These systems are employed by “super-user” managers and business analysts who want to use sophisticated analytics and models to analyze data.

An interesting, small, but powerful DSS is the voyage-estimating system of a large global shipping company that transports bulk cargoes of coal, oil, ores, and finished products. The firm owns some vessels, charters others, and bids for shipping contracts in the open market to carry general cargo. A voyage-estimating system calculates financial and technical voyage details. Financial calculations include ship/time costs (fuel, labor, capital), freight rates for various types of cargo, and port expenses. Technical details include myriad factors, such as ship cargo capacity, speed, port distances, fuel and water consumption, and loading patterns (location of cargo for different ports).

The system can answer questions such as the following: Given a customer delivery schedule and an offered freight rate, which vessel should be assigned at what rate to maximize profits? What is the optimal speed at which a particu- lar vessel can optimize its profit and still meet its delivery schedule? What is the optimal loading pattern for a ship bound for the U.S. West Coast from Malaysia? Figure 2.5 illustrates the DSS built for this company. The system operates on a powerful desktop personal computer, providing a system of menus that makes it easy for users to enter data or obtain information.

The voyage-estimating DSS we have just described draws heavily on models. Other business intelligence systems are more data-driven, focusing instead on extracting useful information from very large quantities of data. For example, large ski resort companies such as Intrawest and Vail Resorts collect and store large amounts of customer data from call centers, lodging and dining reserva- tions, ski schools, and ski equipment rental stores. They use special software to analyze these data to determine the value, revenue potential, and loyalty of each customer to help managers make better decisions about how to target their marketing programs.

Business intelligence systems also address the decision-making needs of se- nior management. Senior managers need systems that focus on strategic issues and long-term trends, both in the firm and in the external environment. They are concerned with questions such as: What will employment levels be in five years? What are the long-term industry cost trends? What products should we be making in five years?

50 Part One Organizations, Management, and the Networked Enterprise

Executive support systems (ESS) help senior management make these decisions. They address nonroutine decisions requiring judgment, evaluation, and insight because there is no agreed-on procedure for arriving at a solution. ESS present graphs and data from many sources through an interface that is easy for senior managers to use. Often the information is delivered to senior executives through a portal, which uses a web interface to present integrated personalized business content.

ESS are designed to incorporate data about external events, such as new tax laws or competitors, but they also draw summarized information from internal MIS and DSS. They filter, compress, and track critical data, displaying the data of greatest importance to senior managers. Increasingly, such systems include business intelligence analytics for analyzing trends, forecasting, and “drilling down” to data at greater levels of detail.

For example, the chief operating officer (COO) and plant managers at Valero, the world’s largest independent petroleum refiner, use a Refining Dashboard to display real-time data related to plant and equipment reli- ability, inventory management, safety, and energy consumption. With the displayed information, the COO and his team can review the performance of each Valero refinery in the United States and Canada in terms of how each plant is performing compared to the production plan of the firm. The headquarters group can drill down from executive level to refinery level and individual system-operator level displays of performance. Valero’s Refining Dashboard is an example of a digital dashboard, which displays on a sin- gle screen graphs and charts of key performance indicators for managing a company. Digital dashboards are becoming an increasingly popular tool for management decision makers.

The Interactive Session on Organizations describes examples of several of these types of systems that the NFL (National Football League) and its teams use. Note the types of systems illustrated by this case and the role they play in improving both operations and decision making.

Ship file (e.g., speed, capacity)

Analytical models

database

Port distance restrictions file

Fuel consumption cost file

Ship charter hire history cost file

Port expense file

PC

Online queries

FIGURE 2.5 VOYAGE-ESTIMATING DECISION-SUPPORT SYSTEM This DSS operates on a powerful PC. It is used daily by managers who must develop bids on shipping contracts.

Chapter 2 Global E-business and Collaboration 51

Retail Chain 36.9%

Web Only 37.9%

Consumer Brand Manufacturer

11.6%

Catalog/Call Center 13.6%

$10$0 $20 $30 $40 $50 ROI (in Dollars)

Social networking sites

Direct mail (postal)

Internet other

Display ads

Online catalogs

Search engine (keywords and context marketing)

Commercial e-mail

DR magazine

DR newspaper

Telephone marketing

Mobile Internet

Radio

Television $6.62

$8.28

$10.08

$8.42

$10.26

$12.45

$12.26

$12.57

$16.75

$19.57

$19.86

$21.90

$42.08

Sales Revenue

Media Utilization

Year

0

500

1000

1500

2000

2010 2011 2012 201420132009

H o

ur s/

ye ar

Media Channel

Te lev

isi on

Ra dio

Int er

ne t

Da ily

ne ws

pa pe

rs

Re co

rd ed

m us

ic

Bo ok

s

Vid eo

ga me

s

1800

1600

1400

1200

1000

800

600

400

200

0

1607

124 115

751

552

125 108149 197 184

Ou t o

f h om

e m ed

ia

(B ox

O �c

e)

Ho me

vi de

o

M ag

az ine

s

Sales by Type 2019 Returns on Investment

10

155

0 20

Average Quantity

$100

$50

$200

$150

$0 $250

Average Amount

A digital dashboard delivers comprehensive and accurate information for decision making, often using a single screen. The graphical overview of key performance indicators helps managers quickly spot areas that need attention.

Systems for Linking the Enterprise Reviewing all the different types of systems we have just described, you might wonder how a business can manage all the information in these different sys- tems. You might also wonder how costly it is to maintain so many different systems. And you might wonder how all these different systems can share in- formation and how managers and employees are able to coordinate their work. In fact, these are all important questions for businesses today.

Enterprise Applications Getting all the different kinds of systems in a company to work together has proven a major challenge. Typically, corporations are put together both through normal “organic” growth and through acquisition of smaller firms. Over a period of time, corporations end up with a collection of systems, most of them older, and face the challenge of getting them all to “talk” with one another and work together as one corporate system. There are several solutions to this problem.

One solution is to implement enterprise applications, which are systems that span functional areas, focus on executing business processes across the firm, and include all levels of management. Enterprise applications help busi- nesses become more flexible and productive by coordinating their business processes more closely and integrating groups of processes so they focus on efficient management of resources and customer service.

There are four major enterprise applications: enterprise systems, supply chain management systems, customer relationship management systems, and knowledge management systems. Each of these enterprise applications integrates a related set of functions and business processes to enhance the

52 Part One Organizations, Management, and the Networked Enterprise

All professional sports teams today collect detailed data on player and team performance, fan behavior, and sales, and increasingly use these data to drive deci- sions about every aspect of the business—marketing, ticketing, player evaluation, and TV and digital media deals. This includes the National Football League (NFL), which is increasingly turning to data to improve how its players and teams perform and how fans expe- rience the game.

Since 2014 the NFL has been capturing player movement data on the field by putting nickel-sized radio frequency identification (RFID) tags beneath players’ shoulder pads to track every move they make. The information the sensors gather is used by NFL teams to improve their training and strat- egy, by commentators on live game broadcasts, and by fans attending games or using the NFL app on the Xbox One.

The NFL’s player tracking system is based on the Zebra Sports Solution developed by Zebra Technologies, a Chicago-based firm specializing in tracking technology that includes the bar codes on groceries and other consumer goods and radio fre- quency identification (RFID) technology. The Zebra Sports Solution system records players’ speed, direc- tion, location on the field, how far they ran on a play, and how long they were sprinting, jogging, or walk- ing. The system can also determine what formation a team was in and how players’ speed or acceleration affects their on-field performance. Want to know how hard Eli Manning is throwing passes or the force with which a ball arrives in the hands of receiver Odell Beckham? The system knows how to do all that.

NFL players have RFID chips in their left and right shoulder pads that transmit data to 20 radio receivers strategically located in the lower and upper levels of stadiums to collect data about how each player moves, using metrics such as velocity, speed in miles per hour, and distance traveled. From there the data are transmitted to an on-site server computer, where Zebra’s software matches an RFID tag to the correct player or official. The football also has a sensor transmitting location data. The data are generated in real-time as the game is being played. Each sensor transmits its location about 25 times per player.

It takes just two seconds for data to be received by the motion sensors, analyzed, and pushed out

to remote cloud computers run by Amazon Web Services for the NFL. From the NFL cloud comput- ers, the data are shared with fans, broadcasters, and NFL teams. The data captured by the NFL are displayed to fans using the NFL Next Gen Stats web- site, NFL social media channels, and the NFL app on Windows 10 and the Xbox One. The data are also transmitted to the giant display screens in the arena to show fans during the game.

The data have multiple uses. NFL teams use them to evaluate player and team performance and to analyze tactics, such as whether it might be better to press forward or to punt in a particular fourth-down situation. Data transmitted to broadcasters, to sta- dium screens, to Next Gen Stats, and to the Next Gen Stats feature of Microsoft’s Xbox One NFL app help create a deeper fan experience that gets fans more involved in the game.

Some of the statistics fans can now see on Next Gen Stats include Fastest Ball Carriers, Longest Tackles, Longest Plays, Passing Leaders, Rushing Leaders, and Receiving Leaders. Next Gen Stats also features charts for individual players and videos that explain the differences and similarities be- tween players, teams, and games based on the data.

While the data may be entertaining for fans, they could prove strategic for the teams. Data markers for each play are recorded, including type of offense, type of defense, whether there was a huddle, all movement during the play, and the yard line where the ball was stopped. The NFL runs custom-created analytics to deliver visualizations of the data to each team within 24 hours of the game, via a custom-built web portal. The system displays charts and graphs as well as tabular data to let teams have more insight. Each NFL team may also hire its own data analyst to wring even more value from the data. The data are giving NFL fans, teams, coaches, and players a deeper look into the game they love.

Sources: Jason Hiner, “How the NFL and Amazon Unleashed ‘Next Gen Stats’ to Grok Football Games,” TechRepublic, February 2, 2018; Teena Maddox, “Super Bowl 52: How the NFL and US Bank Stadium Are Ready to Make Digital History,” TechRepublic, February 1, 2018; Brian McDonough, “How the NFL’s Data Operation Tracks Every Move on the Field,” Information Management, December 7, 2016; www.zebra.com, accessed March 15, 2017; and Mark J. Burns, “Zebra Technologies, NFL Revamp Partnership For Third Season,” SportTechie, September 6, 2016.

INTERACTIVE SESSION ORGANIZATIONS

Data Changes How NFL Teams Play the Game and How Fans See It

Chapter 2 Global E-business and Collaboration 53

3. How do the data about teams and players cap- tured by the NFL help NFL football teams and the NFL itself make better decisions? Give examples of two decisions that were improved by the sys- tems described in this case.

4. How did using data help the NFL and its teams improve the way they run their business?

CASE STUDY QUESTIONS

1. What kinds of systems are illustrated in this case study? Where do they obtain their data? What do they do with the data? Describe some of the inputs and outputs of these systems.

2. What business functions do these systems support? Explain your answer.

Sales and Marketing

FUNCTIONAL AREAS

Manufacturing and Production

Finance and Accounting

Human Resources

Knowledge Management

Systems

Processes

Processes

Enterprise Systems

Customers, Distributors

Suppliers, Business Partners

Processes

Supply Chain

Management Systems

Customer Relationship Management

Systems

FIGURE 2.6 ENTERPRISE APPLICATION ARCHITECTURE Enterprise applications automate processes that span multiple business functions and organizational levels and may extend outside the organization.

performance of the organization as a whole. Figure 2.6 shows that the archi- tecture for these enterprise applications encompasses processes spanning the entire organization and, in some cases, extending beyond the organization to customers, suppliers, and other key business partners.

Enterprise Systems Firms use enterprise systems, also known as enter- prise resource planning (ERP) systems, to integrate business processes in man- ufacturing and production, finance and accounting, sales and marketing, and human resources into a single software system. Information that was previously

54 Part One Organizations, Management, and the Networked Enterprise

fragmented in many different systems is stored in a single comprehensive data repository where it can be used by many different parts of the business.

For example, when a customer places an order, the order data flow auto- matically to other parts of the company that are affected by them. The order transaction triggers the warehouse to pick the ordered products and schedule shipment. The warehouse informs the factory to replenish whatever has been depleted. The accounting department is notified to send the customer an in- voice. Customer service representatives track the progress of the order through every step to inform customers about the status of their orders. Managers are able to use firmwide information to make more-precise and timely decisions about daily operations and longer-term planning.

Supply Chain Management Systems Firms use supply chain management (SCM) systems to help manage relationships with their suppliers. These systems help suppliers, purchasing firms, distributors, and logistics companies share infor- mation about orders, production, inventory levels, and delivery of products and services so they can source, produce, and deliver goods and services efficient- ly. The ultimate objective is to get the right amount of their products from their source to their point of consumption in the least amount of time and at the lowest cost. These systems increase firm profitability by lowering the costs of moving and making products and by enabling managers to make better decisions about how to organize and schedule sourcing, production, and distribution.

Supply chain management systems are one type of interorganizational system because they automate the flow of information across organizational boundaries. You will find examples of other types of interorganizational informa- tion systems throughout this text because such systems make it possible for firms to link digitally to customers and to outsource their work to other companies.

Customer Relationship Management Systems Firms use customer relation- ship management (CRM) systems to help manage their relationships with their customers. CRM systems provide information to coordinate all of the business pro- cesses that deal with customers in sales, marketing, and service to optimize rev- enue, customer satisfaction, and customer retention. This information helps firms identify, attract, and retain the most profitable customers; provide better service to existing customers; and increase sales.

Knowledge Management Systems Some firms perform better than others be- cause they have better knowledge about how to create, produce, and deliver prod- ucts and services. This firm knowledge is unique, is difficult to imitate, and can be leveraged into long-term strategic benefits. Knowledge management systems (KMS) enable organizations to better manage processes for capturing and apply- ing knowledge and expertise. These systems collect all relevant knowledge and experience in the firm and make it available wherever and whenever it is needed to improve business processes and management decisions. They also link the firm to external sources of knowledge.

We examine enterprise systems and systems for supply chain management and customer relationship management in greater detail in Chapter 9. We dis- cuss collaboration systems that support knowledge management in this chapter and cover other types of knowledge management applications in Chapter 11.

Intranets and Extranets Enterprise applications create deep-seated changes in the way the firm con- ducts its business, offering many opportunities to integrate important business

Chapter 2 Global E-business and Collaboration 55

data into a single system. They are often costly and difficult to implement. Intranets and extranets deserve mention here as alternative tools for increas- ing integration and expediting the flow of information within the firm and with customers and suppliers.

Intranets are simply internal company websites that are accessible only by employees. The term intranet refers to an internal network, in contrast to the Internet, which is a public network linking organizations and other external networks. Intranets use the same technologies and techniques as the larger Internet, and they often are simply a private access area in a larger company website. Likewise with extranets, which are company websites that are acces- sible to authorized vendors and suppliers and are often used to coordinate the movement of supplies to the firm’s production apparatus.

For example, Six Flags, which operates 18 theme parks throughout North America, maintains an intranet for its 1900 full-time employees that provides company-related news and information on each park’s day-to-day operations, in- cluding weather forecasts, performance schedules, and details about groups and celebrities visiting the parks. The company also uses an extranet to broadcast information about schedule changes and park events to its 30,000 seasonal em- ployees. We describe the technology for intranets and extranets in more detail in Chapter 7.

E-business, E-commerce, and E-government The systems and technologies we have just described are transforming firms’ relationships with customers, employees, suppliers, and logistic partners into digital relationships using networks and the Internet. So much business is now enabled by or based upon digital networks that we use the terms electronic busi- ness and electronic commerce frequently throughout this text.

Electronic business, or e-business, refers to the use of digital technology and the Internet to execute the major business processes in the enterprise. E-business includes activities for the internal management of the firm and for coordination with suppliers and other business partners. It also includes electronic commerce, or e-commerce.

E-commerce is the part of e-business that deals with the buying and selling of goods and services over the Internet. It also encompasses activities supporting those market transactions, such as advertising, marketing, customer support, security, delivery, and payment.

The technologies associated with e-business have also brought about simi- lar changes in the public sector. Governments on all levels are using Internet technology to deliver information and services to citizens, employees, and busi- nesses with which they work. E-government refers to the application of the Internet and networking technologies to digitally enable government and pub- lic sector agencies’ relationships with citizens, businesses, and other arms of government.

In addition to improving delivery of government services, e-government makes government operations more efficient and also empowers citizens by giving them easier access to information and the ability to network electroni- cally with other citizens. For example, citizens in some states can renew their driver’s licenses or apply for unemployment benefits online, and the Internet has become a powerful tool for instantly mobilizing interest groups for political action and fundraising.

56 Part One Organizations, Management, and the Networked Enterprise

2-3 Why are systems for collaboration and social business so important, and what technologies do they use?

With all these systems and information, you might wonder how it is possible to make sense of them. How do people working in firms pull it all together, work toward common goals, and coordinate plans and actions? In addition to the types of systems we have just described, businesses need special systems to support collaboration and teamwork.

What Is Collaboration? Collaboration is working with others to achieve shared and explicit goals. Collaboration focuses on task or mission accomplishment and usually takes place in a business or other organization and between businesses. You collabo- rate with a colleague in Tokyo who has expertise on a topic about which you know nothing. You collaborate with many colleagues in publishing a company blog. If you’re in a law firm, you collaborate with accountants in an accounting firm in servicing the needs of a client with tax problems.

Collaboration can be short-lived, lasting a few minutes, or longer term, de- pending on the nature of the task and the relationship among participants. Collaboration can be one-to-one or many-to-many.

Employees may collaborate in informal groups that are not a formal part of the business firm’s organizational structure, or they may be organized into formal teams. Teams have a specific mission that someone in the business as- signed to them. Team members need to collaborate on the accomplishment of specific tasks and collectively achieve the team mission. The team mission might be to “win the game” or “increase online sales by 10 percent.” Teams are often short-lived, depending on the problems they tackle and the length of time needed to find a solution and accomplish the mission.

Collaboration and teamwork are more important today than ever for a vari- ety of reasons.

• Changing nature of work. The nature of work has changed from factory manu- facturing and pre-computer office work where each stage in the production process occurred independently of one another and was coordinated by supervisors. Work was organized into silos. Within a silo, work passed from one machine tool station to another, from one desktop to another, until the finished product was completed. Today, jobs require much closer coordina- tion and interaction among the parties involved in producing the service or product. A report from the consulting firm McKinsey & Company estimated that 41 percent of the U.S. labor force is now composed of jobs where interac- tion (talking, e-mailing, presenting, and persuading) is the primary value- adding activity (McKinsey, 2012). Even in factories, workers today often work in production groups, or pods.

• Growth of professional work. “Interaction” jobs tend to be professional jobs in the service sector that require close coordination and collaboration. Professional jobs require substantial education and the sharing of informa- tion and opinions to get work done. Each actor on the job brings specialized expertise to the problem, and all the actors need to take one another into account in order to accomplish the job.

• Changing organization of the firm. For most of the industrial age, managers organized work in a hierarchical fashion. Orders came down the hierarchy, and responses moved back up the hierarchy. Today, work is organized into

Chapter 2 Global E-business and Collaboration 57

groups and teams, and the members are expected to develop their own meth- ods for accomplishing the task. Senior managers observe and measure results but are much less likely to issue detailed orders or operating procedures. In part, this is because expertise and decision-making power have been pushed down in organizations.

• Changing scope of the firm. The work of the firm has changed from a single location to multiple locations—offices or factories throughout a region, a na- tion, or even around the globe. For instance, Henry Ford developed the first mass-production automobile plant at a single Dearborn, Michigan factory. In 2017, Ford employed 202,000 people at about 67 locations worldwide. With this kind of global presence, the need for close coordination of design, production, marketing, distribution, and service obviously takes on new im- portance and scale. Large global companies need to have teams working on a global basis.

• Emphasis on innovation. Although we tend to attribute innovations in busi- ness and science to great individuals, these great individuals are most likely working with a team of brilliant colleagues. Think of Bill Gates and Steve Jobs (founders of Microsoft and Apple), both of whom are highly regarded innovators and both of whom built strong collaborative teams to nurture and support innovation in their firms. Their initial innovations derived from close collaboration with colleagues and partners. Innovation, in other words, is a group and social process, and most innovations derive from collabora- tion among individuals in a lab, a business, or government agencies. Strong collaborative practices and technologies are believed to increase the rate and quality of innovation.

• Changing culture of work and business. Most research on collaboration sup- ports the notion that diverse teams produce better outputs faster than individuals working on their own. Popular notions of the crowd (“crowd- sourcing” and the “wisdom of crowds”) also provide cultural support for collaboration and teamwork.

What Is Social Business? Many firms today enhance collaboration by embracing social business—the use of social networking platforms, including Facebook, Twitter, and internal corporate social tools—to engage their employees, customers, and suppliers. These tools enable workers to set up profiles, form groups, and “follow” each other’s status updates. The goal of social business is to deepen interactions with groups inside and outside the firm to expedite and enhance information shar- ing, innovation, and decision making.

A key word in social business is conversations. Customers, suppliers, employ- ees, managers, and even oversight agencies continually have conversations about firms, often without the knowledge of the firm or its key actors (employ- ees and managers).

Supporters of social business argue that if firms could tune in to these con- versations, they would strengthen their bonds with consumers, suppliers, and employees, increasing their emotional involvement in the firm.

All of this requires a great deal of information transparency. People need to share opinions and facts with others quite directly, without intervention from executives or others. Employees get to know directly what customers and other employees think, suppliers will learn very directly the opinions of supply chain partners, and even managers presumably will learn more directly from their employees how well they are doing. Nearly everyone involved in the creation of value will know much more about everyone else.

58 Part One Organizations, Management, and the Networked Enterprise

If such an environment could be created, it is likely to drive operational ef- ficiencies, spur innovation, and accelerate decision making. If product design- ers can learn directly about how their products are doing in the market in real time, based on consumer feedback, they can speed up the redesign process. If employees can use social connections inside and outside the company to cap- ture new knowledge and insights, they will be able to work more efficiently and solve more business problems.

Table 2.2 describes important applications of social business inside and out- side the firm. This chapter focuses on enterprise social business—its internal corporate uses. Chapters 7 and 10 describe social business applications relating to customers and suppliers outside the company.

Business Benefits of Collaboration and Social Business Much of the research on collaboration has been anecdotal, but there is a gen- eral belief among both business and academic communities that the more a business firm is “collaborative,” the more successful it will be, and that collabo- ration within and among firms is more essential than in the past. MIT Sloan Management Review’s research found that a focus on collaboration is central to how digitally advanced companies create business value and establish competi- tive advantage (Kiron, 2017). A global survey of business and information sys- tems managers found that investments in collaboration technology produced organizational improvements that returned more than four times the amount of the investment, with the greatest benefits for sales, marketing, and research and development functions (Frost and Sullivan, 2009). McKinsey & Company consultants predict that social technologies used within and across enterprises could potentially raise the productivity of interaction workers by 20 to 25 per- cent (McKinsey Global Institute, 2012).

Table 2.3 summarizes some of the benefits of collaboration and social busi- ness that have been identified. Figure 2.7 graphically illustrates how collabora- tion is believed to affect business performance.

TABLE 2.2 APPLICATIONS OF SOCIAL BUSINESS

SOCIAL BUSINESS APPLICATION DESCRIPTION

Social networks Connect through personal and business profiles

Crowdsourcing Harness collective knowledge to generate new ideas and solutions

Shared workspaces Coordinate projects and tasks; co-create content

Blogs and wikis Publish and rapidly access knowledge; discuss opinions and experiences

Social commerce Share opinions about purchasing on social platforms

File sharing Upload, share, and comment on photos, videos, audio, text documents

Social marketing Use social media to interact with customers; derive customer insights

Communities Discuss topics in open forums; share expertise

Chapter 2 Global E-business and Collaboration 59

TABLE 2.3 BUSINESS BENEFITS OF COLLABORATION AND SOCIAL BUSINESS

BENEFIT RATIONALE

Productivity People interacting and working together can capture expert knowledge and solve problems more rapidly than the same number of people working in isolation from one another. There will be fewer errors.

Quality People working collaboratively can communicate errors and corrective actions faster than if they work in isolation. Collaborative and social technologies help reduce time delays in design and production.

Innovation People working collaboratively can come up with more innovative ideas for products, services, and administration than the same number working in isolation from one another. There are advantages to diversity and the “wisdom of crowds.”

Customer service People working together using collaboration and social tools can solve customer complaints and issues faster and more effectively than if they were working in isolation from one another.

Financial performance (profitability, sales, and sales growth)

As a result of all of the above, collaborative firms have superior sales, sales growth, and financial performance.

Collaboration Capability

• Open culture

• Decentralized structure • Breadth of collaboration

Collaboration Technology

• Use of collaboration and social technology for implementation and operations

• Use of collaborative and social technology for strategic planning

Firm Performance Collaboration

Quality

FIGURE 2.7 REQUIREMENTS FOR COLLABORATION Successful collaboration requires an appropriate organizational structure and culture along with appropriate collaboration technology.

60 Part One Organizations, Management, and the Networked Enterprise

Building a Collaborative Culture and Business Processes Collaboration won’t take place spontaneously in a business firm, especially in the absence of supportive culture or business processes. Business firms, espe- cially large firms, had a reputation in the past for being “command and control” organizations where the top leaders thought up all the really important mat- ters and then ordered lower-level employees to execute senior management plans. The job of middle management supposedly was to pass messages back and forth, up and down the hierarchy.

Command and control firms required lower-level employees to carry out orders without asking too many questions, with no responsibility to improve processes, and with no rewards for teamwork or team performance. If your work group needed help from another work group, that was something for the bosses to figure out. You never communicated horizontally, always verti- cally, so management could control the process. Together, the expectations of management and employees formed a culture, a set of assumptions about common goals and how people should behave. Many business firms still oper- ate this way.

A collaborative business culture and business processes are very different. Senior managers are responsible for achieving results but rely on teams of employees to achieve and implement the results. Policies, products, designs, processes, and systems are much more dependent on teams at all levels of the organization to devise, to create, and to build. Teams are rewarded for their performance, and individuals are rewarded for their performance in a team. The function of middle managers is to build the teams, coordinate their work, and monitor their performance. The business culture and busi- ness processes are more “social.” In a collaborative culture, senior manage- ment establishes collaboration and teamwork as vital to the organization, and it actually implements collaboration for the senior ranks of the business as well.

Tools and Technologies for Collaboration and Social Business A collaborative, team-oriented culture won’t produce benefits without informa- tion systems in place to enable collaboration and social business. Currently there are hundreds of tools designed to deal with the fact that, in order to suc- ceed in our jobs, we are all much more dependent on one another, our fellow employees, customers, suppliers, and managers. Some of these tools are expen- sive, but others are available online for free (or with premium versions for a modest fee). Let’s look more closely at some of these tools.

E-mail and Instant Messaging (IM) E-mail and instant messaging (including text messaging) have been major communication and collaboration tools for interaction jobs. Their software operates on computers, mobile phones, tablets, and other wireless devices and includes features for sharing files as well as transmitting messages. Many instant messaging systems allow users to engage in real-time conversations with multiple participants simultaneously. In recent years, e-mail use has declined, with messaging and social media becoming preferred channels of communication.

Chapter 2 Global E-business and Collaboration 61

Wikis Wikis are a type of website that makes it easy for users to contribute and edit text content and graphics without any knowledge of web page development or programming techniques. The most well-known wiki is Wikipedia, the largest collaboratively edited reference project in the world. It relies on volunteers, makes no money, and accepts no advertising.

Wikis are very useful tools for storing and sharing corporate knowledge and insights. Enterprise software vendor SAP AG has a wiki that acts as a base of information for people outside the company, such as customers and software developers who build programs that interact with SAP software. In the past, those people asked and sometimes answered questions in an informal way on SAP online forums, but that was an inefficient system, with people asking and answering the same questions over and over.

Virtual Worlds Virtual worlds, such as Second Life, are online 3-D environments populated by “residents” who have built graphical representations of themselves known as avatars. Companies like IBM, Cisco, and Intel Corporations use the online world for meetings, interviews, guest speaker events, and employee training. Real-world people represented by avatars meet, interact, and exchange ideas at these virtual locations using gestures, chat box conversations, and voice communication.

Collaboration and Social Business Platforms There are now suites of software products providing multifunction platforms for collaboration and social business among teams of employees who work to- gether from many different locations. The most widely used are Internet-based audio conferencing and video conferencing systems, cloud collaboration ser- vices such as Google’s online services and tools, corporate collaboration systems such as Microsoft SharePoint and IBM Notes, and enterprise social networking tools such as Salesforce Chatter, Microsoft Yammer, Jive, Facebook Workplace, and IBM Connections.

Virtual Meeting Systems In an effort to reduce travel expenses and enable people in different locations to meet and collaborate, many companies, both large and small, are adopting videoconferencing and web conferencing technologies. Companies such as Heinz, GE, and PepsiCo are using virtual meeting systems for product briefings, training courses, and strategy sessions.

A videoconference allows individuals at two or more locations to com- municate simultaneously through two-way video and audio transmissions. High-end videoconferencing systems feature telepresence technology, an integrated audio and visual environment that allows a person to give the ap- pearance of being present at a remote location (see the Interactive Session on Technology). Free or low-cost Internet-based systems such as Skype group videoconferencing, Amazon Chime, and Zoom are of lower quality, but still useful for smaller companies. Apple’s FaceTime is useful for one-to-one videoconferencing. Some of these tools are available on mobile devices.

Companies of all sizes are finding web-based online meeting tools such as Cisco WebEx, Skype for Business, GoTo Meeting, and Adobe Connect especially helpful for training and sales presentations. These products enable participants to share documents and presentations in conjunction with audioconferencing and live video.

62 Part One Organizations, Management, and the Networked Enterprise

When it comes to collaboration, videoconferenc- ing is becoming a tool of choice for organizations of all sizes. In the past, videoconferencing was lim- ited to the very largest companies that could afford dedicated videoconference rooms and expensive networking and software for this purpose. Today, videoconferencing has been democratized. There’s something for everyone.

The cost of the technology has radically fallen; global Internet and desktop transmission of video and audio data is affordable. There are inexpensive mobile and desktop tools as well as high-end video- conferencing and telepresence systems to manage business processes and to connect and collaborate with others—even customers—around the globe.

The current generation of telepresence platforms provide much more than video collaboration, with the ability to coordinate multiple rich data streams that integrate digital information from mobile, desk- top, and video, create a collaborative environment, and move the information to where managers and professionals are making decisions. Cisco’s IX5000 immersive telepresence system is an example. It of- fers leading-edge telepresence, but it’s much more affordable and easier to use than in the past. Three 4K ultra high-definition cameras clustered discreetly above three 70-inch LCD screens provide crisp, high-definition video. Theater-quality sound ema- nates from 18 custom speakers and one powerful sub-woofer, creating a high-quality lifelike collabora- tion experience for 8 to 18 people. The camera and graphic processors are able to capture the whole room in fine detail, so you can stand up and move around or go the whiteboard. Images can be cropped to show participants seated behind their tables, but when someone stands up, the crop is removed to show both standing and sitting participants.

Installing the IX500 system requires no special changes to a room, and it needs only half the power, installation time, and data transmission capacity (bandwidth) as previous telepresence systems. A 6-seat IX5000 studio lists for $299,000, while the 18-seat studio costs $339,000.

Produban, Grupo Santander’s technology company specializing in the continuous design and operation of IT infrastructures, adopted the IX5000 system to bring people together to make better decisions faster.

Grupo Santander is a Spanish banking group and one of the largest banks in the world, with over 188,000 employees serving more than 125 million customers and operations across Europe, Latin America, North America, Africa, and Asia. Produban is responsible for the entire IT infrastructure of this sprawling global company and also provides expertise to 120 other companies in IT infrastructure design and ser- vices. Produban has over 5,500 employees working in 9 different countries.

With 50 percent less power usage, 50 percent less data transmission capacity and half the installation time of earlier systems (only 8 hours), the IX5000 has reduced the total cost of purchasing and operat- ing the telepresence system by 30 percent over 3 years. Lower overall costs enable Produban to set up video rooms in more locations, so more teams can benefit. Produban is intent on using videoconferenc- ing throughout the entire corporation.

King County, Washington, which includes the city of Seattle and has 14,000 employees, opted for a less-sophisticated but more-affordable solution. In 2016 it started using Logitech’s SmartDock audio and video videoconferencing and collaboration sys- tem to hold meetings, interview job candidates, and handle other tasks. SmartDock is a user-friendly touch-screen control console to launch and manage audio and video calls in any meeting space, large or small. It has an embedded Microsoft Surface Pro tab- let running a special version of Skype for Business, called Skype Room System, and works with Office for Business productivity tools and qualified devices, including Logitech ConferenceCams. With Logitech SmartDock, people can start meetings with a single touch, then instantly project to the display in the room and share with remote participants via their Skype for Business clients on a smartphone or lap- top. Participants can share content in a meeting and view and edit documents in real time. An embedded motion sensor activates the system when anyone is in the room. Prices range from $1,999 to $3,999, depending on the size of the meeting room and the need for webcams.

In the past, King County had used a variety of sys- tems and technologies for videoconferencing and col- laboration. They were time consuming for the county’s IT staff to administer and had limited capabilities and

INTERACTIVE SESSION TECHNOLOGY

Videoconferencing: Something for Everyone

Chapter 2 Global E-business and Collaboration 63

1. Compare the capabilities of Cisco’s IX5000 telepres- ence and the Logitech SmartDock systems. How do they promote collaboration and innovation?

2. Why would a company like Produban want to invest in a high-end telepresence system such as Cisco’s IX5000? How is videoconferencing

technology and telepresence related to Produban’s business model and business strategy?

3. Why would King County, Washington want to implement the Logitech SmartDock system? What business benefits did it obtain from using this technology?

features. Teams couldn’t connect remotely and estab- lish multipoint connections with smartphones and tablets. King County’s IT staff might spend 20 minutes or more setting up a videoconferencing system, which often relied on legacy technology from multiple ven- dors along with computer monitors and outdated VGA-quality TV sets. King County received multiple requests to use these systems daily in its 30 on-site conference rooms and needed to standardize the tech- nology and make it more supportive of collaboration.

The King County IT staff was able to handle instal- lation and implementation of the Logitech SmartDock

system on its own. Employees are using the video- conferencing and collaboration systems without IT involvement. Being able to share presentations and co-edit documents in Word, Excel, and other formats has made working much more collaborative.

Sources: “‘Less Is More’ as Cisco Completely Reimagines Flagship Three-Screen Video Conferencing Technology” and “Cisco Telepresence IX5000 Series,” www.cisco.com, accessed February 5, 2018; www.produban.com, accessed February 5, 2018; www. santander.com, accessed February 5, 2018; www.logitech.com, ac- cessed February 5, 2018; and Samuel Greengard, “King County Focuses on Collaboration,” CIO Insight, December 20, 2017.

Cloud Collaboration Services Google offers many online tools and services, and some are suitable for collaboration. They include Google Drive, Google Docs, G Suites, and Google Sites. Most are free of charge.

Google Drive is a file storage and synchronization service for cloud storage, file sharing, and collaborative editing. Such web-based online file-sharing ser- vices allow users to upload files to secure online storage sites from which the files can be shared with others. Microsoft OneDrive and Dropbox are other lead- ing cloud storage services. They feature both free and paid services, depending on the amount of storage space and administration required. Users are able to synchronize their files stored online with their local PCs and other kinds of de- vices, with options for making the files private or public and for sharing them with designated contacts.

Google Drive and Microsoft OneDrive are integrated with tools for docu- ment creation and sharing. OneDrive provides online storage for Microsoft Office documents and other files and works with Microsoft Office apps, both installed and on the web. It can share to Facebook as well. Google Drive is integrated with Google Docs, Sheets, and Slides, a suite of productivity ap- plications that offer collaborative editing on documents, spreadsheets, and presentations. Google’s cloud-based productivity suite for businesses, called G Suite, also works with Google Drive. Google Sites allows users to quickly create online team-oriented sites where multiple people can collaborate and share files.

Microsoft SharePoint and IBM Notes Microsoft SharePoint is a browser-based collaboration and document management platform, combined with a powerful search engine, that is installed on corporate servers. SharePoint has a web-based interface and close integration with productivity tools such as Microsoft Office.

CASE STUDY QUESTIONS

64 Part One Organizations, Management, and the Networked Enterprise

SharePoint software makes it possible for employees to share their documents and collaborate on projects using Office documents as the foundation.

SharePoint can be used to host internal websites that organize and store in- formation in one central workspace to enable teams to coordinate work ac- tivities, collaborate on and publish documents, maintain task lists, implement workflows, and share information via wikis and blogs. Users are able to con- trol versions of documents and document security. Because SharePoint stores and organizes information in one place, users can find relevant information quickly and efficiently while working closely together on tasks, projects, and documents. Enterprise search tools help locate people, expertise, and content. SharePoint now features social tools.

IBM Notes (formerly Lotus Notes) is a collaborative software system with capabilities for sharing calendars, e-mail, messaging, collective writing and ed- iting, shared database access, and online meetings. Notes software installed on desktop or laptop computers obtains applications stored on an IBM Domino server. Notes is web-enabled and offers an application development environ- ment so that users can build custom applications to suit their unique needs. Notes has also added capabilities for blogs, microblogs, wikis, online content aggregators, help desk systems, voice and video conferencing, and online meet- ings. IBM Notes promises high levels of security and reliability and the ability to retain control over sensitive corporate information.

Enterprise Social Networking Tools The tools we have just described include capabilities for supporting social business, but there are also more specialized so- cial tools for this purpose, such as Salesforce Chatter, Microsoft Yammer, Jive, Face- book Workplace, and IBM Connections. Enterprise social networking tools create business value by connecting the members of an organization through profiles, updates, and notifications similar to Facebook features but tailored to internal cor- porate uses. Table 2.4 provides more detail about these internal social capabilities.

TABLE 2.4 ENTERPRISE SOCIAL NETWORKING SOFTWARE CAPABILITIES

SOCIAL SOFTWARE CAPABILITY DESCRIPTION

Profiles Ability to set up member profiles describing who individuals are, educational background, interests. Includes work-related associations and expertise (skills, projects, teams).

Content sharing Share, store, and manage content including documents, presentations, images, and videos.

Feeds and notifications Real-time information streams, status updates, and announcements from designated individuals and groups.

Groups and team workspaces Establish groups to share information, collaborate on documents, and work on projects with the ability to set up private and public groups and to archive conversations to preserve team knowledge.

Tagging and social bookmarking Indicate preferences for specific pieces of content, similar to the Facebook Like button. Tagging lets people add keywords to identify content they like.

Permissions and privacy Ability to make sure private information stays within the right circles, as determined by the nature of relationships. In enterprise social networks, there is a need to establish who in the company has permission to see what information.

Chapter 2 Global E-business and Collaboration 65

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Time/Space Collaboration and Social Tool Matrix

FIGURE 2.8 THE TIME/SPACE COLLABORATION AND SOCIAL TOOL MATRIX

Collaboration and social technologies can be classified in terms of whether they support interactions at the same or different times or places, and whether these interactions are remote or colocated.

Although companies have benefited from enterprise social networking, in- ternal social networking has not always been easy to implement. The chapter- ending case study addresses this topic.

Checklist for Managers: Evaluating and Selecting Collaboration and Social Software Tools With so many collaboration and social business tools and services available, how do you choose the right collaboration technology for your firm? To answer this question, you need a framework for understanding just what problems these tools are designed to solve. One framework that has been helpful for us to talk about collaboration tools is the time/space collaboration and social tool matrix devel- oped in the early 1990s by a number of collaborative work scholars (Figure 2.8).

The time/space matrix focuses on two dimensions of the collaboration prob- lem: time and space. For instance, you need to collaborate with people in dif- ferent time zones, and you cannot all meet at the same time. Midnight in New York is noon in Mumbai, so this makes it difficult to have a videoconference (the people in New York are too tired). Time is clearly an obstacle to collabora- tion on a global scale.

Place (location) also inhibits collaboration in large global or even national and regional firms. Assembling people for a physical meeting is made difficult by the physical dispersion of distributed firms (firms with more than one loca- tion), the cost of travel, and the time limitations of managers.

The collaboration and social technologies we have just described are ways of overcoming the limitations of time and space. Using this time/space frame- work will help you to choose the most appropriate collaboration and teamwork tools for your firm. Note that some tools are applicable in more than one time/ place scenario. For example, Internet collaboration suites such as IBM Notes have capabilities for both synchronous (instant messaging, meeting tools) and asynchronous (e-mail, wikis, document editing) interactions.

66 Part One Organizations, Management, and the Networked Enterprise

Here’s a “to-do” list to get started. If you follow these six steps, you should be led to investing in the correct collaboration software for your firm at a price you can afford and within your risk tolerance.

1. What are the collaboration challenges facing the firm in terms of time and space? Locate your firm in the time/space matrix. Your firm can occupy more than one cell in the matrix. Different collaboration tools will be needed for each situation.

2. Within each cell of the matrix where your firm faces challenges, exactly what kinds of solutions are available? Make a list of vendor products.

3. Analyze each of the products in terms of its cost and benefits to your firm. Be sure to include the costs of training in your cost estimates and the costs of involving the information systems department, if needed.

4. Identify the risks to security and vulnerability involved with each of the products. Is your firm willing to put proprietary information into the hands of external service providers over the Internet? Is your firm willing to expose its important operations to systems controlled by other firms? What are the financial risks facing your vendors? Will they be here in three to five years? What would be the cost of making a switch to another vendor in the event the vendor firm fails?

5. Seek the help of potential users to identify implementation and training issues. Some of these tools are easier to use than others.

6. Make your selection of candidate tools, and invite the vendors to make presentations.

2-4 What is the role of the information systems function in a business?

We’ve seen that businesses need information systems to operate today and that they use many different kinds of systems. But who is responsible for running these systems? Who is responsible for making sure the hardware, software, and other technologies used by these systems are running properly and are up to date? End users manage their systems from a business standpoint, but manag- ing the technology requires a special information systems function.

The Information Systems Department In all but the smallest of firms, the information systems department is the formal organizational unit responsible for information technology services. The information systems department is responsible for maintaining the hardware, software, data storage, and networks that comprise the firm’s IT infrastructure. We describe IT infrastructure in detail in Chapter 5.

The information systems department consists of specialists, such as program- mers, systems analysts, project leaders, and information systems managers. Programmers are highly trained technical specialists who write the software instructions for computers. Systems analysts constitute the principal liaisons between the information systems groups and the rest of the organization. It is the systems analyst’s job to translate business problems and requirements into information requirements and systems. Information systems managers are leaders of teams of programmers and analysts, project managers, physical facility managers, telecommunications managers, or database specialists. They are also managers of computer operations and data entry staff. Also, external specialists, such as hardware vendors and manufacturers, software firms, and

Chapter 2 Global E-business and Collaboration 67

consultants, frequently participate in the day-to-day operations and long-term planning of information systems.

In many companies, the information systems department is headed by a chief information officer (CIO). The CIO is a senior manager who oversees the use of information technology in the firm. Today’s CIOs are expected to have a strong business background as well as information systems expertise and to play a leadership role in exploring new technologies and integrating technology into the firm’s business strategy. Large firms today also have posi- tions for a chief security officer, chief knowledge officer, chief data officer, and chief privacy officer, all of whom work closely with the CIO.

The chief security officer (CSO) is in charge of information systems secu- rity for the firm and is responsible for enforcing the firm’s information security policy (see Chapter 8). (Sometimes this position is called the chief information security officer [CISO] where information systems security is separated from physical security.) The CSO is responsible for educating and training users and information systems specialists about security, keeping management aware of security threats and breakdowns, and maintaining the tools and policies chosen to implement security.

Information systems security and the need to safeguard personal data have become so important that corporations collecting vast quantities of personal data have established positions for a chief privacy officer (CPO). The CPO is respon- sible for ensuring that the company complies with existing data privacy laws.

The chief knowledge officer (CKO) is responsible for the firm’s knowl- edge management program. The CKO helps design programs and systems to find new sources of knowledge or to make better use of existing knowledge in organizational and management processes.

The chief data officer (CDO) is responsible for enterprise-wide governance and utilization of information to maximize the value the organization can real- ize from its data. The CDO ensures that the firm is collecting the appropriate data to serve its needs, deploying appropriate technologies for analyzing the data, and using the results to support business decisions. This position arose to deal with the very large amounts of data organizations are now generating and collecting (see Chapter 6).

End users are representatives of departments outside of the information sys- tems group for whom applications are developed. These users are playing an increasingly large role in the design and development of information systems.

In the early years of computing, the information systems group was com- posed mostly of programmers who performed highly specialized but limited technical functions. Today, a growing proportion of staff members are systems analysts and network specialists, with the information systems department act- ing as a powerful change agent in the organization. The information systems department suggests new business strategies and new information-based prod- ucts and services and coordinates both the development of the technology and the planned changes in the organization.

In 2019 there are about 4.5 million information system managers and employ- ees in the United States, with an estimated growth rate of 13 percent through 2026, expanding the number of new jobs by more than 550,000. Although all IT/ IS occupations show above-average growth, the fastest-growing occupations are information security analysts (28 percent), software developers (24 percent), computer scientists (19 percent), web developers (15 percent), IS/IT manag- ers (12 percent), com puter support specialists (11 percent), database adminis- trators (11  percent), systems analysts (9 percent), computer network architects (6  percent), and network and system administrators (6 percent) (Bureau of Labor Statistics, 2018). The number of computer programmers will decline 7 percent in

68 Part One Organizations, Management, and the Networked Enterprise

this period, in part because the process of creating computer programs is becoming increasingly efficient with the growth of online software services, cloud comput- ing, and outsourcing of coding to low-wage countries. In general, the management of IT occupations is showing faster expansion than the technical occupations in IT. System and network security management positions are especially in demand. See the Learning Track for this chapter titled “Occupational and Career Outlook for Information Systems Majors 2016–2026” for more details on IS job opportunities.

Organizing the Information Systems Function There are many types of business firms, and there are many ways in which the IT function is organized within the firm. A very small company will not have a formal information systems group. It might have one employee who is responsi- ble for keeping its networks and applications running, or it might use consultants for these services. Larger companies will have a separate information systems department, which may be organized along several different lines, depending on the nature and interests of the firm. Our Learning Track describes alternative ways of organizing the information systems function within the business.

The question of how the information systems department should be orga- nized is part of the larger issue of IT governance. IT governance includes the strategy and policies for using information technology within an organization. It specifies the decision rights and framework for accountability to ensure that the use of information technology supports the organization’s strategies and objectives. How much should the information systems function be centralized? What decisions must be made to ensure effective management and use of infor- mation technology, including the return on IT investments? Who should make these decisions? How will these decisions be made and monitored? Firms with superior IT governance will have clearly thought out the answers.

2-5 How will MIS help my career? Here is how Chapter 2 and this book can help you find a job as a sales support specialist.

The Company Comprehensive Supplemental Insurance USA is a leading provider of individ- ual supplemental accident, disability, health, and life insurance products. It is headquartered in Minneapolis and has an open position for an entry-level sales support specialist. The company offers supplemental insurance to complement existing employer benefits programs, maintaining a field sales force and corpo- rate staff of over 5,000 people worldwide. It is known for investing in its em- ployees and their career development.

Position Description This position will provide overall systems, administrative, and data manage- ment support to the national sales organization for the company’s division that markets to small businesses. Job responsibilities include:

• Daily administration and support of the firm’s Salesforce.com customer relationship management system, including managing user setup, profiles and roles, and validating data.

Chapter 2 Global E-business and Collaboration 69

• Assisting with data management and providing system training and ongoing support to the field.

• Preparing routine weekly, monthly, and quarterly sales and key performance indicator reports for sales management.

• Preparing agent commission reports and creating new reports as requested.

• Supporting various projects related to agent licensing and agent compensation.

Job Requirements • Strong Excel skills plus some knowledge of data management

• Strong customer service skills

• Strong analytical, critical thinking, and communication skills

• Ability to multitask in a fast-paced environment

• College degree or 2 years equivalent experience

Interview Questions 1. What do you know about customer relationship management? Have

you ever worked with Salesforce.com? If so, what have you used the system for?

2. What do you know about data management? Have you ever worked with data management software? If so, what exactly have you done with it?

3. Tell us what you can do with Excel. What kinds of problems have you used Excel to solve? Did you take courses in Excel?

4. Have you ever worked in customer service? What exactly did you do? What do you think is required to take on a successful client-oriented role for this company’s agents and customers?

5. Can you give an example of a client service challenge you had to face? How did you approach this challenge?

Author Tips 1. Review the section of this chapter on enterprise applications, the Chapter 9

discussion of customer relationship management, and Chapter 6 on data management.

2. Use the web and the professional networking site LinkedIn to find out more about the company, its insurance products and services, and the way it oper- ates. Think about what it needs to do to support its agents and its customers and why customer relationship management and data management are so important. You might inquire about your responsibilities for data manage- ment in this job position.

3. Learn what you can about Salesforce.com, especially how to set up user profiles and roles and how to validate data. Indicate you want to learn more about Salesforce and work with this tool.

4. Inquire how you would be using Excel; for example, calculating agent com- missions. If you’ve never done that before, show some of the Excel work you have done (and perhaps bring examples with you to the interview). Show that you would be eager to learn what you don’t know in Excel to fulfill your job assignments.

70 Part One Organizations, Management, and the Networked Enterprise

2-1 What are business processes? How are they related to information systems? A business process is a logically related set of activities that defines how specific business tasks are

performed, and it represents a unique way in which an organization coordinates work, information, and knowledge. Managers need to pay attention to business processes because they determine how well the organization can execute its business, and they may be a source of strategic advantage. There are business processes specific to each of the major business functions, but many business processes are cross-functional. Information systems automate parts of business processes, and they can help organizations redesign and streamline these processes.

2-2 How do systems serve the different management groups in a business, and how do systems that link the enterprise improve organizational performance?

Systems serving operational management are transaction processing systems (TPS), such as payroll or order processing, that track the flow of the daily routine transactions necessary to conduct business. Management information systems (MIS) produce reports serving middle management by condensing information from TPS, and these are not highly analytical. Decision-support systems (DSS) support management decisions that are unique and rapidly changing using advanced analytical models. All of these types of systems provide business intelligence that helps managers and enterprise employ- ees make more-informed decisions. These systems for business intelligence serve multiple levels of management and include executive support systems (ESS) for senior management that provide data in the form of graphs, charts, and dashboards delivered via portals using many sources of internal and external information.

Enterprise applications are designed to coordinate multiple functions and business processes. En- terprise systems integrate the key internal business processes of a firm into a single software system to improve coordination and decision making. Supply chain management systems help the firm manage its relationship with suppliers to optimize the planning, sourcing, manufacturing, and delivery of prod- ucts and services. Customer relationship management (CRM) systems coordinate the business pro- cesses surrounding the firm’s customers. Knowledge management systems enable firms to optimize the creation, sharing, and distribution of knowledge. Intranets and extranets are private corporate networks based on Internet technology that assemble information from disparate systems. Extranets make portions of private corporate intranets available to outsiders.

2-3 Why are systems for collaboration and social business so important, and what technologies do they use?

Collaboration is working with others to achieve shared and explicit goals. Social business is the use of internal and external social networking platforms to engage employees, customers, and suppliers, and it can enhance collaborative work. Collaboration and social business have become increasingly important in business because of globalization, the decentralization of decision mak- ing, and growth in jobs where interaction is the primary value-adding activity. Collaboration and social business enhance innovation, productivity, quality, and customer service. Tools for collabo- ration and social business include e-mail and instant messaging, wikis, virtual meeting systems, virtual worlds, cloud-based file-sharing services, corporate collaboration systems such as Microsoft SharePoint and IBM Notes, and enterprise social networking tools such as Chatter, Yammer, Jive, and IBM Connections.

2-4 What is the role of the information systems function in a business? The information systems department is the formal organizational unit responsible for information

technology services. It is responsible for maintaining the hardware, software, data storage, and net- works that comprise the firm’s IT infrastructure. The department consists of specialists, such as pro- grammers, systems analysts, project leaders, and information systems managers, and is often headed by a CIO.

REVIEW SUMMARY

Chapter 2 Global E-business and Collaboration 71

Key Terms Business intelligence, 47 Chief data officer (CDO), 67 Chief information officer (CIO), 67 Chief knowledge officer (CKO), 67 Chief privacy officer (CPO), 67 Chief security officer (CSO), 67 Collaboration, 56 Customer relationship management (CRM) systems, 54 Decision-support systems (DSS), 49 Digital dashboard, 50 Electronic business (e-business), 55 Electronic commerce (e-commerce), 55 E-government, 55 End users, 67 Enterprise applications, 51 Enterprise systems, 53

Executive support systems (ESS), 50 Information systems department, 66 Information systems managers, 66 Interorganizational system, 54 IT governance, 68 Knowledge management systems (KMS), 54 Management information systems (MIS), 47 Portal, 50 Programmers, 66 Social business, 57 Supply chain management (SCM) systems, 54 Systems analysts, 66 Teams, 56 Telepresence, 61 Transaction processing systems (TPS), 46

MyLab MIS To complete the problems marked with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.

Review Questions 2-1 What are business processes? How are they

related to information systems?

• Define business processes and describe the role they play in organizations.

• Describe the relationship between informa- tion systems and business processes.

2-2 How do systems serve the different management groups in a business, and how do systems that link the enterprise improve organizational performance?

• Describe the characteristics of transaction processing systems (TPS) and the roles they play in a business.

• Describe the characteristics of management information systems (MIS) and explain how MIS differ from TPS and from DSS.

• Describe the characteristics of decision- support systems (DSS) and how they ben- efit businesses.

• Describe the characteristics of executive support systems (ESS) and explain how these systems differ from DSS.

• Explain how enterprise applications im- prove organizational performance.

• Define enterprise systems, supply chain management systems, customer relation- ship management systems, and knowledge

management systems and describe their business benefits.

• Explain how intranets and extranets help firms integrate information and business processes.

2-3 Why are systems for collaboration and social business so important, and what technologies do they use?

• Define collaboration and social business and explain why they have become so important in business today.

• List and describe the business benefits of collaboration and social business.

• Describe a supportive organizational culture and business processes for collaboration.

• List and describe the various types of col- laboration and social business tools.

2-4 What is the role of the information systems function in a business?

• Describe how the information systems function supports a business.

• Compare the roles played by programmers, systems analysts, information systems managers, the chief information officer (CIO), the chief security officer (CSO), the chief data officer (CDO), and the chief knowledge officer (CKO).

72 Part One Organizations, Management, and the Networked Enterprise

Discussion Questions 2-5 How could information systems be used

to support the order fulfillment process illustrated in Figure 2.1? What are the most important pieces of information these systems should capture? Explain your answer.

2-6 Identify the steps that are performed in the process of selecting and checking out a book from your college library and

MyLab MIS

MyLab MIS

the information that flows among these activities. Diagram the process. Are there any ways this process could be changed to improve the performance of your library or your school? Diagram the improved process.

2-7 Use the time/space collaboration and social tool matrix to classify the collaboration and social technologies used by Sanofi Pasteur.

MyLab MIS

Hands-On MIS Projects The projects in this section give you hands-on experience analyzing opportunities to improve business processes with new information system applications, using a spreadsheet to improve decision making about suppliers, and using Internet software to plan efficient transportation routes. Visit MyLab MIS to access this chapter’s Hands- On MIS Projects.

Management Decision Problems

2-8 Don’s Lumber Company on the Hudson River features a large selection of materials for flooring, decks, moldings, windows, siding, and roofing. The prices of lumber and other building materials are constantly changing. When a customer inquires about the price on prefinished wood flooring, sales representatives consult a manual price sheet and then call the supplier for the most recent price. The supplier in turn uses a manual price sheet, which has been updated each day. Often, the supplier must call back Don’s sales reps because the company does not have the newest pricing information immediately on hand. Assess the business impact of this situation, describe how this process could be improved with information technology, and identify the decisions that would have to be made to implement a solution.

2-9 Henry’s Hardware is a small family business in Sacramento, California. The owners, Henry and Kathleen, must use every square foot of store space as profitably as possible. They have never kept detailed inventory or sales records. As soon as a shipment of goods arrives, the items are immediately placed on store shelves. Invoices from suppliers are only kept for tax purposes. When an item is sold, the item number and price are rung up at the cash register. The owners use their own judgment in identifying items that need to be reordered. What is the business impact of this situation? How could information systems help Henry and Kathleen run their business? What data should these systems capture? What decisions could the systems improve?

Improving Decision Making: Using a Spreadsheet to Select Suppliers

Software skills: Spreadsheet date functions, data filtering, DAVERAGE function Business skills: Analyzing supplier performance and pricing

2-10 In this exercise, you will learn how to use spreadsheet software to improve management decisions about selecting suppliers. You will filter transactional data on suppliers based on several different criteria to select the best suppliers for your company. You run a company that manufactures aircraft components. You have many competitors who are trying

to offer lower prices and better service to customers, and you are trying to determine whether you can benefit from better supply chain management. In MyLab MIS, you will find a spreadsheet file that contains a list of all of the items that your firm has ordered from its suppliers during the past three months. The fields in the spreadsheet file include vendor name, vendor identification number, purchaser’s order number, item identifica- tion number and item description (for each item ordered from the vendor), cost per item, number of units of the item ordered (quantity), total cost of each order, vendor’s accounts payable terms, order date, and actual arrival date for each order.

Prepare a recommendation of how you can use the data in this spreadsheet database to improve your decisions about selecting suppliers. Some criteria to consider for identifying preferred suppliers include the supplier’s track record for on-time deliveries, suppliers offering the best accounts payable terms, and suppliers

Chapter 2 Global E-business and Collaboration 73

offering lower pricing when the same item can be provided by multiple suppliers. Use your spreadsheet soft- ware to prepare reports to support your recommendations.

Achieving Operational Excellence: Using Internet Software to Plan Efficient Transportation Routes

Software skills: Internet-based software Business skills: Transportation planning

2-11 In this exercise, you will use Google Maps to map out transportation routes for a business and select the most efficient route. You have just started working as a dispatcher for Cross-Country Transport, a new trucking and delivery

service based in Cleveland, Ohio. Your first assignment is to plan a delivery of office equipment and furniture from Elkhart, Indiana (at the corner of E. Indiana Ave. and Prairie Street), to Hagerstown, Maryland (at the corner of Eastern Blvd. N. and Potomac Ave.). To guide your trucker, you need to know the most efficient route between the two cities. Use Google Maps to find the route that is the shortest distance between the two cities. Use Google Maps again to find the route that takes the least time. Compare the results. Which route should Cross-Country use?

Collaboration and Teamwork Project Identifying Management Decisions and Systems

2-12 With a team of three or four other students, find a description of a manager in a corporation in Business Week, Forbes, Fortune, the Wall Street Journal, or another business publication, or do your research on the web. Gather information about what the manager does and the role he or she plays in the company. Identify the organizational level and business function where this manager works. Make a list of the kinds of decisions this manager has to make and the kind of information the manager would need for those decisions. Suggest how information systems could supply this information. If possible, use Google Docs and Google Drive or Google Sites to brainstorm, organize, and develop a presentation of your findings for the class.

74 Part One Organizations, Management, and the Networked Enterprise

communication on both social media and email, increasing the time and cost of performing their jobs. BASF, the world’s largest chemical producer with subsidiaries and joint ventures in more than 80 countries, prohibited some project teams from using e-mail to encourage employees to use new social media tools.

Social business requires a change in thinking, including the ability to view the organization more democratically in a flatter and more horizontal way. A social business is much more open to everyone’s ideas. A secretary, assembly line worker, or sales clerk might be the source of the next big idea. As a result, getting people to espouse social business tools requires a more of a “pull” approach, one that en- gages workers and offers them a significantly better way to work. In most cases, they can’t be forced to use social business apps.

Enterprise capabilities for managing social net- works and sharing digital content can help or hurt an organization. Social networks can provide rich and diverse sources of information that enhance orga- nizational productivity, efficiency, and innovation, or they can be used to support pre-existing groups of like-minded people that are reluctant to com- municate and exchange knowledge with outsiders. Productivity and morale will fall if employees use internal social networks to criticize others or pursue personal agendas.

Social business applications modeled on consumer- facing platforms such as Facebook and Twitter will not necessarily work well in an organization or organizational department that has incompatible objectives. Will the firm use social business for opera- tions, human resources, or innovation? The social media platform that will work best depends on its specific business purpose. Additionally, employees who have actively used Facebook and Twitter in their personal lives are often hesitant to use similar social tools for work purposes because they see social media primarily as an informal, personal means of self- expression and communication with friends and fam- ily. Most managers want employees to use internal social tools to communicate informally about work, but not to discuss personal matters. Employees ac- customed to Facebook and Twitter may have trouble

As companies become more dispersed in the global marketplace, businesses are turning increasingly to workplace collaboration tech- nology, including tools for internal social network- ing. These tools can promote employee collaboration and knowledge sharing, and help employees make faster decisions, develop more innovative ideas for products and services, and become more engaged in their work and their companies.

Adoption of internal enterprise social networking is also being driven by the flood of email that em- ployees typically receive each day and are increas- ingly unable to handle. Hundreds of email messages must be opened, read, answered, forwarded, or deleted. For example, too much email is what drove Hawk Ridge Systems to adopt a Glip, a cloud-based social tool for its 200 employees located in 15 of- fices in the United States and Canada. Glip features real-time messaging, group chat, videoconferencing, shared calendars, task management, and file sharing all in one place. Glip helped Hawk Ridge operations manager Samuel Eakin go from 200 to around 30 emails per day. Another driver of enterprise social networking is “app fatigue.” In order to collaborate, many employees have to log on to numerous apps, creating additional work. Contemporary enterprise social networking systems often integrate multiple capabilities in one place.

A recent survey of 421 professionals conducted by Harvard Business Review Analytics Services found that collaboration tools could be effective in boosting efficiency and productivity, while enabling users to make better business decisions. The products also expanded the potential for innovation. However, not all companies are successfully using them. Implementation and adoption of enterprise social networking depend not only on the capabilities of the technology but on the organization’s culture and the compatibility of these tools with the firm’s busi- ness processes.

When firms introduce new social media technol- ogy (as well as other technologies), a sizable number of employees resist the new tools, clinging to old ways of working, including email, because these methods are more familiar and comfortable. There are companies where employees have duplicated

Should Companies Embrace Social Business?

CASE STUDY

Chapter 2 Global E-business and Collaboration 75

imagining how they could use social tools without getting personal.

This means that instead of focusing on the tech- nology, businesses should first identify how social initiatives will actually improve work practices for employees and managers. They need a detailed understanding of social networks: how people are currently working, with whom they are working, what their needs are, and measures for overcoming employee biases and resistance.

A successful social business strategy requires leadership and behavioral changes. Just sponsor- ing a social project is not enough—managers need to demonstrate their commitment to a more open, transparent work style. Employees who are used to collaborating and doing business in more tradi- tional ways need an incentive to use social software. Changing an organization to work in a different way requires enlisting those most engaged and interested to help design and build the right workplace environ- ment for using social technologies.

Management needs to ensure that the internal and external social networking efforts of the com- pany are providing genuine value to the business. Content on the networks needs to be relevant, up to date, and easy to access; users need to be able to con- nect to people that have the information they need and that would otherwise be difficult or impossible to reach. Social business tools should be appropriate for the tasks on hand and the organization’s business processes, and users need to understand how and why to use them.

For example, NASA’s Goddard Space Flight Center had to abandon a custom-built enterprise social network called Spacebook because no one knew how its social tools would help people do their jobs. Spacebook had been designed and developed without taking into consideration the organization’s culture and politics. This is not an isolated phenom- enon. Dimension Data found that one-fourth of the 900 enterprises it surveyed focused more on the suc- cessful implementation of collaboration technology, rather than how it’s used and adopted.

Despite the challenges associated with launching an internal social network, there are companies using these networks successfully. For example, Covestro, a leading global supplier of coatings and adhesives, polyurethanes, and highly impact- resistant plastics, made social collaboration a success by making the tools more accessible; demonstrating the value of these tools in pilot projects; employing a reverse mentoring

program for senior executives; and training employee experts to spread know-how of the new social tools and approaches within the company, and demonstrate their usefulness. Using IBM Connections as the social business toolset, Covestro’s efforts are now paying off: 50 percent of employees are now routinely active in the company’s enterprise social network. Although ROI on social business initiatives has been difficult to measure, Covestro has benefited from faster knowledge flows, increased efficiency, and lower operating costs.

Another company that has made social business work is ModCloth, a popular online apparel, accesso- ries, and home décor retailer noted for its fun and en- gaging customer shopping experience. The company’s business is based on strong social media ties with cus- tomers, with 134,000 Twitter followers and 1,600,000 Facebook “likes.” Because social networks played such a large role in ModCloth’s growth and development, the company was eager to adopt social networking tools for internal communication. ModCloth adopted Microsoft’s Yammer as its social business tool.

ModCloth started piloting Yammer with a small test group, and used a People Team to promote the tool. Yammer caught on quickly with employees, and was soon being used by over 250 employees across four offices in the United States. Every new ModCloth employee is introduced to Yammer on his or her first day of work. Yammer helps new hires learn their coworkers’ names and feel they are part of the company.

Yammer has proved very useful for connecting people and ideas, saving ModCloth considerable time and money. For example, Scott Hernandez, ModCloth Head of Talent Acquisition, has used Yammer to identify promising hires for engineering through referrals from ModCloth employees. Yammer has helped save teams from duplicating work that has already been done. ModCloth’s User Experience group began designing a research cam- paign to find out what users wanted in mobile appli- cations for the company, posting news of the project to Yammer. Within hours, a member of ModCloth’s Social Team posted the results of a large user survey on mobile expectations, including a detailed spread- sheet with customer feedback data that it had already completed. The User Experience team was able to save two weeks of work.

The Esquel Group, based in Hong Kong, is a sup- plier of cotton textiles and apparel, doing everything from cotton farming and fabric production to gar- ment manufacturing and finishing. Its core business

76 Part One Organizations, Management, and the Networked Enterprise

is making cotton tops for fashion brands such as Lacoste, Ralph Lauren, and Nike. This company was attracted to internal social networking as a way to unite its different lines of business in various locations. Esquel chose Microsoft Yammer as its en- terprise social networking tool. Esquel employees communicate in a variety of languages, so it espe- cially appreciated Yammer’s translation capabilities.

Management sees many benefits in being able to “listen” to its workforce. When people post com- plaints on the network, it is able to find innovative solutions and new ideas. For example, workers in Esquel’s garment operation posted a complaint on Yammer about having to wait in a long line to re- charge their cards for purchasing meals in the com- pany cafeteria. Four months later, the company had a solution—a kiosk that instantly transferred funds from payroll to the meal card.

Ideas posted on Yammer were used to improve Esquel’s quality control process. Instead of using mea- suring tape to ensure that sleeves and collars matched specifications, an employee in the quality control de- partment used Yammer to float the idea of an electric ruler. The concept was refined through more Yammer discussion. Instead of taking measurements and writ- ing numbers down, staff can capture measurements faster and more accurately electronically.

Yammer also helps Esquel replicate innovation- and efficiency-promoting solutions throughout the company. Traditionally, an innovation at one site often is not rolled out to other locations. Yammer provides a channel for news of innovations and better practices to spread more easily throughout the organization.

Esquel’s industry is one where companies often move to lower-wage countries as labor costs rise. Rather than relocating operations, Esquel prefers to achieve savings through improvements in produc- tivity. By helping employees work more efficiently and effectively, business social networking has helped Esquel save approximately $2 million each year.

Sources: “Top Four Social Collaboration Software Fails,” search- mobilecoputing.techtarget.com, accessed February 7, 2018; “ModCloth: Keeping Employees Engaged While Scaling Up,” and “Esquel Group: Social Technology Weaves an Enterprise Together,” blogs.office.com, accessed February 7, 2018; Margaret Jones and Cordelia Kroob, “The Growth of an Enterprise Social Network at BASF,” www.simply-communicate.com, accessed March 12, 2018; Paul Leonardi and Tsedal Neeley, “What Managers Need to Know About Social Tools,” Harvard Business Review, November- December 2017; Sue Hildreth, “What’s Next for Workplace Collaboration?” searchcontentmanagement.com, March 2, 2017; Arunima Majumdar, “3 Reasons Why Collaboration Tools Fail to Make the intended Impact,” eLearning Industry, January 20, 2017; Harvard Business Review Analytic Services, “Collaboration Technology Boosts Organizations,” Insight Enterprises Inc. (February 13, 2017); and Dimension Data, “2016 Connected Enterprise Report,” 2016.

CASE STUDY QUESTIONS 2-13 Identify the management, organization, and

technology factors affecting adoption of inter- nal corporate social networks.

2-14 Compare the experiences implementing internal social networks of the organizations described in this case. Why were some successful? What role did management play in this process?

2-15 Should all companies implement internal enterprise social networks? Why or why not?

MyLab MIS Go to the Assignments section of MyLab MIS to complete these writing exercises.

2-16 Identify and describe the capabilities of enterprise social networking software. Describe how a firm could use each of these capabilities.

2-17 Describe the systems used by various management groups within the firm in terms of the information they use, their outputs, and groups served.

Chapter 2 Global E-business and Collaboration 77

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Banker, Rajiv D., Nan Hu, Paul A. Pavlou, and Jerry Luftman. “CIO Reporting Structure, Strategic Positioning, and Firm Performance.” MIS Quarterly 35, No. 2 (June 2011).

Boughzala, Imed, and Gert-Jan De Vreede. “Evaluating Team Col- laboration Quality: The Development and Field Application of a Collaboration Maturity Model.” Journal of Management Information Systems 32 No. 3 (2015).

Bughin, Jacques, Michael Chui, and Martin Harrysson. “How Social Tools Can Reshape the Organization.” McKinsey Global Institute (May 2016).

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Colony, George F. “CIOs and the Future of IT.” MIT Sloan Manage- ment Review (Spring 2018).

Cummings, Jeff, and Alan Dennis. “Virtual First Impressions Mat- ter: The Effect of Enterprise Social Networking on Impres- sion Formation in Virtual Teams.” MIS Quarterly 42, No. 3 (September 2018).

Forrester Research. “Social Business: Delivering Critical Business Value.” (April 2012).

Frost and Sullivan. “Meetings Around the World II: Charting the Course of Advanced Collaboration.” (October 14, 2009).

Gast, Arne, and Raul Lansink. “Digital Hives: Creating a Surge Around Change.” McKinsey Quarterly (April 2015).

Greengard, Samuel. “Collaboration: At the Center of Effective Business.” Baseline (January 24, 2014).

___________. “The Social Business Gets Results.” Baseline (June 19, 2014).

Guillemette, Manon G., and Guy Pare. “Toward a New Theory of the Contribution of the IT Function in Organizations.” MIS Quarterly 36, No. 2 (June 2012).

Haffke, Ingmar, Bradley Kalgovas, and Alexander Benloan. “ Options for Transforming the IT Function Using Bimodal IT.” MIS Quarterly Executive (June 2017).

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Kiron, David. “Why Your Company Needs More Collaboration,” MIT Sloan Management Review (Fall 2017).

Kiron, David, Doug Palmer, Anh Nguyen Phillips, and Nina Kruschwitz. “What Managers Really Think About Social Business.” MIT Sloan Management Review 53, No. 4 (Summer 2012).

Kolfschoten, Gwendolyn L., Fred Niederman, Robert O. Briggs, and Gert-Jan De Vreede. “Facilitation Roles and Responsibilities for Sustained Collaboration Support in Organizations.” Journal of Management Information Systems 28, No. 4 (Spring 2012).

Leonardi, Paul and Tsedal Neeley. “What Managers Need to Know About Social Tools.” Harvard Business Review (November– December 2017).

Li, Charlene. “Making the Business Case for Enterprise Social Networks.” Altimeter Group (February 22, 2012).

Malone, Thomas M., Kevin Crowston, Jintae Lee, and Brian Pent- land. “Tools for Inventing Organizations: Toward a Handbook of Organizational Processes.” Management Science 45, No. 3 (March 1999).

Maruping, Likoebe M., and Massimo Magni. “Motivating Employ- ees to Explore Collaboration Technology in Team Contexts.” MIS Quarterly 39, No.1 (March 2015).

McKinsey & Company. “Transforming the Business Through Social Tools.” (2015).

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Miller, Claire Cain. “Tech’s Damaging Myth of the Loner Genius Nerd.” New York Times (August 12, 2017).

Mortensen, Mark. “Technology Alone Won’t Solve Our Collabora- tion Problems.” Harvard Business Review (March 26, 2015).

Poltrock, Steven, and Mark Handel. “Models of Collabora- tion as the Foundation for Collaboration Technologies.” Journal of Management Information Systems 27, No. 1 (Summer 2010).

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Ross, Jeanne. “Architect Your Company for Agility.” MIT Sloan Management Review (January 10, 2018).

Saunders, Carol, A. F. Rutkowski, Michiel van Genuchten, Doug Vogel, and Julio Molina Orrego. “Virtual Space and Place: Theory and Test.” MIS Quarterly 35, No. 4 (December 2011).

Srivastava, Shirish, and Shalini Chandra. “Social Presence in Virtu- al World Collaboration: An Uncertainty Reduction Perspective Using a Mixed Methods Approach.” MIS Quarterly 42, No. 3 (September 2018).

Tallon, Paul P., Ronald V. Ramirez, and James E. Short. “The Information Artifact in IT Governance: Toward a Theory of Information Governance.” Journal of Management Information Systems 30, No. 3 (Winter 2014).

Weill, Peter, and Jeanne W. Ross. IT Governance. Boston: Harvard Business School Press (2004).

78

MyLab MIS Discussion Questions: 3-5, 3-6, 3-7; Hands-on MIS Projects: 3-8, 3-9, 3-10, 3-11; Writing Assignments: 3-17, 3-18; eText with Conceptual Animations

CHAPTER CASES Technology Helps Starbucks Find Better

Ways to Compete Digital Technology Helps Crayola Brighten

Its Brand Smart Products—Coming Your Way Grocery Wars

VIDEO CASES GE Becomes a Digital Firm: The Emerging

Industrial Internet National Basketball Association: Competing

on Global Delivery with Akamai OS Streaming

LEARNING OBJECTIVES After reading this chapter, you will be able to answer the following questions:

3-1 Which features of organizations do managers need to know about to build and use information systems successfully?

3-2 What is the impact of information systems on organizations?

3-3 How do Porter’s competitive forces model, the value chain model, synergies, core competencies, and network economics help companies develop competitive strategies using information systems?

3-4 What are the challenges posed by strategic information systems, and how should they be addressed?

3-5 How will MIS help my career?

Information Systems, Organizations, and Strategy3CHAPTER

79

Starbucks is the world’s largest specialty coffee retailer, with over 24,000 shops in 75 markets. Starbucks’s reputation rests on its high-end specialty coffees and beverages, friendly and knowledgeable servers, and customer- friendly coffee shops. This was a winning formula for many years and has en- abled Starbucks to charge premium prices for many of its items. But Starbucks has competitors, and must constantly fine-tune its business model and business strategy to keep pace with the competitive environment.

Starbucks tried online retailing and it didn’t work out. If you go to the Starbucks.com website, you’ll see coffee, branded mugs, espresso machines, and brewing accesso- ries described online, but you will need to purchase these items from Starbucks stores, supermarkets, or Starbucks-designated retailers. Starbucks stopped selling online in August of 2017. Starbucks man- agement believes there has been a “seismic shift” in retailing, and merchants need to create unique and immersive in-store experi- ences to survive. For Starbucks, products and services, for the most part, should not be sold online.

Instead, Starbucks is focusing on improving the in-store experience. The company rolled out a new Mercato menu of freshly-made sandwiches and salads to more than 1,000 stores in 2018 and plans to expand its line of caffeinated fruit juices (Starbucks Refreshers) and nitro-brew cold drinks. Management hopes to double food sales by 2021. Starbucks is also building high-end cafes around the world under the “Reserve” brand to draw customers willing to pay more for pre- mium coffee and pastries.

Starbucks continues to enhance the customer’s in-store experience through information technology. Each Starbucks store has a Wi-Fi network providing free wireless Internet access for customers. Many Starbucks customers are active users of smartphones. Starbucks launched a mobile ordering app for the iPhone and Android mobile devices in September 2015. The Starbucks Mobile Order & Pay app makes it fast and easy to pay for drinks and food.

Technology Helps Starbucks Find Better Ways to Compete

© Atstock Productions/Shutterstock

80 Part One Organizations, Management, and the Networked Enterprise

Customers can place their orders on the way to Starbucks stores with Mobile Order & Pay and also tip the barista. Those ordering are told the time when their beverage will be ready. There’s no need to wait in line. The mobile app can also identify the songs playing in Starbucks stores and save them to a playlist on Spotify. The app helps Starbucks target products to customers more effectively, which could be especially important as the chain also adds more lunch items and cold drinks to its menu to draw in more customers after the morning coffee rush. Cold drinks now represent half of Starbucks’ beverage sales.

Starbucks wants U.S. customers who use its in-store Wi-Fi network to enter their email address in the first store where they get connected. The company’s software remembers the customer’s device and connects it automatically thereafter. That would give Starbucks additional email addresses that it could target with more promotions.

Sources: Julie Jargon, “Starbucks Aims for More Mobile Orders,” Wall Street Journal, March 21, 2018; Stacy Cowley, “Starbucks Closes Online Store to Focus on In-Person Experience,” New York Times, October 1, 2017; “Starbucks’ Mobile Order Push Meets Resistance From Ritual Seekers,” Reuters, March 21, 2018; and www. starbucks.com, ac- cessed March 28, 2018.

Starbucks illustrates some of the ways that information systems help busi-nesses compete, as well as the challenges of finding the right business strat- egy and how to use technology in that strategy. Retailing today is an extremely crowded and competitive playing field, both online and in physical brick-and- mortar stores. Even though Starbucks is the world’s leading specialty coffee retailer, it has many competitors, and it is searching for ways to keep growing its business. Customers are increasingly doing more retail shopping online, but Starbucks products do not sell well on the web. They are meant for an in-person experience. They are too experiential.

The chapter-opening diagram calls attention to important points raised by this case and this chapter. Starbucks’ business model is based on an aggres- sive product differentiation strategy, intended to emphasize the high quality of its beverages and foods, efficient and helpful customer service, and the plea- sures of purchasing and consuming these items in a Starbucks store. Starbucks is using information technology to improve its in-store customer experience. Its Mobile Order & Pay app expedites order and payment for Starbucks beverages and food, and Starbucks had to redesign its payment process to take advantage of mobile technology. The free Wi-Fi network makes Starbucks stores more in- viting to visit, linger, and consume food and beverages. The mobile app enables stores to serve more customers, and enrollment in the Wi-Fi service provides additional e-mail addresses for promotional campaigns.

Here are some questions to think about: What is Starbucks’ business strategy? How much has technology helped Starbucks compete? Explain your answer.

Chapter 3 Information Systems, Organizations, and Strategy 81

3-1 Which features of organizations do managers need to know about to build and use information systems successfully?

Information systems and organizations influence one another. Information sys- tems are built by managers to serve the interests of the business firm. At the same time, the organization must be aware of and open to the influences of information systems to benefit from new technologies.

The interaction between information technology and organizations is com- plex and is influenced by many mediating factors, including the organization’s structure, business processes, politics, culture, surrounding environment, and management decisions (see Figure 3.1). You will need to understand how infor- mation systems can change social and work life in your firm. You will not be able to design new systems successfully or understand existing systems with- out understanding your own business organization.

As a manager, you will be the one to decide which systems will be built, what they will do, and how they will be implemented. You may not be able to antici- pate all of the consequences of these decisions. Some of the changes that occur in business firms because of new information technology (IT) investments cannot be foreseen and have results that may or may not meet your expectations. Who would have imagined 15 years ago, for instance, that e-mail and instant messag- ing would become a dominant form of business communication and that many managers would be inundated with more than 200 e-mail messages each day?

What Is an Organization? An organization is a stable, formal social structure that takes resources from the environment and processes them to produce outputs. This technical defini- tion focuses on three elements of an organization. Capital and labor are primary production factors provided by the environment. The organization (the firm)

Management

Organization

Technology

Mobile Order and Pay

• Opportunities from new technology

• Intense competition

• Target promotions

• Optimize in- store experience

• Redesign business processes

• Wi-Fi wireless network • Smartphones • Mobile app

• Expedite ordering and purchasing • Increase product promotions

• Increase revenue • Increase service

• Determine business strategy • Design new products and services

Information System

Business Problem

Business Solutions

82 Part One Organizations, Management, and the Networked Enterprise

transforms these inputs into products and services in a production function. The products and services are consumed by environments in return for supply inputs (see Figure 3.2).

An organization is more stable than an informal group (such as a group of friends that meets every Friday for lunch) in terms of longevity and routine- ness. Organizations are formal legal entities with internal rules and procedures that must abide by laws. Organizations are also social structures because they are collections of social elements, much as a machine has a structure—a par- ticular arrangement of valves, cams, shafts, and other parts.

This definition of organizations is powerful and simple, but it is not very de- scriptive or even predictive of real-world organizations. A more realistic behav- ioral definition of an organization is a collection of rights, privileges, obligations,

FIGURE 3.2 THE TECHNICAL MICROECONOMIC DEFINITION OF THE ORGANIZATION

In the microeconomic definition of organizations, capital and labor (the primary produc- tion factors provided by the environment) are transformed by the firm through the pro- duction process into products and services (outputs to the environment). The products and services are consumed by the environment, which supplies additional capital and labor as inputs in the feedback loop.

Inputs from the environment

Organization

Outputs to the environment

Production process

FIGURE 3.1 THE TWO-WAY RELATIONSHIP BETWEEN ORGANIZATIONS AND INFORMATION TECHNOLOGY

This complex two-way relationship is mediated by many factors, not the least of which are the decisions made—or not made—by managers. Other factors mediating the relationship include the organizational culture, structure, politics, business processes, and environment.

Organizations InformationTechnology

Mediating Factors Environment Culture Structure Business Processes Politics Management Decisions

Chapter 3 Information Systems, Organizations, and Strategy 83

and responsibilities delicately balanced over a period of time through conflict and conflict resolution (see Figure 3.3).

In this behavioral view of the firm, people who work in organizations de- velop customary ways of working; they gain attachments to existing relation- ships; and they make arrangements with subordinates and superiors about how work will be done, the amount of work that will be done, and under what condi- tions work will be done. Most of these arrangements and feelings are not dis- cussed in any formal rulebook.

How do these definitions of organizations relate to information systems tech- nology? A technical view of organizations encourages us to focus on how in- puts are combined to create outputs when technology changes are introduced into the company. The firm is seen as infinitely malleable, with capital and labor substituting for each other quite easily. But the more realistic behavioral definition of an organization suggests that building new information systems, or rebuilding old ones, involves much more than a technical rearrangement of machines or workers—that some information systems change the organi- zational balance of rights, privileges, obligations, responsibilities, and feelings that have been established over a long period of time.

Changing these elements can take a long time, be very disruptive, and requires more resources to support training and learning. For instance, the length of time required to implement a new information system effectively is much longer than usually anticipated simply because there is a lag between implementing a techni- cal system and teaching employees and managers how to use the system.

Technological change requires changes in who owns and controls infor- mation, who has the right to access and update that information, and who makes decisions about whom, when, and how. This more complex view forces us to look at the way work is designed and the procedures used to achieve outputs.

The technical and behavioral definitions of organizations are not contradic- tory. Indeed, they complement each other: The technical definition tells us how thousands of firms in competitive markets combine capital, labor, and information technology, whereas the behavioral model takes us inside the individual firm to see how that technology affects the organization’s inner

FIGURE 3.3 THE BEHAVIORAL VIEW OF ORGANIZATIONS The behavioral view of organizations emphasizes group relationships, values, and structures.

FORMAL ORGANIZATION

Structure Hierarchy Division of labor Rules, procedures Business processes Culture

Process Rights/obligations Privileges/responsibilities Values Norms People

Environmental resources

Environmental outputs

84 Part One Organizations, Management, and the Networked Enterprise

workings. Section 3-2 describes how each of these definitions of organiza- tions can help explain the relationships between information systems and organizations.

Features of Organizations All modern organizations share certain characteristics. They are bureaucracies with clear-cut divisions of labor and specialization. Organizations arrange spe- cialists in a hierarchy of authority in which everyone is accountable to someone and authority is limited to specific actions governed by abstract rules or proce- dures. These rules create a system of impartial and universal decision making. Organizations try to hire and promote employees on the basis of technical qual- ifications and professionalism (not personal connections). The organization is devoted to the principle of efficiency: maximizing output using limited inputs. Other features of organizations include their business processes, organizational culture, organizational politics, surrounding environments, structure, goals, constituencies, and leadership styles. All of these features affect the kinds of information systems used by organizations.

Routines and Business Processes All organizations, including business firms, become very efficient over time be- cause individuals in the firm develop routines for producing goods and services. Routines—sometimes called standard operating procedures—are precise rules, procedures, and practices that have been developed to cope with virtually all expected situations. As employees learn these routines, they become highly pro- ductive and efficient, and the firm is able to reduce its costs over time as effi- ciency increases. For instance, when you visit a doctor’s office, receptionists have a well-developed set of routines for gathering basic information from you, nurses have a different set of routines for preparing you for an interview with a doctor, and the doctor has a well-developed set of routines for diagnosing you. Business processes, which we introduced in Chapters 1 and 2, are collections of such rou- tines. A business firm, in turn, is a collection of business processes (Figure 3.4).

Organizational Politics People in organizations occupy different positions with different specialties, concerns, and perspectives. As a result, they naturally have divergent view- points about how resources, rewards, and punishments should be distributed. These differences matter to both managers and employees, and they result in political struggles for resources, competition, and conflict within every orga- nization. Political resistance is one of the great difficulties of bringing about organizational change—especially the development of new information sys- tems. Virtually all large information systems investments by a firm that bring about significant changes in strategy, business objectives, business processes, and procedures become politically charged events. Managers who know how to work with the politics of an organization will be more successful than less- skilled managers in implementing new information systems. Throughout this book, you will find many examples where internal politics defeated the best- laid plans for an information system.

Organizational Culture All organizations have bedrock, unassailable, unquestioned (by the mem- bers) assumptions that define their goals and products. Organizational culture encompasses this set of assumptions about what products the

Chapter 3 Information Systems, Organizations, and Strategy 85

organization should produce, how it should produce them, where, and for whom. Generally, these cultural assumptions are taken totally for granted and are rarely publicly announced or discussed. Business processes—the ac- tual way business firms produce value—are usually ensconced in the organi- zation’s culture.

You can see organizational culture at work by looking around your univer- sity or college. Some bedrock assumptions of university life are that profes- sors know more than students, the reason students attend college is to learn, and classes follow a regular schedule. Organizational culture is a powerful unifying force that restrains political conflict and promotes common under- standing, agreement on procedures, and common practices. If we all share the same basic cultural assumptions, agreement on other matters is more likely.

At the same time, organizational culture is a powerful restraint on change, especially technological change. Most organizations will do almost anything to avoid making changes in basic assumptions. Any technological change that threatens commonly held cultural assumptions usually meets a great deal of resistance. However, there are times when the only sensible way for a firm to move forward is to employ a new technology that directly opposes an existing

FIGURE 3.4 ROUTINES, BUSINESS PROCESSES, AND FIRMS All organizations are composed of individual routines and behaviors, a collection of which make up a business process. A collection of business processes make up the business firm. New information system applications require that individual routines and business processes change to achieve high levels of organizational performance.

Individual Routines

Business Process 1

Business Process 2

Business Process 3

Business Process N

Business Firm

Routines, Business Processes, and Firms

86 Part One Organizations, Management, and the Networked Enterprise

organizational culture. When this occurs, the technology is often stalled while the culture slowly adjusts.

Organizational Environments Organizations reside in environments from which they draw resources and to which they supply goods and services. Organizations and environments have a reciprocal relationship. On the one hand, organizations are open to and dependent on the social and physical environment that surrounds them. Without financial and human resources—people willing to work reliably and consistently for a set wage or revenue from customers—organizations could not exist. Organizations must respond to legislative and other requirements imposed by government as well as the actions of customers and competitors. On the other hand, organizations can influence their environments. For ex- ample, business firms form alliances with other businesses to influence the political process; they advertise to influence customer acceptance of their products.

Figure 3.5 illustrates the role of information systems in helping organizations perceive changes in their environments and also in helping organizations act on their environments. Information systems are key instruments for environ- mental scanning, helping managers identify external changes that might require an organizational response.

Environments generally change much faster than organizations. New tech- nologies, new products, and changing public tastes and values (many of which result in new government regulations) put strains on any organization’s cul- ture, politics, and people. Most organizations are unable to adapt to a rapidly changing environment. Inertia built into an organization’s standard operating procedures, the political conflict raised by changes to the existing order, and the

FIGURE 3.5 ENVIRONMENTS AND ORGANIZATIONS HAVE A RECIPROCAL RELATIONSHIP

Environments shape what organizations can do, but organizations can influence their environments and decide to change environments altogether. Information technol- ogy plays a critical role in helping organizations perceive environmental change and in helping organizations act on their environment.

The Organization and Its Environment

Environmental Resources and Constraints

Governments Competitors Customers Financial Institutions Culture

Knowledge Technology

The Firm

Information Systems

Chapter 3 Information Systems, Organizations, and Strategy 87

threat to closely held cultural values inhibit organizations from making signifi- cant changes. Young firms typically lack resources to sustain even short periods of troubled times. It is not surprising that only 10 percent of the Fortune 500 companies in 1919 still exist today.

Disruptive Technologies: Riding the Wave Sometimes a technology and resulting business innovation come along to radically change the business landscape and environment. These innovations are loosely called “disrup- tive” (Christensen, 2003; Christensen, Raynor, and McDonald, 2015). What makes a technology disruptive? In some cases, disruptive technologies are substitute products that perform as well as or better (often much better) than anything currently produced. The car substituted for the horse-drawn carriage, the word processor for typewriters, the Apple iPod and streaming music service for portable CD players, and digital photography for process film photography. Table 3.1 describes just a few disruptive technologies from the past.

In these cases, entire industries were put out of business. In other cases,  disruptive technologies simply extend the market, usually with less func- tionality and much less cost than existing products. Eventually they turn into low-cost competitors for whatever was sold before. Disk drives are an example: Small hard disk drives used in PCs extended the market for disk drives by offer- ing cheap digital storage for small files. Eventually, small PC hard disk drives became the largest segment of the disk drive marketplace.

TABLE 3.1 DISRUPTIVE TECHNOLOGIES: WINNERS AND LOSERS

TECHNOLOGY DESCRIPTION WINNERS AND LOSERS

Microprocessor chips (1971) Thousands and eventually millions of transistors on a silicon chip

Microprocessor firms win (Intel, Texas Instruments), while transistor firms (GE) decline.

Personal computers (1975) Small, inexpensive, but fully functional desktop computers

PC manufacturers (HP, Apple, IBM) and chip manufacturers prosper (Intel), while mainframe (IBM) and minicomputer (DEC) firms lose.

Digital photography (1975) Using CCD (charge-coupled device) image sensor chips to record images

CCD manufacturers and traditional camera companies win; manufacturers of film products lose.

World Wide Web (1989) A global database of digital files and “pages” instantly available

Owners of online content and news benefit, while traditional publishers (newspapers, magazines, and broadcast television) lose.

Internet music, video, TV services (1998)

Repositories of downloadable music, video, and TV broadcasts on the web

Owners of Internet platforms, telecommunications providers owning Internet backbone (ATT, Verizon), and local Internet service providers win, while content owners and physical retailers (Tower Records, Blockbuster) lose.

PageRank algorithm A method for ranking web pages in terms of their popularity to supplement web search by key terms

Google is the winner (it owns the patent), while traditional key word search engines (Alta Vista) lose.

Software as web service Using the Internet to provide remote access to online software

Online software services companies (Salesforce.com) win, while traditional “boxed” software companies (Microsoft, SAP, Oracle) lose.

88 Part One Organizations, Management, and the Networked Enterprise

Some firms are able to create these technologies and ride the wave to prof- its; others learn quickly and adapt their business; still others are obliterated because their products, services, and business models become obsolete. They may be very efficient at doing what no longer needs to be done! There are also cases where no firms benefit and all the gains go to consumers (firms fail to capture any profits). Moreover, not all change or technology is disruptive (King and Baatartogtokh, 2015). Managers of older businesses often do make the right decisions and find ways to continue competing. Disruptive technolo- gies are tricky. Firms that invent disruptive technologies as “first movers” do not always benefit if they lack the resources to exploit the technology or fail to see the opportunity. The MITS Altair 8800 is widely regarded as the first PC, but its inventors did not take advantage of their first mover status. Second movers, so-called “fast followers,” such as IBM and Microsoft, reaped the re- wards. Citibank’s ATMs revolutionized retail banking, but they were copied by other banks. Now all banks use ATMs, with the benefits going mostly to the consumers.

Organizational Structure All organizations have a structure or shape. Mintzberg’s classification, described in Table 3.2, identifies five basic kinds of organizational structure (Mintzberg, 1971).

The kind of information systems you find in a business firm—and the nature of problems with these systems—often reflects the type of organiza- tional structure. For instance, in a professional bureaucracy such as a hospi- tal, it is not unusual to find parallel patient record systems operated by the administration, another by doctors, and another by other professional staff such as nurses and social workers. In small entrepreneurial firms, you will often find poorly designed systems developed in a rush that quickly out- grow their usefulness. In huge multidivisional firms operating in hundreds

TABLE 3.2 ORGANIZATIONAL STRUCTURES

ORGANIZATIONAL TYPE DESCRIPTION EXAMPLES

Entrepreneurial structure Young, small firm in a fast-changing environment. It has a simple structure and is managed by an entrepreneur serving as its single chief executive officer.

Small start-up business

Machine bureaucracy Large bureaucracy existing in a slowly changing environment, producing standard products. It is dominated by a centralized management team and centralized decision making.

Midsize manufacturing firm

Divisionalized bureaucracy Combination of multiple machine bureaucracies, each producing a different product or service, all topped by one central headquarters.

Fortune 500 firms, such as General Motors

Professional bureaucracy Knowledge-based organization where goods and services depend on the expertise and knowledge of professionals. Dominated by department heads with weak centralized authority.

Law firms, school systems, hospitals

Adhocracy Task force organization that must respond to rapidly changing environments. Consists of large groups of specialists organized into short-lived multidisciplinary teams and has weak central management.

Consulting firms, such as the Rand Corporation

Chapter 3 Information Systems, Organizations, and Strategy 89

of locations, you will frequently find there is not a single integrating infor- mation system, but instead each locale or each division has its own set of information systems.

Other Organizational Features Organizations have goals and use different means to achieve them. Some orga- nizations have coercive goals (e.g., prisons); others have utilitarian goals (e.g., businesses). Still others have normative goals (universities, religious groups). Organizations also serve different groups or have different constituencies, some primarily benefiting their members, others benefiting clients, stockhold- ers, or the public. The nature of leadership differs greatly from one organiza- tion to another—some organizations may be more democratic or authoritarian than others. Another way organizations differ is by the tasks they perform and the technology they use. Some organizations perform primarily routine tasks that can be reduced to formal rules that require little judgment (such as manu- facturing auto parts), whereas others (such as consulting firms) work primarily with nonroutine tasks.

3-2 What is the impact of information systems on organizations?

Information systems have become integral, online, interactive tools deeply involved in the minute-to-minute operations and decision making of large or- ganizations. Over the past decade, information systems have fundamentally altered the economics of organizations and greatly increased the possibilities for organizing work. Theories and concepts from economics and sociology help us understand the changes brought about by IT.

Economic Impacts From the point of view of economics, IT changes both the relative costs of capital and the costs of information. Information systems technology can be viewed as a factor of production that can be substituted for traditional capital and labor. As the cost of information technology decreases, it is substituted for labor, which historically has been a rising cost. Hence, information technology should result in a decline in the number of middle managers and clerical work- ers as information technology substitutes for their labor.

As the cost of information technology decreases, it also substitutes for other forms of capital such as buildings and machinery, which remain rela- tively expensive. Hence, over time we should expect managers to increase their investments in IT because of its declining cost relative to other capital investments.

IT also affects the cost and quality of information and changes the econom- ics of information. Information technology helps firms contract in size because it can reduce transaction costs—the costs incurred when a firm buys on the marketplace what it cannot make itself. According to transaction cost theory, firms and individuals seek to economize on transaction costs, much as they do on production costs. Using markets is expensive because of costs such as lo- cating and communicating with distant suppliers, monitoring contract compli- ance, buying insurance, obtaining information on products, and so forth (Coase, 1937; Williamson, 1985). Traditionally, firms have tried to reduce transaction

90 Part One Organizations, Management, and the Networked Enterprise

costs through vertical integration, by getting bigger, hiring more employees, and buying their own suppliers and distributors, as both General Motors and Ford used to do.

Information technology, especially the use of networks, can help firms lower the cost of market participation (transaction costs), making it worthwhile for firms to contract with external suppliers instead of using internal sources. As a re- sult, firms can shrink in size (numbers of employees) because it is far less expen- sive to outsource work to a competitive marketplace rather than hire employees.

For instance, by using computer links to external suppliers, automakers such as Chrysler, Toyota, and Honda can achieve economies by obtaining more than 70 percent of their parts from the outside. Information systems make it possible for companies such as Apple Cisco Systems and Dell Inc. to outsource assembly of iPhones to contract manufacturers such as Foxconn instead of making their products themselves.

As transaction costs decrease, firm size (the number of employees) should shrink because it becomes easier and cheaper for the firm to contract for the pur- chase of goods and services in the marketplace rather than to make the product or offer the service itself. Firm size can stay constant or contract even as the com- pany increases its revenues. For example, when Eastman Chemical Company split off from Kodak in 1994, it had $3.3 billion in revenue and 24,000 full-time em- ployees. In 2017, it generated $9.5 billion in revenue with only 14,500 employees.

Information technology also can reduce internal management costs. According to agency theory, the firm is viewed as a “nexus of contracts” among self-interested individuals rather than as a unified, profit-maximizing entity (Jensen and Meckling, 1976). A principal (owner) employs “agents” (em- ployees) to perform work on his or her behalf. However, agents need constant supervision and management; otherwise, they will tend to pursue their own in- terests rather than those of the owners. As firms grow in size and scope, agency costs or coordination costs rise because owners must expend more and more effort supervising and managing employees.

Information technology, by reducing the costs of acquiring and analyzing information, permits organizations to reduce agency costs because it becomes easier for managers to oversee a greater number of employees. By reducing overall management costs, information technology enables firms to increase revenues while shrinking the number of middle managers and clerical work- ers. We have seen examples in earlier chapters where information technology expanded the power and scope of small organizations by enabling them to per- form coordinated activities such as processing orders or keeping track of inven- tory with very few clerks and managers.

Because IT reduces both agency and transaction costs for firms, we should expect firm size to shrink over time as more capital is invested in IT. Firms should have fewer managers, and we expect to see revenue per employee in- crease over time.

Organizational and Behavioral Impacts Theories based in the sociology of complex organizations also provide some understanding about how and why firms change with the implementation of new IT applications.

IT Flattens Organizations Large, bureaucratic organizations, which primarily developed before the com- puter age, are often inefficient, slow to change, and less competitive than newly

Chapter 3 Information Systems, Organizations, and Strategy 91

created organizations. Some of these large organizations have downsized, reduc- ing the number of employees and the number of levels in their organizational hierarchies.

Behavioral researchers have theorized that information technology facili- tates flattening of hierarchies by broadening the distribution of information to empower lower-level employees and increase management efficiency (see Figure 3.6). IT pushes decision-making rights lower in the organization be- cause lower-level employees receive the information they need to make de- cisions without supervision. (This empowerment is also possible because of higher educational levels among the workforce, which give employees more capabilities to make intelligent decisions.) Because managers now receive so much more accurate information on time, they become much faster at making decisions, so fewer managers are required. Management costs de- cline as a percentage of revenues, and the hierarchy becomes much more efficient.

These changes mean that the management span of control has also been broadened, enabling high-level managers to manage and control more workers spread over greater distances. Many companies have eliminated thousands of middle managers as a result of these changes.

Postindustrial Organizations Postindustrial theories based more on history and sociology than economics also support the notion that IT should flatten hierarchies. In postindustrial societies, authority increasingly relies on knowledge and competence and not merely on formal positions. Hence, the shape of organizations flattens because profes- sional workers tend to be self-managing, and decision making should become

FIGURE 3.6 FLATTENING ORGANIZATIONS Information systems can reduce the number of levels in an organization by providing managers with information to supervise larger numbers of workers and by giving lower- level employees more decision-making authority.

An organization that has been “flattened” by removing layers of management

A traditional hierarchical organization with many levels of management

92 Part One Organizations, Management, and the Networked Enterprise

more decentralized as knowledge and information become more widespread throughout the firm.

Information technology may encourage task force–networked organizations in which groups of professionals come together—face-to-face or electronically— for short periods of time to accomplish a specific task (e.g., designing a new au- tomobile); once the task is accomplished, the individuals join other task forces. The global consulting service Accenture is an example. Many of its 373,000 em- ployees move from location to location to work on projects at client locations in more than 56 different countries.

Who makes sure that self-managed teams do not head off in the wrong direc- tion? Who decides which person works on which team and for how long? How can managers evaluate the performance of someone who is constantly rotating from team to team? How do people know where their careers are headed? New approaches for evaluating, organizing, and informing workers are required, and not all companies can make virtual work effective.

Understanding Organizational Resistance to Change Information systems inevitably become bound up in organizational poli- tics because they influence access to a key resource—namely, information. Information systems can affect who does what to whom, when, where, and how in an organization. Many new information systems require changes in per- sonal, individual routines that can be painful for those involved and require retraining and additional effort that may or may not be compensated. Because information systems potentially change an organization’s structure, culture, business processes, and strategy, there is often considerable resistance to them when they are introduced.

There are several ways to visualize organizational resistance. Research on or- ganizational resistance to innovation suggests that four factors are paramount: the nature of the IT innovation, the organization’s structure, the culture of peo- ple in the organization, and the tasks affected by the innovation (see Figure 3.7).

FIGURE 3.7 ORGANIZATIONAL RESISTANCE TO INFORMATION SYSTEM INNOVATIONS

Implementing information systems has consequences for task arrangements, structures, and people. According to this model, to implement change, all four components must be changed simultaneously.

Information Technology

Organizational Structure

People Job Tasks Resistance

to Change

Chapter 3 Information Systems, Organizations, and Strategy 93

Here, changes in technology are absorbed, interpreted, deflected, and defeated by organizational task arrangements, structures, and people. In this model, the only way to bring about change is to change the technology, tasks, structure, and people simultaneously. Other authors have spoken about the need to “un- freeze” organizations before introducing an innovation, quickly implement- ing  it, and “refreezing” or institutionalizing the change (Kolb and Frohman, 1970).

Because organizational resistance to change is so powerful, many informa- tion technology investments flounder and do not increase productivity. Indeed, research on project implementation failures demonstrates that the most com- mon reason for failure of large projects to reach their objectives is not the fail- ure of the technology but organizational and political resistance to change. Chapter 14 treats this issue in detail. Therefore, as a manager involved in future IT investments, your ability to work with people and organizations is just as important as your technical awareness and knowledge.

The Internet and Organizations The Internet, especially the World Wide Web, has an important impact on the relationships between many firms and external entities and even on the organi- zation of business processes inside a firm. The Internet increases the accessibil- ity, storage, and distribution of information and knowledge for organizations. In essence, the Internet is capable of dramatically lowering the transaction and agency costs facing most organizations. For instance, a global sales force can receive nearly instant product price information updates using the web or in- structions from management sent by e-mail or text messaging on smartphones or mobile laptops. Vendors of some large retailers can access retailers’ internal websites directly to find up-to-the-minute sales information and to initiate re- plenishment orders instantly.

Businesses are rapidly rebuilding some of their key business processes based on Internet technology and making this technology a key component of their IT infrastructures. If prior networking is any guide, one result will be simpler business processes, fewer employees, and flatter organizations than in the past.

Implications for the Design and Understanding of Information Systems To deliver genuine benefits, information systems must be built with a clear un- derstanding of the organization in which they will be used. In our experience, the central organizational factors to consider when planning a new system are the following:

• The environment in which the organization must function

• The structure of the organization: hierarchy, specialization, routines, and business processes

• The organization’s culture and politics

• The type of organization and its style of leadership

• The principal interest groups affected by the system and the attitudes of workers who will be using the system

• The kinds of tasks, decisions, and business processes that the information system is designed to assist

94 Part One Organizations, Management, and the Networked Enterprise

3-3 How do Porter’s competitive forces model, the value chain model, synergies, core competencies, and network economics help companies develop competitive strategies using information systems?

In almost every industry you examine, you will find that some firms do bet- ter than most others. There’s almost always a standout firm. In the automo- tive industry, Toyota is considered a superior performer. In pure online retail, Amazon is the leader; in off-line retail, Walmart, the largest retailer on earth, is the leader. In online music, Apple’s iTunes is considered the leader with more than 60 percent of the downloaded music market. In web search, Google is considered the leader.

Firms that “do better” than others are said to have a competitive advantage over others: They either have access to special resources that others do not, or they are able to use commonly available resources more efficiently—usually because of superior knowledge and information assets. In any event, they do better in terms of revenue growth, profitability, or productivity growth (effi- ciency), all of which ultimately in the long run translate into higher stock mar- ket valuations than their competitors.

But why do some firms do better than others, and how do they achieve com- petitive advantage? How can you analyze a business and identify its strategic advantages? How can you develop a strategic advantage for your own business? And how do information systems contribute to strategic advantages? One an- swer to that question is Michael Porter’s competitive forces model.

Porter’s Competitive Forces Model Arguably, the most widely used model for understanding competitive advan- tage is Michael Porter’s competitive forces model (see Figure 3.8). This model provides a general view of the firm, its competitors, and the firm’s environ- ment. Earlier in this chapter, we described the importance of a firm’s environ- ment and the dependence of firms on environments. Porter’s model is all about the firm’s general business environment. In this model, five competitive forces shape the fate of the firm.

FIGURE 3.8 PORTER’S COMPETITIVE FORCES MODEL In Porter’s competitive forces model, the strategic position of the firm and its strate- gies are determined not only by competition with its traditional direct competitors but also by four other forces in the industry’s environment: new market entrants, substitute products, customers, and suppliers.

New market entrants

The Firm Competitors

Substitute products

Suppliers Customers

Chapter 3 Information Systems, Organizations, and Strategy 95

Traditional Competitors All firms share market space with other competitors who are continuously de- vising new, more-efficient ways to produce by introducing new products and services, and attempting to attract customers by developing their brands and imposing switching costs on their customers.

New Market Entrants In a free economy with mobile labor and financial resources, new companies are always entering the marketplace. In some industries, there are very low bar- riers to entry, whereas in other industries, entry is very difficult. For instance, it is fairly easy to start a pizza business or just about any small retail business, but it is much more expensive and difficult to enter the computer chip busi- ness, which has very high capital costs and requires significant expertise and knowledge that are hard to obtain. New companies have several possible ad- vantages: They are not locked into old plants and equipment, they often hire younger workers who are less expensive and perhaps more innovative, they are not encumbered by old worn-out brand names, and they are “more hungry” (more highly motivated) than traditional occupants of an industry. These ad- vantages are also their weaknesses: They depend on outside financing for new plants and equipment, which can be expensive; they have a less-experienced workforce; and they have little brand recognition.

Substitute Products and Services In just about every industry, there are substitutes that your customers might use if your prices become too high. New technologies create new substitutes all the time. Ethanol can substitute for gasoline in cars; vegetable oil for diesel fuel in trucks; and wind, solar, coal, and hydro power for industrial electricity generation. Likewise, Internet and wireless telephone service can substitute for traditional telephone service. And, of course, an Internet music service that al- lows you to download music tracks to an iPad or smartphone has become a sub- stitute for CD-based music stores. The more substitute products and services in your industry, the less you can control pricing and the lower your profit margins.

Customers A profitable company depends in large measure on its ability to attract and retain customers (while denying them to competitors) and charge high prices. The power of customers grows if they can easily switch to a competitor’s prod- ucts and services or if they can force a business and its competitors to com- pete on price alone in a transparent marketplace where there is little product differentiation and all prices are known instantly (such as on the Internet). For instance, in the used college textbook market on the Internet, students (customers) can find multiple suppliers of just about any current college text- book. In this case, online customers have extraordinary power over used-book firms.

Suppliers The market power of suppliers can have a significant impact on firm profits, especially when the firm cannot raise prices as fast as can suppliers. The more different suppliers a firm has, the greater control it can exercise over suppliers in terms of price, quality, and delivery schedules. For instance, manufacturers of laptop PCs almost always have multiple competing suppliers of key compo- nents, such as keyboards, hard drives, and display screens.

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Information System Strategies for Dealing with Competitive Forces What is a firm to do when it is faced with all these competitive forces? And how can the firm use information systems to counteract some of these forces? How do you prevent substitutes and inhibit new market entrants? There are four generic strategies, each of which often is enabled by using information technol- ogy and systems: low-cost leadership, product differentiation, focus on market niche, and strengthening customer and supplier intimacy.

Low-Cost Leadership Use information systems to achieve the lowest operational costs and the lowest prices. The classic example is Walmart. By keeping prices low and shelves well stocked using a legendary inventory replenishment system, Walmart became the leading retail business in the United States. Walmart’s continuous replenish- ment system sends orders for new merchandise directly to suppliers as soon as consumers pay for their purchases at the cash register. Point-of-sale terminals record the bar code of each item passing the checkout counter and send a pur- chase transaction directly to a central computer at Walmart headquarters. The computer collects the orders from all Walmart stores and transmits them to sup- pliers. Suppliers can also access Walmart’s sales and inventory data using web technology.

Because the system replenishes inventory with lightning speed, Walmart does not need to spend much money on maintaining large inventories of goods in its own warehouses. The system also enables Walmart to adjust purchases of store items to meet customer demands. Competitors, such as Sears, have been spending 24.9 percent of sales on overhead. But by using systems to keep oper- ating costs low, Walmart pays only 16.6 percent of sales revenue for overhead. (Operating costs average 20.7 percent of sales in the retail industry.)

Walmart’s continuous replenishment system is also an example of an efficient customer response system. An efficient customer response system directly links

Supermarkets and large re- tail stores such as Walmart use sales data captured at the checkout counter to determine which items have sold and need to be reor- dered. Walmart’s continu- ous replenishment system transmits orders to restock directly to its suppliers. The system enables Walmart to keep costs low while fine- tuning its merchandise to meet customer demands.

© Betty LaRue/Alamy Stock Photo

Chapter 3 Information Systems, Organizations, and Strategy 97

consumer behavior to distribution and production and supply chains. Walmart’s continuous replenishment system provides such an efficient customer response.

Product Differentiation Use information systems to enable new products and services or greatly change the customer convenience in using your existing products and services. Big Tech firms like Google, Facebook, Amazon, Apple, and others are pouring billions of dollars into research and deployment of new services, and enhancements to their most valuable services and products in order to differentiate them from potential competitors. For instance, in 2018 Google updated its Google Assistant to enable more natural continuous conversations and smart displays that can display the output of Assistant to screens. Google added Assistant support to its core Google Maps service to make interaction with Maps more natural, and released a Machine Language Kit for developers that supports text recogni- tion, face detection, image labeling, and landmark recognition. The continual stream of innovations flowing from Big Tech companies ensures their products are unique, and difficult to copy.

Crayola, not known as a tech company, is another firm that is creating new technology-based products and services to inspire children, parents, and edu- cators, and differentiate their products from competitors. (See the Interactive Session on Organizations.)

Manufacturers and retailers are using information systems to create prod- ucts and services that are customized and personalized to fit the precise specifications of individual customers. For example, Nike sells customized sneakers through its NIKEiD program on its website. Customers are able to select the type of shoe, colors, material, outsoles, and even a logo of up to eight characters. Nike transmits the orders via computers to specially equipped plants in China and Korea. The sneakers take about three weeks to reach the customer. This ability to offer individually tailored products or services using the same production resources as mass production is called mass customization.

Table 3.3 lists a number of companies that have developed IT-based products and services that other firms have found difficult to copy—or at least taken a long time to copy.

Focus on Market Niche Use information systems to enable a specific market focus and serve this nar- row target market better than competitors. Information systems support this strategy by producing and analyzing data for finely tuned sales and marketing techniques. Information systems enable companies to analyze customer buy- ing patterns, tastes, and preferences closely so that they efficiently pitch adver- tising and marketing campaigns to smaller and smaller target markets.

The data come from a range of sources—credit card transactions, demo- graphic data, purchase data from checkout counter scanners at supermarkets

TABLE 3.3 IT-ENABLED NEW PRODUCTS AND SERVICES PROVIDING COMPETITIVE ADVANTAGE

Amazon: One-click shopping Amazon holds a patent on one-click shopping that it licenses to other online retailers.

Online music: Apple iTunes Apple sells music from an online library of more than 45 million songs.

Golf club customization: Ping Customers can select from more than 1 million different golf club options; a build-to- order system ships their customized clubs within 48 hours.

Online person-to-person payment: PayPal

PayPal enables the transfer of money between individual bank accounts and between bank accounts and credit card accounts.

98 Part One Organizations, Management, and the Networked Enterprise

INTERACTIVE SESSION ORGANIZATIONS

Digital Technology Helps Crayola Brighten Its Brand Crayola is one of the world’s most beloved brands for children and their parents. The Easton, Pennsylvania–based company has been noted for high-quality, non-toxic crayons, markers, pencils, modeling clay, creative toys, and innovative art tools that have inspired artistic creativity in children for more than one hundred years. You can find Cray- ola products nearly everywhere, including schools, offices, supermarkets, drug stores, hospitals, theme parks, airports, gas stations, and restaurants.

The Crayola crayon box became part of the col- lective history and experiences of generations of Americans, and a symbol of the color and fun of childhood. But today, that Crayola crayon box is not as iconic as in the past. The popularity of Crayola crayons is under assault—not by Crayola’s traditional competitors (Faber-Castelli, DixonTiconderoga, and MEGA Brands), but by changing times.

There has been a profound technological and cultural shift in how children play. Children and their families are being bombarded with increasingly sophisticated forms of entertainment, many of them digitally based. Digital products are starting to sup- plant physical ones in the world of children’s play as well as in other areas of work and everyday life. With the advent of computers and web-based learning, chil- dren are leaving behind hand-held art supplies at an increasingly younger age. The phenomenon is called KGOY, standing for “Kids Growing Older Younger.” As children reach the age of 4 or 5, when they become old enough to play with a computer, they become less interested in toys and crayons and prefer electronics such as video games and digital tablets and smart- phones. Crayola is not immune to this problem.

Will Crayola become a dinosaur from a different era? Not likely, thanks to the company’s forward- looking management, which embarked over a decade ago on far-reaching changes in leadership, organiza- tional culture, and the product development func- tion. The organization restructured around consumer insights and needs rather than specific product lines.

Vicky Lozano, Crayola’s VP of Corporate Strategy and her team recognized that Crayola’s purpose has always been to nourish originality and to help parents and teachers raise creative and inspired children. Crayola’s broader mission is not just to put crayons and art materials in children’s hands but to

help children learn and play in colorful ways. The question they asked was not, how can we sell more crayons? Instead they asked, what kinds of experi- ences and technologies should Crayola embrace? Crayola has reframed its business model, introduced a new innovation process for product development, and created new products and revenue streams. The company has been transformed from a manufacturer of crayons and art tools into a trusted source of tools and experiences for creative play.

Crayola is using digital technology, but not to re- place its core crayon business. Instead, it’s integrat- ing the old and the new. The company now offers a new range of products like the iMarker, an all-in-one digital pen, crayon, and pencil, designed for use with the Color Studio HD iPad app. It’s like a traditional coloring book, but includes new interactive sounds and motion. Lights, Camera, Color! is another digital application that allows kids to turn their favorite pho- tos into digital coloring book pages. Tech toys such as the Digital Light Designer, a 360-degree domed draw- ing surface, encourage imaginations to run wild with colored LED lights. Children can play updated ver- sions of their favorite games or animate and save up to 50 pieces of their own artwork. Crayola found that par- ents are looking for toys that are less messy than tra- ditional markers or fingerpaints. These digital toys are “100 percent mess-proof,” and technology has helped Crayola make its other products less messy as well.

In designing new digital products and experiences, Crayola has drawn on its extensive knowledge of child development. It understands how digital tech- nology can play a part at different ages. For instance, the My First Crayola line is targeted specifically at one-year-olds; while Crayola Catwalk Creations is designed for “tween” girls who like expressing them- selves through fashion.

Crayola also understood that it had to change the way it markets its products as well as the products themselves and has been investing more and more in digital marketing. These initiatives include online advertising, promotions, social media pushes, and other digital activation programs that allow Crayola to connect with parents and educators invested in rais- ing children’s creativity level. Social media has proven especially effective and Crayola has a presence on Facebook, YouTube, Pinterest, Twitter, and Instagram.

and retail stores, and data collected when people access and interact with websites. Sophisticated software tools find patterns in these large pools of data and infer rules from them to guide decision making. Analysis of such data drives one-to-one marketing that creates personal messages based on individualized preferences. For example, Hilton Hotels’ OnQ system analyzes detailed data collected on active guests in all of its properties to determine the preferences of each guest and each guest’s profitability. Hilton uses this information to give its most profitable customers additional privileges, such as late checkouts. Contemporary customer relationship management (CRM) systems feature analytical capabilities for this type of intensive data analysis (see Chapters 2 and 9).

Credit card companies are able to use this strategy to predict their most prof- itable cardholders. The companies gather vast quantities of data about con- sumer purchases and other behaviors and mine these data to construct detailed profiles that identify cardholders who might be good or bad credit risks. We discuss the tools and technologies for data analysis in Chapters 6 and 12.

Strengthen Customer and Supplier Intimacy Use information systems to tighten linkages with suppliers and develop intimacy with customers. Toyota, Ford, and other automobile manufacturers use information systems to facilitate direct access by suppliers to production schedules and even permit suppliers to decide how and when to ship supplies to their factories. This allows suppliers more lead time in producing goods.

Chapter 3 Information Systems, Organizations, and Strategy 99

Crayola’s YouTube channel features colorful videos on Crayola products and instructions for creative projects where they can be used. The company’s Facebook presence features a live chat series with experts and creative celebrities called “Inside the Crayon Box.” Crayola wants to stimulate conversations around cre- ativity so parents can learn from each other and un- derstand how to build creativity in their children.

Crayola’s core parent audience is turning to the web for gift and usage ideas, comparing prices, and reading reviews before making purchases. Crayola wants to be first in mind as a source of $20 artsy toys and mess-proof gifts. The company focuses heavily on search, social media, and digital display, to help parents find the Crayola products needed for their children’s school supplies or gifts. Crayola closely

tracks activity on its online channels through Google Analytics to make sure it is getting the most out of its marketing and ad campaigns.

Crayola’s website has been thoughtfully designed for children, parents, and educators. It features free ideas for crafts, printable coloring pages, and even advice on how to remove stains. The website also can be used for ordering Crayola products online. Thanks to its new array of products and services, Crayola has experienced better growth, and its future looks as bright as the vibrant colors of its iconic crayons.

Sources: www.crayola.com, accessed March 28, 2018; “Crayola SWOT,” www.marketingteacher.com, accessed March 29, 2018; and Jon Coen, “Crayola’s Colorful Evolution,” Think Play, July 2012.

CASE STUDY QUESTIONS

1. Analyze Crayola’s problem. What management, organization, and technology factors contributed to the problem?

2. What competitive strategies is Crayola pursu- ing? How does digital technology support those strategies?

3. What people issues did Crayola have to address in designing its new technology-based products?

4. How has digital technology changed Crayola’s business model and the way it runs its business?

100 Part One Organizations, Management, and the Networked Enterprise

On the customer side, Amazon keeps track of user preferences for book and CD purchases and can recommend titles purchased by others to its customers. Strong linkages to customers and suppliers increase switching costs (the cost of switching from one product to a competing product) and loyalty to your firm.

Table 3.4 summarizes the competitive strategies we have just described. Some companies focus on one of these strategies, but you will often see com- panies pursuing several of them simultaneously. For example, Starbucks, the world’s largest specialty coffee retailer, offers unique high-end specialty coffees and beverages but is also trying to compete by more targeted marketing.

The Internet’s Impact on Competitive Advantage Because of the Internet, the traditional competitive forces are still at work, but competitive rivalry has become much more intense (Porter, 2001). Internet technology is based on universal standards that any company can use, making it easy for rivals to compete on price alone and for new competitors to enter the market. Because information is available to everyone, the Internet raises the bargaining power of customers, who can quickly find the lowest-cost provider on the web. Profits have been dampened. Table 3.5 summarizes some of the po- tentially negative impacts of the Internet on business firms identified by Porter.

The Internet has nearly destroyed some industries and has severely threat- ened more. For instance, the printed encyclopedia industry and the travel

TABLE 3.5 IMPACT OF THE INTERNET ON COMPETITIVE FORCES AND INDUSTRY STRUCTURE

COMPETITIVE FORCE IMPACT OF THE INTERNET

Substitute products or services Enables substitutes to emerge with new approaches to meeting needs and performing functions

Customers’ bargaining power Availability of global price and product information shifts bargaining power to customers

Suppliers’ bargaining power Procurement over the Internet tends to raise bargaining power over suppliers; suppliers can also benefit from reduced barriers to entry and from the elimination of distributors and other intermediaries standing between them and their users

Threat of new entrants Reduces barriers to entry, such as the need for a sales force, access to channels, and physical assets; provides a technology for driving business processes that makes other things easier to do

Positioning and rivalry among existing competitors

Widens the geographic market, increasing the number of competitors and reducing differences among competitors; makes it more difficult to sustain operational advantages; puts pressure to compete on price

TABLE 3.4 FOUR BASIC COMPETITIVE STRATEGIES

STRATEGY DESCRIPTION EXAMPLE

Low-cost leadership Use information systems to produce products and services at a lower price than competitors while enhancing quality and level of service

Walmart

Product differentiation Use information systems to differentiate products, and enable new services and products

Uber, Nike, Apple

Focus on market niche Use information systems to enable a focused strategy on a single market niche; specialize

Hilton Hotels, Harrah’s

Customer and supplier intimacy

Use information systems to develop strong ties and loyalty with customers and suppliers

Toyota Corporation, Amazon

Chapter 3 Information Systems, Organizations, and Strategy 101

agency industry have been nearly decimated by the availability of substitutes over the Internet. Likewise, the Internet has had a significant impact on the retail, music, book, retail brokerage, software, telecommunications, and news- paper industries.

However, the Internet has also created entirely new markets; formed the basis for thousands of new products, services, and business models; and pro- vided new opportunities for building brands with very large and loyal customer bases. Amazon, eBay, iTunes, YouTube, Facebook, Travelocity, and Google are examples. In this sense, the Internet is “transforming” entire industries, forcing firms to change how they do business.

Smart Products and the Internet of Things The growing use of sensors in industrial and consumer products, often called the Internet of Things (IoT), is an excellent example of how the Internet is changing competition within industries and creating new products and ser- vices. Under Armour and other sports and fitness companies are pouring money into wearable health trackers and fitness equipment that use sensors to report users’ activities to remote corporate computing centers where the data can be analyzed (see the Interactive Session on Technology). John Deere tractors are loaded with field radar, GPS transceivers, and hundreds of sensors keeping track of the equipment, as described in the Chapter 12 opening case. GE is creating a new business helping its aircraft and wind turbine clients improve operations by examining the data generated from the many thousands of sensors in the equip- ment. The result is what are referred to as “smart products”—products that are a part of a larger set of information-intensive services sold by firms (Gandhi and Gervet, 2016; Porter and Heppelmann, 2014; Iansiti and Lakhani, 2014).

The impact of smart, Internet-connected products is just now being under- stood. Smart products offer new functionality, greater reliability, and more in- tense use of products while providing detailed information that can be used to improve both the products and the customer experience. They expand opportu- nities for product and service differentiation. When you buy a wearable digital health product, you not only get the product itself, you also get a host of ser- vices available from the manufacturer’s cloud servers. Smart products increase rivalry among firms that will either innovate or lose customers to competitors. Smart products generally raise switching costs and inhibit new entrants to a market because existing customers are trapped in the dominant firm’s software environment. Finally, smart products may decrease the power of suppliers of industrial components if, as many believe, the physical product becomes less important than the software and hardware that make it run.

The Business Value Chain Model Although the Porter model is very helpful for identifying competitive forces and suggesting generic strategies, it is not very specific about what exactly to do, and it does not provide a methodology to follow for achieving competi- tive advantages. If your goal is to achieve operational excellence, where do you start? Here’s where the business value chain model is helpful.

The value chain model highlights specific activities in the business where competitive strategies can best be applied (Porter, 1985) and where informa- tion systems are most likely to have a strategic impact. This model identifies specific, critical leverage points where a firm can use information technology most effectively to enhance its competitive position. The value chain model views the firm as a series or chain of basic activities that add a margin of value

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INTERACTIVE SESSION TECHNOLOGY

Smart Products—Coming Your Way If you don’t use a smart product yet, you soon will. Your shoes, your clothing, your watch, your water bottle, and even your toothbrush are being rede- signed to incorporate sensors and metering devices connected to the Internet so that their performance can be monitored and analyzed. Your home will in- creasingly use smart devices such as smart thermo- stats, smart electrical meters, smart security systems, and smart lighting systems.

Under Armour, noted for performance clothing, spent $710 million to scoop up mobile apps such as MyFitnessPal, Map My Fitness, and Endomondo, which enable it to tap into the world’s largest digital health and fitness community, with more than 225 million registered users. According to company data, Under Armour’s connected fitness users have logged more than 500 million workouts and taken 7 trillion steps since the company started tracking the data. Analyzing these data has provided insights such as 3.1 miles being the average distance for a run and that May is the most active month for exercise.

Under Armour is trying to enhance its perfor- mance clothing with digital technology. The com- pany now sells connected running shoes. The shoes come in several models and feature a built-in wire- less Bluetooth sensor that tracks cadence, distance, pace, stride length, and steps, even if the runner does not bring a smartphone along. The data are stored on the shoe until they can sync wirelessly to Under Armour’s Map My Run app for iPhone, iPad, and Android devices. Users can also connect to the app on third-party devices such as AppleWatch, Garmin, or Fitbit, to incorporate metrics such as heart rate that can’t be tracked by the shoes. The shoe’s analytics will let users know when it’s time to purchase new shoes and sensor batteries have to be charged.

Under Armour has recently added a digital coach- ing feature for the connected running shoes and Map My Run app. Runners will be able to monitor their gait and stride length mile after mile, and see how that impacts their pace and cadence. By analyz- ing these data, along with data about the runner’s gender, age, weight, and height, Map My Run will be able to provide a runner with tips on how to improve his or her pace and splits, by taking shorter or longer strides while running, for instance.

Under Armour can generate revenue from in-app ads, including ads from other companies, and pur- chases from app users referred to its products. The platform delivers unprecedented depth of informa- tion and insight about fitness- and health-oriented consumers, creating numerous opportunities for Under Armour and other brands to engage with po- tential and existing customers. For example, Map My Fitness collects data about a user’s name, e-mail ad- dress, birth date, location, performance, and profile if the user connects to the app using social media. Under Armour does not sell identifiable personal data about individuals to third parties but does pro- vide advertisers with aggregate information about app users. Under Armour is hoping that daily use of its smartphone apps will build stronger ties to customers that will lead to stronger sales of its own apparel, footwear, and other athletic gear. The com- pany is clearly benefiting from bringing the power of software to its physical products.

Smart products are also finding their way into people’s homes. Between 2017 and 2022, Con Edison, which supplies electrical power and natu- ral gas to the New York City metropolitan area, is installing 3.6 million new electric smart meters and 1.2 million new gas smart meters in all its cus- tomers’ homes and businesses. A smart meter is a digital meter that communicates between a resi- dence or business and Con Edison through a secure wireless communication network. The smart meter records and transmits each customer’s energy con- sumption regularly throughout the day. The smart meter transmits data to a system of access points on utility poles, which send the usage information to Con Edison.

The smart meter will let the company know when a customer loses service, resulting in faster repairs, and will also provide real-time billing information to customers based on energy usage, enabling them to pinpoint areas for energy savings. They will also permit more definitive voltage regulation, enhancing electric distribution-system efficiency, reducing costs, and providing savings that ultimately get reflected in lower customer bills. Data from the new meters will let Con Ed set prices based on customers’ time and level of use. Rates might jump during summer hours

when hot weather makes people turn on their air con- ditioners, or drop overnight when power use is lowest.

Con Ed customers can use an online My Account dashboard with tools to track their daily energy consumption down to 15-minute increments. They can analyze their usage by comparing hour to hour, weekday versus weekend, or day versus evening use to see where they can save, and they can receive high bill alerts if they are using more energy than usual. Con Ed also offers a mobile app for iPhone

and Android smartphone users so that they can track their detailed energy usage while they are on the go.

Sources: Jen Booton, “Under Armour’s New HOVR Smart Shoe Will Automatically Track Your Run,” SportTechie, January 26, 2018; Edgar Alvarez, “Under Armour’s HOVR smart running shoes are more than just a gimmick,” Engadget, February 9, 2018; www.coned.com, accessed March 28, 2018; Edward C. Baig, “Under Armour and HTC Team Up on Connected Fitness,” USA Today, January 5, 2016; www.underarmour. com, accessed April 20, 2018; and John Kell, “Why Under Armour Is Making a Costly Bet on Connected Fitness,” Fortune, April 21, 2016.

CASE STUDY QUESTIONS

1. Describe the role of information technology in the products described in this case. How is it adding value to these products? How is it transforming these products?

2. How are these smart products changing opera- tions and decision making for these organizations?

How are they changing the behavior of their users?

3. Are there any ethical issues raised by these smart products, such as their impact on consumer pri- vacy? Explain your answer.

Chapter 3 Information Systems, Organizations, and Strategy 103

to a firm’s products or services. These activities can be categorized as either primary activities or support activities (see Figure 3.9).

Primary activities are most directly related to the production and distribu- tion of the firm’s products and services, which create value for the customer. Primary activities include inbound logistics, operations, outbound logistics, sales and marketing, and service. Inbound logistics includes receiving and storing ma- terials for distribution to production. Operations transforms inputs into finished products. Outbound logistics entails storing and distributing finished products. Sales and marketing includes promoting and selling the firm’s products. The ser- vice activity includes maintenance and repair of the firm’s goods and services.

Support activities make the delivery of the primary activities possible and consist of organization infrastructure (administration and management), human resources (employee recruiting, hiring, and training), technology (improving products and the production process), and procurement (purchasing input).

Now you can ask at each stage of the value chain, “How can we use information systems to improve operational efficiency and improve customer and supplier in- timacy?” This will force you to critically examine how you perform value-adding activities at each stage and how the business processes might be improved. You can also begin to ask how information systems can be used to improve the rela- tionship with customers and with suppliers who lie outside the firm’s value chain but belong to the firm’s extended value chain where they are absolutely critical to your success. Here, supply chain management systems that coordinate the flow of resources into your firm and customer relationship management systems that coordinate your sales and support employees with customers are two of the most common system applications that result from a business value chain analysis. We discuss these enterprise applications in detail later in Chapter 9.

Using the business value chain model will also cause you to consider bench- marking your business processes against your competitors or others in related industries and identifying industry best practices. Benchmarking involves

104 Part One Organizations, Management, and the Networked Enterprise

FIGURE 3.9 THE VALUE CHAIN MODEL This figure provides examples of systems for both primary and support activities of a firm and of its value partners that can add a margin of value to a firm’s products or services.

Administration and Management: Electronic scheduling and messaging systems

Human Resources: Workforce planning systems

Procurement: Computerized ordering systems

Technology: Computer-aided design systems

Inbound Logistics

Automated warehousing systems

Operations

Computer- controlled machining systems

Sales and Marketing

Computerized ordering systems

Service

Equipment maintenance systems

Outbound Logistics

Automated shipment scheduling systems

Firm Value Chain

Support Activities

Primary Activities

Customer Relationship Management Systems

Sourcing and Procurement Systems

Suppliers Firm Distributors Customers Suppliers’ Suppliers

Industry Value Chain

comparing the efficiency and effectiveness of your business processes against strict standards and then measuring performance against those standards. Industry best practices are usually identified by consulting companies, re- search organizations, government agencies, and industry associations as the most successful solutions or problem-solving methods for consistently and ef- fectively achieving a business objective.

Once you have analyzed the various stages in the value chain at your busi- ness, you can come up with candidate applications of information systems. Then, once you have a list of candidate applications, you can decide which to develop first. By making improvements in your own business value chain that your competitors might miss, you can achieve competitive advantage by attaining operational excellence, lowering costs, improving profit margins, and forging a closer relationship with customers and suppliers. If your competitors are making similar improvements, then at least you will not be at a competitive disadvantage—the worst of all cases!

Extending the Value Chain: The Value Web Figure 3.9 shows that a firm’s value chain is linked to the value chains of its suppliers, distributors, and customers. After all, the performance of most firms depends not only on what goes on inside a firm but also on how well the firm coordinates with direct and indirect suppliers, delivery firms (logistics partners, such as FedEx or UPS), and, of course, customers.

Chapter 3 Information Systems, Organizations, and Strategy 105

How can information systems be used to achieve strategic advantage at the industry level? By working with other firms, industry participants can use infor- mation technology to develop industrywide standards for exchanging informa- tion or business transactions electronically, which force all market participants to subscribe to similar standards. Such efforts increase efficiency, making prod- uct substitution less likely and perhaps raising entry costs—thus discouraging new entrants. Also, industry members can build industrywide, IT-supported consortia, symposia, and communications networks to coordinate activities con- cerning government agencies, foreign competition, and competing industries.

Looking at the industry value chain encourages you to think about how to use information systems to link up more efficiently with your suppliers, stra- tegic partners, and customers. Strategic advantage derives from your ability to relate your value chain to the value chains of other partners in the process. For instance, if you are Amazon.com, you want to build systems that:

• Make it easy for suppliers to display goods and open stores on the Amazon site

• Make it easy for customers to pay for goods

• Develop systems that coordinate the shipment of goods to customers

• Develop shipment tracking systems for customers

Internet technology has made it possible to create highly synchronized in- dustry value chains called value webs. A value web is a collection of indepen- dent firms that use information technology to coordinate their value chains to produce a product or service for a market collectively. It is more customer driven and operates in a less linear fashion than the traditional value chain.

Figure 3.10 shows that this value web synchronizes the business processes of customers, suppliers, and trading partners among different companies in an industry or in related industries. These value webs are flexible and adaptive to changes in supply and demand. Relationships can be bundled or unbundled in re- sponse to changing market conditions. Firms will accelerate time to market and to customers by optimizing their value web relationships to make quick decisions on who can deliver the required products or services at the right price and location.

Synergies, Core Competencies, and Network-Based Strategies A large corporation is typically a collection of businesses. Often, the firm is or- ganized financially as a collection of strategic business units and the returns to the firm are directly tied to the performance of all the strategic business units. Information systems can improve the overall performance of these business units by promoting synergies and core competencies.

Synergies The idea of synergies is that when the output of some units can be used as inputs to other units or two organizations pool markets and expertise, these re- lationships lower costs and generate profits. Bank and financial firm mergers such as the merger of JPMorgan Chase and Bank of New York as well as Bank of America and Countrywide Financial Corporation occurred precisely for this purpose.

One use of information technology in these synergy situations is to tie to- gether the operations of disparate business units so that they can act as a whole. For example, acquiring Countrywide Financial enabled Bank of America to ex- tend its mortgage lending business and to tap into a large pool of new customers

106 Part One Organizations, Management, and the Networked Enterprise

who might be interested in its credit card, consumer banking, and other finan- cial products. Information systems would help the merged companies consoli- date operations, lower retailing costs, and increase cross-marketing of financial products.

Enhancing Core Competencies Yet another way to use information systems for competitive advantage is to think about ways that systems can enhance core competencies. The argument is that the performance of all business units will increase insofar as these busi- ness units develop, or create, a central core of competencies. A core compe- tency is an activity for which a firm is a world-class leader. Core competencies may involve being the world’s best miniature parts designer, the best package delivery service, or the best thin-film manufacturer. In general, a core com- petency relies on knowledge that is gained over many years of practical field experience with a technology. This practical knowledge is typically supple- mented with a long-term research effort and committed employees.

Any information system that encourages the sharing of knowledge across business units enhances competency. Such systems might encourage or enhance existing competencies and help employees become aware of new external knowledge; such systems might also help a business leverage exist- ing competencies to related markets. For example, Procter & Gamble, a world leader in brand management and consumer product innovation, uses a series of systems to enhance its core competencies by helping people working on similar problems share ideas and expertise. Employees working in research and development (R&D), engineering, purchasing, marketing, legal affairs, and

FIGURE 3.10 THE VALUE WEB The value web is a networked system that can synchronize the value chains of business partners within an industry to respond rapidly to changes in supply and demand.

Supply Chain Management Systems

Supplier Extranets

Net Marketplaces

Customer Relationship Management Systems

Customers

Customers’ Customers

Strategic Alliance and Partner Firms

Industry

Firms

ERP Systems

Core Transaction Systems

Indirect Suppliers

Suppliers

Suppliers’ Suppliers

Chapter 3 Information Systems, Organizations, and Strategy 107

business information systems around the world can share documents, reports, charts, videos, and other data from various sources online and locate employ- ees with special expertise. P&G systems also can link to research scientists and entrepreneurs outside the company who are searching for new, innovative products worldwide.

Network-Based Strategies Internet and networking technology have inspired strategies that take advan- tage of firms’ abilities to create networks or network with each other. Network- based strategies include the use of network economics, a virtual company model, and business ecosystems.

Network Economics Network economics refers to market situations where the economic value being produced depends on the number of people using a product. For certain products and markets, the real economic value comes from the fact that other people use the product. In these situations, “network effects” are at work. For instance, what’s the value of a telephone if it is not connected to millions of others? Email has value because it allows us to communicate with millions of others. Business models that are based on network effects have been highly successful on the Internet, including social networks, software, messaging apps, and on-demand companies like Uber and Airbnb.

In traditional economics—the economics of factories and agriculture— production experiences diminishing returns. The more any given resource is ap- plied to production, the lower the marginal gain in output, until a point is reached where the additional inputs produce no additional outputs. This is the law of di- minishing returns, and it is the foundation for most of modern economics.

In some situations, the law of diminishing returns does not work. For in- stance, in a network, the marginal costs of adding another participant are about zero, whereas the marginal gain is much larger. The larger the number of subscribers in a telephone system or the Internet, the greater the value to all participants because each user can interact with more people. It is not much more expensive to operate a television station with 1,000 subscribers than with 10 million subscribers. The value of a community of people grows with size, whereas the cost of adding new members is inconsequential. The value of Facebook to users increases greatly as more people use the social network.

From this network economics perspective, information technology can be strategically useful. Internet sites can be used by firms to build communities of users—like-minded customers who want to share their experiences. This builds customer loyalty and enjoyment and builds unique ties to customers. eBay, the giant online auction site, is an example. This business is based on a network of millions of users, and has built an online community by using the Internet. The more people offering products on eBay, the more valuable the eBay site is to everyone because more products are listed, and more competition among suppliers lowers prices. Network economics also provides strategic benefits to commercial software vendors. The value of their software and complementary software products increases as more people use them, and there is a larger in- stalled base to justify continued use of the product and vendor support.

Virtual Company Model Another network-based strategy uses the model of a virtual company to create a competitive business. A virtual company, also known as a virtual organization, uses networks to link people, assets, and ideas, enabling it to ally with other companies to create and distribute products and ser- vices without being limited by traditional organizational boundaries or physical lo- cations. One company can use the capabilities of another company without being

108 Part One Organizations, Management, and the Networked Enterprise

organizationally tied to that company. The virtual company model is useful when a company finds it cheaper to acquire products, services, or capabilities from an external vendor or when it needs to move quickly to exploit new market opportu- nities and lacks the time and resources to respond on its own.

Fashion companies, such as GUESS, Ann Taylor, Levi Strauss, and Reebok, enlist Hong Kong–based Li & Fung to manage production and shipment of their garments. Li & Fung handles product development, raw material sourcing, pro- duction planning, quality assurance, and shipping. Li & Fung does not own any fabric, factories, or machines, outsourcing all of its work to a network of more than 15,000 suppliers in 40 countries all over the world. Customers place orders with Li & Fung over its private extranet. Li & Fung then sends instruc- tions to appropriate raw material suppliers and factories where the clothing is produced. The Li & Fung extranet tracks the entire production process for each order. Working as a virtual company keeps Li & Fung flexible and adaptable so that it can design and produce the products ordered by its clients in short order to keep pace with rapidly changing fashion trends.

Business Ecosystems and Platforms The Internet and the emergence of digital firms call for some modification of the industry competitive forces model. The tra- ditional Porter model assumes a relatively static industry environment; relatively clear-cut industry boundaries; and a relatively stable set of suppliers, substitutes, and customers. Instead of participating in a single industry, some of today’s firms participate in industry sets—collections of industries that provide related services and products that deliver value to the customer (see Figure 3.11). Business eco- system is another term for these loosely coupled but interdependent networks of suppliers, distributors, outsourcing firms, transportation service firms, and tech- nology manufacturers (Iansiti and Levien, 2004).

An example of a business ecosystem is the mobile Internet platform. In this ecosystem there are four industries: device makers (Apple iPhone, Samsung, LG, and others), wireless telecommunication firms (AT&T, Verizon, T-Mobile, Sprint, and others), independent software applications providers (generally

FIGURE 3.11 AN ECOSYSTEM STRATEGIC MODEL The digital firm era requires a more dynamic view of the boundaries among industries, firms, customers, and suppliers, with competition occurring among industry sets in a business ecosystem. In the ecosystem model, multiple industries work together to deliver value to the customer. IT plays an important role in enabling a dense network of interactions among the participating firms.

Industry 1

Industry 3

Industry 2

Industry 4

Industry Ecosystem

Customers

Substitute Products

and Services

New Market

Entrants

Suppliers

Chapter 3 Information Systems, Organizations, and Strategy 109

small firms selling games, applications, and ring tones), and Internet service providers (who participate as providers of Internet service to the mobile plat- form). Each of these industries has its own history, interests, and driving forces. But these elements come together in a sometimes cooperative and sometimes competitive new mobile digital platform ecosystem, creating value for consum- ers that none of them could achieve acting alone.

Business ecosystems typically have one or only a few keystone firms that domi- nate the ecosystem and create the platforms used by other niche firms. For in- stance, both Microsoft and Facebook provide platforms composed of information systems, technologies, and services that thousands of other firms in different in- dustries use to enhance their own capabilities (Van Alstyne et. al, 2016). Facebook is a platform used by billions of people and millions of businesses to interact and share information as well as to buy, market, and sell numerous products and ser- vices. More firms are trying to use information systems to develop into keystone firms by building IT-based platforms that other firms can use. Alternatively, firms should consider how their information systems will enable them to become profit- able niche players in the larger ecosystems created by keystone firms.

3-4 What are the challenges posed by strategic information systems, and how should they be addressed?

Strategic information systems often change the organization as well as its products, services, and operating procedures, driving the organization into new behavioral patterns. Successfully using information systems to achieve a competitive advantage is challenging and requires precise coordination of tech- nology, organizations, and management.

Sustaining Competitive Advantage The competitive advantages that strategic systems confer do not necessarily last long enough to ensure long-term profitability. Because competitors can re- taliate and copy strategic systems, competitive advantage is not always sustain- able. Markets, customer expectations, and technology change; globalization has made these changes even more rapid and unpredictable. The Internet can make competitive advantages disappear very quickly because virtually all companies can use this technology. Classic strategic systems, such as American Airlines’s SABRE computerized reservation system, Citibank’s ATM system, and FedEx’s package tracking system, benefited by being the first in their industries. Then rival systems emerged. Amazon was an e-commerce leader but now faces com- petition from eBay, Walmart, and Google. Information systems alone cannot provide an enduring business advantage. Systems originally intended to be stra- tegic frequently become tools for survival, required by every firm to stay in business, or they may inhibit organizations from making the strategic changes essential for future success.

Aligning IT with Business Objectives The research on IT and business performance has found that (a) the more suc- cessfully a firm can align information technology with its business goals, the more profitable it will be, and (b) only one-quarter of firms achieve alignment

110 Part One Organizations, Management, and the Networked Enterprise

of IT with the business. About half of a business firm’s profits can be explained by alignment of IT with business (Luftman, 2003).

Most businesses get it wrong: Information technology takes on a life of its own and does not serve management and shareholder interests very well. Instead of businesspeople taking an active role in shaping IT to the enterprise, they ignore it, claim not to understand IT, and tolerate failure in the IT area as just a nuisance to work around. Such firms pay a hefty price in poor perfor- mance. Successful firms and managers understand what IT can do and how it works, take an active role in shaping its use, and measure its impact on rev- enues and profits.

Management Checklist: Performing a Strategic Systems Analysis To align IT with the business and use information systems effectively for com- petitive advantage, managers need to perform a strategic systems analysis. To identify the types of systems that provide a strategic advantage to their firms, managers should ask the following questions:

1. What is the structure of the industry in which the firm is located? • What are some of the competitive forces at work in the industry?

Are there new entrants to the industry? What is the relative power of suppliers, customers, and substitute products and services over prices?

• Is the basis of competition quality, price, or brand? • What are the direction and nature of change within the industry? From

where are the momentum and change coming? • How is the industry currently using information technology? Is the organiza-

tion behind or ahead of the industry in its application of information systems?

2. What are the business, firm, and industry value chains for this particular firm? • How is the company creating value for the customer—through lower

prices and transaction costs or higher quality? Are there any places in the value chain where the business could create more value for the customer and additional profit for the company?

• Does the firm understand and manage its business processes using the best practices available? Is it taking maximum advantage of supply chain management, customer relationship management, and enterprise systems?

• Does the firm leverage its core competencies? • Is the industry supply chain and customer base changing in ways that

benefit or harm the firm? • Can the firm benefit from strategic partnerships, value webs, ecosystems,

or platforms? • Where in the value chain will information systems provide the greatest

value to the firm?

3. Have we aligned IT with our business strategy and goals? • Have we correctly articulated our business strategy and goals? • Is IT improving the right business processes and activities to promote this

strategy? • Are we using the right metrics to measure progress toward those goals?

Managing Strategic Transitions Adopting the kinds of strategic systems described in this chapter generally requires changes in business goals, relationships with customers and suppli- ers, and business processes. These sociotechnical changes, affecting both

Chapter 3 Information Systems, Organizations, and Strategy 111

social and technical elements of the organization, can be considered strategic transitions—a movement between levels of sociotechnical systems.

Such changes often entail blurring of organizational boundaries, both external and internal. Suppliers and customers must become intimately linked and may share each other’s responsibilities. Managers will need to devise new business pro- cesses for coordinating their firms’ activities with those of customers, suppliers, and other organizations. The organizational change requirements surrounding new information systems are so important that they merit attention throughout this text. Chapter 14 examines organizational change issues in more detail.

3-5 How will MIS help my career? Here is how Chapter 3 and this book can help you find a job as an entry-level business development representative.

The Company Superior Data Quality, a fast-growing Los Angeles–based company providing software and services to help large companies manage their data and data qual- ity, is looking for an entry-level business development representative. The company’s data quality and data management tools and services help firms correct, standardize, and enhance customer data by capturing accurate address, email, and phone information; removing duplicate data in corporate systems; analyzing data to discover relationships; restructuring and standardizing data; and monitoring data to ensure ongoing quality control and standardization. The company has 12,000 clients worldwide, 450 employees, and offices throughout the United States, Europe, and Asia.

Position Description The business development representative will help the company’s sales team meet aggressive growth targets. The company provides classroom and on-the- job training on how to communicate with prospects and customers, how to identify appropriate markets for its solutions, how to write a sales plan, and how to use tools such as Salesforce.com. Job responsibilities include:

• Researching targeted accounts to generate potential business opportunities.

• Supporting customer acquisition and sales strategies.

• Implementing tactics for successful execution of marketing campaigns.

• Building and managing a pipeline of sales leads through prospecting and qualifying marketing-generated leads.

• Reporting on the success of campaigns and lead generation activities.

Job Requirements • Bachelor’s degree

• Strong interest in a sales career

• Exceptional communication, interpersonal, analytical, and problem-solving skills

• Ability to multitask in fast-paced environment

112 Part One Organizations, Management, and the Networked Enterprise

Interview Questions 1. What do you know about data quality and data management? Have you any

work experience in these areas? Have you ever encountered a data quality problem? If so, can you describe how the problem was solved?

2. Have you ever worked with Salesforce.com? What do you know about it? How have you used the software?

3. Can you give us an example of a marketing or sales-related problem or other business problem that you helped solve? Do you have any examples of your writing and analysis work?

4. Have you had much face-to-face contact with customers? Can you describe what work you did with customers?

Author Tips 1. Review the discussion of IT and business strategy in Chapter 3 and also the

section on data management, including data quality, in Chapter 6.

2. Use the web to find out more about tools and services for promoting data quality and data management and research the company’s specific offerings in this area.

3. Review the company’s LinkedIn profile and posts in addition to other social media channels. Are there consistent themes across these channels on which the company seems to focus? Be prepared to show that you understand the kinds of business challenges facing this company.

4. Learn what you can about Salesforce.com related to the responsibilities out- lined for this job. Inquire about exactly how you would be using Salesforce. com in your work.

5. Consider inquiring what kinds of problems with customers’ data quality you would be most likely to encounter on the job.

3-1 Which features of organizations do managers need to know about to build and use information systems successfully?

All modern organizations are hierarchical, specialized, and impartial, using explicit routines to max- imize efficiency. All organizations have their own cultures and politics arising from differences in interest groups, and they are affected by their surrounding environment. Organizations differ in goals, groups served, social roles, leadership styles, incentives, types of tasks performed, and type of struc- ture. These features help explain differences in organizations’ use of information systems. Information systems and the organizations in which they are used interact with and influence each other.

3-2 What is the impact of information systems on organizations? The introduction of a new information system will affect organizational structure, goals, work design,

values, competition between interest groups, decision making, and day-to-day behavior. At the same time, information systems must be designed to serve the needs of important organizational groups and will be shaped by the organization’s structure, business processes, goals, culture, politics, and manage- ment. Information technology can reduce transaction and agency costs, and such changes have been accentuated in organizations using the Internet. New systems disrupt established patterns of work and power relationships, so there is often considerable resistance to them when they are introduced.

3-3 How do Porter’s competitive forces model, the value chain model, synergies, core competencies, and network economics help companies develop competitive strategies using information systems?

In Porter’s competitive forces model, the strategic position of the firm and its strategies are deter- mined by competition with its traditional direct competitors, but they are also greatly affected by new

REVIEW SUMMARY

Chapter 3 Information Systems, Organizations, and Strategy 113

market entrants, substitute products and services, suppliers, and customers. Information systems help com- panies compete by maintaining low costs, differentiating products or services, focusing on market niche, strengthening ties with customers and suppliers, and increasing barriers to market entry with high levels of operational excellence.

The value chain model highlights specific activities in the business where competitive strategies and infor- mation systems will have the greatest impact. The model views the firm as a series of primary and support activities that add value to a firm’s products or services. Primary activities are directly related to production and distribution, whereas support activities make the delivery of primary activities possible. A firm’s value chain can be linked to the value chains of its suppliers, distributors, and customers. A value web consists of information systems that enhance competitiveness at the industry level by promoting the use of standards and industrywide consortia and by enabling businesses to work more efficiently with their value partners.

Because firms consist of multiple business units, information systems achieve additional efficiencies or enhance services by tying together the operations of disparate business units. Information systems help businesses leverage their core competencies by promoting the sharing of knowledge across business units. Information systems facilitate business models based on large networks of users or subscribers that take advantage of network economics. A virtual company strategy uses networks to link to other firms so that a company can use the capabilities of other companies to build, market, and distribute products and services. In business ecosystems, multiple industries work together to deliver value to the customer. Information systems support a dense network of interactions among the participating firms.

3-4 What are the challenges posed by strategic information systems, and how should they be addressed? Implementing strategic systems often requires extensive organizational change and a transition from one

sociotechnical level to another. Such changes are called strategic transitions and are often difficult and pain- ful to achieve. Moreover, not all strategic systems are profitable, and they can be expensive to build. Many strategic information systems are easily copied by other firms, so that strategic advantage is not always sustainable.

Key Terms Agency theory, 90 Benchmarking, 103 Best practices, 104 Business ecosystem, 108 Competitive forces model, 94 Core competency, 106 Disruptive technologies, 87 Efficient customer response system, 96 Mass customization, 97 Network economics, 107 Organization, 81

Platforms, 109 Primary activities, 103 Product differentiation, 95 Routines, 84 Strategic transitions, 111 Support activities, 103 Switching costs, 100 Transaction cost theory, 89 Value chain model, 101 Value web, 105 Virtual company, 107

MyLab MIS To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.

Review Questions 3-1 Which features of organizations do managers

need to know about to build and use information systems successfully?

• Define an organization and compare the technical definition of organizations with the behavioral definition.

• Identify and describe the features of orga- nizations that help explain differences in organizations’ use of information systems.

3-2 What is the impact of information systems on organizations?

• Describe the major economic theories that help explain how information systems affect organizations.

• Describe the major behavioral theories that help explain how information systems affect organizations.

114 Part One Organizations, Management, and the Networked Enterprise

• Explain why there is considerable organi- zational resistance to the introduction of information systems.

• Describe the impact of the Internet and dis- ruptive technologies on organizations.

3-3 How do Porter’s competitive forces model, the value chain model, synergies, core competencies, and network economics help companies develop competitive strategies using information systems?

• Define Porter’s competitive forces model and explain how it works.

• Describe what the competitive forces model explains about competitive advantage.

• List and describe four competitive strate- gies enabled by information systems that firms can pursue.

• Describe how information systems can sup- port each of these competitive strategies and give examples.

• Explain why aligning IT with business objec- tives is essential for strategic use of systems.

• Define and describe the value chain model.

• Explain how the value chain model can be used to identify opportunities for informa- tion systems.

• Define the value web and show how it is related to the value chain.

• Explain how the value web helps busi- nesses identify opportunities for strategic information systems.

• Describe how the Internet has changed com- petitive forces and competitive advantage.

• Explain how information systems promote synergies and core competencies.

• Describe how promoting synergies and core competencies enhances competitive advantage.

• Explain how businesses benefit by using network economics and ecosystems.

• Define and describe a virtual company and the benefits of pursuing a virtual company strategy.

3-4 What are the challenges posed by strategic information systems, and how should they be addressed? • List and describe the management challenges

posed by strategic information systems.

• Explain how to perform a strategic systems analysis.

Discussion Questions 3-5 It has been said that there is no such thing

as a sustainable strategic advantage. Do you agree? Why or why not?

3-6 It has been said that the advantage that leading-edge retailers such as Dell and Walmart have over their competition isn’t

MyLab MIS

MyLab MIS

technology; it’s their management. Do you agree? Why or why not?

3-7 What are some of the issues to consider in determining whether the Internet would provide your business with a competitive advantage?

MyLab MIS

Hands-On MIS Projects The projects in this section give you hands-on experience identifying information systems to support a business strategy and to solve a customer retention problem, using a database to improve decision making about busi- ness strategy, and using web tools to configure and price an automobile. Visit MyLab MIS to access this chapter’s Hands-On MIS Projects.

Management Decision Problems

3-8 Macy’s, Inc., through its subsidiaries, operates approximately 840 department stores in the United States. Its retail stores sell a range of merchandise, including apparel, home furnishings, and housewares. Senior management has decided that Macy’s needs to tailor merchandise more to local tastes and that the colors, sizes, brands, and styles of clothing and other merchandise should be based on the sales patterns in each individual Macy’s store. How could information systems help Macy’s management implement this new strategy? What pieces of data should these systems collect to help management make merchandising decisions that support this strategy?

Chapter 3 Information Systems, Organizations, and Strategy 115

3-9 T-Mobile has launched aggressive campaigns to attract customers with lower mobile phone prices, and it has added to its customer base. However, management wants to know if there are other ways of luring and keeping customers. Are customers concerned about the level of customer service, uneven network coverage, or data plans? How can the company use information systems to help find the answer? What management decisions could be made using information from these systems?

Improving Decision Making: Using a Database to Clarify Business Strategy

Software skills: Database querying and reporting; database design Business skills: Reservation systems; customer analysis

3-10 In this exercise, you will use database software to analyze the reservation transactions for a hotel and use that information to fine-tune the hotel’s business strategy and marketing activities. In MyLab MIS, you will find a database for hotel reservation transactions developed in Microsoft Access

with information about the President’s Inn in Cape May, New Jersey. At the Inn, 10 rooms overlook side streets, 10 rooms have bay windows that offer limited views of the ocean, and the remaining 10 rooms in the front of the hotel face the ocean. Room rates are based on room choice, length of stay, and number of guests per room. Room rates are the same for one to four guests. Fifth and sixth guests must pay an additional $20 charge each per person per day. Guests staying for seven days or more receive a 10 percent discount on their daily room rates.

The owners currently use a manual reservation and bookkeeping system, which has caused many prob- lems. Use the database to develop reports on average length of stay, average visitors per room, base revenue per room (i.e., length of visit multiplied by the daily rate), and strongest customer base. After answering these ques- tions, write a brief report about the Inn’s current business situation and suggest future strategies.

Improving Decision Making: Using Web Tools to Configure and Price an Automobile

Software skills: Internet-based software Business skills: Researching product information and pricing

3-11 In this exercise, you will use software at car websites to find product information about a car of your choice and use that information to make an important purchase decision. You will also evaluate two of these sites as selling tools. You are interested in purchasing a new Ford Escape (or some other car of your choice). Go to the website

of CarsDirect (www.carsdirect.com) and begin your investigation. Locate the Ford Escape. Research the vari- ous Escape models, and choose one you prefer in terms of price, features, and safety ratings. Locate and read at least two reviews. Surf the website of the manufacturer, in this case Ford (www.ford.com). Compare the infor- mation available on Ford’s website with that of CarsDirect for the Ford Escape. Try to locate the lowest price for the car you want in a local dealer’s inventory. Suggest improvements for CarsDirect.com and Ford.com.

Collaboration and Teamwork Project Identifying Opportunities for Strategic Information Systems

3-12 With your team of three or four other students, select a company described in the Wall Street Journal, Fortune, Forbes, or another business publication or do your research on the web. Visit the company’s website to find additional information about that company and to see how the firm is using the web. On the basis of this information, analyze the business. Include a description of the organization’s features, such as important business processes, culture, structure, and environment as well as its business strategy. Suggest strategic information systems appropriate for that particular business, including those based on Internet technology, if appropriate. If possible, use Google Docs and Google Drive or Google Sites to brainstorm, organize, and develop a presentation of your findings for the class.

116 Part One Organizations, Management, and the Networked Enterprise

Grocery Wars

CASE STUDY

On June 16, 2017 Amazon announced that it was purchasing the upscale food market chain Whole Foods for $13.7 billion. The acquisition, completed in August of that year, was Amazon’s largest, and sent shock waves throughout the grocery industry. The purchase has profound im- plications for the future of groceries, the entire food industry, and perhaps the future of shopping itself.

Even before acquiring Whole Foods, Amazon had been expanding into groceries and physical locations, including bookstores, two Seattle drive-through gro- cery stores where customers can pick up online or- ders, and a convenience store called Amazon Go that uses sensors and software to let shoppers pay for pur- chases without waiting in line to check out. Amazon has also acquired experience with online grocery sales through its Amazon Fresh program. However, Amazon hadn’t quite achieved the success with online grocer- ies as it had with books and media. Whole Foods gives Amazon new ways to enhance its online business while establishing a presence in physical retail outlets.

The grocery business is notoriously competitive and low-margin, with profits of 1–2 cents on the dollar. Although Amazon is skilled at competing on low price, why take on this challenge? From Amazon’s stand- point, there are several reasons why Whole Foods might turn out to be a very good investment. Groceries are an important purchase category, representing $800 billion in U.S. sales. A recent report by the Food Marketing Institute found that U.S. grocery sales could grow fivefold over the next decade. Purchasing Whole Foods helps Amazon become a major player in the grocery industry. Whole Foods takes Amazon’s physi- cal presence to a new level, with more than 460 stores in the United States, Canada, and Britain and sales of $16 billion in fiscal 2017. It will be within an hour or 30 minutes of as many people as possible.

Amazon could use its $119-a-year Prime member- ship service, which gives customers free, two-day shipping and other benefits, to offer Whole Foods customers a better price on groceries, as it does for books in its bookstores. The stores could also serve as an advertisement to get more customers to sign up for Prime. As of September 2017, Prime had 49 mil- lion subscribers in the United States, representing about 44 percent of households.

Amazon is a master at providing what’s known as “consumer convenience.” E-commerce is soaring and food-delivery businesses are taking off because people are too busy or otherwise occupied to leave their homes to go out and shop. Americans are ordering more of their groceries and meals online. A study com- missioned by the market-research firm Euromonitor projects that the online market is projected to grow 15 times faster than the rest of the restaurant business through the end of the decade. Amazon can continue to sell groceries online but it can also provide the cus- tomer experience of shopping for food in person.

Whole Foods can also be used as a delivery net- work for Amazon’s other non-grocery products. Amazon has been trying to open warehouses closer to customers so it can deliver orders in as little as two hours, and Whole Foods stores will bring Amazon physically closer to its shoppers. The stores could become locations for returning online orders of all kinds. Amazon could also use them to cut deliv- ery times for online orders.

Several analysts have observed that Whole Foods’ urban and suburban locations are so valuable for Amazon’s delivery business that the deal could be worthwhile even if Whole Foods pretty much stopped selling food. When Amazon bought Whole Foods, it acquired 431 U.S. upper-income, prime- location distribution points for everything it does. With Whole Foods’ footprint in affluent areas and Amazon’s expertise in supply chain and delivery, it could upend both food retailing and food delivery.

One expert has called Amazon a “life bundle,” par- ticularly for affluent Americans. Amazon Prime could become the cable bundle of the future—an annual subscription to a group of diverse services that give Amazon a dependable revenue stream and a grow- ing, loyal customer base. More than half of American households with incomes over $100,000 are already Prime subscribers, and they spend more than $1,000 a year using this service. Affluent families regularly spend $500 a month at Whole Foods. Once Amazon owns Whole Foods, its richest customers could be ex- pected to spend thousands of dollars a year through Amazon. As Whole Foods customers are urged to sign up for Amazon Prime—and as Prime customers get enticing deals at Whole Foods—Amazon’s penetration

Chapter 3 Information Systems, Organizations, and Strategy 117

of the upscale market should grow, even as it offers discounts to lower-income Americans.

Amazon started making changes to Whole Foods as soon as the acquisition was completed in August 2017. The day the acquisition went through, prices of many Whole Foods staples dropped. Prices of some items decreased by up to 40 percent. An identi- cal basket of items from a Whole Foods location in Brooklyn went from $97.76 pre-acquisition to $75.85 post-acquisition. In November 2017, Whole Foods announced another round of price cuts, with a focus on holiday staples and best-sellers as well as Whole Foods’ private-label 365 line of products.

In February 2018, Amazon and Whole Foods launched a test to deliver groceries and other goods directly from Whole Foods in four cities across the United States. Whole Foods was basically used as an Amazon depot. Customers can order fresh produce, seafood, meat, flowers, baked goods, and dairy prod- ucts for delivery, with items arriving at their door- step within two hours. The company plans to roll out the service through Prime Now to more cities. Later in February, Amazon extended its 5 percent cash-back benefit to Prime members shopping at Whole Foods with the Amazon Prime Rewards Visa Card. Selected Whole Foods stores have begun selling Amazon technology products, including the Amazon Echo voice- controlled speaker system, Echo Dots, Fire TV, Kindle e-readers, and Fire tablets.

Whole Foods announced that Amazon Prime would replace Whole Foods’ loyalty program. And Whole Foods goods are now available on Amazon. com, AmazonFresh (Amazon’s grocery delivery ser- vice), Prime Pantry, and Prime Now. Some Whole Foods stores have added Amazon Lockers, allowing customers to have their Amazon.com orders deliv- ered to a secure location inside certain Whole Foods stores until it’s time to pick them up. Customers can also use lockers to return Amazon items. Amazon and Whole Foods are integrating their point-of-sale systems to enable more of Amazon’s brands to be available at Whole Foods, and vice versa.

Buying Whole Foods represents an escalation of Amazon’s long-running battle with Walmart. Walmart is the world’s largest and most successful physical retailer, while Amazon dominates the online com- merce space. Each wants to move into the other’s turf: Amazon would like to have a more formidable physical presence as well as online, while Walmart is making a big push to expand in e-commerce.

Walmart is the largest seller of groceries in the United States, and with Sam’s Club, accounts for about 18 percent of the grocery market. Grocery ac- counts for 56 percent of Walmart’s total sales, and grocery shopping is a major driver of store traffic and customer loyalty. The company is intent on main- taining its position as the leading U.S. grocer. Walmart has invested and tested in click-and-collect programs, stand-alone grocery pick-up sites, and scanning and paying for items with smartphones. Grocery is where Walmart really shines. If Walmart loses the grocery battle to Amazon, it has no chance of ever overtaking Amazon as the world’s largest e-commerce player.

Online grocery sales were a key part of Walmart’s e-commerce sales growth in 2017, and management expects online grocery expansion to be the main driver of Walmart’s sales growth going forward. But if Walmart wants to meet their goal of 40 percent growth in online sales in 2018, it will have to do even more. Management rolled out same-day grocery delivery to 100 markets by the end of 2018, covering 40 percent of U.S. households. Deliveries are handled by Uber Technologies and other providers, with a $9.95 service fee for a minimum $30 purchase. Walmart’s online order and pickup service was available at 2,000 stores by the end of 2018. Management is hoping growth will continue to increase year over year with rollout of new stores into the online order and pickup program.

The move into home delivery will help get more of Walmart’s in-store shoppers to start buying online as well, where they typically spend twice as much. It also complements Walmart’s rollout of curbside gro- cery pickup, now available in 1,200 stores and adding an additional 1,000 this year.

Walmart will compete against Amazon’s Prime Now service, which offers free two-hour delivery to members of its loyalty program. Both companies have also introduced services that allow delivery people to enter homes and leave packages inside.

How will the rest of the grocery industry fare as a re- sult of these developments? Amazon terrifies competi- tors because it can offer such low prices on so many different categories of items. If Whole Foods follows this playbook, shoppers can expect prices to fall, and other grocery industry players will suffer. Stocks for Kroger, Costco, and Dollar General all fell more than six percent when Amazon announced the Whole Foods acquisition. The merger might be even worse news for Instacart, the grocery-delivery service that has had a close relationship with Whole Foods.

118 Part One Organizations, Management, and the Networked Enterprise

There are other forces at work affecting Amazon-Whole Foods, Walmart, and the grocery industry’s competitive landscape. Money spent on dining out has surpassed grocery sales. Instead of shopping weekly at the supermarket for gro- ceries to prepare meals at home, consumers are increasingly snacking and using prepared foods. Companies in the $1.5 billion meal kit industry (such as Blue Apron) have moved into the market, though grocery chains are creating their own pre- packaged food kits as well.

Grocers are also adapting to surging consumer de- mand for fresher items, personalized options, and use of technology to improve the food-buying experience. Deloitte researchers found an overwhelming majority of shoppers are deploying digital devices to research the groceries they intend to buy. Deloitte also found that shoppers spend more when using digital tools.

Despite the growth of online food shopping and these other shifts in the competitive landscape, ex- perts believe the market for supermarkets is strong. According to brokerage and advisory firm Marcus & Millichap, there will be a wave of grocery store open- ings consuming 25 million square feet of commercial space over the next five years. Domestic chains and German discount supermarkets Aldi and Lidl are

opening U.S. locations and smaller-format stores are likely to be part of the mix.

Sources: Kate Taylor, “Here Are the Changes Amazon Is Making to Whole Foods,” Business Insider, March 2, 2018; Adam Levy, “Walmart’s Grocery Efforts Probably Aren’t Enough to Overcome Amazon,” The Motley Fool, March 17, 2018; Matthew Boyle, “Walmart to Expand Grocery Delivery as Amazon Battle Rages,” Bloomberg, March 14, 2018; John Cook, “Walmart Counterpunches Amazon with Plan to Expand Grocery Delivery Service to 100 U.S. Markets,” GeekWire, March 14, 2018; Toby Clarence-Smith, “Amazon vs. Walmart: Bezos Goes for the Jugular with Whole Foods Acquisition,” www.Toptal.com, accessed March 21, 2018; Tom McGee,” Perspective for the Grocery Wars: Shoppers Crave Experience,” Forbes, September 13, 2017; Derek Thompson, “Why Amazon Bought Whole Foods,” The Atlantic, June 16, 2017; and Nick Wingfield and Michael J. de la Merced, “Amazon to Buy Whole Foods for $13.4 Billion,” New York Times, June 16, 2017.

CASE STUDY QUESTIONS 3-13 Analyze Amazon.com and Walmart using the

value chain and competitive forces models.

3-14 Compare the role of grocery sales in Amazon and Walmart’s business strategies.

3-15 What role does information technology play in these strategies?

3-16 Which company is more likely to dominate grocery retailing? Explain your answer.

MyLab MIS Go to the Assignments section of MyLab MIS to complete these writing exercises.

3-17 Describe the impact of the Internet on each of the five competitive forces.

3-18 What are the main factors that mediate the relationship between information technology and organiza- tions and that managers need to take into account when developing new information systems? Give a business example of how each factor would influence the development of new information systems.

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MyLab MIS Discussion Questions: 4-5, 4-6, 4-7; Hands-on MIS Projects: 4-8, 4-9, 4-10, 4-11; Writing Assignments: 4-17, 4-18; eText with Conceptual Animations

CHAPTER CASES Are Cars Becoming Big Brother on Wheels? Will Automation Kill Jobs? How Harmful Are Smartphones? Facebook Privacy: Your Life for Sale

VIDEO CASES What Net Neutrality Means for You Facebook and Google Privacy: What Privacy? United States v. Terrorism: Data Mining for

Terrorists and Innocents

Instructional Video: Viktor Mayer-Schönberger on the Right to Be

Forgotten

LEARNING OBJECTIVES After reading this chapter, you will be able to answer the following questions:

4-1 What ethical, social, and political issues are raised by information systems?

4-2 What specific principles for conduct can be used to guide ethical decisions?

4-3 Why do contemporary information systems technology and the Internet pose challenges to the protection of individual privacy and intellectual property?

4-4 How have information systems affected laws for establishing accountability and liability and the quality of everyday life?

4-5 How will MIS help my career?

Ethical and Social Issues in Information Systems4CHAPTER

121

Cars today have become sophisticated listening posts on wheels. They can track phone calls and texts, record what radio stations you listen to, mon-itor the speed at which you drive and your braking actions, and even tell when you are breaking the speed limit, often without your knowledge.

Tens of millions of drivers in the United States are currently being moni- tored, with that number rising every time a new vehicle is sold or leased. There are 78  million cars on the road with an embedded cyber connection that can be used for monitoring drivers. According to research firm Gartner Inc., 98 percent of new cars sold in the United States and Europe will be connected by 2021.

Since 2014, every new car in the United States comes with an event data recorder (EDR), which records and stores over a dozen data points, including vehicle speed, seat belt use, and braking activation. EDR data are available to any auto maker as well as to insurance companies, which use these stored EDR data to help establish responsibility for an accident or to detect fraud.

EDRs are mandated and regulated by the U.S. gov- ernment, but other data-gathering software in today’s cars is not. Such software underlies numerous sen- sors, diagnostic systems, in-dash navigation systems, and built-in cellular connections, as well as driver- assistance systems to help drivers park, stay in their lane, avoid rear-ending another car, and steer for short time periods. All of this software keeps track of what drivers are doing. Newer cars may record driver eye movements, the weight of people in the front seats, and whether the driver’s hands are on the wheel. Smartphones, whether connected to the car or not, can also track your activities, including any texting while driving. Auto makers are able to mine all this information, as are app developers and com- panies such as Google or Spotify.

With the exception of medical information, the United States has few regu- lations governing what data companies can gather and how they can use the data. Companies generally are not required to conceal names or other personal details. In most cases the driver must consent to allowing his or her personal information to be tracked or monitored. Many people unwittingly provide this consent when they check off a box on one of the lengthy service agreement forms required to register a car’s in-dash system or navigation app.

Collecting such large amounts of personal data generated by drivers has raised concerns about whether automakers and others are doing enough to pro- tect people’s privacy. Drivers may welcome the use of information to relay helpful diagnostic information or updates on nearby traffic jams. But they do

Are Cars Becoming Big Brother on Wheels?

© Metamorworks/Shutterstock

122 Part One Organizations, Management, and the Networked Enterprise

not necessarily endorse other uses, and automakers have refrained from com- menting on future data collection plans and policies.

Automakers argue that the data are valuable for improving vehicle perfor- mance and vehicle safety and soon will be able to reduce traffic accidents and fatalities. Amassing detailed data about human driving behavior is also essential for the development of self-driving cars. But privacy experts believe the prac- tice is dangerous. With enough data about driver behavior, individual profiles as unique as fingerprints could be developed. Trips to businesses reveal buy- ing habits and relationships that could be valuable to corporations, government agencies, or law enforcement. For example, frequent visits to a liquor store or mental health clinic could reveal information about someone’s drinking habits or health problems. People obviously would not want such confidential data shared with others.

Sources: Peter Holley, “Big Brother on Wheels: Why Your Car Company May Know More About You Than Your Spouse.” Washington Post, January 15, 2018; Christina Rogers, “What Your Car Knows about You,” Wall Street Journal, August 18, 2018; John R. Quain, “Cars Suck Up Data About You. Where Does It All Go?” New York Times, July 27, 2017; and Russ Heaps, “Data Collection for Self-Driving Cars Could Be Risking Your Privacy,” Autotrader, September 2016.

The challenges that connected vehicles and big data pose to privacy, described in the chapter-opening case, show that technology can be a double-edged sword. It can be the source of many benefits, including the capability to make driving safer and more efficient. At the same time, digital technology creates new opportunities for invading privacy and using information that could cause harm.

The chapter-opening diagram calls attention to important points this case and this chapter raise. Developments in data management technology, the Internet of Things (IoT), and analytics have created opportunities for organizations to use big data to improve operations and decision making. Big data analytics are now being applied to all the data generated by motor vehicles, especially those with Internet connections. The auto makers and other organizations described here are benefiting from using big data to monitor vehicle performance and driver behavior and to provide drivers with helpful tools for driving safely and caring for their cars. However, the use of big data from motor vehicles is also taking benefits away from individuals. Individuals might be subject to job dis- crimination or higher insurance rates because organizations have new tools to assemble and analyze huge quantities of data about their driving behavior. There are very few privacy protections for all the personal data gathered from car driving. New privacy protection laws and policies need to be developed to keep up with the technologies for assembling and analyzing big data.

This case illustrates an ethical dilemma because it shows two sets of interests at work, the interests of organizations that have raised profits or even helped many people with the data generated by connected vehicles and those who fer- vently believe that businesses and public organizations should not use big data analysis to invade privacy or harm individuals. As a manager, you will need to be sensitive to both the positive and negative impacts of information systems for your firm, employees, and customers. You will need to learn how to resolve ethical dilemmas involving information systems.

Chapter 4 Ethical and Social Issues in Information Systems 123

Business Solutions

Management

Organization

Vehicle and Driver Monitoring Systems

Technology

Information System

Business Problem

• Opportunities from new technology • Undeveloped legal environment

• Collect car- generated data

• Analyze car/driver data

• Monitor vehicle performance • Monitor driver behavior • Provide diagnostic and navigation tools • Assemble individual profiless

• Invade privacy? • Increase e�ciency • Increase safety

• Internet of Things • Sensors • Smartphones • EDR • In-car diagnostic/navigation/safety/ entertainment systems

• Develop big data strategy

• Develop privacy policies

Here are some questions to think about: Does analyzing big data from motor vehicles create an ethical dilemma? Why or why not? Should there be new privacy laws to protect personal data collected from cars? Why or why not?

4-1 What ethical, social, and political issues are raised by information systems?

In the past 20 years, we have witnessed, arguably, one of the most ethically challenging periods for U.S. and global business. Table 4.1 provides a small sam- ple of recent cases demonstrating failed ethical judgment by senior and middle managers. These lapses in ethical and business judgment occurred across a broad spectrum of industries.

In today’s new legal environment, managers who violate the law and are convicted will most likely spend time in prison. U.S. federal sentencing guide- lines adopted in 1987 mandate that federal judges impose stiff sentences on business executives based on the monetary value of the crime, the presence of a conspiracy to prevent discovery of the crime, the use of structured financial transactions to hide the crime, and failure to cooperate with prosecutors (U.S. Sentencing Commission, 2004).

Although business firms would, in the past, often pay for the legal defense of their employees enmeshed in civil charges and criminal investigations, firms are now encouraged to cooperate with prosecutors to reduce charges against the entire firm for obstructing investigations. More than ever, as a manager or an employee, you will have to decide for yourself what constitutes proper legal and ethical conduct.

These major instances of failed ethical and legal judgment were not master- minded by information systems departments, but information systems were instrumental in many of these frauds. In many cases, the perpetrators of these crimes artfully used financial reporting information systems to bury their deci- sions from public scrutiny.

124 Part One Organizations, Management, and the Networked Enterprise

We deal with the issue of control in information systems in Chapter 8. In this chapter, we will talk about the ethical dimensions of these and other actions based on the use of information systems.

Ethics refers to the principles of right and wrong that individuals, acting as free moral agents, use to make choices to guide their behavior. Information systems raise new ethical questions for both individuals and societies because they create opportunities for intense social change and, thus, threaten existing distributions of power, money, rights, and obligations. Like other technologies, such as steam engines, electricity, and the telephone, information technology can be used to achieve social progress, but it can also be used to commit crimes and threaten cherished social values. The development of information technol- ogy will produce benefits for many and costs for others.

Ethical issues in information systems have been given new urgency by the rise of the Internet and e-commerce. Internet and digital technologies make it easier than ever to assemble, integrate, and distribute information, unleashing new concerns about the appropriate use of customer information, the protec- tion of personal privacy, and the protection of intellectual property.

Other pressing ethical issues that information systems raise include estab- lishing accountability for the consequences of information systems, setting standards to safeguard system quality that protects the safety of the individual and society, and preserving values and institutions considered essential to the quality of life in an information society. When using information systems, it is essential to ask, “What is the ethical and socially responsible course of action?”

A Model for Thinking about Ethical, Social, and Political Issues Ethical, social, and political issues are closely linked. The ethical dilemma you may face as a manager of information systems typically is reflected in social and political debate. One way to think about these relationships is

TABLE 4.1 RECENT EXAMPLES OF FAILED ETHICAL JUDGMENT BY SENIOR MANAGERS

Wells Fargo (2018) Wells Fargo bank admitted to opening millions of false accounts, manipulating terms of mortgages, and forcing auto loan customers to purchase unneeded insurance. The bank was fined $2.5 billion by the federal government.

Deerfield Management (2017) Washington, D.C., hedge fund indicted for using confidential information about government financing to trade shares in healthcare companies that would be affected by the changes.

General Motors, Inc. (2015) General Motors CEO admitted the firm covered up faulty ignition switches for more than a decade, resulting in the deaths of at least 114 customers. More than 100 million vehicles worldwide were affected.

Takata Corporation (2015) Takata executives admitted they covered up faulty airbags used in millions of cars over many years. Three executives were indicted on criminal charges and Takata was fined $1 billion. Takata filed for bankruptcy in June 2017.

GlaxoSmithKline LLC (2012) The global healthcare giant admitted to unlawful and criminal promotion of certain prescription drugs, its failure to report certain safety data, and its civil liability for alleged false price reporting practices. Fined $3 billion, the largest healthcare fraud settlement in U.S. history.

Bank of America (2012) Federal prosecutors charged Bank of America and its affiliate, Countrywide Financial, with defrauding government-backed mortgage agencies by churning out loans at a rapid pace without proper controls. Prosecutors sought $1 billion in penalties from the bank.

Chapter 4 Ethical and Social Issues in Information Systems 125

shown in Figure 4.1. Imagine society as a more or less calm pond on a sum- mer day, a delicate ecosystem in partial equilibrium with individuals and with social and political institutions. Individuals know how to act in this pond because social institutions (family, education, organizations) have de- veloped well-honed rules of behavior, and these are supported by laws de- veloped in the political sector that prescribe behavior and promise sanctions for violations. Now toss a rock into the center of the pond. What happens? Ripples, of course.

Imagine instead that the disturbing force is a powerful shock of new informa- tion technology and systems hitting a society more or less at rest. Suddenly, in- dividual actors are confronted with new situations often not covered by the old rules. Social institutions cannot respond overnight to these ripples—it may take years to develop etiquette, expectations, social responsibility, politically cor- rect attitudes, or approved rules. Political institutions also require time before developing new laws and often require the demonstration of real harm before they act. In the meantime, you may have to act. You may be forced to act in a legal gray area.

We can use this model to illustrate the dynamics that connect ethical, social, and political issues. This model is also useful for identifying the main moral dimensions of the information society, which cut across various levels of action—individual, social, and political.

FIGURE 4.1 THE RELATIONSHIP BETWEEN ETHICAL, SOCIAL, AND POLITICAL ISSUES IN AN INFORMATION SOCIETY

The introduction of new information technology has a ripple effect, raising new ethical, social, and political issues that must be dealt with on the individual, social, and politi- cal levels. These issues have five moral dimensions: information rights and obligations, property rights and obligations, system quality, quality of life, and accountability and control.

System Quality

Ethical Issues

Social Issues

Political Issues

Polity

Society

Individual

Quality of Life

Accountability and Control

Information Rights and Obligations

Property Rights and Obligations

Information Technology and

Systems

126 Part One Organizations, Management, and the Networked Enterprise

Five Moral Dimensions of the Information Age The major ethical, social, and political issues that information systems raise include the following moral dimensions.

• Information rights and obligations What information rights do individuals and organizations possess with respect to themselves? What can they protect?

• Property rights and obligations How will traditional intellectual property rights be protected in a digital society in which tracing and accounting for owner- ship are difficult, and ignoring such property rights is so easy?

• Accountability and control Who can and will be held accountable and liable for the harm done to individual and collective information and property rights?

• System quality What standards of data and system quality should we demand to protect individual rights and the safety of society?

• Quality of life What values should be preserved in an information- and knowledge-based society? Which institutions should we protect from violation? Which cultural values and practices does the new information technology support?

We explore these moral dimensions in detail in Section 4-3.

Key Technology Trends that Raise Ethical Issues Ethical issues long preceded information technology. Nevertheless, information technology has heightened ethical concerns, taxed existing social arrangements, and made some laws obsolete or severely crippled. Five key technological trends are responsible for these ethical stresses, summarized in Table 4.2.

The doubling of computing power every 18 months has made it possible for most organizations to use information systems for their core production processes. As a result, our dependence on systems and our vulnerability to system errors and poor data quality have increased. Social rules and laws have not yet adjusted to this dependence. Standards for ensuring the accuracy and reliability of information systems (see Chapter 8) are not universally accepted or enforced.

Advances in data storage techniques and rapidly declining storage costs have been responsible for the proliferation of databases on individuals—employees, customers, and potential customers—maintained by private and public organi- zations. These advances in data storage have made the routine violation of indi- vidual privacy both inexpensive and effective. Enormous data storage systems

TABLE 4.2 TECHNOLOGY TRENDS THAT RAISE ETHICAL ISSUES

TREND IMPACT

Computing power doubles every 18 months

More organizations depend on computer systems for critical operations and become more vulnerable to system failures.

Data storage costs rapidly decline

Organizations can easily maintain detailed databases on individuals. There are no limits on the data collected about you.

Data analysis advances Companies can analyze vast quantities of data gathered on individuals to develop detailed profiles of individual behavior. Large-scale population surveillance is enabled.

Networking advances The cost of moving data and making data accessible from anywhere falls exponentially. Access to data becomes more difficult to control.

Mobile device growth impact Individual cell phones may be tracked without user consent or knowledge. The always-on device becomes a tether.

Chapter 4 Ethical and Social Issues in Information Systems 127

for terabytes and petabytes of data are now available on-site or as online ser- vices for firms of all sizes to use in identifying customers.

Advances in data analysis techniques for large pools of data are another technological trend that heightens ethical concerns because companies and government agencies can find out highly detailed personal information about individuals. With contemporary data management tools (see Chapter 6), com- panies can assemble and combine myriad pieces of information about you stored on computers much more easily than in the past.

Think of all the ways you generate digital information about yourself—credit card purchases; telephone calls; magazine subscriptions; video rentals; mail- order purchases; banking records; local, state, and federal government records (including court and police records); and visits to websites. Put together and mined properly, this information could reveal not only your credit information but also your driving habits, your tastes, your associations, what you read and watch, and your political interests.

Companies purchase relevant personal information from these sources to help them more finely target their marketing campaigns. Chapters 6 and 12 de- scribe how companies can analyze large pools of data from multiple sources to identify buying patterns of customers rapidly and make individualized recom- mendations. The use of computers to combine data from multiple sources and create digital dossiers of detailed information on individuals is called profiling.

For example, several thousand of the most popular websites allow DoubleClick (owned by Google), an Internet advertising broker, to track the activities of their visitors in exchange for revenue from advertisements based on visitor in- formation DoubleClick gathers. DoubleClick uses this information to create a profile of each online visitor, adding more detail to the profile as the visitor accesses an associated DoubleClick site. Over time, DoubleClick can create a detailed dossier of a person’s spending and computing habits on the web that is sold to companies to help them target their web ads more precisely. Advertisers can combine online consumer information with offline information, such as credit card purchases at stores.

Credit card purchases can make personal informa- tion available to market researchers, telemarketers, and direct mail companies. Advances in information technology facilitate the invasion of privacy.

© Dedivan1923/123RF

128 Part One Organizations, Management, and the Networked Enterprise

LexisNexis Risk Solutions (formerly ChoicePoint) gathers data from police, criminal, and motor vehicle records, credit and employment histories, current and previous addresses, professional licenses, and insurance claims to assemble and maintain dossiers on almost every adult in the United States. The company sells this personal information to businesses and government agencies. Demand for personal data is so enormous that data broker businesses, such as Risk Solutions, Acxiom, Nielsen, Experian, Equifax, and CoreLogic, are flourishing. The two largest credit card networks, Visa Inc. and Mastercard Inc., have agreed to link credit card purchase information with consumer social network and other information to create customer profiles that could be sold to advertising firms.

A data analysis technology called nonobvious relationship awareness (NORA) has given both the government and the private sector even more powerful profiling capabilities. NORA can take information about people from many disparate sources, such as employment applications, telephone records, customer listings, and wanted lists, and correlate relationships to find obscure connections that might help identify criminals or terrorists (see Figure 4.2).

NORA technology scans data and extracts information as the data are being generated so that it could, for example, instantly discover a man at an airline ticket counter who shares a phone number with a known terrorist before that person boards an airplane. The technology is considered a valuable tool for homeland security but does have privacy implications because it can provide such a detailed picture of the activities and associations of a single individual.

FIGURE 4.2 NONOBVIOUS RELATIONSHIP AWARENESS (NORA) NORA technology can take information about people from disparate sources and find obscure, nonobvious relationships. It might discover, for example, that an applicant for a job at a casino shares a telephone number with a known criminal and issue an alert to the hiring manager.

Customer Transaction

Systems

Incident and Arrest Systems

Telephone Records

Human Resources Systems

“Watch” Lists

Name standardization Match Merge

NORA Alerts

Chapter 4 Ethical and Social Issues in Information Systems 129

Finally, advances in networking, including the Internet, promise to reduce greatly the costs of moving and accessing large quantities of data and open the possibility of mining large pools of data remotely by using small desktop ma- chines, mobile devices, and cloud servers, permitting an invasion of privacy on a scale and with a precision heretofore unimaginable.

4-2 What specific principles for conduct can be used to guide ethical decisions?

Ethics is a concern of humans who have freedom of choice. Ethics is about indi- vidual choice: When faced with alternative courses of action, what is the correct moral choice? What are the main features of ethical choice?

Basic Concepts: Responsibility, Accountability, and Liability Ethical choices are decisions made by individuals who are responsible for the consequences of their actions. Responsibility is a key element of ethical action. Responsibility means that you accept the potential costs, duties, and obligations for the decisions you make. Accountability is a feature of systems and social institutions; it means that mechanisms are in place to determine who took action and who is responsible. Systems and institutions in which it is impossible to find out who took what action are inherently incapable of ethical analysis or ethical action. Liability extends the concept of responsibility further to the area of laws. Liability is a feature of political systems in which a body of laws is in place that permits individuals to recover the damages done to them by other actors, sys- tems, or organizations. Due process is a related feature of law-governed societies and is a process in which laws are known and understood, and ability exists to appeal to higher authorities to ensure that the laws are applied correctly.

These basic concepts form the underpinning of an ethical analysis of infor- mation systems and those who manage them. First, information technologies are filtered through social institutions, organizations, and individuals. Systems do not have impacts by themselves. Whatever information system effects exist are products of institutional, organizational, and individual actions and behav- iors. Second, responsibility for the consequences of technology falls clearly on the institutions, organizations, and individual managers who choose to use the technology. Using information technology in a socially responsible man- ner means that you can and will be held accountable for the consequences of your actions. Third, in an ethical, political society, individuals and others can recover damages done to them through a set of laws characterized by due process.

Ethical Analysis When confronted with a situation that seems to present ethical issues, how should you analyze it? The following five-step process should help:

1. Identify and describe the facts clearly Find out who did what to whom and where, when, and how. In many instances, you will be surprised at the er- rors in the initially reported facts, and often you will find that simply getting the facts straight helps define the solution. It also helps to get the opposing parties involved in an ethical dilemma to agree on the facts.

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2. Define the conflict or dilemma and identify the higher-order values involved Ethical, social, and political issues always reference higher values. The parties to a dispute all claim to be pursuing higher values (e.g., freedom, privacy, protection of property, or the free enterprise system). Typically, an ethical issue involves a dilemma: two diametrically opposed courses of action that support worthwhile values. For example, the chapter-opening case study illustrates two competing values: the need to make organizations more efficient and cost-effective and the need to respect individual privacy.

3. Identify the stakeholders Every ethical, social, and political issue has stake- holders: players in the game who have an interest in the outcome, who have invested in the situation, and usually who have vocal opinions. Find out the identity of these groups and what they want. This will be useful later when designing a solution.

4. Identify the options that you can reasonably take You may find that none of the options satisfy all the interests involved but that some options do a better job than others. Sometimes arriving at a good or ethical solution may not always be a balancing of consequences to stakeholders.

5. Identify the potential consequences of your options Some options may be ethi- cally correct but disastrous from other points of view. Other options may work in one instance but not in similar instances. Always ask yourself, “What if I choose this option consistently over time?”

Candidate Ethical Principles Once your analysis is complete, what ethical principles or rules should you use to make a decision? What higher-order values should inform your judgment? Although you are the only one who can decide which among many ethical prin- ciples you will follow, and how you will prioritize them, it is helpful to consider some ethical principles with deep roots in many cultures that have survived throughout recorded history:

1. Do unto others as you would have them do unto you (the Golden Rule). Put- ting yourself in the place of others, and thinking of yourself as the object of the decision, can help you think about fairness in decision making.

2. If an action is not right for everyone to take, it is not right for anyone (Immanuel Kant’s categorical imperative). Ask yourself, “If everyone did this, could the organization, or society, survive?”

3. If an action cannot be taken repeatedly, it is not right to take at all. This is the slippery slope rule: An action may bring about a small change now that is acceptable, but if it is repeated, it would bring unacceptable changes in the long run. In the vernacular, it might be stated as “once started down a slip- pery path, you may not be able to stop.”

4. Take the action that achieves the higher or greater value (utilitarian principle). This rule assumes you can prioritize values in a rank order and understand the consequences of various courses of action.

5. Take the action that produces the least harm or the least potential cost (risk aversion principle). Some actions have extremely high failure costs of very low probability (e.g., building a nuclear generating facility in an urban area) or extremely high failure costs of moderate probability (speeding and auto- mobile accidents). Avoid actions that have extremely high failure costs; focus on reducing the probability of accidents occurring.

6. Assume that virtually all tangible and intangible objects are owned by someone else unless there is a specific declaration otherwise. (This is the ethical no- free-lunch rule.) If something someone else has created is useful to you, it has value, and you should assume the creator wants compensation for this work.

Chapter 4 Ethical and Social Issues in Information Systems 131

Actions that do not easily pass these rules deserve close attention and a great deal of caution. The appearance of unethical behavior may do as much harm to you and your company as actual unethical behavior.

Professional Codes of Conduct When groups of people claim to be professionals, they take on special rights and obligations because of their special claims to knowledge, wisdom, and respect. Professional codes of conduct are promulgated by associations of professionals such as the American Medical Association (AMA), the American Bar Association (ABA), the Association of Information Technology Professionals (AITP), and the Association for Computing Machinery (ACM). These professional groups take responsibility for the partial regulation of their professions by determining entrance qualifications and competence. Codes of ethics are promises by professions to regulate themselves in the general interest of society. For example, avoiding harm to others, honor- ing property rights (including intellectual property), and respecting privacy are among the General Moral Imperatives of the ACM’s Code of Ethics and Professional Conduct.

Some Real-World Ethical Dilemmas Information systems have created new ethical dilemmas in which one set of interests is pitted against another. For example, many companies use voice recognition software to reduce the size of their customer support staff by en- abling computers to recognize a customer’s responses to a series of computer- ized questions. Many companies monitor what their employees are doing on the Internet to prevent them from wasting company resources on nonbusiness activities (see the Chapter 7 Interactive Session on Management).

In each instance, you can find competing values at work, with groups lined up on either side of a debate. A company may argue, for example, that it has a right to use information systems to increase productivity and reduce the size of its workforce to lower costs and stay in business. Employees displaced by information systems may argue that employers have some responsibility for their welfare. Business owners might feel obligated to monitor employee email and Internet use to minimize drains on productivity. Employees might believe they should be able to use the Internet for short personal tasks in place of the telephone. A close analysis of the facts can sometimes produce compromised solutions that give each side half a loaf. Try to apply some of the principles of ethical analysis described to each of these cases. What is the right thing to do?

4-3 Why do contemporary information systems technology and the Internet pose challenges to the protection of individual privacy and intellectual property?

In this section, we take a closer look at the five moral dimensions of informa- tion systems first described in Figure 4.1. In each dimension, we identify the ethical, social, and political levels of analysis and use real-world examples to illustrate the values involved, the stakeholders, and the options chosen.

132 Part One Organizations, Management, and the Networked Enterprise

Information Rights: Privacy and Freedom in the Internet Age Privacy is the claim of individuals to be left alone, free from surveillance or in- terference from other individuals or organizations, including the state. Claims to privacy are also involved at the workplace. Millions of employees are sub- ject to digital and other forms of high-tech surveillance. Information technology and systems threaten individual claims to privacy by making the invasion of privacy cheap, profitable, and effective.

The claim to privacy is protected in the United States, Canadian, and German constitutions in a variety of ways and in other countries through various stat- utes. In the United States, the claim to privacy is protected primarily by the First Amendment guarantees of freedom of speech and association, the Fourth Amendment protections against unreasonable search and seizure of one’s per- sonal documents or home, and the guarantee of due process.

Table 4.3 describes the major U.S. federal statutes that set forth the condi- tions for handling information about individuals in such areas as credit re- porting, education, financial records, newspaper records, and electronic and digital communications. The Privacy Act of 1974 has been the most impor- tant of these laws, regulating the federal government’s collection, use, and disclosure of information. At present, most U.S. federal privacy laws apply only to the federal government and regulate very few areas of the private sector.

Most American and European privacy law is based on a regime called Fair Information Practices (FIP), first set forth in a report written in 1973 by a federal government advisory committee and updated in 2010 to take into ac- count new privacy-invading technology (U.S. Department of Health, Education, and Welfare, 1973). FIP is a set of principles governing the collection and use of information about individuals. FIP principles are based on the notion of a mu- tuality of interest between the record holder and the individual. The individual has an interest in engaging in a transaction, and the record keeper— usually a business or government agency—requires information about the individual to support the transaction. After information is gathered, the individual main- tains an interest in the record, and the record may not be used to support other activities without the individual’s consent. In 1998, the Federal Trade

TABLE 4.3 FEDERAL PRIVACY LAWS IN THE UNITED STATES

GENERAL FEDERAL PRIVACY LAWS PRIVACY LAWS AFFECTING PRIVATE INSTITUTIONS

Freedom of Information Act of 1966 as Amended (5 USC 552)

Fair Credit Reporting Act of 1970

Privacy Act of 1974 as Amended (5 USC 552a) Family Educational Rights and Privacy Act of 1974

Electronic Communications Privacy Act of 1986 Right to Financial Privacy Act of 1978

Computer Matching and Privacy Protection Act of 1988

Privacy Protection Act of 1980

Computer Security Act of 1987 Cable Communications Policy Act of 1984

Federal Managers Financial Integrity Act of 1982

Electronic Communications Privacy Act of 1986

Driver’s Privacy Protection Act of 1994 Video Privacy Protection Act of 1988

E-Government Act of 2002 The Health Insurance Portability and Accountability Act (HIPAA) of 1996

Children’s Online Privacy Protection Act (COPPA) of 1998

Financial Modernization Act (Gramm-Leach-Bliley Act) of 1999

Chapter 4 Ethical and Social Issues in Information Systems 133

Commission (FTC) restated and extended the original FIP to provide guidelines for protecting online privacy. Table 4.4 describes the FTC’s FIP principles.

The FTC’s FIP principles are being used as guidelines to drive changes in pri- vacy legislation. In July 1998, the U.S. Congress passed the Children’s Online Privacy Protection Act (COPPA), requiring websites to obtain parental permis- sion before collecting information on children under the age of 13. The FTC has recommended additional legislation to protect online consumer privacy in advertising networks that collect records of consumer web activity to develop detailed profiles, which other companies then use to target online ads. In 2010, the FTC added three practices to its framework for privacy. Firms should adopt privacy by design, building products and services that protect privacy; firms should increase the transparency of their data practices; and firms should re- quire consumer consent and provide clear options to opt out of data collection schemes (Federal Trade Commission, 2012). Other proposed Internet privacy legislation focuses on protecting the online use of personal identification num- bers, such as social security numbers; protecting personal information collected on the Internet from individuals not covered by COPPA; and limiting the use of data mining for homeland security. In 2015 the FTC was researching new guid- ance for the protection of privacy and the Internet of Things (IoT), and mobile health apps (Federal Trade Commission, 2015).

In 2012, the FTC extended its FIP doctrine to address the issue of behavioral targeting. However, the government, privacy groups, and the online ad industry are still at loggerheads over two issues. Privacy advocates want both an opt-in policy at all sites and a national Do Not Track list. The online industry opposes these moves and continues to insist that an opt-out capability is the only way to avoid tracking. Nevertheless, there is an emerging consensus among all par- ties that greater transparency and user control (especially making opting out of tracking the default option) is required to deal with behavioral tracking. Public opinion polls show an ongoing distrust of online marketers. Although there are many studies of privacy issues at the federal level, there has been no significant legislation in recent years. A 2016 survey by the Pew Research Center found that 91 percent of Americans feel consumers have lost control of their personal information online and 86 percent have taken steps to protect their information online.

Privacy protections have also been added to recent laws deregulating finan- cial services and safeguarding the maintenance and transmission of health information about individuals. The Gramm-Leach-Bliley Act of 1999, which repeals earlier restrictions on affiliations among banks, securities firms, and

TABLE 4.4 FEDERAL TRADE COMMISSION FAIR INFORMATION PRACTICE PRINCIPLES

Notice/awareness (core principle). Websites must disclose their information practices before collecting data. Includes identification of collector; uses of data; other recipients of data; nature of collection (active/inactive); voluntary or required status; consequences of refusal; and steps taken to protect confidentiality, integrity, and quality of the data.

Choice/consent (core principle). A choice regime must be in place allowing consumers to choose how their information will be used for secondary purposes other than supporting the transaction, including internal use and transfer to third parties.

Access/participation. Consumers should be able to review and contest the accuracy and completeness of data collected about them in a timely, inexpensive process.

Security. Data collectors must take responsible steps to ensure that consumer information is accurate and secure from unauthorized use.

Enforcement. A mechanism must be in place to enforce FIP principles. This can involve self-regulation, legislation giving consumers legal remedies for violations, or federal statutes and regulations.

134 Part One Organizations, Management, and the Networked Enterprise

insurance companies, includes some privacy protection for consumers of finan- cial services. All financial institutions are required to disclose their policies and practices for protecting the privacy of nonpublic personal information and to allow customers to opt out of information-sharing arrangements with nonaffili- ated third parties.

The Health Insurance Portability and Accountability Act (HIPAA) of 1996, which took effect on April 14, 2003, includes privacy protection for medical records. The law gives patients access to their personal medical records that healthcare providers, hospitals, and health insurers maintain and the right to authorize how protected information about themselves can be used or dis- closed. Doctors, hospitals, and other healthcare providers must limit the disclo- sure of personal information about patients to the minimum amount necessary to achieve a given purpose.

The European Directive on Data Protection In Europe, privacy protection is much more stringent than in the United States. Unlike the United States, European countries do not allow businesses to use per- sonally identifiable information without consumers’ prior consent. In 1998, the European Commission’s Data Protection Directive went into effect, requiring companies in European Union (EU) nations to inform people when they collect information about them and disclose how it will be stored and used. Customers must provide their informed consent before any company can legally use data about them, and they have the right to access that information, correct it, and request that no further data be collected. Informed consent can be defined as consent given with knowledge of all the facts needed to make a rational decision. Individual EU member nations translated these principles into their own laws and prohibited the transfer of personal data to countries, such as the United States, that do not have similar privacy protection regulations. In 2009, the European Parliament passed new rules governing the use of third-party cookies for behav- ioral tracking purposes. These new rules require website visitors to give explicit consent to be tracked by cookies and websites to have highly visible warnings on their pages if third-party cookies are being used (European Parliament, 2009).

In 2012, the EU changed its data protection rules to apply to all compa- nies providing services in Europe and required Internet companies, such as Amazon, Facebook, Apple, Google, and others, to obtain explicit consent from consumers about the use of their personal data, delete information at the us- er’s request, and retain information only as long as absolutely necessary. In 2014, the European Parliament extended greater control to Internet users by establishing the “right to be forgotten,” which gives EU citizens the right to ask Google and social network sites to remove their personal information. Although the privacy policies of U.S. firms (in contrast to the government’s) are largely voluntary, in Europe, corporate privacy policies are mandated and more consis- tent across jurisdictions.

The European Commission and the U.S. Department of Commerce devel- oped a safe harbor framework for U.S. firms. A safe harbor is a private, self- regulating policy and enforcement mechanism that meets the objectives of government regulators and legislation but does not involve government regula- tion or enforcement. U.S. businesses would be allowed to use personal data from EU countries if the firms developed privacy protection policies that met EU standards. Enforcement would occur in the United States by using self-policing, regulation, and government enforcement of fair trade statutes.

By 2015 the EU started taking steps to replace safe harbor and the Data Protection Directive with a more stringent General Data Protection

Chapter 4 Ethical and Social Issues in Information Systems 135

Regulation (GDPR). The GDPR applies to any firm operating in any EU coun- try, requires unambiguous consent to use personal data for purposes like track- ing individuals across the web, and limits the use of data for purposes other than those for which it was collected (such as constructing user profiles). It also strengthens the right to be forgotten by allowing individuals to remove personal data from social platforms like Facebook and to prevent such companies from collecting any new information. Companies operating in the EU are required to delete personal information once it no longer serves the purpose for which it was collected (European Commission, 2016).

Following the revelation that U.S. government intelligence agencies had access to personal information on EU citizens, and a growing sense that Facebook and Google were not complying with EU policies, the EU GDPR was revised in 2016 to further strengthen users’ ability to control what information is collected and retained, with whom it is shared, and how and where it is processed. Fines for failure to comply were increased to up to 4 percent of a firm’s global rev- enue (about $1.6 billion for Facebook). GDPR also created a single EU privacy policy that governed all 28 nations in the Union. One result in Europe, but not in the United States, is that ad targeting will be reduced, along with the likeli- hood that ads will follow users around the Internet. The GDPR went into effect in May 2018. Facebook, Google, and Microsoft are building major data centers in Europe, and are planning to implement the GDPR regulations worldwide.

Internet Challenges to Privacy Internet technology has posed new challenges for the protection of individual privacy. Websites track searches that have been conducted, the websites and web pages visited, the online content a person has accessed, and what items that person has inspected or purchased over the web. This monitoring and tracking of website visitors occurs in the background without the visitor’s knowledge. It is conducted not just by individual websites but by advertising networks such as Microsoft Advertising, Yahoo, and Google’s DoubleClick that are capable of tracking personal browsing behavior across thousands of websites. Both website publishers and the advertising industry defend tracking of individuals across the web because doing so allows more relevant ads to be targeted to users, and this pays for the cost of publishing websites. In this sense, it’s like broadcast television: advertiser-supported content that is free to the user. The commer- cial demand for this personal information is virtually insatiable. However, these practices also impinge on individual privacy.

Cookies are small text files deposited on a computer hard drive when a user visits websites. Cookies identify the visitor’s web browser software and track visits to the website. When the visitor returns to a site that has stored a cookie, the website software searches the visitor’s computer, finds the cookie, and knows what that person has done in the past. It may also update the cookie, depending on the activity during the visit. In this way, the site can customize its content for each visitor’s interests. For example, if you purchase a book on Amazon.com and return later from the same browser, the site will welcome you by name and recommend other books of interest based on your past purchases. DoubleClick, described earlier in this chapter, uses cookies to build its dossiers with details of online purchases and examine the behavior of website visitors. Figure 4.3 illustrates how cookies work.

Websites using cookie technology cannot directly obtain visitors’ names and addresses. However, if a person has registered at a site, that information can be combined with cookie data to identify the visitor. Website owners can also com- bine the data they have gathered from cookies and other website monitoring

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tools with personal data from other sources, such as offline data collected from surveys or paper catalog purchases, to develop very detailed profiles of their visitors.

There are now even more subtle and surreptitious tools for surveillance of Internet users. Web beacons, also called web bugs (or simply tracking files), are tiny software programs that keep a record of users’ online clickstreams. They report this data back to whomever owns the tracking file, which is invis- ibly embedded in email messages and web pages to monitor the behavior of the user visiting a website or sending email. Web beacons are placed on popular websites by third-party firms who pay the websites a fee for access to their audi- ence. So how common is web tracking? In a path-breaking series of articles in the Wall Street Journal, researchers examined the tracking files on 50 of the most popular U.S. websites. What they found revealed a very widespread surveil- lance system. On the 50 sites, they discovered 3,180 tracking files installed on visitor computers. Only one site, Wikipedia, had no tracking files. Two-thirds of the tracking files came from 131 companies whose primary business is identify- ing and tracking Internet users to create consumer profiles that can be sold to advertising firms looking for specific types of customers. The biggest trackers were Google, Microsoft, and Quantcast, all of whom are in the business of sell- ing ads to advertising firms and marketers. A follow-up study found tracking on the 50 most popular sites had risen nearly fivefold due to the growth of online ad auctions where advertisers buy the data about users’ web-browsing behavior.

Other spyware can secretly install itself on an Internet user’s computer by piggybacking on larger applications. Once installed, the spyware calls out to websites to send banner ads and other unsolicited material to the user, and it can report the user’s movements on the Internet to other computers. More in- formation is available about intrusive software in Chapter 8.

Nearly 80 percent of global Internet users use Google Search and other Google services, making Google the world’s largest collector of online user data. Whatever Google does with its data has an enormous impact on online privacy. Most experts believe that Google possesses the largest collection of personal

FIGURE 4.3 HOW COOKIES IDENTIFY WEB VISITORS Cookies are written by a website on a visitor’s computer. When the visitor returns to that website, the web server requests the ID number from the cookie and uses it to access the data stored by that server on that visitor. The website can then use these data to display personalized information.

1

3

2

4 User

Windows 10 Internet Explorer 11 [email protected]

Cookie

931032944 Previous buyer

Welcome back, Jane Doe! Server

1. The web server reads the user’s web browser and determines the operating system, browser name, version number, Internet address, and other information. 2. The server transmits a tiny text file with user identification information called a cookie,

which the user’s browser receives and stores on the user’s computer hard drive.

3. When the user returns to the website, the server requests the contents of any cookie it deposited previously in the user’s computer.

4. The web server reads the cookie, identifies the visitor, and calls up data on the user.

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information in the world—more data on more people than any government agency. The nearest competitor is Facebook.

After Google acquired the advertising network DoubleClick in 2007, it began using behavioral targeting to help display more relevant ads based on users’ search activities and to target individuals as they move from one site to another to show them display or banner ads. Google allows tracking software on its search pages, and using DoubleClick, it can track users across the Internet. One of its programs enables advertisers to target ads based on the search histories of Google users, along with any other information the user submits to Google such as age, demographics, region, and web activities (such as blogging). Google’s AdSense program enables Google to help advertisers select keywords and de- sign ads for various market segments based on search histories such as help- ing a clothing website create and test ads targeted at teenage females. Google now displays targeted ads on YouTube and Google mobile applications, and its DoubleClick ad network serves up targeted banner ads.

The United States has allowed businesses to gather transaction information generated in the marketplace and then use that information for other market- ing purposes without obtaining the informed consent of the individual whose information is being used. These firms argue that when users agree to the sites’ terms of service, they are also agreeing to allow the site to collect information about their online activities. An opt-out model of informed consent permits the collection of personal information until the consumer specifically requests the data not to be collected. Privacy advocates would like to see wider use of an opt-in model of informed consent in which a business is prohibited from col- lecting any personal information unless the consumer specifically takes action to approve information collection and use. Here, the default option is no collec- tion of user information.

The online industry has preferred self-regulation to privacy legislation for protecting consumers. Members of the advertising network industry, including Google’s DoubleClick, have created an industry association called the Network Advertising Initiative (NAI) to develop its own privacy policies to help consum- ers opt out of advertising network programs and provide consumers redress from abuses.

Individual firms such as Microsoft, Mozilla Foundation, Yahoo, and Google have recently adopted policies on their own in an effort to address public con- cern about tracking people online. Microsoft’s Internet Explorer 11 web browser was released in 2015 with the opt-out option as the default, but this was changed to opt-in by default because most websites ignored the request to opt out. Other browsers have opt-out options, but users need to turn them on, and most users fail to do this. AOL established an opt-out policy that allows users of its site to choose not to be tracked. Yahoo follows NAI guidelines and allows opt-out for tracking and web beacons (web bugs). Google has reduced retention time for tracking data.

In general, most Internet businesses do little to protect the privacy of their customers, and consumers do not do as much as they should to protect them- selves. For commercial websites that depend on advertising to support them- selves, most revenue derives from selling access to customer information. Of the companies that do post privacy policies on their websites, about half do not monitor their sites to ensure that they adhere to these policies. The vast ma- jority of online customers claim they are concerned about online privacy, but fewer than half read the privacy statements on websites. In general, website privacy policies require a law degree to understand and are ambiguous about key terms (Laudon and Traver, 2019). Today, what firms such as Facebook and

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Google call a privacy policy is in fact a data use policy. The concept of privacy is associated with consumer rights, which firms do not wish to recognize. A data use policy simply tells customers how the information will be used without any mention of rights.

A group of students at the University of California at Berkeley conducted surveys of online users and of complaints filed with the FTC involving privacy issues. Some results showed that people feel they have no control over the information collected about them, and they don’t know to whom to complain. Websites collect all this information but do not let users have access, their poli- cies are unclear, and they share data with affiliates but never identify who the affiliates are and how many there are. Web bug trackers are ubiquitous, and users are not informed of trackers on the pages they visit. The results of this study and others suggest that consumers want some controls on what personal information can be collected, what is done with the information, and the abil- ity to opt out of the entire tracking enterprise. (The full report is available at knowprivacy.org.)

Technical Solutions In addition to legislation, there are a few technologies that can protect user privacy during interactions with websites. Many of these tools are used for en- crypting email, for making email or surfing activities appear anonymous, for preventing client computers from accepting cookies, or for detecting and elimi- nating spyware. For the most part, technical solutions have failed to protect users from being tracked as they move from one site to another.

Many browsers have Do Not Track options. For users who have selected the Do Not Track browser option, their browser will send a request to websites that the user’s behavior not be tracked, but websites are not obligated to honor these requests. There is no online advertising industry agreement on how to respond to Do Not Track requests nor, currently, any legislation requiring web- sites to stop tracking. Private browser encryption software or apps on mobile devices provide consumers a powerful opportunity to at least keep their mes- sages private.

Property Rights: Intellectual Property Contemporary information systems have severely challenged existing laws and social practices that protect intellectual property. Intellectual property is de- fined as tangible and intangible products of the mind created by individuals or corporations. Information technology has made it difficult to protect intellec- tual property because computerized information can be so easily copied or dis- tributed on networks. Intellectual property is subject to a variety of protections under four legal traditions: copyright, patents, trademarks, and trade secrets.

Copyright Copyright is a statutory grant that protects creators of intellectual property from having their work copied by others for any purpose during the life of the author plus an additional 70 years after the author’s death. For corporate- owned works, copyright protection lasts for 95 years after their initial creation. Congress has extended copyright protection to books, periodicals, lectures, dramas, musical compositions, maps, drawings, artwork of any kind, and mo- tion pictures. The intent behind copyright laws has been to encourage creativ- ity and authorship by ensuring that creative people receive the financial and other benefits of their work. Most industrial nations have their own copyright

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laws, and there are several international conventions and bilateral agreements through which nations coordinate and enforce their laws.

In the mid-1960s, the Copyright Office began registering software programs, and in 1980, Congress passed the Computer Software Copyright Act, which clearly provides protection for software program code and copies of the original sold in commerce; it sets forth the rights of the purchaser to use the software while the creator retains legal title.

Copyright protects against copying entire programs or their parts. Damages and relief are readily obtained for infringement. The drawback to copyright protection is that the underlying ideas behind a work are not protected, only their manifestation in a work. A competitor can use your software, understand how it works, and build new software that follows the same concepts without infringing on a copyright.

Look-and-feel copyright infringement lawsuits are precisely about the dis- tinction between an idea and its expression. For instance, in the early 1990s, Apple Computer sued Microsoft Corporation and Hewlett-Packard for in- fringement of the expression of Apple’s Macintosh interface, claiming that the defendants copied the expression of overlapping windows. The defendants countered that the idea of overlapping windows can be expressed only in a single way and, therefore, was not protectable under the merger doctrine of copyright law. When ideas and their expression merge, the expression cannot be copyrighted.

In general, courts appear to be following the reasoning of a 1989 case—Brown Bag Software v. Symantec Corp—in which the court dissected the elements of software alleged to be infringing. The court found that similar concept, func- tion, general functional features (e.g., drop-down menus), and colors are not protectable by copyright law (Brown Bag Software v. Symantec Corp., 1992).

Patents A patent grants the owner an exclusive monopoly on the ideas behind an invention for 20 years. The congressional intent behind patent law was to ensure that inventors of new machines, devices, or methods receive the full financial and other rewards of their labor and yet make widespread use of the invention possible by providing detailed diagrams for those wishing to use the idea under license from the patent’s owner. The granting of a patent is deter- mined by the United States Patent and Trademark Office and relies on court rulings.

The key concepts in patent law are originality, novelty, and invention. The Patent Office did not accept applications for software patents routinely until a 1981 Supreme Court decision held that computer programs could be part of a patentable process. Since that time, hundreds of patents have been granted, and thousands await consideration.

The strength of patent protection is that it grants a monopoly on the underly- ing concepts and ideas of software. The difficulty is passing stringent criteria of nonobviousness (e.g., the work must reflect some special understanding and contribution), originality, and novelty as well as years of waiting to receive protection.

In what some call the patent trial of the century, in 2011, Apple sued Samsung for violating its patents for iPhones, iPads, and iPods. On August 24, 2012, a California jury in federal district court awarded Apple $1 billion in dam- ages and prohibited Samsung from selling its new Galaxy 10 tablet computer in the United States. The decision established criteria for determining just how close a competitor can come to an industry-leading and standard-setting

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product like Apple’s iPhone before it violates the design and utility patents of the leading firm. Samsung subsequently won a patent infringement case against Apple that banned a handful of older iPhone and iPad devices. In 2014, Apple sued Samsung again, claiming infringement of five patents cover- ing hardware and software techniques for handling photos, videos, and lists used on the Samsung Galaxy 5. In 2015, the U.S. Court of Appeals reaffirmed that Samsung had copied specific design patents, but reduced the damages asked by Apple from $2 billion to $930 million. This lawsuit returned to court in May 2018 to consider how to calculate the damages caused by Samsung’s infringement.

To make matters more complicated, Apple has been one of Samsung’s largest customers for flash memory processors, graphic chips, solid-state drives, and display parts that are used in Apple’s iPhones, iPads, iPod Touch devices, and MacBooks. The Samsung and Apple patent cases are indicative of the complex relationships among the leading computer firms.

Trademarks Trademarks are the marks, symbols, and images used to distinguish products in the marketplace. Trademark laws protect consumers by ensuring they re- ceive what they paid for. These laws also protect the investments that firms have made to bring products to market. Typical trademark infringement viola- tions occur when one firm appropriates or pirates the marks of a competing firm. Infringement also occurs when firms dilute the value of another firm’s marks by weakening the connection between a mark and the product. For in- stance, if a search engine firm copies the trademarked Google icon, colors, and images, it would be infringing on Google’s trademarks. It would also be diluting the connection between the Google search service and its trademarks, poten- tially creating confusion in the marketplace.

Trade Secrets Any intellectual work product—a formula, device, pattern, or compilation of data—used for a business purpose can be classified as a trade secret, provided it is not based on information in the public domain. Protections for trade se- crets vary from state to state. In general, trade secret laws grant a monopoly on the ideas behind a work product, but it can be a very tenuous monopoly.

Software that contains novel or unique elements, procedures, or compila- tions can be considered a trade secret. Trade secret law protects the actual ideas in a work product, not only their manifestation. To make this claim, the creator or owner must take care to bind employees and customers with nondisclosure agreements and prevent the secret from falling into the public domain.

The limitation of trade secret protection is that, although virtually all soft- ware programs of any complexity contain unique elements of some sort, it is difficult to prevent the ideas in the work from falling into the public domain when the software is widely distributed.

Challenges to Intellectual Property Rights Contemporary information technologies, especially software, pose severe chal- lenges to existing intellectual property regimes and, therefore, create significant ethical, social, and political issues. Digital media differ from books, periodicals, and other media in terms of ease of replication; ease of transmission; ease of alter- ation; compactness, making theft easy; and difficulties in establishing uniqueness.

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The proliferation of digital networks, including the Internet, has made it even more difficult to protect intellectual property. Before widespread use of networks, copies of software, books, magazine articles, or films had to be stored on physical media, such as paper, computer disks, or videotape, creating some hurdles to distribution. Using networks, information can be more widely reproduced and distributed. The BSA Global Software Survey conducted by International Data Corporation and The Software Alliance (also known as BSA) reported that 37 percent of the software installed on personal computers was unlicensed in 2018 (The Software Alliance, 2018).

The Internet was designed to transmit information freely around the world, including copyrighted information. You can easily copy and distribute virtually anything to millions of people worldwide, even if they are using different types of computer systems. Information can be illicitly copied from one place and distributed through other systems and networks even though these parties do not willingly participate in the infringement.

Individuals have been illegally copying and distributing digitized music files on the Internet for several decades. File-sharing services such as Napster and, later, Grokster, Kazaa, Morpheus, Megaupload, and The Pirate Bay sprang up to help users locate and swap digital music and video files, including those protected by copyright. Illegal file sharing became so widespread that it threat- ened the viability of the music recording industry and, at one point, consumed 20 percent of Internet bandwidth. The recording industry won several legal bat- tles for shutting these services down, but it has not been able to halt illegal file sharing entirely. The motion picture and cable television industries are waging similar battles. Several European nations have worked with U.S. authorities to shut down illegal sharing sites, with mixed results.

As legitimate online music stores such as iTunes and streaming services such as Pandora expanded, illegal file sharing significantly declined. The Apple iTunes Store legitimized paying for music and entertainment and created a closed environment from which music and videos could not be easily copied and widely distributed unless played on Apple devices. Amazon’s Kindle also protects the rights of publishers and writers because its books cannot be cop- ied to the Internet and distributed. Streaming of Internet radio, on services such as Pandora and Spotify, and Hollywood movies (at sites such as Hulu and Netflix) also inhibit piracy because the streams cannot be easily recorded on separate devices and videos cannot be downloaded so easily. Despite these gains in legitimate online music platforms, artists and record labels have ex- perienced a 50 percent decline in revenues and the loss of thousands of jobs since 2000.

The Digital Millennium Copyright Act (DMCA) of 1998 also provides some copyright protection. The DMCA implemented a World Intellectual Property Organization Treaty that makes it illegal to circumvent technology- based protections of copyrighted materials. Internet service providers (ISPs) are required to take down sites of copyright infringers they are hosting when the ISPs are notified of the problem. Microsoft and other major software and information content firms are represented by the Software and Information Industry Association (SIIA), which lobbies for new laws and enforcement of ex- isting laws to protect intellectual property around the world. The SIIA runs an antipiracy hotline for individuals to report piracy activities, offers educational programs to help organizations combat software piracy, and has published guidelines for employee use of software.

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4-4 How have information systems affected laws for establishing accountability and liability and the quality of everyday life?

Along with privacy and property laws, new information technologies are chal- lenging existing liability laws and social practices for holding individuals and institutions accountable. If a person is injured by a machine controlled, in part, by software, who should be held accountable and, therefore, held liable? Should a social network site like Facebook or Twitter be held liable and ac- countable for the posting of pornographic material or racial insults, or should it be held harmless against any liability for what users post (as is true of com- mon carriers, such as the telephone system)? What about the Internet? If you outsource your information processing to the cloud, and the cloud provider fails to provide adequate service, what can you do? Cloud providers often claim the software you are using is the problem, not the cloud servers.

Computer-Related Liability Problems In late 2013 hackers obtained credit card, debit card, and additional personal infor- mation about 70 to 110 million customers of Target, one of the largest U.S. retail- ers. Target’s sales and reputation took an immediate hit from which it has still not completely recovered. Target says it has spent over $60 million to strengthen its systems. In 2015, Target agreed to pay $10 million to customers and $19 million to Mastercard. It has paid an even greater price through the loss of sales and trust.

Who is liable for any economic harm caused to individuals or businesses whose credit cards were compromised? Is Target responsible for allowing the breach to occur despite efforts it did make to secure the information? Or is this just a cost of doing business in a credit card world where customers and businesses have insurance policies to protect them against losses? Customers, for instance, have a maximum liability of $50 for credit card theft under federal banking law.

Are information system managers responsible for the harm that corporate systems can do? Beyond IT managers, insofar as computer software is part of a machine, and the machine injures someone physically or economically, the producer of the software and the operator can be held liable for damages. Insofar as the software acts like a book, storing and displaying information, courts have been reluctant to hold authors, publishers, and booksellers liable for contents (the exception being instances of fraud or defamation); hence, courts have been wary of holding software authors liable.

In general, it is very difficult (if not impossible) to hold software producers liable for their software products that are considered to be like books, regardless of the physical or economic harm that results. Historically, print publishers of books and periodicals have not been held liable because of fears that liability claims would interfere with First Amendment rights guaranteeing freedom of expression. The kind of harm software failures cause is rarely fatal and typically inconveniences users but does not physically harm them (the exception being medical devices).

What about software as a service? ATMs are a service provided to bank cus- tomers. If this service fails, customers will be inconvenienced and perhaps harmed economically if they cannot access their funds in a timely manner. Should liability protections be extended to software publishers and operators of defective financial, accounting, simulation, or marketing systems?

Software is very different from books. Software users may develop expec- tations of infallibility about software; software is less easily inspected than a

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book, and it is more difficult to compare with other software products for qual- ity; software claims to perform a task rather than describe a task, as a book does; and people come to depend on services essentially based on software. Given the centrality of software to everyday life, the chances are excellent that liability law will extend its reach to include software even when the software merely provides an information service.

Telephone systems have not been held liable for the messages transmitted be- cause they are regulated common carriers. In return for their right to provide tele- phone service, they must provide access to all, at reasonable rates, and achieve acceptable reliability. Likewise, cable networks are considered private networks not subject to regulation, but broadcasters using the public airwaves are subject to a wide variety of federal and local constraints on content and facilities. In the United States, with few exceptions, websites are not held liable for content posted on their sites regardless of whether it was placed there by the website owners or users.

System Quality: Data Quality and System Errors White Christmas turned into a blackout for millions of Netflix customers and social network users on December 24, 2012. The blackout was caused by the failure of Amazon’s cloud computing service (AWS), which provides storage and computing power for many websites and services, including Netflix. The loss of service lasted for a day. Amazon blamed it on elastic load balancing, a software program that balances the loads on all its cloud servers to prevent overload. Amazon’s cloud computing services have had several subsequent outages, al- though none as long-lasting as the Christmas Eve outage. In September 2016, AWS experienced a five-hour outage. Outages at cloud computing services are rare but recur. These outages have called into question the reliability and qual- ity of cloud services. Are these outages acceptable?

The debate over liability and accountability for unintentional consequences of system use raises a related but independent moral dimension: What is an ac- ceptable, technologically feasible level of system quality? At what point should system managers say, “Stop testing, we’ve done all we can to perfect this soft- ware. Ship it!” Individuals and organizations may be held responsible for avoid- able and foreseeable consequences, which they have a duty to perceive and correct. The gray area is that some system errors are foreseeable and correct- able only at very great expense, expense so great that pursuing this level of per- fection is not feasible economically—no one could afford the product.

For example, although software companies try to debug their products be- fore releasing them to the marketplace, they knowingly ship buggy products because the time and cost of fixing all minor errors would prevent these prod- ucts from ever being released. What if the product was not offered on the mar- ketplace? Would social welfare as a whole falter and perhaps even decline? Carrying this further, just what is the responsibility of a producer of computer services—should it withdraw the product that can never be perfect, warn the user, or forget about the risk (let the buyer beware)?

Three principal sources of poor system performance are (1) software bugs and errors, (2) hardware or facility failures caused by natural or other causes, and (3) poor input data quality. The Chapter 8 Learning Track discusses why zero defects in software code of any complexity cannot be achieved and why the seriousness of remaining bugs cannot be estimated. Hence, there is a tech- nological barrier to perfect software, and users must be aware of the potential for catastrophic failure. The software industry has not yet arrived at testing standards for producing software of acceptable but imperfect performance.

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Although software bugs and facility catastrophes are likely to be widely reported in the press, by far the most common source of business system failure is data qual- ity (see Chapter 6). Few companies routinely measure the quality of their data, but individual organizations report data error rates ranging from 0.5 to 30 percent.

Quality of Life: Equity, Access, and Boundaries The negative social costs of introducing information technologies and systems are beginning to mount along with the power of the technology. Many of these negative social consequences are not violations of individual rights or property crimes. Nevertheless, they can be extremely harmful to individuals, societies, and political institutions. Computers and information technologies potentially can destroy valuable elements of our culture and society even while they bring us benefits. If there is a balance of good and bad consequences of using infor- mation systems, whom do we hold responsible for the bad consequences? Next, we briefly examine some of the negative social consequences of systems, con- sidering individual, social, and political responses.

Balancing Power: Center Versus Periphery An early fear of the computer age was that huge, centralized mainframe com- puters would centralize power in the nation’s capital, resulting in a Big Brother society, as was suggested in George Orwell’s novel 1984. The shift toward highly decentralized client–server computing, coupled with an ideology of empower- ment of Twitter and social media users, and the decentralization of decision making to lower organizational levels, until recently reduced the fears of power centralization in government institutions. Yet much of the empowerment de- scribed in popular business magazines is trivial. Lower-level employees may be empowered to make minor decisions, but the key policy decisions can be as centralized as in the past. At the same time, corporate Internet behemoths such as Google, Apple, Yahoo, Amazon, and Microsoft have come to dominate the collection and analysis of personal private information of all citizens. Since the terrorist attacks against the United States on September 11, 2001, the fed- eral government has greatly expanded its use of this private sector information under the authority of the Patriot Act of 2001, and subsequent and secret execu- tive orders. In this sense, the power of information has become more central- ized in the hands of a few private oligopolies and large government agencies.

Rapidity of Change: Reduced Response Time to Competition Information systems have helped to create much more efficient national and international markets. Today’s rapid-moving global marketplace has reduced the normal social buffers that permitted businesses many years to adjust to competition. Time-based competition has an ugly side; the business you work for may not have enough time to respond to global competitors and may be wiped out in a year along with your job. We stand the risk of developing a just- in-time society with just-in-time jobs and just-in-time workplaces, families, and vacations. One impact of Uber (see Chapter 10) and other on-demand services firms is to create just-in-time jobs with no benefits or insurance for employees.

Maintaining Boundaries: Family, Work, and Leisure The danger of ubiquitous computing, telecommuting, nomad computing, mo- bile computing, and the do-anything-anywhere computing environment is that it is actually coming true. The traditional boundaries that separate work from family and just plain leisure have been weakened.

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Although writers have traditionally worked just about anywhere, the advent of information systems, coupled with the growth of knowledge-work occupations, means that more and more people are working when traditionally they would have been playing or communicating with family and friends. The work um- brella now extends far beyond the eight-hour day into commuting time, vacation time, and leisure time. The explosive growth and use of smartphones have only heightened the sense of many employees that they are never away from work.

Even leisure time spent on the computer threatens these close social rela- tionships. Extensive Internet and cell phone use, even for entertainment or recreational purposes, takes people away from their family and friends. Among middle school and teenage children, it can lead to harmful antisocial behavior, such as the recent upsurge in cyberbullying.

Weakening these institutions poses clear-cut risks. Family and friends histori- cally have provided powerful support mechanisms for individuals, and they act as balance points in a society by preserving private life, providing a place for peo- ple to collect their thoughts, think in ways contrary to their employer, and dream.

Dependence and Vulnerability Today, our businesses, governments, schools, and private associations, such as churches, are incredibly dependent on information systems and are, there- fore, highly vulnerable if these systems fail. Think of what would happen if the nation’s electric power grid shut down, with no backup structure to make up for the loss of the system. With systems now as ubiquitous as the telephone system, it is startling to remember that there are no regulatory or standard- setting forces in place that are similar to telephone, electrical, radio, television, or other public utility technologies. The absence of standards and the criticality of some system applications will probably call forth demands for national stan- dards and perhaps regulatory oversight.

Computer Crime and Abuse New technologies, including computers, create new opportunities for commit- ting crime by creating new, valuable items to steal, new ways to steal them, and new ways to harm others. Computer crime is the commission of illegal acts by

Although some people enjoy the convenience of working at home, the do-anything-anywhere computing environment can blur the traditional boundar- ies between work and family time.

© David Pereiras Villagrá/123RF

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using a computer or against a computer system. Simply accessing a computer system without authorization or with intent to do harm, even by accident, is now a federal crime. The most frequent types of incidents comprise a greatest hits list of cybercrime: malware, phishing, network interruption, spyware, and denial of service attacks (PwC, 2016). The true cost of all computer crime is unknown, but it is estimated to be in the billions of dollars. You can find a more detailed discussion of computer crime in Chapter 8.

Computer abuse is the commission of acts involving a computer that may not be illegal but are considered unethical. The popularity of the Internet, email, and mobile phones has turned one form of computer abuse— spamming—into a serious problem for both individuals and businesses. Originally, spam was junk email an organization or individual sent to a mass audience of Internet users who had expressed no interest in the product or service being marketed. Spammers tend to market pornography, fraudulent deals and services, out- right scams, and other products not widely approved in most civilized societies. Some countries have passed laws to outlaw spamming or restrict its use. In the United States, it is still legal if it does not involve fraud and the sender and sub- ject of the email are properly identified.

Spamming has mushroomed because it costs only a few cents to send thou- sands of messages advertising wares to Internet users. The percentage of all email that is spam was estimated at around 60 percent in 2017 (Symantec, 2018). Most spam originates from bot networks, which consist of thousands of captured PCs that can initiate and relay spam messages. Spam costs for busi- nesses are very high (estimated at more than $50 billion per year) because of the computing and network resources and the time required to deal with bil- lions of unwanted email messages.

Identity and financial-theft cybercriminals are targeting smartphones as users check email, do online banking, pay bills, and reveal personal information. Cell phone spam usually comes in the form of SMS text messages, but increasingly, users are receiving spam in their Facebook News feed and messaging service as well.

ISPs and individuals can combat spam by using spam filtering software to block suspicious email before it enters a recipient’s email inbox. However, spam filters may block legitimate messages. Spammers know how to skirt filters by continually changing their email accounts, by incorporating spam messages in images, by embedding spam in email attachments and digital greeting cards, and by using other people’s computers that have been hijacked by botnets (see Chapter 8). Many spam messages are sent from one country although another country hosts the spam website.

Spamming is more tightly regulated in Europe than in the United States. In 2002, the European Parliament passed a ban on unsolicited commercial messag- ing. Digital marketing can be targeted only to people who have given prior consent.

The U.S. CAN-SPAM Act of 2003, which went into effect in 2004, does not outlaw spamming but does ban deceptive email practices by requiring commer- cial email messages to display accurate subject lines, identify the true senders, and offer recipients an easy way to remove their names from email lists. It also prohibits the use of fake return addresses. A few people have been prosecuted under this law, but it has had a negligible impact on spamming, in large part because of the Internet’s exceptionally poor security and the use of offshore servers and botnets. Most large-scale spamming has moved offshore to Russia and Eastern Europe, where hackers control global botnets capable of generating billions of spam messages. One of the largest spam networks in recent years was the Russian network Festi, based in St. Petersburg. Festi is best known as the spam generator behind the global Viagra-spam industry.

Chapter 4 Ethical and Social Issues in Information Systems 147

Employment: Trickle-Down Technology and Reengineering Job Loss Reengineering work is typically hailed in the information systems community as a major benefit of new information technology. It is much less frequently noted that redesigning business processes has caused millions of mid-level factory managers and clerical workers to lose their jobs. Some economists have sounded new alarms about information and computer technology threatening middle-class, white- collar jobs (in addition to blue-collar factory jobs). Erik Brynjolfsson and Andrew P. McAfee argue that the pace of automation has picked up in recent years be- cause of a combination of technologies, including robotics, numerically controlled machines, computerized inventory control, pattern recognition, voice recognition, and online commerce. One result is that machines can now do a great many jobs heretofore reserved for humans, including tech support, call center work, X-ray examination, and even legal document review (Brynjolfsson and McAfee, 2011).

These views contrast with other economists’ assessments that new technolo- gies created as many or more new jobs than they destroyed. In some cases, em- ployment has grown or remained unchanged in industries like finance, where investment in IT capital is highest. For instance, the growth of e-commerce has led to a decline in retail sales jobs but an increase in jobs for warehouse workers, supervisors, and delivery work. These economists also believe that bright, educated workers who are displaced by technology will move to better jobs in fast-growth industries. Missing from this equation are unskilled, blue- collar workers and older, less–well-educated middle managers. It is not clear that these groups can be retrained easily for high-quality, high-paying jobs. The Interactive Session on Organizations explores this issue.

Equity and Access: Increasing Racial and Social Class Cleavages Does everyone have an equal opportunity to participate in the digital age? Will the social, economic, and cultural gaps that exist in the United States and other societies be reduced by information systems technology? Or will the cleavages be increased, permitting the better-off to become even more better-off relative to others?

These questions have not yet been fully answered because the impact of sys- tems technology on various groups in society has not been thoroughly studied. What is known is that information, knowledge, computers, and access to these resources through educational institutions and public libraries are inequitably distributed along ethnic and social class lines, as are many other information re- sources. Several studies have found that low-income groups in the United States are less likely to have computers or online Internet access even though com- puter ownership and Internet access have soared in the past five years. Although the gap in computer access is narrowing, higher-income families in each ethnic group are still more likely to have home computers and broadband Internet ac- cess than lower-income families in the same group. Moreover, the children of higher-income families are far more likely to use their Internet access to pursue educational goals, whereas lower-income children are much more likely to spend time on entertainment and games. This is called the “time-wasting” gap.

Left uncorrected, this digital divide could lead to a society of information haves, who are computer literate and skilled, versus a large group of information have-nots, who are computer illiterate and unskilled. Public interest groups want to narrow this digital divide by making digital information services— including the Internet—available to virtually everyone, just as basic telephone service is now.

148 Part One Organizations, Management, and the Networked Enterprise

Dennis Kriebal of Youngstown, Ohio, had been a su- pervisor at an aluminum extrusion factory, where he punched out parts for cars and tractors. Six years ago, he lost his job to a robot, and since then has been doing odd jobs to keep afloat. Sherry Johnson used to work for the local newspaper in Marietta, Geor- gia, feeding paper into printing machines and laying out pages. She lost this job as well as others making medical equipment and working in inventory and filing to automation.

These situations illustrate the negative impact of computer technology on jobs. Far more U.S. jobs have been lost to robots and automation than to trade with China, Mexico, or any other country. According to a study by the Center for Business and Economic Research at Ball State University, about 87 percent of manufacturing job losses between 2000 and 2010 stemmed from factories becoming more efficient through automation and better technology. Only 13 percent of job losses were due to trade. For example, the U.S. steel industry lost 400,000 jobs between 1962 and 2005. A study by the American Economic Review found that steel shipments did not decline, but fewer people were needed to do the same amount of work as before, with major productivity gains from using mini mills (small plants that make specialty steel from scrap iron).

A November 2015 McKinsey Global Institute re- port by Michael Chui, James Manyika, and Mehdi Miremadi examined 2,000 distinct types of work activities in 800 occupations. The authors found that 45 percent of these work activities could be automated by 2055 using technologies that cur- rently exist. About 51 percent of the work activities Americans perform involve predictable and routine physical work, data collection, and data process- ing. All of these tasks are ripe for some degree of automation. No one knows exactly how many U.S. jobs will be lost or how soon, but the researchers estimate that from 9 to 47 percent of jobs could eventually be affected and perhaps 5 percent of jobs eliminated entirely. These changes shouldn’t lead to mass unemployment because automation could increase global productivity by 0.8 percent to 1.4 percent annually over the next 50 years and create many new jobs.

According to a study by MIT labor economist David Autor, automation advances up to this point have not eliminated most jobs. Sometimes ma- chines do replace humans, as in agriculture and manufacturing, but not across an entire economy. Productivity gains from workforce automation have increased the demand for goods and services, in turn increasing the demand for new forms of labor. Jobs that have not been eliminated by au- tomation are often enhanced by it. For example, since BMW’s Spartanburg, South Carolina, plant automated many routine production tasks over the past decade, it has more than doubled its an- nual car production to more than 400,000 units. The Spartanburg labor force has grown from 4,200 workers to 10,000, and they handle vastly more complex autos. (Cars that once had 3,000 parts now have 15,000.)

The positive and negative impacts of technology are not delivered in an equal way. All the new jobs created by automation are not necessarily better jobs. There have been increases in high-paying jobs (such as accountants) but also in low-paying jobs such as food service workers and home health aides. Disappearing factory jobs have been largely replaced by new jobs in the service sector but often at lower wages.

Manufacturing jobs have been the hardest hit by robots and automation. There are more than 5 million fewer jobs in manufacturing today than in 2000. According to a study by economists Daron Acemoglu of MIT and Pascual Restrepo of Boston University, for every robot per thousand workers, up to six workers lost their jobs and wages fell as much as 0.75 percent. Acemoglu and Restrepo found very little employment increase in other occupations to offset job losses in manufacturing. That increase could eventually happen, but right now there are large numbers of people out of work in the United States, especially blue-collar men and women with- out college degrees. These researchers also found in- dustrial robots were to blame for as many as 670,000 manufacturing jobs lost between 1990 and 2007, and this number will rise going forward because the number of industrial robots is predicted to qua- druple. Acemoglu and Restrepo noted that a specific local economy, such as Detroit, could be especially

INTERACTIVE SESSION ORGANIZATIONS

Will Automation Kill Jobs?

Chapter 4 Ethical and Social Issues in Information Systems 149

1. How does automating jobs pose an ethical dilemma? Who are the stakeholders? Identify the options that can be taken and the potential conse- quences of each.

2. If you were the owner of a factory deciding on whether to acquire robots to perform certain tasks, what people, organization, and technology factors would you consider?

hard-hit, although nationally the effects of robots are smaller because jobs were created in other places. The new jobs created by technology are not neces- sarily in the places losing jobs, such as the Rust Belt. Those forced out of a job by robots generally do not have the skills or mobility to assume the new jobs created by automation.

Automation is not just affecting manual labor and factory jobs. Computers are now capable of taking over certain kinds of white collar and service-sector work, including X-ray analysis and sifting through documents. Job opportunities are shrinking slightly for medical technicians, supervisors, and even law- yers. Work that requires creativity, management, information technology skills, or personal caregiving is least at risk.

According to Boston University economist James Bessen, the problem is not mass unemployment; it’s transitioning people from one job to another. People need to learn new skills to work in the new economy. When the United States moved from an agrarian to an industrialized economy, high school education

expanded rapidly. By 1951 the average American had 6.2 more years of education than someone born 75 years earlier. Additional education enabled people to do new kinds of jobs in factories, hospitals, and schools.

Sources: William Wilkes, “How the World’s Biggest Companies Are Fine-Tuning the Robot Revolution,” Wall Street Journal, May 14, 2018; James Manyika and Michael Spence, “The False Choice Between Automation and Jobs,” Harvard Business Review, February 5, 2018; Andrew Hobbs, “Automation Will Replace 9 Percent of U.S. Jobs in 2018,” Internet of Business, February 16, 2018; Patrick Gillespie, “Rise of the Machines: Fear Robots, Not China or Mexico,” CNN Money, January 30, 2017; Claire Cain Miller, “Evidence That Robots Are Win- ning the Race for American Jobs,” New York Times, March 28, 2017; “The Long-Term Jobs Killer Is Not China, It’s Automation,” New York Times, December 21, 2016; “A Darker Theme in Obama’s Farewell: Automation Can Divide Us,” New York Times, January 12, 2017; Steve Lohr, “Robots Will Take Jobs, But Not as Fast as Some Fear,” New York Times, January 12, 2017; Michael Chui, James Manyika, and Mehdi Miremadi, “Where Machines Could Replace Humans—and Where They Can’t (Yet),” McKinsey Quarterly, July 2016; Stephen Gold, “The Future of Automation—and Your Job,” Industry Week, January 18, 2016; and Christopher Mims, “Automation Can Actually Create More Jobs,” Wall Street Journal, December 11, 2016.

CASE STUDY QUESTIONS

Health Risks: RSI, CVS, and Cognitive Decline A common occupational disease today is repetitive stress injury (RSI). RSI occurs when muscle groups are forced through repetitive actions often with high-impact loads (such as tennis) or tens of thousands of repetitions under low-impact loads (such as working at a computer keyboard). The incidence of RSI is estimated to affect as much as one-third of the labor force and accounts for one-third of all disability cases.

The single largest source of RSI is computer keyboards. The most common kind of computer-related RSI is carpal tunnel syndrome (CTS), in which pressure on the median nerve through the wrist’s bony structure, called a carpal tunnel, produces pain. The pressure is caused by constant repeti- tion of keystrokes: In a single shift, a word processor may perform 23,000 keystrokes. Symptoms of CTS include numbness, shooting pain, inability to grasp objects, and tingling. Millions of workers have been diagnosed with CTS. It affects an estimated 3 to 6 percent of the workforce (LeBlanc and Cestia, 2011).

150 Part One Organizations, Management, and the Networked Enterprise

RSI is avoidable. Designing workstations for a neutral wrist position (using a wrist rest to support the wrist), proper monitor stands, and footrests all con- tribute to proper posture and reduced RSI. Ergonomically correct keyboards are also an option. These measures should be supported by frequent rest breaks and rotation of employees to different jobs.

RSI is not the only occupational illness computers cause. Back and neck pain, leg stress, and foot pain also result from poor ergonomic designs of work- stations. Computer vision syndrome (CVS) refers to any eyestrain condi- tion related to display screen use in desktop computers, laptops, e-readers, smartphones, and handheld video games. CVS affects about 90 percent of people who spend three hours or more per day at a computer. Its symptoms, which are usually temporary, include headaches, blurred vision, and dry and irritated eyes.

In addition to these maladies, computer technology may be harming our cognitive functions or at least changing how we think and solve prob- lems. Although the Internet has made it much easier for people to access, create, and use information, some experts believe that it is also preventing people from focusing and thinking clearly on their own. They argue that ex- cessive use of computers (and smartphones—see the Interactive Session on Technology) reduces intelligence. One MIT scholar believes exposure to com- puters encourages looking up answers rather than engaging in real problem solving. Students, in this view, don’t learn much surfing the web or answering email when compared to listening, drawing, arguing, looking, and exploring (Henry, 2011).

The computer has become part of our lives—personally as well as socially, culturally, and politically. It is unlikely that the issues and our choices will be- come easier as information technology continues to transform our world. The growth of the Internet and the information economy suggests that all the ethi- cal and social issues we have described will be heightened further as we move further into the first digital century.

Repetitive stress injury (RSI) is a leading occupational disease today. The single largest cause of RSI is computer keyboard work.

© Ian Allenden/123RF

Chapter 4 Ethical and Social Issues in Information Systems 151

For many of us, smartphones have become indispens- able, but they have also come under fire for their impact on the way we think and behave, especially among children. Two of the largest investors in Apple Inc. are urging the iPhone maker to take action against smartphone addiction among children over growing concerns about the negative effects of technology.

An open letter to Apple on January 6, 2018 from New York-based JANA Partners and the California State Teachers’ Retirement System (CalSTRS) stated that the firm must do more to help children fight smartphone addiction. These two shareholders to- gether control about $2 billion in Apple stock.

The investors’ letter urged Apple to offer tools to pre- vent smartphone addiction and to provide more paren- tal options for monitoring children’s smartphone usage. The iOS operating system for Apple smartphones and tablets already has limited parental controls for restrict- ing apps, features such as location sharing, and access to certain types of content. The investors felt Apple needs to do more—for example, enable parents to specify the age of the user of the phone during setup, establish limits on screen time, select hours of the day the phone can be used, and block social media services.

The average American teenager who uses a smart- phone receives his or her first phone at age 10 and spends over 4.5 hours a day on it (excluding texting and talking). Seventy-eight percent of teens check their phones at least hourly and 50 percent report feeling “addicted” to their phones. The investors’ letter cited a number of studies on the negative effects of heavy smartphone and social media use on the men- tal and physical health of children whose brains are still developing. These range from distractions in the classroom to a higher risk of suicide and depression.

A recent survey of over 2,300 teachers by the Center on Media and Child Health and the University of Alberta found that 67 percent of the teachers reported that the number of students who are negatively distracted by digital technologies in the classroom is growing. Seventy-five percent of these teachers think students’ ability to focus on educational tasks has decreased. Research by psychology profes- sor Jean Twenge of San Diego State University found that U.S. teenagers who spend 3 hours a day or more on electronic devices are 35 percent more likely, and those who spend 5 hours or more are 71 percent more

likely, to have a risk factor for suicide than those who spend less than 1 hour. This research also showed that eighth-graders who are heavy users of social media have a 27 percent higher risk of depression. Those who spend more than the average time playing sports, hanging out with friends in person, or doing home- work have a significantly lower risk. Additionally, teens who spend 5 or more hours a day on electronic devices are 51 percent more likely to get less than 7 hours of sleep per night (versus the recommended 9).

Nicholas Carr, who has studied the impact of tech- nology on business and culture, shares these con- cerns. He has been highly critical of the Internet’s ef- fect on cognition, and these cognitive effects extend to smartphone use. Carr worries that excessive use of mobile devices diminishes the capacity for concen- tration and contemplation.

Carr recognizes that smartphones provide many use- ful functions in a very handy form. However, this ex- traordinary usefulness gives them too much influence on our attention, thinking, and behavior. Smartphones shape our thoughts in deep and complicated ways, and their effects persist even when we aren’t using the de- vices. Research suggests that the intellect weakens as the brain grows dependent on the technology.

Carr points to the work of Adrian Ward, a cognitive psychologist and marketing professor at the University of Texas at Austin, who for a decade has been study- ing how smartphones and the Internet affect people’s thoughts and judgment. Ward has observed that using a smartphone, or even hearing one ring or vibrate, produces distractions that make it harder to concen- trate on a difficult problem or job. Divided attention impedes reasoning and performance.

A study published in Applied Cognitive Psychology in April 2017 examined how smartphones affected learning in a lecture class with 160 students at the University of Arkansas at Monticello. It found that students who didn’t bring their phones to the class- room scored a full letter-grade higher on a test of the material presented than those who brought their phones. It didn’t matter whether students who brought their phones used them or not. A study of 91 U.K. secondary schools, published in 2016 in the jour- nal Labour Economics, found that when schools ban smartphones, students’ examination scores go up sub- stantially, and the weakest students benefit the most.

INTERACTIVE SESSION TECHNOLOGY

How Harmful Are Smartphones?

152 Part One Organizations, Management, and the Networked Enterprise

1. Identify the problem described in this case study. In what sense is it an ethical dilemma?

2. Should restrictions be placed on children’s and teenagers’ smartphone use? Why or why not?

3. Can the problem of smartphones reducing cogni- tive skills be solved? Why or why not? Explain your answer.

Carr also observes that using smartphones ex- tensively can be detrimental to social skills and relationships. Connecting with “friends” electroni- cally via smartphones is not a substitute for genu- ine person-to-person relationships and face-to-face conversations.

Sources: “Letter from JANA Partners & CalSTRS to Apple, Inc.,” posted by Anne Sheehan, California State Teachers’ Retirement System, Harvard Law School Forum on Corporate Governance and Financial Regulation, January 19, 2018; Samuel Gibbs, “Apple Investors Call for Action over iPhone ‘Addiction’ among Children,” The Guardian, January 8, 2018; David Benoit, “iPhones and Children

CASE STUDY QUESTIONS

4-5 How will MIS help my career? Here is how Chapter 4 and this book can help you find a job as a junior privacy analyst.

The Company Pinnacle Air Force Base in Texas has an open entry-level position for a junior privacy analyst in its human resources office. The office maintains detailed personnel records, including work history, compensation, healthcare, and re- tirement benefits, on more than 6,800 military members and their families and 1,250 civilian employees.

Position Description The junior privacy analyst will assist with employee recordkeeping and help ensure compliance with all federal and state privacy regulations. Job responsi- bilities include:

• Analyzing and developing policy and procedures related to privacy office functions.

• Logging and tracking Privacy Act requests, assistance with review, redac- tion and preparation of responsive records, and tracking all privacy office correspondence.

• Monitoring and responding to written, verbal, and electronic correspondence and inquiries directed to the government privacy office, including sensitive beneficiary/personnel correspondence.

• Coordinating privacy office meetings.

• Reviewing and analyzing data and documents and assessing options, issues, and positions for a variety of program planning, reporting, and execution activities.

Job Requirements • Bachelor’s degree in liberal arts or business

• Strong communication and organizational skills

• Experience with recordkeeping and file systems desirable

Are a Toxic Pair, Say Two Big Apple Investors,” Wall Street Journal, January 7, 2018; and Nicholas Carr, “How Smartphones Hijack Our Minds,” Wall Street Journal, October 7, 2017.

Chapter 4 Ethical and Social Issues in Information Systems 153

Interview Questions 1. What background or job experience do you have in the privacy protection field?

2. What do you know about the Privacy Act?

3. What do you know about privacy protection practices for both written and electronic correspondence?

4. If you were asked to improve privacy protection for our organization, how would you proceed?

5. Have you ever dealt with a problem involving privacy protection? What role did you play in its solution?

Author Tips 1. Review this chapter, with special attention to the sections dealing with infor-

mation systems and privacy.

2. Use the web to find out more about the Privacy Act and privacy protection procedures and policies for personnel records.

3. Try to find out more about employee recordkeeping and privacy protection at U.S. military bases or other organizations.

4. If you do not have any hands-on experience in the privacy area, explain what you do know about privacy and why it is so important to protect sensitive personal data, and indicate you would be very interested in learning more and doing privacy-related work.

4-1 What ethical, social, and political issues are raised by information systems? Information technology is introducing changes for which laws and rules of acceptable conduct have

not yet been developed. Increasing computing power, storage, and networking capabilities—including the Internet—expand the reach of individual and organizational actions and magnify their impacts. The ease and anonymity with which information is now communicated, copied, and manipulated in online environments pose new challenges to the protection of privacy and intellectual property. The main ethical, social, and political issues information systems raise center on information rights and ob- ligations, property rights and obligations, accountability and control, system quality, and quality of life.

4-2 What specific principles for conduct can be used to guide ethical decisions? Six ethical principles for judging conduct include the Golden Rule, Immanuel Kant’s categorical

imperative, the slippery slope rule, the utilitarian principle, the risk aversion principle, and the ethical no-free-lunch rule. These principles should be used in conjunction with an ethical analysis.

4-3 Why do contemporary information systems technology and the Internet pose challenges to the protection of individual privacy and intellectual property?

Contemporary data storage and data analysis technology enable companies to gather personal data from many sources easily about individuals and analyze these data to create detailed digital profiles about individuals and their behaviors. Data flowing over the Internet can be monitored at many points. Cookies and other web monitoring tools closely track the activities of website visitors. Not all websites have strong privacy protection policies, and they do not always allow for informed consent regarding the use of personal information. Traditional copyright laws are insufficient to protect against software piracy because digital material can be copied so easily and transmitted to many locations simultane- ously over the Internet.

REVIEW SUMMARY

154 Part One Organizations, Management, and the Networked Enterprise

4-4 How have information systems affected laws for establishing accountability and liability and the quality of everyday life?

New information technologies are challenging existing liability laws and social practices for holding individuals and institutions accountable for harm done to others. Although computer systems have been sources of efficiency and wealth, they have some negative impacts. Computer errors can cause serious harm to individuals and organizations. Poor data quality is also responsible for disruptions and losses for businesses. Jobs can be lost when computers replace workers or tasks become unnecessary in reengineered business processes. The ability to own and use a computer may be exacerbating socio- economic disparities among different ethnic groups and social classes. Widespread use of computers increases opportunities for computer crime and computer abuse. Computers can also create health and cognitive problems such as repetitive stress injury, computer vision syndrome, and the inability to think clearly and perform complex tasks.

Key Terms Accountability, 129 Carpal tunnel syndrome (CTS), 149 Computer abuse, 146 Computer crime, 145 Computer vision syndrome (CVS), 150 Cookies, 135 Copyright, 138 Digital divide, 147 Digital Millennium Copyright Act (DMCA), 141 Due process, 129 Ethical no-free-lunch rule, 130 Ethics, 124 Fair Information Practices (FIP), 132 General Data Protection Regulation (GDPR), 134 Golden Rule, 130 Immanuel Kant’s categorical imperative, 130 Information rights, 126 Informed consent, 134 Intellectual property, 138

Liability, 129 Nonobvious relationship awareness (NORA), 128 Opt-in, 137 Opt-out, 137 Patent, 139 Privacy, 132 Profiling, 127 Repetitive stress injury (RSI), 149 Responsibility, 129 Risk aversion principle, 130 Safe harbor, 134 Slippery slope rule, 130 Spam, 146 Spyware, 136 Trade secret, 140 Trademarks, 140 Utilitarian principle, 130 Web beacons, 136

MyLab MIS To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.

Review Questions 4-1 What ethical, social, and political issues are

raised by information systems?

• Explain how ethical, social, and politi- cal issues are connected and give some examples.

• List and describe the key technological trends that heighten ethical concerns.

• Differentiate between responsibility, accountability, and liability.

4-2 What specific principles for conduct can be used to guide ethical decisions?

• List and describe the five steps in an ethical analysis.

• Identify and describe six ethical principles.

4-3 Why do contemporary information systems technology and the Internet pose challenges to the protection of individual privacy and intellectual property?

• Define privacy and Fair Information Practices.

• Explain how the Internet challenges the protection of individual privacy and intel- lectual property.

• Explain how informed consent, legislation, industry self-regulation, and technology tools help protect the individual privacy of Internet users.

• List and define the three regimes that protect intellectual property rights.

Chapter 4 Ethical and Social Issues in Information Systems 155

4-4 How have information systems affected laws for establishing accountability and liability and the quality of everyday life?

• Explain why it is so difficult to hold soft- ware services liable for failure or injury.

• List and describe the principal causes of system quality problems.

• Name and describe four quality of life impacts of computers and information systems.

• Define and describe computer vision syn- drome and repetitive stress injury (RSI) and explain their relationship to information technology.

Discussion Questions 4-5 Should producers of software-based services,

such as ATMs, be held liable for economic injuries suffered when their systems fail?

4-6 Should companies be responsible for unemployment their information systems cause? Why or why not?

MyLab MIS

MyLab MIS

4-7 Discuss the pros and cons of allowing companies to amass personal data for behavioral targeting.

MyLab MIS

Hands-On MIS Projects The projects in this section give you hands-on experience in analyzing the privacy implications of using online data brokers, developing a corporate policy for employee web usage, using blog creation tools to create a simple blog, and analyzing web browser privacy. Visit MyLab MIS to access this chapter’s Hands-On MIS Projects.

Management Decision Problems

4-8 InfoFree’s website is linked to massive databases that consolidate personal data on millions of people. Users can purchase marketing lists of consumers broken down by location, age, gender, income level, home value, and interests. One could use this capability to obtain a list, for example, of everyone in Peekskill, New York, making $150,000 or more per year. Do data brokers such as InfoFree raise privacy issues? Why or why not? If your name and other personal information were in this database, what limitations on access would you want to preserve your privacy? Consider the following data users: government agencies, your employer, private business firms, other individuals.

4-9 As the head of a small insurance company with six employees, you are concerned about how effectively your company is using its networking and human resources. Budgets are tight, and you are struggling to meet payrolls because employees are reporting many overtime hours. You do not believe that the employees have a sufficiently heavy workload to warrant working longer hours and are looking into the amount of time they spend on the Internet.

Each employee uses a computer with Internet access on the job. Review a sample of your company’s weekly report of employee web usage, which can be found in MyLab MIS.

• Calculate the total amount of time each employee spent on the web for the week and the total amount of time that company computers were used for this purpose. Rank the employees in the order of the amount of time each spent online.

• Do your findings and the contents of the report indicate any ethical problems employees are creating? Is the company creating an ethical problem by monitoring its employees’ use of the Internet?

• Use the guidelines for ethical analysis presented in this chapter to develop a solution to the problems you have identified.

Achieving Operational Excellence: Creating a Simple Blog

Software skills: Blog creation Business skills: Blog and web page design

4-10 In this project, you’ll learn how to build a simple blog of your own design using the online blog creation software available at Blogger.com. Pick a sport, hobby, or topic of interest as the theme for your blog. Name

156 Part One Organizations, Management, and the Networked Enterprise

the blog, give it a title, and choose a template for the blog. Post at least four entries to the blog, adding a label for each posting. Edit your posts if necessary. Upload an image, such as a photo from your computer, or the web, to your blog. Add capabilities for other registered users, such as team members, to comment on your blog. Briefly describe how your blog could be useful to a company selling products or services related to the theme of your blog. List the tools available to Blogger that would make your blog more useful for business and describe the business uses of each. Save your blog and show it to your instructor.

Improving Decision Making: Analyzing Web Browser Privacy

Software Skills: Web browser software Business Skills: Analyzing web browser privacy protection features

4-11 This project will help develop your Internet skills for using the privacy protection features of leading web browser software. Examine the privacy protection features and settings for two leading web browsers such as Internet

Explorer, Mozilla Firefox, or Google Chrome. Make a table comparing the features of two of these browsers in terms of functions provided and ease of use.

• How do these privacy protection features protect individuals?

• How do these privacy protection features affect what businesses can do on the Internet?

• Which browser does the best job of protecting privacy? Why?

Collaboration and Teamwork Project Developing a Corporate Code of Ethics

4-12 With three or four of your classmates, develop a corporate ethics code on privacy that addresses both employ- ee privacy and the privacy of customers and users of the corporate website. Be sure to consider email privacy and employer monitoring of worksites as well as corporate use of information about employees concerning their off-the-job behavior (e.g., lifestyle, marital arrangements, and so forth). If possible, use Google Docs and Google Drive or Google Sites to brainstorm, organize, and develop a presentation of your findings for the class.

Chapter 4 Ethical and Social Issues in Information Systems 157

Facebook describes its corporate mission as giv-ing people the power to build community and bring the world closer together. In 2017 and 2018 these lofty objectives took a serious blow when it became known that Facebook had lost control of the personal information users share on the site. Facebook had allowed its platform to be exploited by Russian intelligence and political consultants with the intention of intensifying existing political cleavages, driving people away from community and from one another during the U.S. presidential election of 2016.

In January 2018, a founder and former employee of a political consulting and voter profiling company called Cambridge Analytica revealed that his firm had harvested the personal information of as many as 87 million users of Facebook, and used this information in an effort to influence the U.S. presidential election of 2016. Facebook does not sell the personal informa- tion of its users, but it did allow third-party apps to obtain the personal information of Facebook users. In this case, a U.K. researcher was granted access to 50,000 Facebook users for the purpose of research. He developed an app quiz that claimed to measure users’ personality traits. Facebook’s design allowed this app to not only collect the personal information of people who agreed to take the survey, but also the personal information of all the people in those users’ Facebook social network. The researcher sold the data to Cambridge Analytica, who in turn used it to send tar- geted political ads in the presidential election.

In a Senate hearing in October 2017, Facebook testified that Russian operatives had exploited Facebook’s social network in an effort to influence the 2016 presidential election. More than 130,000 fake messages and stories had been sent to Facebook users in the United States using an army of auto- mated software bots, built and operated by several thousand Russian-based hackers working for a Russian intelligence agency, the Internet Research Agency. (A bot is a software program that performs an automated task, and is often on the Internet for malicious purposes—see Chapter 8.) Using 75,000 fake Facebook accounts, and 230,000 bots, the Russian messages were sent to an estimated 146 mil- lion people on Facebook. The messages targeted peo- ple based on their personal information collected by

Facebook Privacy: Your Life for Sale

CASE STUDY

Facebook in the normal course of business, including users’ religion, race, ethnicity, personal interests, and political views. The ads targeted groups who had opposing political views, with the intention of inten- sifying social conflict among them.

How could all this happen? As it turns out, it was quite easy and inexpensive, given the design and management of Facebook. Once Facebook grants ac- cess to advertisers, app developers, or researchers, it has a very limited capability to control how that information is used. Third-party agreements and policies are rarely reviewed by Facebook to check for compliance. Facebook executives claimed they were as shocked as others that 87 million Facebook users had their personal information harvested by Russian intelligence agencies and used by Cambridge Analytica to target political ads.

It gets worse: In early June 2018, several months after Facebook was forced to explain its privacy mea- sures and pledge reforms in the wake of the Cambridge Analytica scandal, the New York Times reported that Facebook had data-sharing partnerships with at least 60 device makers. Facebook allowed Apple, Samsung, Amazon, and other companies that sell mobile phones, tablets, TVs, and video game consoles to gain access not only to data about Facebook users but also personal data about their friends—without their explicit consent. As of 2015, Facebook had supposedly prohibited app software developers from collecting information about customers’ friends. Apparently, these restrictions did not extend to device makers.

Shortly thereafter, it was also revealed that Facebook had struck customized data-sharing deals that gave select companies such as Royal Bank of Canada and Nissan Motor Co. special access to user records, even though Facebook claimed it had it walled off that information in 2015. Certain compa- nies were also allowed access to additional informa- tion about a user’s Facebook friends.

Facebook again came under attack from the press, privacy advocates, and government authorities for pleading ignorance and for allowing uncontrolled data sharing to happen. For the first time since its found- ing, Facebook is facing a serious existential crisis, and potentially a threat to its business model. Facebook’s current crisis follows from a history of privacy abuses

158 Part One Organizations, Management, and the Networked Enterprise

in its short 14-year life. Facebook has quickly morphed from a small, niche networking site for mostly Ivy League college students into a publicly traded com- pany with a market worth of $534 billion in 2018. Facebook boasts that it is free to join and always will be, so where’s the money coming from to service 2.1 billion worldwide subscribers? Just like its fellow tech titan and rival Google, Facebook’s revenue comes al- most entirely from advertising (97 percent of $40.6 bil- lion in revenue in 2017). Facebook watches what you do on Facebook and then sells that information and in- formation about your friends to advertisers, not just on Facebook but all over the web. As Tim Cook, CEO of Apple, noted, at Facebook, the product they sell is you.

More than ever, companies such as Facebook and Google, which made approximately $110 billion in ad- vertising revenue in 2017, are using your online activ- ity to develop a frighteningly accurate digital picture of your life, and then selling access to their platform of personal information to advertisers. Facebook’s goal is to serve advertisements that are more relevant to you than anywhere else on the web, but the personal infor- mation it gathers about you both with and without your consent can also be used against you in other ways.

Facebook has a diverse array of compelling and useful features. It has helped families find lost pets and allows active-duty soldiers to stay in touch with their families; it gives smaller companies a chance to further their e-commerce efforts and larger compa- nies a chance to solidify their brands; and, perhaps most obviously, Facebook makes it easier for you to keep in touch with your friends, relatives, local restaurants, and, in short, just about all the things you are interested in. These are the reasons so many people use Facebook—it provides real value to users. The cost of participating in the Facebook platform is that your personal information is shared with adver- tisers and with others you may not know.

Facebook has a checkered past of privacy viola- tions and missteps that raise doubts about whether it should be responsible for the personal data of billions of people. There are no laws in the United States that give consumers the right to know what data compa- nies like Facebook have compiled. You can challenge information in credit reports because of the Fair Credit Reporting Act, but until recently, you could not obtain what data Facebook has gathered about you. It’s been different in Europe: for several years, users had the right to demand that Facebook turn over a report of all the information it had collected on individuals. In 2018, Facebook allowed users to

download all the information they had collected on a person, even though users had no legal right to de- mand that information.

Think you own your face? Not on Facebook, thanks to its facial recognition software for photo tagging of users. This “tag suggestions” feature is automatically on when you sign up, and there is no user consent. A federal court in 2016 allowed a lawsuit to go forward contesting Facebook’s right to photo tag without user consent. This feature is in violation of several state laws that seek to secure the privacy of biometric data.

A Consumer Reports study found that among 150 million Americans on Facebook every day, at least 4.8 million were willingly sharing informa- tion that could be used against them in some way. That includes plans to travel on a particular day, which burglars could use to time robberies, or Liking a page about a particular health condition or treatment, which might prompt insurers to deny coverage. Credit card companies and similar orga- nizations have begun engaging in weblining, taken from the term redlining, by altering their treatment of you based on the actions of other people with profiles similar to yours. Employers can assess your personality and behavior by using your Facebook Likes. Thirteen million users have never adjusted Facebook’s privacy controls, which allow friends using Facebook applications to transfer your data un- wittingly to a third party without your knowledge.

Why, then, do so many people share sensitive details of their life on Facebook? Often, it’s because users do not realize that their data are being col- lected and transmitted in this way. A Facebook user’s friends are not notified if information about them is collected by that user’s applications. Many of Facebook’s features and services are enabled by de- fault when they are launched without notifying users, and a study by Siegel+Gale found that Facebook’s privacy policy is more difficult to comprehend than government notices or typical bank credit card agree- ments, which are notoriously dense. Did you know that whenever you log into a website using Facebook, Facebook shares some personal information with that site and can track your movements in that site? Next time you visit Facebook, click Privacy Settings and see whether you can understand your options.

However, there are some signs that Facebook might become more responsible with its data col- lection processes, whether by its own volition or because it is forced to do so. As a publicly traded company, Facebook now invites more scrutiny from

Chapter 4 Ethical and Social Issues in Information Systems 159

investors and regulators. In 2018, in response to a maelstrom of criticism in the United States, and Europe’s new General Data Protection Regulation (GDPR), Facebook changed its privacy policy to make it easier for users to select their privacy preferences; to know exactly what they are consenting to; to down- load users’ personal archives and the information that Facebook collects and shares, including facial images; to restrict click bait and spam in newsfeeds; to more closely monitor app developers’ use of personal infor- mation; and to increase efforts to eliminate millions of fake accounts. Facebook hired 10,000 new em- ployees and several hundred fact-checking firms to identify and eliminate fake news. For the first time in its history, Facebook is being forced to apply editorial controls to the content posted by users and, in that sense, become more like a traditional publisher and news outlet that takes responsibility for its content. Unfortunately, as researchers have long known, and Facebook executives understand, very few users— estimated to be less than 12 percent—take the time to understand and adjust their privacy preferences. In reality, user choice is not a powerful check on Facebook’s use of personal information.

Although U.S. Facebook users have little recourse to access data that Facebook has collected on them, users from other countries have done better. In Europe, over 100,000 Facebook users have already requested their data, and European law requires Facebook to respond to these requests within 40 days. Government privacy regulators from France, Spain, Italy, Germany, Belgium, and the Netherlands have been actively investigating Facebook’s privacy controls as the European Union pursues more strin- gent privacy protection legislation.

While Facebook has shut down several of its more egregious privacy-invading features, and enhanced its consent process, the company’s data use policies make it very clear that, as a condition of using the service, users grant the company wide latitude in using their personal information in advertising. The default option for users is “opt-in”; most users do not know how to control use of their information; and they cannot “opt out” of all sharing if they want to use Facebook. This is called the “control paradox” by researchers: even when users are given controls over the use of their personal information, they typically choose not to use those controls. Although users can limit some uses of their information, an advanced de- gree in Facebook data features is required. Facebook shows you ads not only on Facebook but across the

web through its Facebook Audience Network, which keeps track of what its users do on other websites and then targets ads to those users on those websites.

Critics have asked Facebook why it doesn’t offer an ad-free service—like music streaming sites—for a monthly fee. Others want to know why Facebook does not allow users just to opt out of tracking. But these kinds of changes would be very difficult for Facebook because its business model depends entirely on the largely unfettered use of its users’ personal private information, just as it declares in its data use policy. That policy states very openly that if you use Facebook you agree to their terms of service, which enable it to share your information with third parties.

Sources: Deepa Seetharaman and Kirsten Grind, “Facebook Gave Some Companies Access to Additional Data About Users’ Friends,” Wall Street Journal, June 8, 2018; Natalia Drozdiak, Sam Schechner, and Valentina Pop, “Mark Zuckerberg Apologizes to EU Lawmakers for Facebook’s Fake-News Failures,” Wall Street Journal, May 22, 2018; Cecilia Kang and Sheera Frenkel, “Facebook Says Cambridge Analytica Harvested Data of Up to 87 Million Users,” New York Times, April 24, 2018; Eduardo Porter, “The Facebook Fallacy: Privacy Is Up to You,” New York Times, April 24, 2018; Jack Nicas, “Facebook to Require Verified Identities for Future Political Ads,” New York Times, April 6, 2018; Sheera Frenkel and Natasha Singer, “Facebook Introduces Central Page for Privacy and Security Settings,” New York Times, March 28, 2018; David Mayer, “Facebook Is Giving You New Privacy Options, But It’s Clear What It Wants You to Choose,” Fortune, March 19, 2018; Matthew Rosenberg, Nicholas Confessore, and Carole Cadwalladr, “How Trump Consultants Exploited the Facebook Data of Millions,” New York Times, March 17, 2018; Sheera Frenkel, “Tech Giants Brace for Europe’s New Data Privacy Rules,” New York Times, January 28, 2018; Georgia Wells and Deepa Seetharaman, “New Facebook Data Shows Russians Targeted Users by Education, Religion, Politics,” Wall Street Journal, November 1, 2017; Hunt Allcott and Matthew Gentzkow, “Social Media and Fake News in the 2016 Election,” Journal of Economic Perspectives, March, 2017; Samuel Gibbs, “Facebook Facing Privacy Actions Across Europe as France Fines Firm €150k,” The Guardian, May 16, 2017; and Katie Collins, “Facebook’s Newest Privacy Problem: ‘Faceprint’ Data,” CNET, May 16, 2016.

CASE STUDY QUESTIONS 4-13 Perform an ethical analysis of Facebook. What

is the ethical dilemma presented by this case?

4-14 What is the relationship of privacy to Facebook’s business model?

4-15 Describe the weaknesses of Facebook’s privacy policies and features. What management, orga- nization, and technology factors have contrib- uted to those weaknesses?

4-16 Will Facebook be able to have a successful busi- ness model without invading privacy? Explain your answer. Could Facebook take any mea- sures to make this possible?

160 Part One Organizations, Management, and the Networked Enterprise

Chapter 4 References Adjerid, Idris, Eyal Peer, and Alessandro Acquisti. “Beyond the

Privacy Paradox: Objective Versus Relative Risk in Privacy Decision Making.” MIS Quarterly 42, No. 2 (June 2018).

Anderson, Chad, Richard L. Baskerville, and Mala Kaul. “Information Security Control Theory: Achieving a Sustainable Reconciliation Between Sharing and Protecting the Privacy of Information.” Journal of Management Information Systems 34, No. 4 (2017).

Belanger, France, and Robert E. Crossler. “Privacy in the Digital Age: A Review of Information Privacy Research in Informa- tion Systems.” MIS Quarterly 35, No. 4 (December 2011).

Bernstein, Amy, and Anand Raman. “The Great Decoupling: An Interview with Erik Brynjolfsson and Andrew McAfee.” Harvard Business Review (June 2015).

Bernstein, Ethan, Saravanan Kesavan, and Bradley Staats. “How to Manage Scheduling Software Fairly.” Harvard Business Review (December 2014).

Bilski v. Kappos, 561 US (2010). Brown Bag Software vs. Symantec Corp. 960 F2D 1465 (Ninth

Circuit, 1992). Brynjolfsson, Erik, and Andrew McAfee. Race Against the Machine.

(Digital Frontier Press, 2011). Chan, Jason, Anindya Ghose, and Robert Seamans. “The Internet

and Racial Hate Crimes: Offline Spillovers from Online Ac- cess.” MIS Quarterly 40, No. 2 (June 2016).

Clemons, Eric K., and Joshua S. Wilson. “Family Preferences Concerning Online Privacy, Data Mining, and Targeted Ads: Regulatory Implications.” Journal of Management Information Systems 32, No. 2 (2015).

Culnan, Mary J., and Cynthia Clark Williams. “How Ethics Can Enhance Organizational Privacy.” MIS Quarterly 33, No. 4 (December 2009).

Davenport, Thomas H., and Julia Kirby. “Beyond Automation.” Harvard Business Review (June 2015).

European Commission. “The EU-U.S. Privacy Shield Factsheet.” July 2016. http://ec.europa.eu, accessed June 15, 2017.

European Parliament. “Directive 2009/136/EC of the European Parliament and of the Council of November 25, 2009.” Euro- pean Parliament (2009).

Federal Trade Commission. “Protecting Consumer Privacy in an Era of Rapid Change.” (Washington, DC, 2012).

___________. “Internet of Things (IoT): Privacy & Security in a Connected World.” (January 2015).

Goelmarch, Vindu. “One Billion Yahoo Accounts Still for Sale, De- spite Hacking Indictments.” New York Times (March 17, 2017).

Goldfarb, Avi, and Catherine Tucker. “Why Managing Consumer Privacy Can Be an Opportunity.” MIT Sloan Management Review 54, No. 3 (Spring 2013).

Gopal, Ram D., Hooman Hidaji, Raymond A. Patterson, Erik Rol- land, and Dmitry Zhdanov. “How Much to Share with Third Parties? User Privacy Concerns and Website Dilemmas.” MIS Quarterly 42, No. 1 (March 2018).

Groysberg, Boris, Eric Lin, George Serafeim, and Robin Abrahams. “The Scandal Effect.” Harvard Business Review (September 2016).

Henry, Patrick. “Why Computers Make Us Stupid.” Slice of MIT (March 6, 2011).

MyLab MIS Go to the Assignments section of MyLab MIS to complete these writing exercises.

4-17 What are the five principles of Fair Information Practices? For each principle, describe a business situa- tion in which the principle comes into play and how you think managers should react.

4-18 What are five digital technology trends in business today that raise ethical issues for business firms and managers? Provide an example from business or personal experience when an ethical issue resulted from each of these trends.

Hsieh, J. J. Po-An, Arun Rai, and Mark Keil. “Understanding Digi- tal Inequality: Comparing Continued Use Behavioral Models of the Socio-Economically Advantaged and Disadvantaged.” MIS Quarterly 32, No. 1 (March 2008).

Hutter, Katja, Johann Fuller, Julia Hautz, Volker Bilgram, and Kurt Matzler. “Machiavellianism or Morality: Which Behavior Pays Off In Online Innovation Contests?” Journal of Management Information Systems 32, No. 3 (2015).

Laudon, Kenneth C. Dossier Society: Value Choices in the Design of National Information Systems. (New York: Columbia Univer- sity Press, 1986).

Laudon, Kenneth C., and Carol Guercio Traver. E-Commerce 2018: Business, Technology, Society, 13th ed. (Upper Saddle River, NJ: Prentice-Hall, 2019).

LeBlanc, K. E., and W. Cestia. “Carpal Tunnel Syndrome.” American Family Physician 83, No. 8 (2011).

Lee, Dong-Joo, Jae-Hyeon Ahn, and Youngsok Bang. “Managing Con- sumer Privacy Concerns in Personalization: A Strategic Analy- sis of Privacy Protection.” MIS Quarterly 35, No. 2 (June 2011).

Lowry, Paul Benjamin, Gregory D. Moody, and Sutirtha Chatter- jee. “Using IT Design to Prevent Cyberbullying.” Journal of Management Information Systems 34, No. 3 (2017).

MacCrory, Frank, George Westerman, Erik Brynjolfsson, and Yousef Alhammadi. “Racing with and Against the Machine: Changes in Occupational Skill Composition in an Era of Rapid Technological Advance.” (2014).

Manyika, James, and Michael Spence. “The False Choice Between Au- tomation and Jobs.” Harvard Business Review (February 5, 2018).

Pew Research Center. “The State of Privacy in America.” (January 20, 2016).

PwC. “US State of Cybercrime Survey 2015.” (June 2016). Saunders, Carol, Martin Wiener, Sabrina Klett, and Sebastian

Sprenger. “The Impact of Mental Representations on ICT- Related Overload in the Use of Mobile Phones.” Journal of Management Information Systems 34, No. 3 (2017).

The Software Alliance. “BSA Global Software Survey 2018.” (June 2018). Sojer, Manuel, Oliver Alexy, Sven Kleinknecht, and Joachim Henkel.

“Understanding the Drivers of Unethical Programming Behav- ior: The Inappropriate Reuse of Internet-Accessible Code.” Jour- nal of Management Information Systems 31, No. 3 (Winter 2014).

Symantec. “2018 Internet Security Threat Report.” (2018). Tarafdar, Monideepa, John D’Arcy, Ofir Turel, and Ashish Gupta.

“The Dark Side of Information Technology.” MIT Sloan Man- agement Review 56, No. 2 (Winter 2015).

U.S. Department of Health, Education, and Welfare. Records, Com- puters, and the Rights of Citizens. (Cambridge: MIT Press, 1973).

U.S. Senate. “Do-Not-Track Online Act of 2011.” Senate 913 (May 9, 2011).

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Wolcott, Robert C. “How Automation Will Change Work, Purpose, and Meaning.” Harvard Business Review (January 11, 2018).

161

Information Technology Infrastructure

PART TWO provides the technical foundation for understanding information systems by

examining hardware, software, database, and networking technologies along with tools and

techniques for security and control. This part answers questions such as: What technologies

do businesses today need to accomplish their work? What do I need to know about these

technologies to make sure they enhance the performance of the firm? How are these tech-

nologies likely to change in the future? What technologies and procedures are required to

ensure that systems are reliable and secure?

PART TWO

CHAPTER 5

IT Infrastructure and Emerging Technologies

CHAPTER 6

Foundations of Business Intelligence: Databases and Information Management

CHAPTER 7

Telecommunications, the Internet, and Wireless Technology

CHAPTER 8

Securing Information Systems

162

MyLab MIS Discussion Questions: 5-6, 5-7, 5-8; Hands-on MIS Projects: 5-9, 5-10, 5-11, 5-12; Writing Assignments: 5-18, 5-19; eText with Conceptual Animations

CHAPTER CASES PeroxyChem’s Cloud Computing Formula for

Success Is Business Ready for Wearable Computers? Look to the Cloud Is BYOD Good for Business?

VIDEO CASES Rockwell Automation Fuels the Oil and Gas

Industry with the Internet of Things (IoT) ESPN.com: The Future of Sports Coverage in

the Cloud Netflix: Building a Business in the Cloud

LEARNING OBJECTIVES After reading this chapter, you will be able to answer the following questions:

5-1 What is IT infrastructure, and what are the stages and drivers of IT infrastructure evolution?

5-2 What are the components of IT infrastructure?

5-3 What are the current trends in computer hardware platforms?

5-4 What are the current computer software platforms and trends?

5-5 What are the challenges of managing IT infrastructure and management solutions?

5-6 How will MIS help my career?

IT Infrastructure and Emerging Technologies5CHAPTER

163

PeroxyChem is a leading global supplier of hydrogen peroxide and related substances for electronics, paper production, and household medical products. The company is headquartered in Philadelphia, Pennsylvania and has about 500 employees; generates over $400 million in revenue; and op- erates research, sales, and manufacturing facilities in North America, Europe, and Asia.

In February 2014 PeroxyChem was divested from its parent company and had just one year to take over management of its business systems. It would have to create its own IT infrastructure and IT department, all while keep- ing day-to-day business systems and operations running smoothly. As part of a large corporation, PeroxyChem had not been responsible for maintaining and managing its own IT systems but suddenly had to become self-sufficient. The company was understandably reluctant at that point to take on the cost or risk of pro- curing its own hardware, setting up a data center on premises, and maintaining a large in-house IT department, nor did it have the in-house expertise to do so.

According to PeroxyChem CIO Jim Curley, management didn’t want to change any of its applications, but it did want to transition to a cloud infrastructure where the computer hardware and software for running a firm’s systems are available as on-demand services in remote computing centers accessed via the Internet. The goal was for PeroxyChem IT personnel to spend only 40 percent of their time on operational tasks to keep the company running and 60 percent on strategic projects designed to grow the business. PeroxyChem also lacked the time and resources to hire and train new personnel to run day-to-day operations.

PeroxyChem worked with IBM to migrate its existing systems to IBM’s SoftLayer cloud computing infrastructure. This is a managed cloud infrastruc- ture in which IBM, as a trusted and experienced third party, manages the or- ganization’s cloud computing activities, freeing the organization to focus on its core competencies. IBM also helped implement enterprise and business intel- ligence applications from SAP, configuring the systems to meet PeroxyChem’s business requirements. The new infrastructure was rigorously tested and was able to go live in four and a half months with no disruptions to PeroxyChem’s existing IT operations.

PeroxyChem’s Cloud Computing Formula for Success

© Olegdudko/123RF

164 Part Two Information Technology Infrastructure

PeroxyChem can run and extend its enterprise business systems with a lean in-house team. The managed IBM Cloud hosting solution has made it possible for PeroxyChem’s IT staff to spend less time on routine maintenance and more time on leveraging its core competencies and developing innova- tive products for specialty industries such as food safety and electronics.

Using a cloud infrastructure has reduced costs and risk by avoiding large up-front capital investment for new hardware, software, and a data center, as well as the expense of maintaining a large in-house IT team. The infrastruc- ture is scalable and can expand computing capacity if the company grows or has peaking workloads, or reduce computing resources (and expenses) if the company has fewer users or less computing work. The company can eas- ily add more users without purchasing additional computing, storage, and networking resources of its own. PeroxyChem’s cloud infrastructure is op- erational around the clock, making it easier to for this global company to do business.

Sources: David Slovensky, “PeroxyChem Builds a Whole New IT Infrastructure in Less Than Five Months,” www.ibm.com, January 17, 2017; “PeroxyChem LLC.” www.03-ibm. com, accessed February 20, 2018; Ken Murphy, “PeroxyChem Starts a Cloud Reaction,” SAP Insider Profiles, December 12, 2016; and www.peroxychem.com, accessed February 20, 2018.

The experience of PeroxyChem illustrates the importance of information technology infrastructure in running a business today. The right technol- ogy at the right price will improve organizational performance. After dives- titure from its parent corporation, PeroxyChem was left to manage its own information systems. The company would have been overwhelmed with set- ting up its own IT department and learning how to run its own systems, with no time for developing systems to support its strategy and future growth. PeroxyChem would be prevented from operating as efficiently and effectively as it could have.

The chapter-opening case diagram calls attention to important points raised by this case and this chapter. Divestiture left PeroxyChem with limited resources and a short time frame to set up and run its essential business infor- mation systems and data center. Using cloud computing for its IT infrastruc- ture enabled PeroxyChem to quickly delegate the operation and management of its IT systems to outside specialists, to maintain a very small in-house IT staff, and to use that staff to support innovation rather than day-to-day opera- tions. The company pays for only the computing capacity it actually uses on an as-needed basis, and did not have to make extensive and costly up-front IT investments.

Here are some questions to think about: What were the business benefits for PeroxyChem of using a cloud computing infrastructure? What role did divesti- ture play in PeroxyChem’s choice of a solution?

Chapter 5 IT Infrastructure and Emerging Technologies 165

5-1 What is IT infrastructure, and what are the stages and drivers of IT infrastructure evolution?

In Chapter 1, we defined information technology (IT) infrastructure as the shared technology resources that provide the platform for the firm’s specific informa- tion system applications. An IT infrastructure includes investment in hard- ware, software, and services—such as consulting, education, and training—that are shared across the entire firm or across entire business units in the firm. A firm’s IT infrastructure provides the foundation for serving customers, working with vendors, and managing internal firm business processes (see Figure 5.1).

Supplying firms worldwide with IT infrastructure (hardware, software, net- working, and IT services) in 2018 was estimated to be a $3.7 trillion industry (Gartner, 2018). Investments in infrastructure account for between 25 and 50 percent of information technology expenditures in large firms, led by finan- cial services firms where IT investment is well over half of all capital investment.

Defining IT Infrastructure An IT infrastructure consists of a set of physical devices and software applica- tions that are required to operate the entire enterprise. But IT infrastructure also includes a set of firmwide services budgeted by management and com- posed of both human and technical capabilities. These services include the following:

• Computing platforms used to provide computing services that connect employees, customers, and suppliers into a coherent digital environment, including large mainframes, midrange computers, desktop and laptop com- puters, and mobile handheld and remote cloud computing services

Business Solutions

Management

Organization

Cloud IT Infrastructure

Technology

Information System

Business Challenges

• Loss of IT infrastructure from divestiture • Limited time frame and resources • Inadequate in-house IT sta

• Shift from operational to strategic technology orientation

• Outsource IT infrastructure management and operations

• Provision computing resources as needed

• Support 24/7 global operations

• Improve e ectiveness • Control costs

• Legacy IT infrastructure

• IBM-managed cloud computing services

• SAP applications

• Plan new IT infrastructure

• Make IT infrastructure investments

166 Part Two Information Technology Infrastructure

• Telecommunications services that provide data, voice, and video connectivity to employees, customers, and suppliers

• Data management services that store and manage corporate data and provide capabilities for analyzing the data

• Application software services, including online software services, that provide enterprise-wide capabilities such as enterprise resource planning, customer relationship management, supply chain manage- ment, and knowledge management systems that are shared by all business units

• Physical facilities management services that develop and manage the physi- cal installations required for computing, telecommunications, and data man- agement services

• IT management services that plan and develop the infrastructure, coordinate with the business units for IT services, manage accounting for the IT expen- diture, and provide project management services

• IT standards services that provide the firm and its business units with policies that determine which information technology will be used, when, and how

• IT education services that provide training in system use to employ- ees and offer managers training in how to plan for and manage IT investments

FIGURE 5.1 CONNECTION BETWEEN THE FIRM, IT INFRASTRUCTURE, AND BUSINESS CAPABILITIES

The services a firm is capable of providing to its customers, suppliers, and employees are a direct function of its IT infrastructure. Ideally, this infrastructure should support the firm’s business and information systems strategy. New information technologies have a powerful impact on business and IT strategies as well as the services that can be provided to customers.

IT Services and

Infrastructure

Customer Services Supplier Services

Enterprise Services

IT Strategy

Information Technology

Business Strategy

Chapter 5 IT Infrastructure and Emerging Technologies 167

• IT research and development services that provide the firm with research on potential future IT projects and investments that could help the firm differ- entiate itself in the marketplace

This “service platform” perspective makes it easier to understand the busi- ness value provided by infrastructure investments. For instance, the real business value of a fully loaded personal computer operating at 3.5 gigahertz that costs about $1,000 and a high-speed Internet connection is hard to un- derstand without knowing who will use it and how it will be used. When we look at the services provided by these tools, however, their value becomes more apparent: The new PC makes it possible for a high-cost employee mak- ing $100,000 a year to connect to all the company’s major systems and the public Internet. The high-speed Internet service saves this employee about an hour per day in reduced wait time for Internet information. Without this PC and Internet connection, the value of this one employee to the firm might be cut in half.

Evolution of IT Infrastructure The IT infrastructure in organizations today is an outgrowth of more than 50 years of evolution in computing platforms. There have been five stages in this evolution, each representing a different configuration of comput- ing power and infrastructure elements (see Figure 5.2). The five eras are general-purpose mainframe and minicomputer computing, personal com- puters, client/server networks, enterprise computing, and cloud and mobile computing.

Technologies that characterize one era may also be used in another time period for other purposes. For example, some companies still run traditional mainframe systems or use mainframe computers as servers supporting large websites and corporate enterprise applications.

General-Purpose Mainframe and Minicomputer Era (1959 to Present) The introduction of the IBM 1401 and 7090 transistorized machines in 1959 marked the beginning of widespread commercial use of mainframe comput- ers. In 1965, the mainframe computer truly came into its own with the in- troduction of the IBM 360 series. The 360 was the first commercial computer that could provide time sharing, multitasking, and virtual memory in more ad- vanced models. IBM has dominated mainframe computing from this point on. Mainframe computers became powerful enough to support thousands of online remote terminals connected to the centralized mainframe using proprietary communication protocols and proprietary data lines.

The mainframe era was a period of highly centralized computing under the control of professional programmers and systems operators (usually in a cor- porate data center), with most elements of infrastructure provided by a single vendor, the manufacturer of the hardware and the software.

This pattern began to change with the introduction of minicomputers, pro- duced by Digital Equipment Corporation (DEC) in 1965. DEC minicomputers (PDP-11 and later the VAX machines) offered powerful machines at far lower prices than IBM mainframes, making possible decentralized computing, cus- tomized to the specific needs of individual departments or business units rather than time sharing on a single huge mainframe. In recent years, the minicom- puter has evolved into a midrange computer or midrange server and is part of a network.

168 Part Two Information Technology Infrastructure

FIGURE 5.2 ERAS IN IT INFRASTRUCTURE EVOLUTION Illustrated here are the typical computing configurations characterizing each of the five eras of IT infrastructure evolution.

Stages in IT Infrastructure Evolution

Mainframe/ Minicomputer (1959–present)

Personal Computer (1981–present)

Client/Server (1983–present)

Enterprise Computing (1992–present)

Cloud and Mobile Computing (2000–present)

Enterprise Server

Internet

THE INTERNET

• Hardware • Software • Services

Chapter 5 IT Infrastructure and Emerging Technologies 169

Personal Computer Era (1981 to Present) Although the first truly personal computers (PCs) appeared in the 1970s (the Xerox Alto, the MITS Altair 8800, and the Apple I and II, to name a few), these machines had only limited distribution to computer enthusiasts. The appear- ance of the IBM PC in 1981 is usually considered the beginning of the PC era because this machine was the first to be widely adopted by businesses. At first using the DOS operating system, a text-based command language, and later the Microsoft Windows operating system, the Wintel PC computer (Windows op- erating system software on a computer with an Intel microprocessor) became the standard desktop personal computer. Worldwide PC sales have declined be- cause of the popularity of tablets and smartphones, but the PC is still a popular tool for business. Approximately 88 percent of desktop PCs are thought to run a version of Windows, and about 8 percent run a version of MacOS. Wintel domi- nance as a computing platform is receding as iPhone and Android device sales increase.

Proliferation of PCs in the 1980s and early 1990s launched a spate of personal desktop productivity software tools—word processors, spreadsheets, electronic presentation software, and small data management programs—that were very valuable to both home and corporate users. These PCs were stand-alone systems until PC operating system software in the 1990s made it possible to link them into networks.

Client/Server Era (1983 to Present) In client/server computing, desktop or laptop computers called clients are networked to powerful server computers that provide the client computers with a variety of services and capabilities. Computer processing work is split between these two types of machines. The client is the user point of entry, whereas the server typically processes and stores shared data, serves up web pages, or manages network activities. The term server refers to both the soft- ware application and the physical computer on which the network software runs. The server could be a mainframe, but today, server computers typi- cally are more powerful versions of personal computers, based on inexpen- sive chips and often using multiple processors in a single computer box or in server racks.

The simplest client/server network consists of a client computer networked to a server computer, with processing split between the two types of machines. This is called a two-tiered client/server architecture. Whereas simple client/server networks can be found in small businesses, most corporations have more com- plex, multitiered client/server architectures (often called N-tier client/server architectures) in which the work of the entire network is balanced over several different levels of servers, depending on the kind of service being requested (see Figure 5.3).

For instance, at the first level, a web server will serve a web page to a cli- ent in response to a request for service. Web server software is responsible for locating and managing stored web pages. If the client requests access to a cor- porate system (a product list or price information, for instance), the request is passed along to an application server. Application server software handles all application operations between a user and an organization’s back-end business systems. The application server may reside on the same computer as the web server or on its own dedicated computer. Chapters 6 and 7 provide more detail on other pieces of software that are used in multitiered client/server architec- tures for e-commerce and e-business.

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Client/server computing enables businesses to distribute computing work across a series of smaller, inexpensive machines that cost much less than cen- tralized mainframe systems. The result is an explosion in computing power and applications throughout the firm.

Novell NetWare was the leading technology for client/server networking at the beginning of the client/server era. Today, Microsoft is the market leader with its Windows operating systems (Windows Server, Windows 10, Windows 8, and Windows 7).

Enterprise Computing Era (1992 to Present) In the early 1990s, firms turned to networking standards and software tools that could integrate disparate networks and applications throughout the firm into an enterprise-wide infrastructure. As the Internet developed into a trusted communications environment after 1995, business firms began seri- ously using the Transmission Control Protocol/Internet Protocol (TCP/IP) net- working standard to tie their disparate networks together. We discuss TCP/IP in detail in Chapter 7.

The resulting IT infrastructure links different pieces of computer hard- ware and smaller networks into an enterprise-wide network so that informa- tion can flow freely across the organization and between the firm and other organizations. It can link different types of computer hardware, including mainframes, servers, PCs, and mobile devices, and it includes public infra- structures such as the telephone system, the Internet, and public network services. The enterprise infrastructure also requires software to link disparate applications and enable data to flow freely among different parts of the busi- ness, such as enterprise applications (see Chapters 2 and 9) and web services (discussed in Section 5-4).

Cloud and Mobile Computing Era (2000 to Present) The growing bandwidth power of the Internet has pushed the client/server model one step further, toward what is called the “cloud computing model.” Cloud computing refers to a model of computing that provides access to a shared pool of computing resources (computers, storage, applications, and

FIGURE 5.3 A MULTITIERED (N-TIER) CLIENT/SERVER NETWORK In a multitiered client/server network, client requests for service are handled by different levels of servers.

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services) over the network, often the Internet. These “clouds” of computing re- sources can be accessed on an as-needed basis from any connected device and location.

Cloud computing bas become the fastest-growing form of computing, with worldwide public cloud spending to reach $411 billion by 2020. Cisco Systems predicts that 94 percent of all computer workloads will run in some type of cloud environment by 2021 (Gartner, 2017; Cisco 2018).

Thousands or even hundreds of thousands of computers are located in cloud data centers, where they can be accessed by desktop computers, laptop com- puters, tablets, entertainment centers, smartphones, and other client machines linked to the Internet. Amazon, Google, IBM, and Microsoft operate huge, scal- able cloud computing centers that provide computing power, data storage, application development tools, and high-speed Internet connections to firms that want to maintain their IT infrastructures remotely. Firms such as Google, Microsoft, SAP, Oracle, and Salesforce.com sell software applications as services delivered over the Internet.

We discuss cloud and mobile computing in more detail in Section 5-3. The Learning Tracks include a table titled “Comparing Stages in IT Infrastructure Evolution,” which compares each era on the infrastructure dimensions introduced.

Technology Drivers of Infrastructure Evolution The changes in IT infrastructure we have just described have resulted from developments in computer processing, memory chips, storage devices, net- working hardware and software, and software design that have exponentially increased computing power while exponentially reducing costs. Let’s look at the most important developments.

Moore’s Law and Microprocessing Power In 1965, Gordon Moore, the director of Fairchild Semiconductor’s Research and Development Laboratories, wrote in Electronics magazine that since the first mi- croprocessor chip was introduced in 1959, the number of components on a chip with the smallest manufacturing costs per component (generally transistors) had doubled each year. This assertion became the foundation of Moore’s Law. Moore later reduced the rate of growth to a doubling every two years.

There are at least three variations of Moore’s Law, none of which Moore ever stated: (1) the power of microprocessors doubles every 18 months, (2) comput- ing power doubles every 18 months, and (3) the price of computing falls by half every 18 months.

Figure 5.4 illustrates the relationship between number of transistors on a mi- croprocessor and millions of instructions per second (MIPS), a common mea- sure of processor power. Figure 5.5 shows the exponential decline in the cost of transistors and rise in computing power. For instance, in 2018, you could buy an Intel i7 processor chip with 2.5 billion transistors for about one ten-millionth of a dollar per transistor.

Exponential growth in the number of transistors and the power of proces- sors coupled with an exponential decline in computing costs may not be able to continue much longer. In the last five years, the cost improvement rate has fallen to single digits from 30 percent annual reductions. Chip manufac- turers continue to miniaturize components. Today’s transistors are 14 nano- meters in size, and should no longer be compared to the size of a human hair (80 thousand nanometers) but rather to the size of a virus (400 nanometers). Within the next five years or so, chip makers may reach the physical limits

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FIGURE 5.5 FALLING COST OF CHIPS Changes in production technology, and very-large-scale production runs, have driven dramatic declines in the cost of chips, and the products that use them. Source: Authors’ estimate.

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FIGURE 5.4 MOORE’S LAW AND MICROPROCESSOR PERFORMANCE Packing 5 billion transistors into a tiny microprocessor has exponentially increased processing power. Processing power has increased to more than 250,000 MIPS (about 2.6 billion instructions per second). Source: Authors’ estimate.

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of semiconductor size. At that point they may need to use alternatives to fashioning chips from silicon or find other ways to make computers more powerful.

Chip manufacturers can shrink the size of transistors down to the width of several atoms by using nanotechnology. Nanotechnology uses individual atoms and molecules to create computer chips and other devices that are thousands of times smaller than current technologies permit. Chip manufac- turers are trying to develop a manufacturing process to produce nanotube processors economically. Stanford University scientists have built a nanotube computer.

The Law of Mass Digital Storage A second technology driver of IT infrastructure change is the Law of Mass Digital Storage. The amount of digital information is roughly doubling every year (Lyman and Varian, 2003). Fortunately, the cost of storing digital informa- tion is falling at an exponential rate of 100 percent a year. Figure 5.6 shows that the number of megabytes that can be stored on magnetic media for $1 from 1950 to the present roughly doubled every 15 months. In 2018, a 1 terabyte hard disk drive sells at retail for about $50.

Metcalfe’s Law and Network Economics Moore’s Law and the Law of Mass Digital Storage help us understand why com- puting resources are now so readily available. But why do people want more computing and storage power? The economics of networks and the growth of the Internet provide some answers.

Robert Metcalfe—inventor of Ethernet local area network technology— claimed in 1970 that the value or power of a network grows exponentially as a function of the number of network members. Metcalfe and others point to the increasing returns to scale that network members receive as more and more people join the network. As the number of members in a network grows

Nanotubes are tiny tubes about 10,000 times thin- ner than a human hair. They consist of rolled-up sheets of carbon hexa- gons, have potential use as minuscule wires or in ultrasmall electronic devices, and are very powerful conductors of electrical current.

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linearly, the value of the entire system grows exponentially and continues to grow as members increase. Demand for information technology has been driven by the social and business value of digital networks, which rapidly multiply the number of actual and potential links among network members.

Declining Communications Costs and the Internet A fourth technology driver transforming IT infrastructure is the rapid de- cline in the costs of communication and the exponential growth in the size of the Internet. Today there are 4.2 billion Internet users worldwide (Internetworldstats.com, 2018). Figure 5.7 illustrates the exponentially de- clining cost of communication both over the Internet and over telephone networks (which increasingly are based on the Internet). As communication costs fall toward a very small number and approach zero, utilization of com- munication and computing facilities explode. In 2018, one megabit of Internet access costs about $2.60. In 2000, the cost was over $300 if available. In this same time frame, average household Internet speeds have risen from .2 Mbps to 18 Mbps.

To take advantage of the business value associated with the Internet, firms must greatly expand their Internet connections, including wireless connectiv- ity, and greatly expand the power of their client/server networks, desktop cli- ents, and mobile computing devices. There is every reason to believe these trends will continue.

Standards and Network Effects Today’s enterprise infrastructure and Internet computing would be impossible— both now and in the future—without agreements among manufacturers and

FIGURE 5.6 THE AMOUNT OF STORAGE PER DOLLAR RISES EXPONENTIALLY, 1950–2018

Cloud storage services like Google Drive provide 100 gigabytes of storage for $1.99 per month. Source: Authors’ estimates.

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FIGURE 5.7 EXPONENTIAL DECLINES IN INTERNET COMMUNICATIONS COSTS ($/MBPS)

The cost of communication over the Internet and over telephone networks has de- clined exponentially, fueling the explosive growth of communication and computing worldwide. Sources: 2007–2018: “Average Internet Connection Speed in the United States from 2007 to 2017 (in Mbps), by Quarter” Statista, 2018; 2006 Home Broadband Adoption 2006 BY John B. Horrigan PEW Research 2007; Internet speeds: How Fast Does Internet Speed grow?By Xah Lee. Date: 2006-12-30. Last updated: 2017-01-22,http://xahlee.info/comp/bandwidth.html

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widespread consumer acceptance of technology standards. Technology stan- dards are specifications that establish the compatibility of products and the abil- ity to communicate in a network.

Technology standards unleash powerful economies of scale and result in price declines as manufacturers focus on the products built to a single standard. Without these economies of scale, computing of any sort would be far more ex- pensive than is currently the case. Table 5.1 describes important standards that have shaped IT infrastructure.

In the 1990s, corporations started moving toward standard computing and communications platforms. The Wintel PC with the Windows operating system and Microsoft Office desktop productivity applications became the standard desktop and mobile client computing platform. (It now shares the spotlight with other standards, such as Apple’s iOS and Macintosh operating systems and the Android operating system.) Widespread adoption of Unix-Linux as the enter- prise server operating system of choice made possible the replacement of pro- prietary and expensive mainframe infrastructures. In networking, the Ethernet standard enabled PCs to connect together in small local area networks (LANs; see Chapter 7), and the TCP/IP standard enabled these LANs to be connected into firmwide networks, and ultimately, to the Internet.

5-2 What are the components of IT infrastructure? IT infrastructure today is composed of seven major components. Figure 5.8 illustrates these infrastructure components and the major vendors within each component category. These components constitute investments that must be coordinated with one another to provide the firm with a coherent infrastructure.

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TABLE 5.1 SOME IMPORTANT STANDARDS IN COMPUTING

STANDARD SIGNIFICANCE

American Standard Code for Information Interchange (ASCII) (1958)

Made it possible for computer machines from different manufacturers to exchange data; later used as the universal language linking input and output devices such as keyboards and mice to computers. Adopted by the American National Standards Institute in 1963.

Common Business Oriented Language (COBOL) (1959)

An easy-to-use software language that greatly expanded the ability of programmers to write business-related programs and reduced the cost of software. Sponsored by the Defense Department in 1959.

Unix (1969–1975) A powerful multitasking, multiuser, portable operating system initially developed at Bell Labs (1969) and later released for use by others (1975). It operates on a wide variety of computers from different manufacturers. Adopted by Sun, IBM, HP, and others in the 1980s, it became the most widely used enterprise-level operating system.

Ethernet (1973) A network standard for connecting desktop computers into local area networks that enabled the widespread adoption of client/server computing and local area networks and further stimulated the adoption of personal computers.

Transmission Control Protocol/Internet Protocol (TCP/IP) (1974)

Suite of communications protocols and a common addressing scheme that enables millions of computers to connect together in one giant global network (the Internet). Later, it was used as the default networking protocol suite for local area networks and intranets. Developed in the early 1970s for the U.S. Department of Defense.

IBM/Microsoft/Intel Personal Computer (1981)

The standard Wintel design for personal desktop computing based on standard Intel processors and other standard devices, Microsoft DOS, and later Windows software. The emergence of this standard, low-cost product laid the foundation for a 25-year period of explosive growth in computing throughout all organizations around the globe. Today, more than 1 billion PCs power business and government activities every day.

World Wide Web (1989–1993) Standards for storing, retrieving, formatting, and displaying information as a worldwide web of electronic pages incorporating text, graphics, audio, and video enables creation of a global repository of billions of web pages.

In the past, technology vendors supplying these components offered pur- chasing firms a mixture of incompatible, proprietary, partial solutions that could not work with other vendor products. Increasingly, vendor firms have been forced to cooperate in strategic partnerships with one another in order to keep their customers. For instance, a hardware and services provider such as IBM cooperates with all the major enterprise software providers, has strategic relationships with system integrators, and promises to work with whichever data management products its client firms wish to use (even though it sells its own database management software called DB2).

Another big change is that companies are moving more of their IT infra- structure to the cloud or to outside services, owning and managing much less on their premises. Firms’ IT infrastructure will increasingly be an amalgam of components and services that are partially owned, partially rented or licensed, partially located on site, and partially supplied by external vendors or cloud services.

Computer Hardware Platforms Firms worldwide are expected to spend $704 billion on computer hardware de- vices in 2018, including mainframes, servers, PCs, tablets, and smartphones. All these devices constitute the computer hardware platform for corporate (and personal) computing worldwide.

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Most business computing has taken place using microprocessor chips manufactured or designed by Intel Corporation and, to a lesser extent, AMD Corporation. Intel and AMD processors are often referred to as “i86” processors because the original IBM PCs used an Intel 8086 processor and all the Intel (and AMD) chips that followed are downward compatible with this processor. (For instance, you should be able to run a software application designed 10 years ago on a new PC you bought yesterday.)

The computer platform changed dramatically with the introduction of mo- bile computing devices, from the iPod in 2001 to the iPhone in 2007 and the iPad in 2010. Worldwide, 2 billion people use smartphones. You can think of these devices as a second computer hardware platform, one that is consumer device–driven.

Mobile devices are not required to perform as many tasks as computers in the first computer hardware platform, so they consume less power, and gener- ate less heat. Processors for mobile devices are manufactured by a wide range of firms, including Apple, Samsung, and Qualcomm, using an architecture de- signed by ARM Holdings.

Mainframes have not disappeared. They continue to be used to reliably and securely handle huge volumes of transactions, for analyzing very large

FIGURE 5.8 THE IT INFRASTRUCTURE ECOSYSTEM There are seven major components that must be coordinated to provide the firm with a coherent IT infrastructure. Listed here are major technologies and suppliers for each component.

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quantities of data, and for handling large workloads in cloud computing centers. The mainframe is still the digital workhorse for banking and tele- communications networks that are often running software programs that are older and require a specific hardware platform. However, the number of providers has dwindled to one: IBM. IBM has also repurposed its main- frame systems so they can be used as giant servers for enterprise networks and corporate websites. A single IBM mainframe can run thousands of instances of Linux or Windows Server software and is capable of replac- ing thousands  of  smaller servers (see the discussion of virtualization in Section 5-3).

Operating System Platforms The leading operating systems for corporate servers are Microsoft Windows Server, Unix, and Linux, an inexpensive and robust open source relative of Unix. Microsoft Windows Server is capable of providing enterprise-wide operat- ing system and network services and appeals to organizations seeking Windows- based IT infrastructures. Unix and Linux are scalable, reliable, and much less expensive than mainframe operating systems. They can also run on many dif- ferent types of processors. The major providers of Unix operating systems are IBM, HP, and Oracle-Sun, each with slightly different and partially incompatible versions.

Nearly 90 percent of PCs use some form of the Microsoft Windows operating system for managing the resources and activities of the computer. However, there is now a much greater variety of client operating systems than in the past, with new operating systems for computing on handheld mobile digital devices or cloud-connected computers.

Google’s Chrome OS provides a lightweight operating system for cloud computing using a web-connected computer. Programs are not stored on the user’s computer but are used over the Internet and accessed through the Chrome web browser. User data reside on servers across the Internet. Android is an open source operating system for mobile devices such as smartphones and tablet computers, developed by the Open Handset Alliance led by Google. It has become the most popular smartphone platform world- wide, competing with iOS, Apple’s mobile operating system for the iPhone, iPad, and iPod Touch. Conventional client operating system software is de- signed around the mouse and keyboard but increasingly is becoming more natural and intuitive by using touch technology. iOS, the operating system for the phenomenally popular Apple iPad and iPhone, features a multitouch interface, where users employ one or more fingers to manipulate objects on a screen without a mouse or keyboard. Microsoft’s Windows 10 and Windows 8, which run on tablets as well as PCs, have multitouch capabilities, as do many Android devices.

Enterprise Software Applications Firms worldwide are expected to spend about $389 billion in 2018 on software for enterprise applications that are treated as components of IT infrastructure. We introduced the various types of enterprise applications in Chapter 2, and Chapter 9 provides a more detailed discussion of each.

The largest providers of enterprise application software are SAP and Oracle. Also included in this category is middleware software supplied by vendors such as IBM and Oracle for achieving firmwide integration by

Chapter 5 IT Infrastructure and Emerging Technologies 179

linking the firm’s existing application systems. Microsoft is attempting to move into the lower ends of this market by focusing on small and medium- sized businesses.

Data Management and Storage Enterprise database management software is responsible for organizing and managing the firm’s data so that they can be efficiently accessed and used. Chapter 6 describes this software in detail. The leading database software providers are IBM (DB2), Oracle, Microsoft (SQL Server), and SAP Sybase (Adaptive Server Enterprise). MySQL is a Linux open source relational da- tabase product now owned by Oracle Corporation, and Apache Hadoop is an open source software framework for managing very large data sets (see Chapter 6).

Networking/Telecommunications Platforms Companies worldwide are expected to spend $1.43 trillion for telecommunica- tions services in 2018 (Gartner, Inc., 2018). Windows Server is predominantly used as a local area network operating system, followed by Linux and Unix. Large, enterprise-wide area networks use some variant of Unix. Most local area networks, as well as wide area enterprise networks, use the TCP/IP protocol suite as a standard (see Chapter 7).

Cisco and Juniper Networks are leading networking hardware providers. Telecommunications platforms are typically provided by telecommunications/ telephone services companies that offer voice and data connectivity, wide area networking, wireless services, and Internet access. Leading telecommunica- tions service vendors include AT&T and Verizon. This market is exploding with new providers of cellular wireless, high-speed Internet, and Internet telephone services.

Internet Platforms Internet platforms include hardware, software, and management services to support a firm’s website, including web hosting services, routers, and cabling or wireless equipment. A web hosting service maintains a large web server, or se- ries of servers, and provides fee-paying subscribers with space to maintain their websites.

The Internet revolution created a veritable explosion in server computers, with many firms collecting thousands of small servers to run their Internet operations. There has been a steady push to reduce the number of server com- puters by increasing the size and power of each and by using software tools that make it possible to run more applications on a single server. Use of stand- alone server computers is decreasing as organizations transition to cloud com- puting services. The Internet hardware server market has become increasingly concentrated in the hands of IBM, Dell, Oracle, and HP, as prices have fallen dramatically.

The major web software application development tools and suites are supplied by Microsoft (Microsoft Visual Studio and the Microsoft .NET develop- ment platform), Oracle-Sun, and a host of independent software developers, including Adobe. Chapter 7 describes the components of the firm’s Internet platform in greater detail.

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Consulting and System Integration Services Today, even a large firm does not have the staff, the skills, the budget, or the necessary experience to deploy and maintain its entire IT infrastructure. Implementing a new infrastructure requires (as noted in Chapters 13 and 14) significant changes in business processes and procedures, training and educa- tion, and software integration. Leading consulting firms providing this exper- tise include Accenture, IBM Services, HP, Infosys, and Wipro.

Software integration means ensuring the new infrastructure works with the firm’s older, so-called legacy systems and ensuring the new elements of the in- frastructure work with one another. Legacy systems are generally older trans- action processing systems created for mainframe computers that continue to be used to avoid the high cost of replacing or redesigning them. Replacing these systems is cost prohibitive and generally not necessary if these older systems can be integrated into a contemporary infrastructure.

5-3 What are the current trends in computer hardware platforms?

The exploding power of computer hardware and networking technology has dramatically changed how businesses organize their computing power, putting more of this power on networks and mobile handheld devices and obtaining more of their computing capabilities in the form of services. We look at eight hardware trends: the mobile digital platform, consumerization of IT and BYOD, quantum computing, virtualization, cloud computing, edge computing, green computing, and high-performance/power-saving processors.

The Mobile Digital Platform Chapter 1 pointed out that new mobile digital computing platforms have emerged as alternatives to PCs and larger computers. The iPhone and Android smartphones have taken on many functions of PCs, including transmitting data, surfing the web, transmitting e-mail and instant messages, displaying digital content, and exchanging data with internal corporate systems. The new mobile platform also includes small, lightweight netbooks optimized for wireless com- munication and Internet access, tablet computers such as the iPad, and digital e-book readers such as Amazon’s Kindle with some web access capabilities.

Smartphones and tablets are becoming the primary means of accessing the Internet and are increasingly used for business computing as well as for con- sumer applications. For example, senior executives at General Motors are using smartphone applications that drill down into vehicle sales information, finan- cial performance, manufacturing metrics, and project management status.

Wearable computing devices are a recent addition to the mobile digital platform. These include smartwatches, smart glasses, smart ID badges, and activity track- ers. Wearable computing technology has many business uses, and it is changing the way firms work, as described in the Interactive Session on Technology.

Consumerization of IT and BYOD The popularity, ease of use, and rich array of useful applications for smartphones and tablet computers have created a groundswell of interest in allowing em- ployees to use their personal mobile devices in the workplace, a phenomenon

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Wearable computing is starting to take off. Smartwatches, smart glasses, smart ID badges, and activity trackers promise to change how we go about each day and the way we do our jobs. According to Gartner Inc., sales of wearables will increase from 275 million units in 2016 to 477 million units by 2020. Although smartwatches such as the Apple Watch and fitness trackers have been successful consumer products, business uses for wearables ap- pear to be advancing more rapidly. A report from research firm Tractica projects that worldwide sales for enterprise wearables will increase exponentially to 66.4 million units by 2021.

Doctors and nurses are using smart eyewear for hands-free access to patients’ medical records. Oil rig workers sport smart helmets to connect with land-based experts, who can view their work remotely and communicate instructions. Warehouse managers are able to capture real-time performance data using a smartwatch to better manage distribu- tion and fulfillment operations. Wearable computing devices improve productivity by delivering informa- tion to workers without requiring them to interrupt their tasks, which in turn empowers employees to make more-informed decisions more quickly.

Wearable devices are helping businesses learn more about employees and the everyday workplace than ever before. New insights and information can be uncovered as IoT sensor data is correlated to actual human behavior. Information on task dura- tion and the proximity of one device or employee to another, when combined with demographic data, can shed light on previously unidentified workflow inefficiencies. Technologically sophisticated firms will understand things they never could before about workers and customers; what they do every day, how healthy they are, where they go, and even how well they feel. This obviously has implications for protect- ing individual privacy, raising potential employee (and customer) fears that businesses are collecting sensitive data about them. Businesses will need to tread carefully.

Global logistics company DHL worked with Ricoh, the imaging and electronics company, and Ubimax, a wearable computing services and solu- tions company, to implement “vision picking” in

its warehouse operations. Location graphics are displayed on smart glasses guiding staffers through the warehouse to both speed the process of find- ing items and reduce errors. The company says the technology delivered a 25 percent increase in ef- ficiency. Vision picking gives workers locational in- formation about the items they need to retrieve and allows them to automatically scan retrieved items. Future enhancements will enable the system to plot optimal routes through the warehouse, provide pic- tures of items to be retrieved (a key aid in case an item has been misplaced on the warehouse shelves), and instruct workers on loading carts and pallets more efficiently.

Google has developed Glass Enterprise Edition smart glasses for business use, with its development partners creating applications for specific indus- tries such as manufacturing and healthcare. Glass Enterprise Edition is being touted as a tool for eas- ing workflows by removing distractions that prevent employees from remaining engaged and focused on tasks. More than 50 businesses including Dignity Health, The Boeing Company, and Volkswagen have been using Glass to complete their work more rap- idly and efficiently.

Duke Energy has been piloting the use of smart glasses, and sees multiple uses for them. According to Aleksandar Vukojevic, technology development manager for Duke Energy’s Emerging Technologies Office, smart glasses can enable employees working in the field to access training or instructional videos to help with equipment repairs or upgrades. The glasses also allow remote management, enabling managers to capture what a line or transformer worker sees, annotate images and video with in- structions, and send them back out to workers in the field. Duke also tried out the smart glasses in its warehouses for stock inventory. As a worker looks at an item code, it’s automatically recorded against an existing database.

There are some challenges. Locking down data that’s accessed with smart glasses is essential, as with any other mobile device used in the enterprise. Today’s smart glasses haven’t been designed with security in mind. The sensors in the smart glasses are also not as accurate as other products. A field

INTERACTIVE SESSION TECHNOLOGY

Is Business Ready for Wearable Computers?

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1. Wearables have the potential to change the way or- ganizations and workers conduct business. Discuss the implications of this statement.

2. What management, organization, and technology issues would have to be addressed if a company was thinking of equipping its workers with a wearable computing device?

3. What kinds of businesses are most likely to benefit from wearable computers? Select a business and describe how a wearable computing device could help that business improve operations or decision making.

worker using smart glasses to locate a breaker or other device might be off by 10 or 15 feet using Google’s GPS instead of a military-grade solu- tion more common to the energy industry, which can locate equipment to within one centimeter. Additionally, smart glasses don’t necessarily allow safety glasses to be worn over them. Integrating data from smart glasses with Duke’s internal databases could prove difficult.

Smart glasses are like smartphones. Without integration with internal content and the right ap- plications, they would not be so useful. The value of wearable computing devices isn’t from transferring the same information from a laptop or smartphone

to a smartwatch or eyeglass display. Rather, it’s about finding ways to use wearables to augment and enhance business processes. Successful adoption of wearable computing depends not only on cost effec- tiveness but on the development of new and better apps and integration with existing IT infrastructure and the organization’s tools for managing and securing mobile devices (see the chapter-ending case study).

Sources: George Thangadurai, “Wearables at Work: Why Enterprise Usage Is Outshining Consumer Usage,” IoT Agenda, March 8, 2018; Josh Garrett, “Wearables: The Next Wave of Enterprise IoT?” IoT Agenda, February 1, 2018; and Lucas Mearian, “Is Google Glass Really Ready for the Enterprise?” Computerworld, August 1, 2017.

CASE STUDY QUESTIONS

popularly called “bring your own device” (BYOD). BYOD is one aspect of the consumerization of IT, in which new information technology that first emerges in the consumer market spreads into business organizations. Consumerization of IT includes not only mobile personal devices but also business uses of soft- ware services that originated in the consumer marketplace as well, such as Google and Yahoo search, Gmail, Google Maps, Dropbox, and even Facebook and Twitter.

Consumerization of IT is forcing businesses to rethink the way they obtain and manage information technology equipment and services. Historically, at least in large firms, the IT department was responsible for selecting and managing the information technology and applications used by the firm and its employees. It furnished employees with desktops or laptops that were able to access corporate systems securely. The IT department maintained control over the firm’s hardware and software to ensure that the business was being protected and that information systems served the purposes of the firm and its management. Today, employees and business departments are playing a much larger role in technology selection, in many cases de- manding that employees be able to use their own personal computers, smartphones, and tablets to access the corporate network. It is more dif- ficult for the firm to manage and control these consumer technologies and make sure they serve the needs of the business. The chapter-ending case study explores some of these management challenges created by BYOD and IT consumerization.

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Quantum Computing Quantum computing uses the principles of quantum physics to represent data and perform operations on these data. While conventional computers han- dle bits of data as either 0 or 1 but not both, quantum computing can process units of data as 0, 1, or both simultaneously. A quantum computer would gain enormous processing power through this ability to be in multiple states at once, allowing it to solve some scientific and business problems millions of times faster than can be done today. IBM has made quantum computing available to the general public through IBM Cloud. Google’s Alphabet, Microsoft, Intel, and NASA and are also working on quantum computing platforms. Quantum computing is still an emerging technology, but its real-world applications are growing.

Virtualization Virtualization is the process of presenting a set of computing resources (such as computing power or data storage) so that they can all be accessed in ways that are not restricted by physical configuration or geographic location. Virtualization enables a single physical resource (such as a server or a storage device) to appear to the user as multiple logical resources. For example, a server or mainframe can be configured to run many instances of an operating system (or different operating systems) so that it acts like many different machines. Each virtual server “looks” like a real physical server to software programs, and multiple virtual servers can run in parallel on a single machine. VMware is the leading virtualization software vendor for Windows and Linux servers.

Server virtualization is a common method of reducing technology costs by providing the ability to host multiple systems on a single physical ma- chine. Most servers run at just 15 to 20 percent of capacity, and virtualization can boost server utilization rates to 70 percent or higher. Higher utilization rates translate into fewer computers required to process the same amount of work, reduced data center space to house machines, and lower energy usage. Virtualization also facilitates centralization and consolidation of hardware administration.

Virtualization also enables multiple physical resources (such as storage de- vices or servers) to appear as a single logical resource, as in software-defined storage (SDS), which separates the software for managing data storage from storage hardware. Using software, firms can pool and arrange multiple storage infrastructure resources and efficiently allocate them to meet specific appli- cation needs. SDS enables firms to replace expensive storage hardware with lower-cost commodity hardware and cloud storage hardware.  There is less under- or over-utilization of storage resources (Letschin, 2016).

Cloud Computing It is now possible for companies and individuals to perform all of their com- puting work using a virtualized IT infrastructure in a remote location, as is the case with cloud computing. Cloud computing is a model of computing in which computer processing, storage, software, and other services are provided as a shared pool of virtualized resources over a network, primarily the Internet. These “clouds” of computing resources can be accessed on an as-needed basis from any connected device and location. Figure 5.9 illustrates the cloud com- puting concept.

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The U.S. National Institute of Standards and Technology (NIST) defines cloud computing as having the following essential characteristics (Mell and Grance, 2009):

• On-demand self-service: Consumers can obtain computing capabilities such as server time or network storage as needed automatically on their own.

• Ubiquitous network access: Cloud resources can be accessed using stan- dard network and Internet devices, including mobile platforms.

• Location-independent resource pooling: Computing resources are pooled to serve multiple users, with different virtual resources dynamically assigned according to user demand. The user generally does not know where the com- puting resources are located.

• Rapid elasticity: Computing resources can be rapidly provisioned, in- creased, or decreased to meet changing user demand.

• Measured service: Charges for cloud resources are based on amount of resources actually used.

FIGURE 5.9 CLOUD COMPUTING PLATFORM In cloud computing, hardware and software capabilities are a pool of virtualized resources provided over a network, often the Internet. Businesses and employees have access to applications and IT infrastructure anywhere, at any time, and on any device.

Platform Services

Cloud Computing

Application Services

Infrastructure Services

Laptops Identity Management

iPhone Tablet Computers Computing Resource

Management Network

Management Storage

Management

Block Storage

Desktops

Servers

Content Management

Enterprise Software

Collaboration Environments

Process Management

Communication Networks

Content Servers

NEWS

Chapter 5 IT Infrastructure and Emerging Technologies 185

Cloud computing consists of three different types of services:

• Infrastructure as a service (IaaS): Customers use processing, storage, networking, and other computing resources from cloud service providers to run their information systems. For example, Amazon uses the spare capac- ity of its IT infrastructure to provide a broadly based cloud environment selling IT infrastructure services. These include its Simple Storage Service (S3) for storing customers’ data and its Elastic Compute Cloud (EC2) service for running their applications. Users pay only for the amount of comput- ing and storage capacity they actually use. (See the Interactive Session on Organizations). Figure 5.10 shows the range of services Amazon Web Services offers.

• Software as a service (SaaS): Customers use software hosted by the ven- dor on the vendor’s cloud infrastructure and delivered as a service over a network. Leading software as a service (SaaS) examples are Google’s G Suite, which provides common business applications online, and Salesforce. com, which leases customer relationship management and related software services over the Internet. Both charge users an annual subscription fee, although Google has a pared-down free version. Users access these applica- tions from a web browser, and the data and software are maintained on the providers’ remote servers.

• Platform as a service (PaaS): Customers use infrastructure and program- ming tools supported by the cloud service provider to develop their own ap- plications. For example, Microsoft offers PaaS tools and services for software development and testing among its Azure cloud services. Another example is Salesforce.com’s Salesforce Platform.

FIGURE 5.10 AMAZON WEB SERVICES Amazon Web Services (AWS) is a collection of web services that Amazon provides to users of its cloud platform. AWS is the largest provider of cloud computing services in the United States.

Amazon Web

Services

Analytics

Application services

Computing

Management

Deployment Database

Data storage

Content delivery

Networking

Chapter 2 discussed Google Docs, Microsoft Office 365, and related soft- ware services for desktop productivity and collaboration. These are among

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If you want to see where computing is taking place, look to the cloud. Cloud computing is now the fastest-growing form of computing. According to Cisco Systems, 94 percent of all computing workloads will run in some form of cloud environment by 2021. This includes both public and private cloud plat- forms. Dedicated servers will be a distinct minority.

Cloud computing has become an affordable and sensible option for companies of all sizes, ranging from tiny Internet startups to established companies like Netflix and FedEx. For example, Amazon Web Services (AWS) provides subscribing companies with flexible computing power and data storage as well as data management, messaging, payment, and other services that can be used together or individually, as the business requires. Anyone with an Internet connection and a little bit of money can harness the same computing systems that Amazon itself uses to run its retail business. If customers provide specifica- tions on the amount of server space, bandwidth, stor- age, and any other services they require, AWS can automatically allocate those resources. You don’t pay a monthly or yearly fee to use Amazon’s computing resources—instead, you pay for exactly what you use. Economies of scale keep costs astonishingly low, and AWS has been able to keep reducing prices. To remain competitive, other cloud computing vendors have had to follow suit.

Cloud computing also appeals to many businesses because the cloud services provider will handle all of the maintenance and upkeep of their IT infra- structures, allowing these businesses to spend more time on higher-value work. Start-up companies and smaller companies are finding that they no longer need to build their own data center. With cloud infra- structures like Amazon’s readily available, they have access to technical capability that was formerly avail- able to only much larger businesses. Hi-Media is the Internet publisher of the Fotolog photo blogging web- site. Hi-Media rebuilt the site and moved it to AWS where it can easily scale computing capacity to meet the demands of Fotolog’s 32 million global users who have collectively posted 1 billion photos and 10 bil- lion comments.

Although cloud computing has been touted as a cheap and more flexible alternative to buying and

owning information technology, this isn’t always the case. For large companies, paying a public cloud pro- vider a monthly service fee for 10,000 or more em- ployees may actually be more expensive than hav- ing the company maintain its own IT infrastructure and staff. Companies also worry about unexpected “runaway costs” from using a pay-per-use model. Integrating cloud services with existing IT infrastruc- tures, errors, mismanagement, or unusually high volumes of web traffic will run up the bill for cloud service users.

A major barrier to widespread cloud adoption has been concerns about cloud reliability and security. Problems with Amazon Web Services’ Direct Connect service took down several large customers on the morning of March 2, 2018, including enterprise software tool provider Atalassian, Capital One, and Amazon’s own Alexa personal assistant. (AWS Direct Connect is used by hybrid cloud customers to set up a secure connection between AWS infrastructure and the customer’s on-premises infrastructure.) Amazon’s S3 cloud storage service experienced a four-hour outage February 28, 2017, shutting down thousands of websites across the Internet. There were also significant Amazon cloud outages in the preceding five years. As cloud computing continues to mature and the major cloud infrastructure providers gain more experience, cloud service and reliability have steadily improved. Experts recommend that compa- nies for whom an outage would be a major risk con- sider using another computing service as a backup.

In February 2016 Netflix completed a decade-long project to shut down its own data centers and use Amazon’s cloud exclusively to run its business. Management liked not having to guess months before- hand what the firm’s hardware, storage, and network- ing needs would be. AWS would provide whatever Netflix needed at the moment. Netflix also maintains a content-delivery network through Internet service providers and other third parties to speed up the de- livery of movies and web traffic between Netflix and its customers. Netflix competes with Amazon in the video-streaming business, and it wanted to retain con- trol of its own content delivery network.

Dropbox, on the other hand, did the opposite. The online file hosting company saved nearly

INTERACTIVE SESSION ORGANIZATIONS

Look to the Cloud

Chapter 5 IT Infrastructure and Emerging Technologies 187

the most popular software services for consumers, although they are in- creasingly used in business. Salesforce.com is a leading software service for business. Salesforce.com provides customer relationship management (CRM) and other application software solutions as software services leased over the Internet. Its sales and service clouds offer applications for improv- ing sales and customer service. A marketing cloud enables companies to engage in digital marketing interactions with customers through email, mo- bile, social, web, and connected products. Salesforce.com also provides a community cloud platform for online collaboration and engagement and an analytics cloud platform to deploy sales, service, marketing, and custom analytics apps.

1. What business benefits do cloud computing services provide? What problems do they solve?

2. What are the disadvantages of cloud computing?

3. What kinds of businesses are most likely to benefit from using cloud computing? Why?

$75 million in infrastructure costs over two years following a cloud data migration off AWS. Dropbox had been an early AWS success story, but it had never run all of its systems on AWS. Dropbox had originally split its architecture to host metadata that provides information about other data in private data centers and to host file content on the AWS Simple Storage Service (S3). Dropbox subsequently built systems better suited to its needs, which so far has produced big savings following its cloud data migration off AWS. However, that transition was costly. The company spent more than $53 million for custom architectures in three colocation facili- ties to accommodate exabytes of storage. Dropbox stores the remaining 10 percent of user data on AWS, in part to localize data in the United States and Europe, and it uses Amazon’s public cloud to help deliver its services. Experts believe that Dropbox’s experience with AWS is not representative of most companies. Dropbox’s strategy to build one of the largest data stores in the world depended on owning its computing resources.

Many large companies are moving more of their computing to the cloud but are unable to migrate completely. Legacy systems are the most difficult to switch over. Most midsized and large companies will gravitate toward a hybrid approach. The top cloud providers themselves—Amazon, Google, Microsoft, and IBM—use their own public cloud services for some purposes, but they continue to keep certain

functions on private servers. Worries about reliabil- ity, security, and risks of change have made it diffi- cult for them to move critical computing tasks to the public cloud.

Honda UK implemented the hybrid cloud model to enable its IT infrastructure to handle sudden spikes in usage of its websites. The company had experienced sudden web server crashes due to band- width limitations. Honda UK had initially moved to a private cloud model, which was used during the launch of the Accord Tourer model to handle heavy user demand for its website. Honda UK then started using the public cloud during the launch of the Honda CR-Z. Honda UK had to pay for the cloud service only when the company used it. The pay-as- you-go model helped keep costs in check while en- suring optimum scalability.

Sources: Trevor Jones, “Dropbox Is Likely an Outlier with its Suc- cessful Cloud Data Migration off AWS,” searchaws.com, February 28, 2018; Andy Patrizio, “Cisco Says Almost All Workloads Will Be Cloud-Based Within 3 Years,” Network World, February 5, 2018; Tom Krazit, “Widespread Outage at Amazon Web Services’ U.S. East Region Takes down Alexa, Atlassian Developer Tools,” GeekWire, March 2, 2018; DasGupta, “A Case Study: How Hybrid Clouds Should Be Done,” Cloudwards.net, January 21, 2018; Robert McMil- lan, “Amazon Grapples with Outage at AWS Cloud Service,” Wall Street Journal, March 1, 2017; “AWS Case Study: Hi-Media,” www. aws.amazon.com, accessed May 14, 2017; and Kelly Bit, “The $10 Hedge Fund Supercomputer That’s Sweeping Wall Street,” Bloom- berg Business Week, May 20, 2015.

CASE STUDY QUESTIONS

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Salesforce.com is also a leading example of platform as a service (PaaS). Its Salesforce Platform gives users the ability to develop, launch, and manage ap- plications without having to deal with the infrastructure required for creating new software. The Salesforce Platform provides a set of development tools and IT services that enable users to build new applications and run them in the cloud on Salesforce.com’s data center infrastructure. Salesforce.com also lists software from other independent developers on its AppExchange, an online marketplace for third-party applications that run on the Salesforce Platform.

A cloud can be private or public. A public cloud is owned and maintained by a cloud service provider, such as Amazon Web Services, and made available to the general public or industry group. Public cloud services are often used for websites with public information and product descriptions, one-time large com- puting projects, developing and testing new applications, and consumer services such as online storage of data, music, and photos. Google Drive, Dropbox, and Apple iCloud are leading examples of these consumer public cloud services.

A private cloud is operated solely for an organization. It may be managed by the organization or a third party and may be hosted either internally or ex- ternally. Like public clouds, private clouds are able to allocate storage, comput- ing power, or other resources seamlessly to provide computing resources on an as-needed basis. Companies that want flexible IT resources and a cloud service model while retaining control over their own IT infrastructure are gravitating toward these private clouds.

Because organizations using public clouds do not own the infrastructure, they do not have to make large investments in their own hardware and soft- ware. Instead, they purchase their computing services from remote providers and pay only for the amount of computing power they actually use (utility computing) or are billed on a monthly or annual subscription basis. The term on-demand computing has also been used to describe such services.

Cloud computing has some drawbacks. Unless users make provisions for storing their data locally, the responsibility for data storage and control is in the hands of the provider. Some companies worry about the security risks re- lated to entrusting their critical data and systems to an outside vendor that also works with other companies. Companies expect their systems to be available 24/7 and do not want to suffer any loss of business capability if cloud infra- structures malfunction. Nevertheless, the trend is for companies to shift more of their computer processing and storage to some form of cloud infrastructure. Startups and small companies with limited IT resources and budgets will find public cloud services especially helpful.

Large firms are most likely to adopt a hybrid cloud computing model where they use their own infrastructure for their most essential core activities and adopt public cloud computing for less critical systems or for additional process- ing capacity during peak business periods. Table 5.2 compares the three cloud computing models. Cloud computing will gradually shift firms from having a fixed infrastructure capacity toward a more flexible infrastructure, some of it owned by the firm and some of it rented from giant computer centers owned by computer hardware vendors. You can find out more about cloud computing in the Learning Tracks for this chapter.

Edge Computing Having all the laptops, smartphones, tablets, wireless sensor networks, and local on-premise servers used in cloud computing systems interacting with a single central public cloud data center to process all their data can be inefficient

Chapter 5 IT Infrastructure and Emerging Technologies 189

and costly. Edge computing is a method of optimizing cloud computing sys- tems by performing some data processing on a set of linked servers at the edge of the network, near the source of the data. This reduces the amount of data flowing back and forth between local computers and other devices and the cen- tral cloud data center.

Edge computing deployments are useful when sensors or other IoT devices do not need to be constantly connected to a central cloud. For example, an oil rig in the ocean might have thousands of sensors producing large amounts of data, perhaps to confirm that systems are working properly. The data do not necessarily need to be sent over a network as soon as they are produced, so the local edge computing system could compile the data and send daily reports to a central data center or cloud for long-term storage. By only sending important data over the network, the edge computing system reduces the amount of data traversing the network

Edge computing also reduces delays in the transmitting and processing of data because data does not have to travel over a network to a remote data center or cloud for processing. This is ideal for situations where delays of milliseconds can be untenable, such as in financial services or manufacturing.

Green Computing By curbing hardware proliferation and power consumption, virtualization has become one of the principal technologies for promoting green computing. Green computing, or green IT, refers to practices and technologies for de- signing, manufacturing, using, and disposing of computers, servers, and associ- ated devices such as monitors, printers, storage devices, and networking and communications systems to minimize impact on the environment.

According to Green House Data, the world’s data centers use as much en- ergy as the output of 30 nuclear power plants, which amounts to 1.5 percent of all energy use in the world. A corporate data center can easily consume over 100 times more power than a standard office building. All this additional power consumption has a negative impact on the environment and corporate operating costs. Data centers are now being designed with energy efficiency in mind, using state-of-the art air-cooling techniques, energy-efficient equip- ment, virtualization, and other energy-saving practices. Large companies like Microsoft, Google, Facebook, and Apple are starting to reduce their carbon foot- print with clean energy–powered data centers with power-conserving equip- ment and extensive use of wind and hydropower.

TABLE 5.2 CLOUD COMPUTING MODELS COMPARED

TYPE OF CLOUD DESCRIPTION MANAGED BY USES

Public cloud Third-party service offering computing, storage, and software services to multiple customers and that is available to the public

Third-party service providers

Companies without major privacy concerns

Companies seeking pay-as-you-go IT services

Companies lacking IT resources and expertise

Private cloud Cloud infrastructure operated solely for a single organization and hosted either internally or externally

In-house IT or private third-party host

Companies with stringent privacy and security requirements

Companies that must have control over data sovereignty

Hybrid cloud Combination of private and public cloud services that remain separate entities

In-house IT, private host, third- party providers

Companies requiring some in-house control of IT that are also willing to assign part of their IT infrastructures to a public cloud

190 Part Two Information Technology Infrastructure

High-Performance and Power-Saving Processors Another way to reduce power requirements and hardware sprawl is to use more efficient and power-saving processors. Contemporary microprocessors now feature multiple processor cores (which perform the reading and execu- tion of computer instructions) on a single chip. A multicore processor is an integrated circuit to which two or more processor cores have been attached for enhanced performance, reduced power consumption, and more efficient si- multaneous processing of multiple tasks. This technology enables two or more processing engines with reduced power requirements and heat dissipation to perform tasks faster than a resource-hungry chip with a single processing core. Today you’ll find PCs with dual-core, quad-core, six-core, and eight-core proces- sors and servers with 16- and 32-core processors.

Intel and other chip manufacturers are working on microprocessors that minimize power consumption, which is essential for prolonging battery life in small mobile digital devices. Highly power-efficient microprocessors, such as the A9, A10, and A11 processors used in Apple’s iPhone and iPad and Intel’s Atom processor, are used in lightweight smartphones and tablets, intelligent cars, and healthcare devices.

5-4 What are the current computer software platforms and trends?

There are four major themes in contemporary software platform evolution:

• Linux and open source software

• Java, HTML, and HTML5

• Web services and service-oriented architecture

• Software outsourcing and cloud services

Linux and Open Source Software Open source software is software produced by a community of several hun- dred thousand programmers around the world. According to the leading open source professional association, OpenSource.org, open source software is free and can be modified by users. Works derived from the original code must also be free. Open source software is by definition not restricted to any specific op- erating system or hardware technology.

Popular open source software tools include the Linux operating system, the Apache HTTP web server, the Mozilla Firefox web browser, and the Apache OpenOffice desktop productivity suite. Google’s Android mobile op- erating system and Chrome web browser are based on open source tools. You can find out more about the Open Source Definition from the Open Source Initiative and the history of open source software in the Learning Tracks for this chapter.

Linux Perhaps the most well-known open source software is Linux, an operating sys- tem related to Unix. Linux was created by Finnish programmer Linus Torvalds and first posted on the Internet in August 1991. Linux applications are embed- ded in cell phones, smartphones, tablet computers, and consumer electronics.

Chapter 5 IT Infrastructure and Emerging Technologies 191

Linux is available in free versions downloadable from the Internet or in low- cost commercial versions that include tools and support from vendors such as Red Hat.

Although Linux is not used in many desktop systems, it is a leading operat- ing system for servers, mainframe computers, and supercomputers. IBM, HP, Intel, Dell, and Oracle have made Linux a central part of their offerings to cor- porations. Linux has profound implications for corporate software platforms— cost reduction, reliability, and resilience—because Linux can work on all the major hardware platforms.

Software for the Web: Java, HTML, and HTML5 Java is an operating system-independent, processor-independent, object- oriented programming language created by Sun Microsystems that has be- come the leading interactive programming environment for the web. The Java platform has migrated into mobile phones, tablets, automobiles, music play- ers, game machines, and set-top cable television systems serving interactive content and pay-per-view services. Java software is designed to run on any computer or computing device, regardless of the specific microprocessor or op- erating system the device uses. For each of the computing environments in which Java is used, a Java Virtual Machine interprets Java programming code for that machine. In this manner, the code is written once and can be used on any machine for which there exists a Java Virtual Machine.

Java developers can create small applet programs that can be embedded in web pages and downloaded to run on a web browser. A web browser is an easy-to-use software tool with a graphical user interface for displaying web pages and for accessing the web and other Internet resources. Microsoft’s Internet Explorer, Mozilla Firefox, Google Chrome, and Apple Safari brows- ers are examples. At the enterprise level, Java is being used for more complex e-commerce and e-business applications that require communication with an organization’s back-end transaction processing systems.

HTML and HTML5 Hypertext Markup Language (HTML) is a page description language for specifying how text, graphics, video, and sound are placed on a web page and for creating dynamic links to other web pages and objects. Using these links, a user need only point at a highlighted keyword or graphic, click on it, and im- mediately be transported to another document.

HTML was originally designed to create and link static documents composed largely of text. Today, however, the web is much more social and interactive, and many web pages have multimedia elements—images, audio, and video. Third-party plug-in applications like Flash, Silverlight, and Java have been re- quired to integrate these rich media with web pages. However, these add-ons require additional programming and put strains on computer processing. The next evolution of HTML, called HTML5, solves this problem by making it pos- sible to embed images, audio, video, and other elements directly into a doc- ument without processor-intensive add-ons. HTML5 makes it easier for web pages to function across different display devices, including mobile devices as well as desktops, and it will support the storage of data offline for apps that run over the web.

Other popular programming tools for web applications include Ruby and Python. Ruby is an object-oriented programming language known for speed

192 Part Two Information Technology Infrastructure

and ease of use in building web applications, and Python (praised for its clarity) is being used for building cloud computing applications.

Web Services and Service-Oriented Architecture Web services refer to a set of loosely coupled software components that ex- change information with each other using universal web communication standards and languages. They can exchange information between two differ- ent systems regardless of the operating systems or programming languages on which the systems are based. They can be used to build open standard web-based applications linking systems of two different organizations, and they can also be used to create applications that link disparate systems within a sin- gle company. Different applications can use web services to communicate with each other in a standard way without time-consuming custom coding.

The foundation technology for web services is XML, which stands for Extensible Markup Language. This language was developed in 1996 by the World Wide Web Consortium (W3C, the international body that oversees the de- velopment of the web) as a more powerful and flexible markup language than hypertext markup language (HTML) for web pages. Whereas HTML is limited to describing how data should be presented in the form of web pages, XML can perform presentation, communication, and storage of data. In XML, a number is not simply a number; the XML tag specifies whether the number represents a price, a date, or a ZIP code. Table 5.3 illustrates some sample XML statements.

By tagging selected elements of the content of documents for their mean- ings, XML makes it possible for computers to manipulate and interpret their data automatically and perform operations on the data without human inter- vention. Web browsers and computer programs, such as order processing or enterprise resource planning (ERP) software, can follow programmed rules for applying and displaying the data. XML provides a standard format for data ex- change, enabling web services to pass data from one process to another.

Web services communicate through XML messages over standard web pro- tocols. Companies discover and locate web services through a directory. Using web protocols, a software application can connect freely to other applications without custom programming for each different application with which it wants to communicate. Everyone shares the same standards.

The collection of web services that are used to build a firm’s software systems constitutes what is known as a service-oriented architecture. A service- oriented architecture (SOA) is set of self-contained services that communi- cate with each other to create a working software application. Business tasks are accomplished by executing a series of these services. Software developers reuse these services in other combinations to assemble other applications as needed.

Virtually all major software vendors provide tools and entire platforms for building and integrating software applications using web services. Microsoft has incorporated web services tools in its Microsoft .NET platform.

TABLE 5.3 EXAMPLES OF XML

PLAIN ENGLISH XML

Subcompact <AUTOMOBILETYPE=“Subcompact”>

4 passenger <PASSENGERUNIT=“PASS”>4</PASSENGER>

$16,800 <PRICE CURRENCY=“USD”>$16,800</PRICE>

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Dollar Rent A Car’s systems use web services for its online booking system with Southwest Airline’s website. Although both companies’ systems are based on different technology platforms, a person booking a flight on Southwest.com can reserve a car from Dollar without leaving the airline’s website. Instead of struggling to get Dollar’s reservation system to share data with Southwest’s in- formation systems, Dollar used Microsoft .NET web services technology as an intermediary. Reservations from Southwest are translated into web services protocols, which are then translated into formats that can be understood by Dollar’s computers.

Other car rental companies have linked their information systems to airline companies’ websites before. But without web services, these connections had to be built one at a time. Web services provide a standard way for Dollar’s comput- ers to “talk” to other companies’ information systems without having to build special links to each one. Dollar is now expanding its use of web services to link directly to the systems of a small tour operator and a large travel reservation system as well as a wireless website for cell phones and smartphones. It does not have to write new software code for each new partner’s information sys- tems or each new wireless device (see Figure 5.11).

Software Outsourcing and Cloud Services Today, many business firms continue to operate legacy systems that continue to meet a business need and that would be extremely costly to replace. But they will purchase or rent most of their new software applications from external sources. Figure 5.12 illustrates the rapid growth in external sources of software for U.S. firms.

FIGURE 5.11 HOW DOLLAR RENT A CAR USES WEB SERVICES Dollar Rent A Car uses web services to provide a standard intermediate layer of software to “talk” to other companies’ information systems. Dollar Rent A Car can use this set of web services to link to other companies’ information systems without having to build a separate link to each firm’s systems.

Tour Operator’s Systems

Wireless WebSite

Dollar Rent A Car Systems

Web Services

Travel Reservation

System

Southwest Airlines

Systems

Future Business Partners’ Systems

Server Legacy

Reservation System

194 Part Two Information Technology Infrastructure

There are three external sources for software: software packages from a com- mercial software vendor (most ERP systems), outsourcing custom application development to an external vendor (which may or may not be offshore), and cloud-based software services and tools (SaaS/PaaS).

Software Packages and Enterprise Software We have already described software packages for enterprise applications as one of the major types of software components in contemporary IT infrastructures. A software package is a prewritten commercially available set of software pro- grams that eliminates the need for a firm to write its own software programs for certain functions, such as payroll processing or order handling.

Enterprise application software vendors such as SAP and Oracle have developed powerful software packages that can support the primary business processes of a firm worldwide from warehousing, customer relationship man- agement, and supply chain management to finance and human resources. These large-scale enterprise software systems provide a single, integrated, worldwide software system for firms at a cost much less than they would pay if they developed it themselves. Chapter 9 discusses enterprise systems in detail.

Software Outsourcing Software outsourcing enables a firm to contract custom software develop- ment or maintenance of existing legacy programs to outside firms, which often operate offshore in low-wage areas of the world. For example, in 2013, IKEA announced a six-year offshore IT outsourcing deal with German infrastruc- ture solutions firm Wincor Nixdorf. Wincor Nixdorf set up 12,000 point-of- sale (POS) systems in 300 IKEA stores in 25 countries. These systems use Wincor Nixdorf’s POS TP.net software to control furniture checkout transactions in each

FIGURE 5.12 CHANGING SOURCES OF FIRM SOFTWARE In 2017, U.S. firms spent an estimated $380 billion on software. About 47 percent ($179 billion) of that originated outside the firm, provided by a variety of vendors. About 13 percent ($49 billion) was provided by SaaS vendors as an online cloud-based service. Sources: BEA National Income and Product Accounts, 2018.

Sources of Software

E xp

en d

it u

re s

(b ill

io n

s $)

Outsourced Software

Total Software Spending

0

50

100

150

200

250

300

350

400

2007 2008 2009 2010 2011 2012 2013 Year

2014 2015 2016 2017

Software as a Se rvice (SaaS)

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store and consolidate all data across the retail group. Wincor Nixdorf provides IKEA with services that include operation and customization of the systems, as well as updating the software and applications running on them. Having a sin- gle software provider offshore helped IKEA reduce the work to run the stores (Existek, 2017). Offshore software outsourcing firms have primarily provided lower-level maintenance, data entry, and call center operations, although more sophisticated and experienced offshore firms, particularly in India, have been hired for new-program development. However, as wages offshore rise and the costs of managing offshore projects are factored in (see Chapter 13), some work that would have been sent offshore is returning to domestic companies.

Cloud-Based Software Services and Tools In the past, software such as Microsoft Word or Adobe Illustrator came in a box and was designed to operate on a single machine. Today, you’re more likely to download the software from the vendor’s website or to use the software as a cloud service delivered over the Internet and pay a subscription fee.

Cloud-based software and the data it uses are hosted on powerful servers in data centers and can be accessed with an Internet connection and standard web browser. In addition to free or low-cost tools for individuals and small busi- nesses provided by Google or Yahoo, enterprise software and other complex business functions are available as services from the major commercial soft- ware vendors. Instead of buying and installing software programs, subscribing companies rent the same functions from these services, with users paying ei- ther on a subscription or per-transaction basis. A leading example of software as a service (SaaS) is Salesforce.com, described earlier in this chapter, which provides on-demand software services for customer relationship management.

In order to manage their relationship with an outsourcer or technology ser- vice provider, firms need a contract that includes a service level agreement (SLA). The SLA is a formal contract between customers and their service pro- viders that defines the specific responsibilities of the service provider and the level of service expected by the customer. SLAs typically specify the nature and level of services provided, criteria for performance measurement, support options, provisions for security and disaster recovery, hardware and software ownership and upgrades, customer support, billing, and conditions for termi- nating the agreement. We provide a Learning Track on this topic.

Mashups and Apps The software you use for both personal and business tasks today may be com- posed of interchangeable components that integrate freely with other applications on the Internet. Individual users and entire companies mix and match these soft- ware components to create their own customized applications and to share infor- mation with others. The resulting software applications are called mashups. The idea is to take different sources and produce a new work that is greater than the sum of its parts. You have performed a mashup if you’ve ever personalized your Facebook profile or your blog with a capability to display videos or slide shows.

Web mashups combine the capabilities of two or more online applications to create a kind of hybrid that provides more customer value than the original sources alone. For instance, ZipRealty uses Google Maps and data provided by an online real estate database. Apps are small, specialized software programs that run on the Internet, on your computer, or on your mobile phone or tablet and are generally delivered over the Internet. Google refers to its online ser- vices as apps. But when we talk about apps today, most of the attention goes to the apps that have been developed for the mobile digital platform. It is these

196 Part Two Information Technology Infrastructure

apps that turn smartphones and tablets into general-purpose computing tools. There are now millions of apps for the IOS and Android operating systems.

Some downloaded apps do not access the web, but many do, providing faster access to web content than traditional web browsers. Apps provide a stream- lined non-browser pathway for users to perform a number of tasks, ranging from reading the newspaper to shopping, searching, personal health monitor- ing, playing games, and buying. They increasingly are used by managers as gateways to their firm’s enterprise systems. Because so many people are now accessing the Internet from their mobile devices, some say that apps are “the new browsers.” Apps are also starting to influence the design and function of traditional websites as consumers are attracted to the look and feel of apps and their speed of operation.

Many apps are free or purchased for a small charge, much less than conven- tional software, which further adds to their appeal. The success of these mobile platforms depends in large part on the quantity and the quality of the apps they provide. Apps tie the customer to a specific hardware platform: As the user adds more and more apps to his or her mobile phone, the cost of switching to a competing mobile platform rises.

At the moment, the most commonly downloaded apps are games, news and weather, maps/navigation, social networking, music, and video/movies. But there are also serious apps for business users that make it possible to create and edit documents, connect to corporate systems, schedule and participate in meetings, track shipments, and dictate voice messages (see the Chapter 1 Interactive Session on Management). Most large online retailers have apps for consumers for researching and buying goods and services online.

5-5 What are the challenges of managing IT infrastructure and management solutions?

Creating and managing a coherent IT infrastructure raises multiple challenges: dealing with platform and technology change (including cloud and mobile computing), management and governance, and making wise infrastructure investments.

Dealing with Platform and Infrastructure Change As firms grow, they often quickly outgrow their infrastructure. As firms shrink, they can get stuck with excessive infrastructure purchased in better times. How can a firm remain flexible if investments in IT infrastructure are fixed-cost pur- chases and licenses? How well does the infrastructure scale? Scalability refers to the ability of a computer, product, or system to expand to serve a large num- ber of users without breaking down. New applications, mergers and acquisi- tions, and changes in business volume all affect computer workload and must be considered when planning hardware capacity.

Firms using mobile computing and cloud computing platforms will require new policies, procedures, and tools for managing these platforms. They will need to inventory all of their mobile devices in business use and develop poli- cies and tools for tracking, updating, and securing them, and for controlling the data and applications that run on them. Firms often turn to mobile device management (MDM) software, which monitors, manages, and secures mobile devices that are deployed across multiple mobile service providers and across

Chapter 5 IT Infrastructure and Emerging Technologies 197

multiple mobile operating systems being used in the organization. MDM tools enable the IT department to monitor mobile usage, install or update mobile software, back up and restore mobile devices, and remove software and data from devices that are stolen or lost.

Firms using cloud computing and SaaS will need to fashion new contractual arrangements with remote vendors to make sure that the hardware and soft- ware for critical applications are always available when needed and that they meet corporate standards for information security. It is up to business manage- ment to determine acceptable levels of computer response time and availability for the firm’s mission-critical systems to maintain the level of business perfor- mance that is expected.

Management and Governance A long-standing issue among information system managers and CEOs has been the question of who will control and manage the firm’s IT infrastructure. Chapter 2 introduced the concept of IT governance and described some issues it addresses. Other important questions about IT governance are: Should de- partments and divisions have the responsibility of making their own informa- tion technology decisions, or should IT infrastructure be centrally controlled and managed? What is the relationship between central information systems management and business unit information systems management? How will infrastructure costs be allocated among business units? Each organization will need to arrive at answers based on its own needs.

Making Wise Infrastructure Investments IT infrastructure is a major investment for the firm. If too much is spent on infrastructure, it lies idle and constitutes a drag on the firm’s financial perfor- mance. If too little is spent, important business services cannot be delivered and the firm’s competitors (who spent the right amount) will outperform the under-investing firm. How much should the firm spend on infrastructure? This question is not easy to answer.

A related question is whether a firm should purchase and maintain its own IT infrastructure components or rent them from external suppliers, includ- ing those offering cloud services. The decision either to purchase your own IT assets or to rent them from external providers is typically called the rent- versus-buy decision.

Cloud computing is a low-cost way to increase scalability and flexibility, but firms should evaluate this option carefully in light of security requirements and impact on business processes and workflows. In some instances, the cost of renting software adds up to more than purchasing and maintaining an applica- tion in-house, or firms can overspend on cloud services (Loten, 2018). Yet there are many benefits to using cloud services including significant reductions in hardware, software, human resources, and maintenance costs. Moving to cloud computing allows firms to focus on their core businesses rather than technol- ogy issues.

Total Cost of Ownership of Technology Assets The actual cost of owning technology resources includes the original cost of acquiring and installing hardware and software as well as ongoing administra- tion costs for hardware and software upgrades, maintenance, technical sup- port, training, and even utility and real estate costs for running and housing

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the technology. The total cost of ownership (TCO) model can be used to analyze these direct and indirect costs to help firms determine the actual cost of specific technology implementations. Table 5.4 describes the most important components to consider in a TCO analysis.

When all these cost components are considered, the TCO for a PC might run up to three times the original purchase price of the equipment. Gains in pro- ductivity and efficiency from equipping employees with mobile computing de- vices must be balanced against increased costs from integrating these devices into the firm’s IT infrastructure and from providing technical support. Other cost components include fees for wireless airtime, end-user training, help desk support, and software for special applications. Costs are higher if the mobile devices run many different applications or need to be integrated into back-end systems such as enterprise applications.

Hardware and software acquisition costs account for only about 20 percent of TCO, so managers must pay close attention to administration costs to under- stand the full cost of the firm’s hardware and software. It is possible to reduce some of these administration costs through better management. Many large firms are saddled with redundant, incompatible hardware and software because their departments and divisions have been allowed to make their own technol- ogy purchases.

In addition to switching to cloud services, these firms could reduce their TCO through greater centralization and standardization of their hardware and soft- ware resources. Companies could reduce the size of the information systems staff required to support their infrastructure if the firm minimizes the number of different computer models and pieces of software that employees are al- lowed to use. In a centralized infrastructure, systems can be administered from a central location and troubleshooting can be performed from that location.

Competitive Forces Model for IT Infrastructure Investment Figure 5.13 illustrates a competitive forces model you can use to address the question of how much your firm should spend on IT infrastructure.

TABLE 5.4 TOTAL COST OF OWNERSHIP (TCO) COST COMPONENTS

INFRASTRUCTURE COMPONENT COST COMPONENTS

Hardware acquisition Purchase price of computer hardware equipment, including computers, terminals, storage, and printers

Software acquisition Purchase or license of software for each user

Installation Cost to install computers and software

Training Cost to provide training for information systems specialists and end users

Support Cost to provide ongoing technical support, help desks, and so forth

Maintenance Cost to upgrade the hardware and software

Infrastructure Cost to acquire, maintain, and support related infrastructure, such as networks and specialized equipment (including storage backup units)

Downtime Cost of lost productivity if hardware or software failures cause the system to be unavailable for processing and user tasks

Space and energy Real estate and utility costs for housing and providing power for the technology

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Market demand for your firm’s services. Make an inventory of the ser- vices you currently provide to customers, suppliers, and employees. Survey each group, or hold focus groups to find out if the services you currently offer are meeting the needs of each group. For example, are customers com- plaining of slow responses to their queries about price and availability? Are employees complaining about the difficulty of finding the right information for their jobs? Are suppliers complaining about the difficulties of discovering your production requirements?

Your firm’s business strategy. Analyze your firm’s five-year business strat- egy and try to assess what new services and capabilities will be required to achieve strategic goals.

Your firm’s IT strategy, infrastructure, and cost. Examine your firm’s information technology plans for the next five years and assess its alignment with the firm’s business plans. Determine the total IT infrastructure costs. You will want to perform a TCO analysis. If your firm has no IT strategy, you will need to devise one that takes into account the firm’s five-year strategic plan.

Information technology assessment. Is your firm behind the technology curve or at the bleeding edge of information technology? Both situations are to be avoided. It is usually not desirable to spend resources on advanced technologies that are still experimental, often expensive, and sometimes unreliable. You want to spend on technologies for which standards have been established; IT vendors are competing on cost, not design; and where there are multiple suppliers. However, you do not want to put off investment in new technologies or allow competitors to develop new business models and capabilities based on the new technologies.

FIGURE 5.13 COMPETITIVE FORCES MODEL FOR IT INFRASTRUCTURE There are six factors you can use to answer the question “How much should our firm spend on IT infrastructure?”

1 Market Demand for Your Firm’s

Customer Services, Supplier Services,

and Enterprise Services

Your Firm’s IT Services

and Infrastructure

4 Information Technology

External Market Factors

Internal Factors

6 Competitor Firms’ IT Infrastructure

Investments

2 Your Firm’s

Business Strategy

3 Your Firm’s IT Strategy,

Infrastructure, and Cost

5 Competitor

Firms’ IT Services

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Competitor firm services. Try to assess what technology services competi- tors offer to customers, suppliers, and employees. Establish quantitative and qualitative measures to compare them to those of your firm. If your firm’s service levels fall short, your company is at a competitive disadvantage. Look for ways your firm can excel at service levels.

Competitor firm IT infrastructure investments. Benchmark your expen- ditures for IT infrastructure against your competitors. Many companies are quite public about their innovative expenditures on IT. If competing firms try to keep IT expenditures secret, you may be able to find IT investment in- formation in public companies’ SEC Form 10-K annual reports to the federal government when those expenditures affect a firm’s financial results.

Your firm does not necessarily need to spend as much as or more than your competitors. Perhaps it has discovered much less expensive ways of providing services, and this can lead to a cost advantage. Alternatively, your firm may be spending far less than competitors, and experiencing commensurate poor per- formance and losing market share.

5-6 How will MIS help my career? Here is how Chapter 5 and this book can help you find a job as an entry-level IT consultant.

The Company A1 Tech IT Consulting, a national technology consulting firm headquartered in Atlanta, is looking for an entry-level IT consultant. The company partners with technology vendors to create and sell leading-edge technology solutions based on cloud, network, and managed IT services to small, medium-sized, and enterprise-sized companies. The company has 65 employees and is noted for outstanding customer service.

Position Description The entry-level IT consultant will work with the firm’s account managers to maintain good relationships with existing clients and help its technology con- sultants create solutions and proposals for prospective customers. The com- pany will provide on-the-job training about the technology industry and its technology consulting process. Job responsibilities include:

• Providing research on potential and existing clients and the competitive landscape.

• Managing digital marketing campaigns.

• Assisting in identifying potential business opportunities.

• Preparing periodic reports on screening, tracking, and monitoring clients and prospects.

Job Requirements • Bachelor’s degree or equivalent

• Ability to communicate well with clients by phone, by email, and face-to-face

• Strong organizational, presentation, and writing skills

Chapter 5 IT Infrastructure and Emerging Technologies 201

• Ability to work in a fast-paced environment and collaborate effectively as a team member

• Proficiency in Microsoft Office (Word, Excel, and PowerPoint)

• Strong organizational, presentation, and writing skills and willingness to learn

Interview Questions

1. What do you know about cloud computing and managed IT services? Are you familiar with common operating systems, security, and data manage- ment platforms? Have you ever used these services on the job? What did you do with them?

2. Have you had much face-to-face contact with customers? Can you describe what work you did with customers? Have you ever helped customers with a technology problem?

3. Do you have any digital marketing experience?

4. Can you give us an example of a sales-related problem or other business problem that you helped solve? Do you do any writing and analysis? Can you provide examples?

5. What is your level of proficiency with Microsoft Office? What work have you done with Excel spreadsheets?

Author Tips

1. Review this chapter and also Chapters 6 and 8 of this text, paying special attention to cloud computing, networking technology, and managed technol- ogy services.

2. Use the web to research the company and how it works with other technol- ogy companies to provide its IT services. Learn what you can about these partner companies as well and the tools and services they offer.

3. Inquire exactly how you would be using Microsoft Office, and if possible provide examples of how you used these tools to solve problems in the classroom or for a job assignment. Bring examples of your writing (includ- ing some from your Digital Portfolio described in MyLab MIS) demonstrating your analytical skills and project experience.

4. Indicate that you are very interested in learning more about the technology industry and technologies and services used by the company.

5. Review the company’s LinkedIn page, Facebook, and Twitter to learn about strategic trends and important issues for this company.

REVIEW SUMMARY

5-1 What is IT infrastructure, and what are the stages and drivers of IT infrastructure evolution? IT infrastructure is the shared technology resources that provide the platform for the firm’s specific

information system applications. IT infrastructure includes hardware, software, and services that are shared across the entire firm.

The five stages of IT infrastructure evolution are the mainframe era, the personal computer era, the client/server era, the enterprise computing era, and the cloud and mobile computing era. Moore’s Law deals with the exponential increase in processing power and decline in the cost of computer technol- ogy, stating that every 18 months the power of microprocessors doubles and the price of computing falls in half. The Law of Mass Digital Storage deals with the exponential decrease in the cost of storing

202 Part Two Information Technology Infrastructure

data, stating that the number of kilobytes of data that can be stored on magnetic media for $1 roughly doubles every 15 months. Metcalfe’s Law states that a network’s value to participants grows exponen- tially as the network takes on more members. The rapid decline in costs of communication and grow- ing agreement in the technology industry to use computing and communications standards are also driving an explosion of computer use.

5-2 What are the components of IT infrastructure? Major IT infrastructure components include computer hardware platforms, operating system plat-

forms, enterprise software platforms, networking and telecommunications platforms, database man- agement software, Internet platforms, and consulting services and systems integrators.

5-3 What are the current trends in computer hardware platforms? Increasingly, computing is taking place on a mobile digital platform. Quantum computing is an

emerging technology that could dramatically boost processing power through the ability to be in more than one state at the same time. Consumerization of IT is the business use of information technology that originated in the consumer market. Virtualization organizes computing resources so that their use is not restricted by physical configuration or geographic location. In cloud computing, firms and indi- viduals obtain computing power and software as services over a network, including the Internet, rath- er than purchasing and installing the hardware and software on their own computers. Edge computing helps optimize cloud computing by performing some data processing on a set of linked servers at the edge of the network, near the source of the data. A multicore processor is a microprocessor to which two or more processing cores have been attached for enhanced performance. Green computing in- cludes practices and technologies for producing, using, and disposing of information technology hard- ware to minimize negative impact on the environment.

5-4 What are the current computer software platforms and trends? Open source software is produced and maintained by a global community of programmers and is

often downloadable for free. Linux is a powerful, resilient open source operating system that can run on multiple hardware platforms and is used widely to run web servers. Java is an operating system– and hardware-independent programming language that is the leading interactive programming envi- ronment for the web. HTML5 makes it possible to embed images, audio, and video directly into a web document without add-on programs. Web services are loosely coupled software components based on open web standards that work with any application software and operating system. They can be used as components of web-based applications linking the systems of two different organizations or to link disparate systems of a single company. Companies are purchasing their new software applications from outside sources, including software packages, by outsourcing custom application development to an external vendor (that may be offshore), or by renting online software services (SaaS). Mashups combine two different software services to create new software applications and services. Apps are software applications that run on mobile devices and are delivered over the Internet.

5-5 What are the challenges of managing IT infrastructure and management solutions? Major challenges include dealing with platform and infrastructure change, infrastructure manage-

ment and governance, and making wise infrastructure investments. Solution guidelines include using a competitive forces model to determine how much to spend on IT infrastructure and where to make strategic infrastructure investments, and establishing the total cost of ownership (TCO) of information technology assets. The total cost of owning technology resources includes not only the original cost of computer hardware and software but also costs for hardware and software upgrades, maintenance, technical support, and training. Many firms are turning to cloud computing in an effort to reduce their IT platform costs. Firms use tools for mobile device management (MDM) to monitor, manage, and se- cure mobile devices that are deployed across the enterprise.

Key Terms Android, 178 Application server, 169 Apps, 195 BYOD, 182

Chrome OS, 178 Clients, 169 Client/server computing, 169 Cloud computing, 170

Chapter 5 IT Infrastructure and Emerging Technologies 203

Consumerization of IT, 182 Edge computing, 189 Green computing (green IT), 189 Hypertext Markup Language (HTML), 191 HTML5, 191 Hybrid cloud, 188 Infrastructure as a service (IaaS), 185 iOS, 178 Java, 191 Legacy systems, 180 Linux, 178 Mainframe, 167 Mashup, 195 Minicomputers, 167 Mobile device management (MDM), 196 Moore’s Law, 171 Multicore processor, 190 Multitiered client/server architecture, 169 Multitouch, 178 Nanotechnology, 173 On-demand computing, 188 Open source software, 190 Operating system, 178 Outsourcing, 194

Platform as a service (PaaS), 185 Private cloud, 188 Public cloud, 188 Quantum computing, 183 Scalability, 196 Server, 169 Service level agreement (SLA), 195 Service-oriented architecture (SOA), 192 Software as a service (SaaS), 185 Software package, 194 Software-defined storage (SDS), 183 Tablet computers, 180 Technology standards, 175 Total cost of ownership (TCO), 198 Unix, 178 Virtualization, 183 Web browser, 191 Web hosting service, 179 Web server, 169 Web services, 192 Windows, 170 Windows 10, 178 Wintel PC, 169 XML, 192

MyLab MIS To complete the problems with MyLab MIS, go to EOC Discussion Questions in MyLab MIS.

Review Questions 5-1 What is IT infrastructure, and what are the stages

and drivers of IT infrastructure evolution?

• Define IT infrastructure from both a tech- nology and a services perspective.

• List each of the eras in IT infrastructure evolution and describe its distinguishing characteristics.

• Define and describe the following: web server, application server, multitiered cli- ent/server architecture.

• Describe Moore’s Law and the Law of Mass Digital Storage.

• Describe how network econom- ics, declining communications costs, and technology standards affect IT infrastructure.

5-2 What are the components of IT infrastructure? • List and describe the components of IT in-

frastructure that firms need to manage.

5-3 What are the current trends in computer hardware platforms?

• Describe the evolving mobile plat- form, consumerization of IT, and cloud computing.

• Explain how businesses can benefit from virtualization, green computing, and multi- core processors.

5-4 What are the current computer software platforms and trends?

• Define and describe open source software and Linux and explain their business benefits.

• Define Java and HTML5 and explain why they are important.

• Define and describe web services and the role played by XML.

• Name and describe the three external sources for software.

• Define and describe software mashups and apps.

5-5 What are the challenges of managing IT infrastructure and management solutions?

• Name and describe the management chal- lenges posed by IT infrastructure.

• Explain how using a competitive forces model and calculating the TCO of technol- ogy assets help firms make good infrastruc- ture investments.

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Hands-On MIS Projects The projects in this section give you hands-on experience in developing solutions for managing IT infrastructures and IT outsourcing, using spreadsheet software to evaluate alternative desktop systems, and using web research to budget for a sales conference. Visit MyLab MIS to access this chapter’s Hands-On MIS Projects.

Management Decision Problems

5-9 The University of Pittsburgh Medical Center (UPMC) relies on information systems to operate 19 hospitals, a network of other care sites, and international and commercial ventures. Demand for additional servers and storage technology was growing by 20 percent each year. UPMC was setting up a separate server for every application, and its servers and other computers were running a number of different operating systems, including several versions of Unix and Windows. UPMC had to manage technologies from many different vendors, including Hewlett-Packard (HP), Sun Microsystems, Microsoft, and IBM. Assess the impact of this situation on business performance. What factors and management decisions must be considered when developing a solution to this problem?

5-10 Qantas Airways, Australia’s leading airline, faces cost pressures from high fuel prices and lower levels of global airline traffic. To remain competitive, the airline must find ways to keep costs low while providing a high level of customer service. Qantas had a 30-year-old data center. Management had to decide whether to replace its IT infrastructure with newer technology or outsource it. What factors should be considered by Qantas management when deciding whether to outsource? If Qantas decides to outsource, list and describe points that should be addressed in a service level agreement.

Improving Decision Making: Using a Spreadsheet to Evaluate Hardware and Software Options

Software skills: Spreadsheet formulas Business skills: Technology pricing

5-11 In this exercise, you will use spreadsheet software to calculate the cost of desktop systems, printers, and software. Use the Internet to obtain pricing information on hardware and software for an office of 30 people. You

will need to price 30 PC desktop systems (monitors, computers, and keyboards) manufactured by Lenovo, Dell, and HP. (For the purposes of this exercise, ignore the fact that desktop systems usually come with preloaded software packages.) Also obtain pricing on 15 desktop printers manufactured by HP, Canon, and Brother. Each desktop system must satisfy the minimum specifications shown in tables that you can find in MyLab MIS.

Also obtain pricing on 30 licenses or copies of the most recent versions of Microsoft Office 365 Business and Apache Open Office (formerly Oracle Open Office) and on 30 copies of Microsoft  Windows 10 Pro. Each desktop productivity solution should contain software for word processing, spreadsheets, database, and presentations. Prepare a spreadsheet showing your research results for the desktop system, printer, and software combination offering the best performance and pricing per worker over a two-year period. Because every two workers share one printer (15 printers/30 systems), your calculations should assume only half a printer cost per worker.

Discussion Questions 5-6 Why is selecting computer hardware and

software for the organization an important management decision? What management, organization, and technology issues should be considered when selecting computer hardware and software?

5-7 Should organizations use software service providers for all their software needs?

MyLab MIS

MyLab MIS

Why or why not? What management, organization, and technology factors should be considered when making this decision?

5-8 What are the advantages and disadvantages of cloud computing?MyLab MIS

Chapter 5 IT Infrastructure and Emerging Technologies 205

Improving Decision Making: Using Web Research to Budget for a Sales Conference

Software skills: Internet-based software Business skills: Researching transportation and lodging costs

5-12 The Foremost Composite Materials Company is planning a two-day sales conference for October 19–20, starting with a reception on the evening of October 18. The conference consists of all-day meetings that the entire sales force, numbering 120 sales representatives and their 16 managers, must attend. Each sales representative requires his or her own room, and the company needs two common meeting rooms, one large enough to hold the entire sales force plus a few visitors (200) and the other able to hold half the force. Management has set a budget of $195,000 for the representatives’ room rentals. The company would like to hold the conference in either Miami or Marco Island, Florida, at a Hilton- or Marriott-owned hotel. Use the Hilton and Marriott websites to select a hotel in whichever of these cities would enable the com-

pany to hold its sales conference within its budget and meet its sales conference requirements. Then locate flights arriving the afternoon prior to the conference. Your attendees will be coming from Los Angeles (51), San Francisco (30), Seattle (22), Chicago (19), and Pittsburgh (14). Determine costs of each airline ticket from these cities. When you are finished, create a budget for the conference. The budget will include the cost of each air- line ticket, the room cost, and $70 per attendee per day for food.

Collaboration and Teamwork Project Evaluating Server and Mobile Operating Systems

5-13 Form a group with three or four of your classmates. Choose server or mobile operating systems to evaluate. You might research and compare the capabilities and costs of Linux versus Unix or the most recent version of the Windows operating system for servers. Alternatively, you could compare the capabilities of the Android mobile operating system with iOS for the iPhone. If possible, use Google Docs and Google Drive or Google Sites to brainstorm, organize, and develop a presentation of your findings for the class.

206 Part Two Information Technology Infrastructure

Is BYOD Good for Business?

CASE STUDY

Just about everyone who has a smartphone wants to be able to bring it to work and use it on the job, and many employers would like workers to do so. A survey of BYOD trends by MarketsandMarkets found that adoption rates among North American companies approached 50 percent by the start of 2018. Research from Sapho workplace productivity experts found the average worker saves 81 minutes per week in productivity by using a per- sonal device at work.

Will BYOD become the new normal? Not neces- sarily. Half of all enterprises believe that BYOD rep- resents a growing problem for their organizations, according to a number of studies. Although BYOD can improve employee job satisfaction and produc- tivity, it also can cause a number of problems if not managed properly. Support for personally owned de- vices is more difficult than it is for company-supplied devices, the cost of managing mobile devices can increase, and protecting corporate data and networks becomes more difficult.

When every employee brings his or her own de- vice to work, IT departments lose almost all control over the hardware. They can’t control what apps or programs are installed, how the devices are secured, or what files are downloaded. In the past, the firm was able to control who had what technology in order to prevent privacy breaches, hacking, and un- authorized access to corporate information. Inability to control the hardware means more vulnerabilities. That is the big tradeoff with BYOD: offering employ- ees greater flexibility while potentially exposing the company to danger.

BYOD advocates have argued that it increases employee productivity, but that is not always the case. When employees bring their own devices to work, they may be tempted to use them on the job for entertainment or catching up with friends. It’s incredibly easy for employees to get sucked into an endless black hole of text messaging, YouTube vid- eos, and checking Facebook updates. Productivity will suffer (see the Chapter 7 Interactive Session on Management).

BYOD requires a significant portion of corporate IT resources dedicated to managing and maintaining a large number of devices within the organization.

In the past, companies tried to limit business smart- phone use to a single platform. This made it easier to keep track of each mobile device and to roll out soft- ware upgrades or fixes because all employees were using the same devices or, at the very least, the same operating system. Today, the mobile digital land- scape is much more complicated, with a variety of devices and operating systems on the market that do not have well-developed tools for administration and security. Android has over 80 percent of the world- wide smartphone market, but it is more difficult to use for corporate work than Apple mobile devices using the iOS operating system. iOS is considered a closed system and runs only on a limited num- ber of different Apple mobile devices. In contrast, Android’s fragmentation makes it more difficult and costly for corporate IT to manage. There are about 25,000 different models of Android-based devices available around the world, according to a report by OpenSignal, which researches wireless networks and devices. Android’s huge consumer market share at- tracts many hackers. Android is also vulnerable be- cause it has an open source architecture and comes in multiple versions.

If employees are allowed to work with more than one type of mobile device and operating system, companies need an effective way to keep track of all the devices employees are using. To access com- pany information, the company’s networks must be configured to receive connections from that device. When employees make changes to their personal phone, such as switching cellular carriers, changing their phone number, or buying a new mobile device altogether, companies will need to quickly and flex- ibly ensure that their employees are still able to remain productive. Firms need a system that keeps track of which devices employees are using, where the device is located, whether it is being used, and what software it is equipped with. For unprepared companies, keeping track of who gets access to what data could be a nightmare.

With the large variety of mobile devices and oper- ating systems available, providing adequate technical support for every employee could be difficult. When employees are not able to access critical data or en- counter other problems with their mobile devices,

Chapter 5 IT Infrastructure and Emerging Technologies 207

they will need assistance from the information sys- tems department. Companies that rely on desktop computers tend to have many of the same computers with the same specs and operating systems, making tech support that much easier. Mobility introduces a new layer of variety and complexity to tech support that companies need to be prepared to handle.

There are significant concerns with securing com- pany information accessed with mobile devices. If a device is stolen or compromised, companies need ways to ensure that sensitive or confidential informa- tion isn’t freely available to anyone. Mobility puts assets and data at greater risk than if they were only located within company walls and on company ma- chines. Marble Security Labs analyzed 1.2 million Android and iOS apps and found that the consumer apps on mobile devices did not adequately protect business information. Companies often use technolo- gies that allow them to wipe data from devices re- motely or encrypt data so that if the device is stolen, it cannot be used. You’ll find a detailed discussion of mobile security issues in Chapter 8.

Intel was a pioneer in the BYOD movement and has successfully implemented an enterprise-wide policy covering more than 30,000 employee mobile devices. Another major issue surrounding a corpo- rate BYOD policy is the potential lack of trust be- tween workers and management when management has access to personal data on employee devices. To deal with this issue, Intel has established clear-cut guidelines informing employees about exactly what information can and can’t be seen when adminis- trators manage personal devices. Intel will quickly respond to any questions employees might have re- garding BYOD. The company also allows employees to choose among different levels of mobile access to corporate systems, with each tier accompanied by different levels of security.

SAP, a leading global vendor of enterprise software, is another tech company that has implemented BYOD successfully. The company developed a specialized mobile platform for various work-related applica- tions, enabling employees to work from anywhere with their mobile devices. SAP has also created a se- curity system for decommissioning a mobile device within a minute whenever a smartphone or tablet is lost or stolen. All SAP divisions across the globe have reported some form of success with BYOD. SAP Australia/New Zealand reports that the policy is key in attracting younger workers who are attached to their mobile devices and constantly use the apps.

The global reinsurance giant Swiss Re believes every employee should be able to work in the way they choose and has more and more staff using their own smartphones and tablets to access its intranet and personal information management (PIM) apps. Swiss Re successfully implemented BYOD by choos- ing a secure, highly scalable Enterprise Mobility Management (EMM) system that could support mul- tiple operating systems, and a local partner to man- age all of its technical and organizational aspects.

Over the past six years, 4,500 employee-owned iPhones and iPads have been added to the system alongside existing company devices. About one-third of the smartphones and tablets are company-owned and the other two-thirds are owned by employees of Swiss Re. Swiss Re manages these devices using MobileIron’s EMM system, which enables global enterprises to secure and manage modern operat- ing systems in a world of mixed-use mobile devices and desktops. It incorporates identity, context, and privacy enforcement to set the appropriate level of access to enterprise data and services.

The multi-OS EMM solution was rolled out with the help of local partner Nomasis AG. Likewise, Android is a possibility in the future. If it meets the company’s security requirements, staff wishing to use Android devices will probably be allowed to do so as part of Swiss Re’s BYOD strategy, obviously within the framework of MobileIron.

Supporting nearly all current mobile operating sys- tems is a big technical and organizational challenge for Swiss Re, but management feels it has been worth- while. Mobile devices have helped the company expe- rience a significant rise in user productivity, because staff can access documents more quickly, whether they’re in the office or traveling on business.

Blackstone, a global investment and advisory firm, has implemented a BYOD policy, but it has placed limitations on the types of devices employees can use. Blackstone’s BYOD policy only allows employ- ees to use their own Apple products such as iPads. For that company, Apple devices were the easiest to support and required little maintenance compared to other mobile tools. Any other devices would add to the workload of Blackstone’s IT department, thus eliminating the cost savings that often come with BYOD. Due to Apple’s popularity, few employees have objected.

At Venafi, a cybersecurity company, employees have the option of bringing their own smartphones, tablets, and notebooks to work with them or using

208 Part Two Information Technology Infrastructure

in the immediate future. Khan notes that the hospi- tality industry and many others still want employees to use corporate-owned devices for any laptop, tab- let, or smartphone requiring access to the corporate network. His business has sensitive information and needs that level of control. Although the hotel might possibly save money with BYOD, it’s ultimately all about productivity.

Sources: “Swiss Re Chooses MobileIron ‘Bring Your Own Device’ Technology,” www.mobileiron.com, accessed March 9, 2018; “5 BYOD Management Case Studies,” Sunviewsoftware.com, ac- cessed March 9, 2018; Stasmayer Incorporated, “The ‘Bring Your Own Device’ Trend: Is It Worth It?” www.stasmayer.com, accessed March 10, 2018; Lisa Phifer, “The Challenges of a Bring Your Own Device (BYOD) Policy,” Simple MDM, January 5, 2017; Jonathan Crowl, “The Latest BYOD Trends and Predictions, from Mobile Focus to Endpoint Management.” Mobile Business Insights, August 14, 2017; Ryan Patrick, “Is a BYOD Strategy Best for Business?” IT World Canada, March 22, 2016; Linda Gimmeson, “3 Companies Showing Success With BYOD,” Toolbox.com, July 9, 2015; Alan F., “Open Signal: 24,093 Unique and Different Android-Powered Devices Are Available,” Phonearena.com, August 5, 2015.

CASE STUDY QUESTIONS 5-14 What are the advantages and disadvantages of

allowing employees to use their personal mo- bile devices for work?

5-15 What management, organization, and technol- ogy factors should be addressed when deciding whether to allow employees to use their per- sonal mobile devices for work?

5-16 Evaluate how the companies described in this case study dealt with the challenges of BYOD.

5-17 Allowing employees to use their own smart- phones for work will save the company money. Do you agree? Why or why not?

company-issued devices. The company has a well- developed BYOD policy. Venafi’s IT department does not support employees’ hardware devices because it would be too difficult to handle all the different mobile devices and software available to consumers. That means employees are responsible for trouble- shooting and repairs of their personal equipment. However, Venafi does ensure that each device is se- curely connected to the corporate network.

According to Tammy Moskites, Venafi CISO and CIO, the biggest challenge in defining a BYOD policy that leaves everyone satisfied has been balanc- ing risk with flexibility. Although Venafi has given employees the choice of using their own mobile devices, it has also written contracts with language describing the terms and conditions for bringing one’s own device into work, including the ability to remove company data from the device if needed.

Many corporate BYOD policies restrict access to time-wasting sites like Facebook, YouTube, or Twitter. But Venafi management believes that instead of resorting to measures like blocking YouTube or Facebook and forbidding the use of mobile phones, companies should focus more on performance. As long as the employees are motivated and performing well, they shouldn’t be subjected to unnecessary re- strictions. Employees typically don’t understand the implications of BYOD and the dangers of lax security. Venafi’s IT department tries to educate employees about realities of BYOD and gives them the power to use their devices responsibly.

Iftekhar Khan, IT director at Toronto’s Chelsea Hotel, remains less sanguine. He believes BYOD might work for his company down the road but not

MyLab MIS Go to the Assignments section of MyLab MIS to complete these writing exercises.

5-18 What are the distinguishing characteristics of cloud computing, and what are the three types of cloud services?

5-19 What is the total cost of ownership of technology assets, and what are its cost components?

Chapter 5 IT Infrastructure and Emerging Technologies 209

Chapter 5 References Amazon Web Services. “Overview of Amazon Web Services.” (April

2017). Benitez, Jose, Gautam Ray, and Jörg Henseler. “Impact of Informa-

tion Technology Infrastructure Flexibility on Mergers and Acquisitions.” MIS Quarterly 42 No. 1 (March 2018).

Butler, Brandon. “Battle of the Clouds: Amazon Web Services vs. Microsoft Azure vs. Google Cloud Platform.” Network World (February 22, 2017).

Carr, Nicholas. The Big Switch. New York: Norton (2008). Choi, Jae, Derek L. Nazareth, and Hemant K. Jain. “Implementing

Service-Oriented Architecture in Organizations.” Journal of Management Information Systems 26, No. 4 (Spring 2010).

Cisco Systems. “Cisco Global Cloud Index: Forecast and Methodol- ogy, 2016–2021 White Paper.” (February 1, 2018).

David, Julie Smith, David Schuff, and Robert St. Louis. “Managing Your IT Total Cost of Ownership.” Communications of the ACM 45, No. 1 (January 2002).

Elumalai, Arul, Kara Sprague, Sid Tandon, and Lareina Yee. “Ten Trends Redefining Enterprise IT Infrastructure.” McKinsey & Company (November 2017).

Existek. “Offshore Outsourcing: 3 Examples of Successful IT Out- sourcing.” (June 22, 2017).

Flamm, Kenneth. “Measuring Moore’s Law: Evidence from Price, Cost, and Quality Indexes.” University of Texas at Austin Preliminary Draft (2017).

Flinders, Karl. “Ofcom Outsources IT Management to Indian Ser- vices Supplier NIIT.” Computer Weekly (January 12, 2016).

Follow, Jaewon Kang. “IBM Bets on Next-Gen Technologies as it Tries to Stave Off Rivals.” TheStreet.com (May 5, 2016).

Gartner, Inc. “Gartner Forecasts Worldwide Public Cloud Services Revenue to Reach $260 Billion in 2017.” (October 12, 2017).

___________. “Gartner Says Global IT Spending to Reach $3.7 Tril- lion in 2018.” (January 18, 2018).

Guo, Zhiling, and Dan Ma. “A Model of Competition Between Per- petual Software and Software as a Service.” MIS Quarterly 42 No. 1 (March 2018).

International Data Corporation. “Worldwide Public Cloud Services Spending Forecast to Double by 2019, According to IDC.” (January 21, 2016).

Internet World Stats. “World Internet Usage and Population Statis- tics.” Internetworldstats.com, accessed March 15, 2018.

Kauffman, Robert J., and Julianna Tsai. “The Unified Procure- ment Strategy for Enterprise Software: A Test of the ‘Move to the Middle’ Hypothesis.” Journal of Management Information Systems 26, No. 2 (Fall 2009).

Letschin, Michael. “Six Trends That Will Change How You Think About Data Storage.” Information Management (February 8, 2016).

Li, Shengli, Hsing Kenneth Cheng, Yang Duan, and Yu-Chen Yang. “A Study of Enterprise Software Licensing Mod- els.” Journal of Management Information Systems 34 No. 1 (2017).

Loten, Angus. “Rush to the Cloud Creates Risk of Overspending.” Wall Street Journal (July 25, 2018).

Lyman, Peter, and Hal R. Varian. “How Much Information 2003?” University of California at Berkeley School of Information Management and Systems (2003).

Markoff, John. “Moore’s Law Running Out of Room, Tech Looks for a Successor.” New York Times (May 4, 2016).

Mearian, Lucas. “Data Storage Goes from $1M to 2 Cents Per Giga- byte.” Computerworld (March 23, 2017).

Mell, Peter, and Tim Grance. “The NIST Definition of Cloud Com- puting.” Version 15. NIST (October 17, 2009).

Metz, Cade. “Chips off the Old Block: Computers Are Taking Design Cues from Human Brains.” New York Times (September 16, 2017).

Moore, Gordon. “Cramming More Components Onto Integrated Circuits,” Electronics 38, No. 8 (April 19, 1965).

Netmarketshare. “Desktop Operating System Market Share.” www.netmarketshare.com, accessed March 10, 2018.

Retana, German F., Chris Forman, Sridhar Narasimhan, Marius Florin Niculescu, and D. J. Wu. “Technology Support and Post-Adoption IT Service Use: Evidence from the Cloud.” MIS Quarterly 42, No. 3 (September 2018).

Schuff, David, and Robert St. Louis. “Centralization vs. Decentral- ization of Application Software.” Communications of the ACM 44, No. 6 (June 2001).

Song, Peijian, Ling Xue, Arun Rai, and Cheng Zha. “The Ecosys- tem of Software Platform: A Study of Asymmetric Cross-Side Network Effects and Platform Governance.” MIS Quarterly 42 No. 1 (March 2018).

Stango, Victor. “The Economics of Standards Wars.” Review of Net- work Economics 3, Issue 1 (March 2004).

Susarla, Anjana, Anitesh Barua, and Andrew B. Whinston. “A Transaction Cost Perspective of the ‘Software as a Service’ Business Model.” Journal of Management Information Systems 26, No. 2 (Fall 2009).

Taft, Darryl K. “Application Development: Java Death De- bunked: 10 Reasons Why It’s Still Hot.” eWeek (February 22, 2012).

Uotila, Juha, Thomas Keil, and Markku Maula. “Supply-Side Network Effects and the Development of Information Technology Standards.” MIS Quarterly 41 No. 4 (December 2017).

Weitzel, Tim. Economics of Standards in Information Networks. Hei- delberg, New York: Physica-Verlag (2004).

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MyLab MIS Discussion Questions: 6-5, 6-6, 6-7; Hands-on MIS Projects 6-8, 6-9, 6-10, 6-11; Writing Assignments: 6-17, 6-18; eText with Conceptual Animations

CHAPTER CASES Data Management Helps the Charlotte

Hornets Learn More About Their Fans Kraft Heinz Finds a New Recipe for Analyzing

Its Data Databases Where the Data Aren’t There How Reliable Is Big Data?

VIDEO CASES Dubuque Uses Cloud Computing and

Sensors to Build a Smarter City Brooks Brothers Closes In on Omnichannel

Retail Maruti Suzuki Business Intelligence and

Enterprise Databases

LEARNING OBJECTIVES After reading this chapter, you will be able to answer the following questions:

6-1 What are the problems of managing data resources in a traditional file environment?

6-2 What are the major capabilities of database management systems (DBMS), and why is a relational DBMS so powerful?

6-3 What are the principal tools and technologies for accessing information from databases to improve business performance and decision making?

6-4 Why are information policy, data administration, and data quality assurance essential for managing the firm’s data resources?

6-5 How will MIS help my career?

Foundations of Business Intelligence: Databases and Information Management6CHAPTER

211

The NBA’s Charlotte Hornets have millions of fans, but until recently they didn’t know very much about them. The Charlotte, North Carolina–based basketball team had many millions of records of fan data—online ticket and team gear purchases, food and beverage purchases at games, and com- ments about the team on social media. Every time a fan performs one of these actions, more data about that fan are created. Three million records of food and beverage purchase transactions are generated during each Hornets game. There was too much unorganized customer data for decision makers to digest.

All of this accumulating data, which came from many different sources, started to overtax the team’s Microsoft Dynamics customer relationship management system. There were 12 to 15 differ- ent sources of data on Hornets fan behavior and they were maintained in separate data repositories that could not communicate with each other. It be- came increasingly difficult for the Hornets to un- derstand their fans and how they were interacting with the organization.

Five years ago, Hornets management decided to improve its approach to data management. The team needed technology that could easily main- tain data from many different sources and 12 different vendors and it needed to be able to combine and integrate what amounted to 12 different profiles on each fan into a single profile. This would enable the Hornets to understand each fan’s behavior in much greater detail and offer them a more personalized experience.

Under the leadership of Chris Zeppenfeld, the Hornets’ senior director of business intelligence, the team implemented a data warehouse that would con- solidate all of the Hornets’ customer data from its various data sources in a single location where the data could be easily accessed and analyzed by busi- ness users. The warehouse was based on a SAP HANA database optimized to process very large quantities of data at ultra-high speed and included Phizzle Fan Tracker™ software to cleanse, streamline, and combine millions of fan re- cords to create a single profile for each Hornets fan. Phizzle Fan Tracker is a fan engagement platform designed to consolidate, analyze, and act on multiple data sources. The platform’s data aggregation capabilities, innovative data vi- sualization tools, and social listening solutions provide sports properties and brands the capability to gather and analyze digital, social, and real-world fan engagements. Fan Tracker works with the SAP HANA database to consolidate

Data Management Helps the Charlotte Hornets Learn More About Their Fans

© Oleksii Sidorov/Shutterstock

212 Part Two Information Technology Infrastructure

customer profiles, analyze and act on real-time online behavior, and consoli- date all existing data sources to uniquely identify fan records. The solution pro- vides a unified overview and deeper understanding of each fan, allowing clubs to offer their fans a more personalized experience.

By using Fan Tracker and a unified data warehouse, the Hornets have com- piled and synthesized 25 million fan and consumer interactions, saving over $1.5 million in consulting expenses. They now have a real-time data profile for every one of their 1.5 million fans, which includes up-to-the minute behavioral data on each fan from third-party applications as well as the Hornets’ own sources. Each profile reveals detailed insights into a fan’s behavior including sentiment, purchase history, interactions, and fan value across multiple points of contact. Zeppenfeld believes that better fan data management has helped the team rank among the top five NBA franchises for new full season ticket sales each year.

Sources: Jim O’Donnell, “Charlotte Hornets Use Phizzle Built on HANA to Analyze Fan Behavior,” SearchSAPtechtarget.com, February 11, 2018; “NBA Team Charlotte Hornets/SAP Case Study,” www.phizzle.com, accessed February 12, 2018; and Mark J. Burns, “Why The Charlotte Hornets Are Using Phizzle To Streamline Their Data Warehouse,” Sport Techie, September 2016.

The experience of the Charlotte Hornets illustrates the importance of data management. Business performance depends on what a firm can or can- not do with its data. The Charlotte Hornets NBA basketball team was a thriv- ing business, but both operational efficiency and management decision making were hampered by fragmented data stored in multiple locations that were dif- ficult to access and analyze. How businesses store, organize, and manage their data has an enormous impact on organizational effectiveness.

The chapter-opening diagram calls attention to important points raised by this case and this chapter. The Charlotte Hornets had accumulated very large quantities of fan data from many different sources. Marketing campaigns and personalized offers to fans were not as effective as they could have been be- cause it was so difficult to assemble and understand the data required to obtain a detailed understanding of each customer. The solution was to combine the Hornets’ customer data from all sources in a data warehouse that provided a single source of data for reporting and analysis and use Fan Tracker software to consolidate disparate pieces of customer data into a single profile for each cus- tomer. The Hornets had to reorganize their data into a standard company-wide format; establish rules, responsibilities, and procedures for accessing and using the data; and provide tools for making the data accessible to users for querying and reporting.

The data warehouse integrated company data from all of its disparate sources into a single comprehensive database that could be queried directly. The data were reconciled to prevent multiple profiles on the same customer. The so- lution improved customer marketing, sales, and service while reducing costs. The Hornets increased their ability to quickly analyze very large quantities of data by using SAP HANA high-speed database technology.

The data warehouse boosted operational efficiency and decision making by making more comprehensive and accurate customer data available and by

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 213

• Very large volume of data • Data fragmented in isolated

databases and files

• Outdated data management technology

• Consolidate and standardize data

• Revise data access rules and procedures

• Consolidate customer profiles • Accelerate decision making • Improve customer analysis

• Reduce costs • Increase customer service

• Increase sales• SAP HANA • Data warehouse • FanTracker

• Centralize data management

• Select data management technology

Business Solutions

Management

Organization

Customer Data Warehouse

Technology

Information System

Business Challenges

making it easier to access all the business’s data on each customer. By help- ing the Hornets understand their own customers better, the solution increased opportunities for selling to customers as well as the effectiveness of marketing and sales campaigns.

Here are some questions to think about: What was the business impact of the Hornets’ data management problems? How did better use of the Hornets’ cus- tomer data improve operational efficiency and management decision making?

6-1 What are the problems of managing data resources in a traditional file environment?

An effective information system provides users with accurate, timely, and relevant information. Accurate information is free of errors. Information is timely when it is available to decision makers when it is needed. Information is relevant when it is useful and appropriate for the types of work and decisions that require it.

You might be surprised to learn that many businesses don’t have timely, ac- curate, or relevant information because the data in their information systems have been poorly organized and maintained. That’s why data management is so essential. To understand the problem, let’s look at how information systems arrange data in computer files and traditional methods of file management.

File Organization Terms and Concepts A computer system organizes data in a hierarchy that starts with bits and bytes and progresses to fields, records, files, and databases (see Figure 6.1). A bit rep- resents the smallest unit of data a computer can handle. A group of bits, called a byte, represents a single character, which can be a letter, a number, or another symbol. A grouping of characters into a word, a group of words, or a complete number (such as a person’s name or age) is called a field. A group of related fields, such as the student’s name, the course taken, the date, and the grade, comprises a record; a group of records of the same type is called a file.

214 Part Two Information Technology Infrastructure

For example, the records in Figure 6.1 could constitute a student course file. A group of related files makes up a database. The student course file illustrated in Figure 6.1 could be grouped with files on students’ personal histories and financial backgrounds to create a student database.

A record describes an entity. An entity is a person, place, thing, or event on which we store and maintain information. Each characteristic or quality describing a particular entity is called an attribute. For example, Student_ID, Course, Date, and Grade are attributes of the entity COURSE. The specific val- ues that these attributes can have are found in the fields of the record describ- ing the entity COURSE.

Problems with the Traditional File Environment In most organizations, systems tended to grow independently without a compa- nywide plan. Accounting, finance, manufacturing, human resources, and sales and marketing all developed their own systems and data files. Figure 6.2 illus- trates the traditional approach to information processing.

FIGURE 6.1 THE DATA HIERARCHY A computer system organizes data in a hierarchy that starts with the bit, which repre- sents either a 0 or a 1. Bits can be grouped to form a byte to represent one character, number, or symbol. Bytes can be grouped to form a field, and related fields can be grouped to form a record. Related records can be collected to form a file, and related files can be organized into a database.

0100 1001 (Letter I in ASCII)

0

IS 101 (Course field)

Student_ID Course Date Grade

39044 IS 101 F18 B+

Bit

Byte

Field

Record

File

Database

Student_ID Course Date Grade

39044 IS 101 F18 B+

59432 IS 101 F18 A

64029 IS 101 F18 C

COURSE

COURSE File

FINANCIAL File

PERSONAL File

Student Database

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 215

Each application, of course, required its own files and its own computer program to operate. For example, the human resources functional area might have a personnel master file, a payroll file, a medical insurance file, a pen- sion file, a mailing list file, and so forth, until tens, perhaps hundreds, of files and programs existed. In the company as a whole, this process led to multiple master files created, maintained, and operated by separate divisions or depart- ments. As this process goes on for 5 or 10 years, the organization is saddled with hundreds of programs and applications that are very difficult to maintain and manage. The resulting problems are data redundancy and inconsistency, program-data dependence, inflexibility, poor data security, and an inability to share data among applications.

Data Redundancy and Inconsistency Data redundancy is the presence of duplicate data in multiple data files so that the same data are stored in more than one place or location. Data redun- dancy occurs when different groups in an organization independently collect the same piece of data and store it independently of each other. Data redun- dancy wastes storage resources and also leads to data inconsistency, where the same attribute may have different values. For example, in instances of the entity COURSE illustrated in Figure 6.1, the Date may be updated in some sys- tems but not in others. The same attribute, Student_ID, might also have dif- ferent names in different systems throughout the organization. Some systems might use Student_ID and others might use ID, for example.

Additional confusion can result from using different coding systems to repre- sent values for an attribute. For instance, the sales, inventory, and manufacturing systems of a clothing retailer might use different codes to represent clothing size.

FIGURE 6.2 TRADITIONAL FILE PROCESSING The use of a traditional approach to file processing encourages each functional area in a corporation to develop specialized applications. Each application requires a unique data file that is likely to be a subset of the master file. These subsets of the master file lead to data redundancy and inconsistency, processing inflexibility, and wasted storage resources.

Users

Users

Users

Users

Application program 4

A B C D

A B D E

A B E G

A E F G

ACCOUNTING AND FINANCE

HUMAN RESOURCES

SALES AND MARKETING

MANUFACTURING

Derivative files

Master file Data elements

A to Z

Application program 3

Application program 1

Application program 2

216 Part Two Information Technology Infrastructure

One system might represent clothing size as “extra large,” whereas another might use the code “XL” for the same purpose. The resulting confusion would make it difficult for companies to create customer relationship management, supply chain management, or enterprise systems that integrate data from different sources.

Program-Data Dependence Program-data dependence refers to the coupling of data stored in files and the specific programs required to update and maintain those files such that changes in programs require changes to the data. Every traditional computer program has to describe the location and nature of the data with which it works. In a traditional file environment, any change in a software program could require a change in the data accessed by that program. One program might be modified from a five-digit to a nine-digit ZIP code. If the original data file were changed from five-digit to nine-digit ZIP codes, then other programs that required the five-digit ZIP code would no longer work properly. Such changes could cost mil- lions of dollars to implement properly.

Lack of Flexibility A traditional file system can deliver routine scheduled reports after extensive programming efforts, but it cannot deliver ad hoc reports or respond to unantic- ipated information requirements in a timely fashion. The information required by ad hoc requests is somewhere in the system but may be too expensive to retrieve. Several programmers might have to work for weeks to put together the required data items in a new file.

Poor Security Because there is little control or management of data, access to and dissemina- tion of information may be out of control. Management might have no way of knowing who is accessing or even making changes to the organization’s data.

Lack of Data Sharing and Availability Because pieces of information in different files and different parts of the organiza- tion cannot be related to one another, it is virtually impossible for information to be shared or accessed in a timely manner. Information cannot flow freely across different functional areas or different parts of the organization. If users find differ- ent values for the same piece of information in two different systems, they may not want to use these systems because they cannot trust the accuracy of their data.

6-2 What are the major capabilities of database management systems (DBMS), and why is a relational DBMS so powerful?

Database technology cuts through many of the problems of traditional file organization. A more rigorous definition of a database is a collection of data organized to serve many applications efficiently by centralizing the data and controlling redundant data. Rather than storing data in separate files for each application, data appear to users as being stored in only one location. A single database services multiple applications. For example, instead of a corporation storing employee data in separate information systems and separate files for personnel, payroll, and benefits, the corporation could create a single common human resources database (see Figure 6.3).

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 217

Database Management Systems A database management system (DBMS) is software that enables an orga- nization to centralize data, manage them efficiently, and provide access to the stored data by application programs. The DBMS acts as an interface between application programs and the physical data files. When the application program calls for a data item, such as gross pay, the DBMS finds this item in the database and presents it to the application program. Using traditional data files, the pro- grammer would have to specify the size and format of each data element used in the program and then tell the computer where they were located.

The DBMS relieves the programmer or end user from the task of understand- ing where and how the data are actually stored by separating the logical and physical views of the data. The logical view presents data, as they would be perceived by end users or business specialists, whereas the physical view shows how data are actually organized and structured on physical storage media.

The database management software makes the physical database available for different logical views required by users. For example, for the human re- sources database illustrated in Figure 6.3, a benefits specialist might require a view consisting of the employee’s name, social security number, and health insurance coverage. A payroll department member might need data such as the employee’s name, social security number, gross pay, and net pay. The data for all these views are stored in a single database, where they can be more easily managed by the organization.

How a DBMS Solves the Problems of the Traditional File Environment A DBMS reduces data redundancy and inconsistency by minimizing isolated files in which the same data are repeated. The DBMS may not enable the organization to eliminate data redundancy entirely, but it can help control redundancy. Even if the organization maintains some redundant data, using a DBMS eliminates data

FIGURE 6.3 HUMAN RESOURCES DATABASE WITH MULTIPLE VIEWS A single human resources database provides many different views of data, depending on the information requirements of the user. Illustrated here are two possible views, one of interest to a benefits specialist and one of interest to a member of the company’s payroll department.

Database Management

System

Name SSN Health_Care

Name SSN Gross_Pay Net_Pay

Employee_ID Name SSN Position Date_Hired Gross_Pay Net_Pay Life_Insurance Pension_Benefit Health_Care

Human Resources Database

Benefits View

Payroll View

218 Part Two Information Technology Infrastructure

inconsistency because the DBMS can help the organization ensure that every oc- currence of redundant data has the same values. The DBMS uncouples programs and data, enabling data to stand on their own. The description of the data used by the program does not have to be specified in detail each time a different program is written. Access and availability of information will be increased and program development and maintenance costs reduced because users and programmers can perform ad hoc queries of the database for many simple applications with- out having to write complicated programs. The DBMS enables the organization to centrally manage data, their use, and security. Data sharing throughout the organization is easier because the data are presented to users as being in a single location rather than fragmented in many different systems and files.

Relational DBMS Contemporary DBMS use different database models to keep track of enti- ties, attributes, and relationships. The most popular type of DBMS today for PCs as well as for larger computers and mainframes is the relational DBMS. Relational databases represent data as two-dimensional tables (called relations). Tables may be referred to as files. Each table contains data on an entity and its attributes. Microsoft Access is a relational DBMS for desktop systems, whereas DB2, Oracle Database, and Microsoft SQL Server are relational DBMS for large mainframes and midrange computers. MySQL is a popular open source DBMS.

Let’s look at how a relational database organizes data about suppliers and parts (see Figure 6.4). The database has a separate table for the entity SUPPLIER and a table for the entity PART. Each table consists of a grid of columns and rows of data. Each individual element of data for each entity is stored as a separate field, and each field represents an attribute for that entity. Fields in a relational database are also called columns. For the entity SUPPLIER, the sup- plier identification number, name, street, city, state, and ZIP code are stored as separate fields within the SUPPLIER table and each field represents an attribute for the entity SUPPLIER.

The actual information about a single supplier that resides in a table is called a row. Rows are commonly referred to as records, or in very technical terms, as tuples. Data for the entity PART have their own separate table.

The field for Supplier_Number in the SUPPLIER table uniquely identifies each record so that the record can be retrieved, updated, or sorted. It is called a key field. Each table in a relational database has one field that is designated as its primary key. This key field is the unique identifier for all the information in any row of the table and this primary key cannot be duplicated. Supplier_Number is the primary key for the SUPPLIER table and Part_Number is the primary key for the PART table. Note that Supplier_Number appears in both the SUPPLIER and PART tables. In the SUPPLIER table, Supplier_Number is the primary key. When the field Supplier_Number appears in the PART table, it is called a foreign key and is essentially a lookup field to look up data about the supplier of a specific part.

Operations of a Relational DBMS Relational database tables can be combined easily to deliver data required by users, provided that any two tables share a common data element. Suppose we wanted to find in this database the names of suppliers who could provide us with part number 137 or part number 150. We would need information from two tables: the SUPPLIER table and the PART table. Note that these two files have a shared data element: Supplier_Number.

In a relational database, three basic operations, as shown in Figure 6.5, are used to develop useful sets of data: select, join, and project. The select

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 219

operation creates a subset consisting of all records in the file that meet stated criteria. Select creates, in other words, a subset of rows that meet certain cri- teria. In our example, we want to select records (rows) from the PART table where the Part_Number equals 137 or 150. The join operation combines re- lational tables to provide the user with more information than is available in individual tables. In our example, we want to join the now-shortened PART table (only parts 137 or 150 will be presented) and the SUPPLIER table into a single new table.

The project operation creates a subset consisting of columns in a table, permit- ting the user to create new tables that contain only the information required. In our example, we want to extract from the new table only the following columns: Part_Number, Part_Name, Supplier_Number, and Supplier_Name.

Capabilities of Database Management Systems A DBMS includes capabilities and tools for organizing, managing, and accessing the data in the database. The most important are its data definition language, data dictionary, and data manipulation language.

FIGURE 6.4 RELATIONAL DATABASE TABLES A relational database organizes data in the form of two-dimensional tables. Illustrated here are tables for the entities SUPPLIER and PART showing how they represent each entity and its attributes. Supplier_Number is a primary key for the SUPPLIER table and a foreign key for the PART table.

Columns (Attributes, Fields)

Rows (Records, Tuples)

SUPPLIER

Key Field (Primary Key)

OH

OH

KY

NY

Supplier_State

Dayton

Cleveland

Lexington

Rochester

Supplier_City

74 5th Avenue

1277 Gandolly Street

8233 Micklin Street

4315 Mill Drive

Supplier_Street

CBM Inc.

B. R. Molds

Jackson Composites

Bryant Corporation

Supplier_Name

8259

8261

8263

8444

Supplier_Number

45220

49345

56723

11344

Supplier_Zip

PART

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8259

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8259

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31.00

54.00

10.00

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Door latch

844412.00Side mirror

82636.00Door molding

Door lock

Compressor

Door handle

Part_Name

137

145

152

150

155

178

Part_Number

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FIGURE 6.5 THE THREE BASIC OPERATIONS OF A RELATIONAL DBMS The select, join, and project operations enable data from two different tables to be combined and only selected attributes to be displayed.

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Chapter 6 Foundations of Business Intelligence: Databases and Information Management 221

DBMS have a data definition capability to specify the structure of the con- tent of the database. It would be used to create database tables and to define the characteristics of the fields in each table. This information about the database would be documented in a data dictionary. A data dictionary is an automated or manual file that stores definitions of data elements and their characteristics.

Microsoft Access has a rudimentary data dictionary capability that displays in- formation about the name, description, size, type, format, and other properties of each field in a table (see Figure 6.6). Data dictionaries for large corporate databases may capture additional information, such as usage, ownership (who in the orga- nization is responsible for maintaining the data), authorization, security, and the individuals, business functions, programs, and reports that use each data element.

Querying and Reporting DBMS includes tools for accessing and manipulating information in databases. Most DBMS have a specialized language called a data manipulation language that is used to add, change, delete, and retrieve the data in the database. This language contains commands that permit end users and programming special- ists to extract data from the database to satisfy information requests and de- velop applications. The most prominent data manipulation language today is Structured Query Language, or SQL. Figure 6.7 illustrates the SQL query

FIGURE 6.6 ACCESS DATA DICTIONARY FEATURES Microsoft Access has a rudimentary data dictionary capability that displays information about the size, format, and other characteristics of each field in a database. Displayed here is the information maintained in the SUPPLIER table. The small key icon to the left of Supplier_Number indicates that it is a key field. Courtesy of Microsoft Corporation

FIGURE 6.7 EXAMPLE OF AN SQL QUERY Illustrated here are the SQL statements for a query to select suppliers for parts 137 or 150. They produce a list with the same results as Figure 6.5.

SELECT PART.Part_Number, PART.Part_Name, SUPPLIER.Supplier_Number, SUPPLIER.Supplier_Name FROM PART, SUPPLIER WHERE PART.Supplier_Number = SUPPLIER.Supplier_Number AND Part_Number = 137 OR Part_Number = 150;

222 Part Two Information Technology Infrastructure

that would produce the new resultant table in Figure 6.5. You can find out more about how to perform SQL queries in our Learning Tracks for this chapter.

Users of DBMS for large and midrange computers, such as DB2, Oracle, or SQL Server, would employ SQL to retrieve information they needed from the database. Microsoft Access also uses SQL, but it provides its own set of user- friendly tools for querying databases and for organizing data from databases into more polished reports.

In Microsoft Access, you will find features that enable users to create queries by identifying the tables and fields they want and the results and then selecting the rows from the database that meet particular criteria. These actions in turn are translated into SQL commands. Figure 6.8 illustrates how the same query as the SQL query to select parts and suppliers would be constructed using the Microsoft Access query-building tools.

Microsoft Access and other DBMS include capabilities for report generation so that the data of interest can be displayed in a more structured and polished format than would be possible just by querying. Crystal Reports is a popular report generator for large corporate DBMS, although it can also be used with Access. Access also has capabilities for developing desktop system applications. These include tools for creating data entry screens, reports, and developing the logic for processing transactions.

Designing Databases To create a database, you must understand the relationships among the data, the type of data that will be maintained in the database, how the data will be used, and how the organization will need to change to manage data from a companywide perspective. The database requires both a conceptual design and a physical design. The conceptual, or logical, design of a database is an abstract model of the database from a business perspective, whereas the physical design shows how the database is actually arranged on direct-access storage devices.

FIGURE 6.8 AN ACCESS QUERY Illustrated here is how the query in Figure 6.7 would be constructed using Microsoft Access query-building tools. It shows the tables, fields, and selection criteria used for the query. Courtesy of Microsoft Corporation

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 223

Normalization and Entity-Relationship Diagrams The conceptual database design describes how the data elements in the da- tabase are to be grouped. The design process identifies relationships among data elements and the most efficient way of grouping data elements together to meet business information requirements. The process also identifies redundant data elements and the groupings of data elements required for specific appli- cation programs. Groups of data are organized, refined, and streamlined until an overall logical view of the relationships among all the data in the database emerges.

To use a relational database model effectively, complex groupings of data must be streamlined to minimize redundant data elements and awkward many- to-many relationships. The process of creating small, stable, yet flexible and adaptive data structures from complex groups of data is called normalization. Figures 6.9 and 6.10 illustrate this process.

In the particular business modeled here, an order can have more than one part, but each part is provided by only one supplier. If we build a relation called ORDER with all the fields included here, we would have to repeat the name and address of the supplier for every part on the order, even though the order is for parts from a single supplier. This relationship contains what are called repeat- ing data groups because there can be many parts on a single order to a given supplier. A more efficient way to arrange the data is to break down ORDER into smaller relations, each of which describes a single entity. If we go step by step and normalize the relation ORDER, we emerge with the relations illustrated in Figure 6.10. You can find out more about normalization, entity-relationship dia- gramming, and database design in the Learning Tracks for this chapter.

FIGURE 6.9 AN UNNORMALIZED RELATION FOR ORDER An unnormalized relation contains repeating groups. For example, there can be many parts and suppliers for each order. There is only a one-to-one correspondence between Order_Number and Order_Date.

Unit_ Price

Part_ Number

Part_ Name

Part_ Quantity

Order_ Number

Order_ Date

Supplier_ Number

Supplier_ Name

Supplier_ Street

Supplier_ City

Supplier_ State

Supplier_ Zip

ORDER (Before Normalization)

FIGURE 6.10 NORMALIZED TABLES CREATED FROM ORDER After normalization, the original relation ORDER has been broken down into four smaller relations. The relation ORDER is left with only two attributes, and the relation LINE_ITEM has a combined, or concatenated, key consisting of Order_ Number and Part_Number.

Part_ Number

Part_ Name

Unit_ Price

Supplier_ Number

Order_ Number

Order_ Date

Supplier_ Street

Supplier_ City

Supplier_ State

Supplier_ Zip

PART LINE ITEM

SUPPLIER ORDER

Key Key

Supplier_ Number

Supplier_ Name

Key Key

Part_ Number

Part_ Quantity

Order_ Number

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Relational database systems try to enforce referential integrity rules to en- sure that relationships between coupled tables remain consistent. When one table has a foreign key that points to another table, you may not add a record to the table with the foreign key unless there is a corresponding record in the linked table. In the database we examined earlier in this chapter, the foreign key Supplier_Number links the PART table to the SUPPLIER table. We may not add a new record to the PART table for a part with Supplier_Number 8266 unless there is a corresponding record in the SUPPLIER table for Supplier_Number 8266. We must also delete the corresponding record in the PART table if we delete the record in the SUPPLIER table for Supplier_Number 8266. In other words, we shouldn’t have parts from nonexistent suppliers!

Database designers document their data model with an entity-relationship diagram, illustrated in Figure 6.11. This diagram illustrates the relationship be- tween the entities SUPPLIER, PART, LINE_ITEM, and ORDER. The boxes rep- resent entities. The lines connecting the boxes represent relationships. A line connecting two entities that ends in two short marks designates a one-to-one relationship. A line connecting two entities that ends with a crow’s foot topped by a short mark indicates a one-to-many relationship. Figure 6.11 shows that one ORDER can contain many LINE_ITEMs. (A PART can be ordered many times and appear many times as a line item in a single order.) Each PART can have only one SUPPLIER, but many PARTs can be provided by the same SUPPLIER.

It can’t be emphasized enough: If the business doesn’t get its data model right, the system won’t be able to serve the business well. The company’s sys- tems will not be as effective as they could be because they’ll have to work with data that may be inaccurate, incomplete, or difficult to retrieve. Understanding the organization’s data and how they should be represented in a database is per- haps the most important lesson you can learn from this course.

For example, Famous Footwear, a shoe store chain with more than 800 loca- tions in 49 states, could not achieve its goal of having “the right style of shoe in the right store for sale at the right price” because its database was not properly designed for rapidly adjusting store inventory. The company had an Oracle relational database running on a midrange computer, but the database was de- signed primarily for producing standard reports for management rather than for reacting to marketplace changes. Management could not obtain precise data on specific items in inventory in each of its stores. The company had to work around this problem by building a new database where the sales and inventory data could be better organized for analysis and inventory management.

Non-relational Databases, Cloud Databases, and Blockchain For more than 30 years, relational database technology has been the gold standard. Cloud computing, unprecedented data volumes, massive work- loads for web services, and the need to store new types of data require

FIGURE 6.11 AN ENTITY-RELATIONSHIP DIAGRAM This diagram shows the relationships between the entities SUPPLIER, PART, LINE_ITEM, and ORDER that might be used to model the database in Figure 6.10.

provides

is supplied by

is ordered

contains

belongs to

includes

ORDERLINE_ITEMPARTSUPPLIER

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 225

database alternatives to the traditional relational model of organizing data in the form of tables, columns, and rows. Companies are turning to “NoSQL” non-relational database technologies for this purpose. Non-relational da- tabase management systems use a more flexible data model and are de- signed for managing large data sets across many distributed machines and for easily scaling up or down. They are useful for accelerating simple queries against large volumes of structured and unstructured data, including web, so- cial media, graphics, and other forms of data that are difficult to analyze with traditional SQL-based tools.

There are several different kinds of NoSQL databases, each with its own technical features and behavior. Oracle NoSQL Database is one example, as is Amazon’s SimpleDB, one of the Amazon Web Services that run in the cloud. SimpleDB provides a simple web services interface to create and store mul- tiple data sets, query data easily, and return the results. There is no need to predefine a formal database structure or change that definition if new data are added later.

MetLife’s MongoDB open source NoSQL database brings together data from more than 70 separate administrative systems, claims systems, and other data sources, including semi-structured and unstructured data, such as images of health records and death certificates. The NoSQL database can handle struc- tured, semi-structured, and unstructured information without requiring te- dious, expensive, and time-consuming database mapping to normalize all data to a rigid schema, as required by relational databases.

Cloud Databases and Distributed Databases Among the services Amazon and other cloud computing vendors provide are relational database engines. Amazon Relational Database Service (Amazon RDS) offers MySQL, Microsoft SQL Server, Oracle Database, PostgreSQL, or Amazon Aurora as database engines. Pricing is based on usage. Oracle has its own Database Cloud Services using its relational Oracle Database, and Microsoft Azure SQL Database is a cloud-based relational database service based on the Microsoft SQL Server DBMS. Cloud-based data management ser- vices have special appeal for web-focused startups or small to medium-sized businesses seeking database capabilities at a lower cost than in-house database products.

Google now offers its Spanner distributed database technology as a cloud service. A distributed database is one that is stored in multiple physical lo- cations. Parts or copies of the database are physically stored in one location and other parts or copies are maintained in other locations. Spanner makes it possible to store information across millions of machines in hundreds of data centers around the globe, with special time-keeping tools to synchronize the data precisely in all of its locations and ensure the data are always consistent. Google uses Spanner to support its various cloud services, including Google Photos, AdWords (Google’s online ad system), and Gmail, and is now making the technology available to other companies that might need such capabilities to run a global business.

Blockchain Blockchain is a distributed database technology that enables firms and organi- zations to create and verify transactions on a network nearly instantaneously without a central authority. The system stores transactions as a distributed led- ger among a network of computers The information held in the database is continually reconciled by the computers in the network.

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The blockchain maintains a continuously growing list of records called blocks. Each block contains a timestamp and link to a previous block. Once a block of data is recorded on the blockchain ledger, it cannot be altered retroac- tively. When someone wants to add a transaction, participants in the network (all of whom have copies of the existing blockchain) run algorithms to evalu- ate and verify the proposed transaction. Legitimate changes to the ledger are recorded across the blockchain in a matter of seconds or minutes and records are protected through cryptography. What makes a blockchain system possible and attractive to business firms is encryption and authentication of the actors and participating firms, which ensures that only legitimate actors can enter information, and only validated transactions are accepted. Once recorded, the transaction cannot be changed. Figure 6.12 illustrates how blockchain works for fulfilling an order.

There are many large benefits to firms using blockchain databases. Blockchain networks radically reduce the cost of verifying users, validating transactions, and the risks of storing and processing transaction information across thousands of firms. Instead of thousands of firms building their own pri- vate transaction systems, then integrating them with suppliers, shippers, and financial institution systems, blockchain can provide a single, simple, low-cost transaction system for participating firms. Standardization of recording transac- tions is aided through the use of smart contracts. Smart contracts are computer programs that implement the rules governing transactions between firms, e.g., what is the price of products, how will they be shipped, when will the transac- tion be completed, who will finance the transaction, what are financing terms, and the like.

The simplicity and security that blockchain offers has made it attractive for storing and securing financial transactions, supply chain transactions, medi- cal records, and other types of data. Blockchain is a foundation technology for Bitcoin, Ethereum, and other cryptocurrencies. Chapter 8 provides more detail on securing transactions with blockchain.

FIGURE 6.12 HOW BLOCKCHAIN WORKS A blockchain system is a distributed database that records transactions in a peer-to-peer network of computers

An order is submitted by a user or customer

User verification

Transaction validation

The transaction is broadcast to a P2P network of computers

The transaction is validated by others in the network

The block is added to the chain of transactions for this user

Production, Warehouse, Logistics add additional blocks

The order is fulfilled

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 227

6-3 What are the principal tools and technologies for accessing information from databases to improve business performance and decision making?

Businesses use their databases to keep track of basic transactions, such as pay- ing suppliers, processing orders, keeping track of customers, and paying em- ployees. But they also need databases to provide information that will help the company run the business more efficiently and help managers and employees make better decisions. If a company wants to know which product is the most popular or who is its most profitable customer, the answer lies in the data.

The Challenge of Big Data Most data collected by organizations used to be transaction data that could eas- ily fit into rows and columns of relational database management systems. We are now witnessing an explosion of data from web traffic, email messages, and social media content (tweets, status messages), as well as machine-generated data from sensors (used in smart meters, manufacturing sensors, and electrical meters) or from electronic trading systems. These data may be unstructured or semi-structured and thus not suitable for relational database products that or- ganize data in the form of columns and rows. We now use the term big data to describe these data sets with volumes so huge that they are beyond the ability of typical DBMS to capture, store, and analyze.

Big data is often characterized by the “3Vs”: the extreme volume of data, the wide variety of data types and sources, and the velocity at which data must be processed. Big data doesn’t designate any specific quantity but usually refers to data in the petabyte and exabyte range—in other words, billions to trillions of records, many from different sources. Big data are produced in much larger quantities and much more rapidly than traditional data. For example, a single jet engine is capable of generating 10 terabytes of data in just 30 minutes, and there are more than 25,000 airline flights each day. Twitter generates more than 8 terabytes of data daily. According to the International Data Center (IDC) technology research firm, data are more than doubling every two years, so the amount of data available to organizations is skyrocketing.

Businesses are interested in big data because they can reveal more patterns and interesting relationships than smaller data sets, with the potential to pro- vide new insights into customer behavior, weather patterns, financial market activity, or other phenomena. For example, Shutterstock, the global online image marketplace, stores 24 million images, adding 10,000 more each day. To find ways to optimize the buying experience, Shutterstock analyzes its big data to find out where its website visitors place their cursors and how long they hover over an image before making a purchase. Big data is also finding many uses in the public sector, For example, city governments have been using big data to manage traffic flows and to fight crime.

However, to derive business value from these data, organizations need new technologies and tools capable of managing and analyzing nontraditional data along with their traditional enterprise data. They also need to know what questions to ask of the data and limitations of big data. Capturing, storing, and analyzing big data can be expensive, and information from big data may not necessarily help decision makers. It’s important to have a clear understanding of the problem big data will solve for the business. The chapter-ending case explores these issues.

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Business Intelligence Infrastructure Suppose you wanted concise, reliable information about current operations, trends, and changes across the entire company. If you worked in a large com- pany, the data you need might have to be pieced together from separate sys- tems, such as sales, manufacturing, and accounting, and even from external sources, such as demographic or competitor data. Increasingly, you might need to use big data. A contemporary infrastructure for business intelligence has an array of tools for obtaining useful information from all the different types of data used by businesses today, including semi-structured and unstructured big data in vast quantities. These capabilities include data warehouses and data marts, Hadoop, in-memory computing, and analytical platforms. Some of these capabilities are available as cloud services.

Data Warehouses and Data Marts The traditional tool for analyzing corporate data for the past two decades has been the data warehouse. A data warehouse is a database that stores current and historical data of potential interest to decision makers throughout the com- pany. The data originate in many core operational transaction systems, such as systems for sales, customer accounts, and manufacturing, and may include data from website transactions. The data warehouse extracts current and his- torical data from multiple operational systems inside the organization. These data are combined with data from external sources and transformed by correct- ing inaccurate and incomplete data and restructuring the data for management reporting and analysis before being loaded into the data warehouse.

The data warehouse makes the data available for anyone to access as needed, but the data cannot be altered. A data warehouse system also provides a range of ad hoc and standardized query tools, analytical tools, and graphical reporting facilities.

Companies often build enterprise-wide data warehouses, where a central data warehouse serves the entire organization, or they create smaller, decen- tralized warehouses called data marts. A data mart is a subset of a data ware- house in which a summarized or highly focused portion of the organization’s data is placed in a separate database for a specific population of users. For ex- ample, a company might develop marketing and sales data marts to deal with customer information. Bookseller Barnes & Noble used to maintain a series of data marts—one for point-of-sale data in retail stores, another for college book- store sales, and a third for online sales.

Hadoop Relational DBMS and data warehouse products are not well suited for organiz- ing and analyzing big data or data that do not easily fit into columns and rows used in their data models. For handling unstructured and semi-structured data in vast quantities, as well as structured data, organizations are using Hadoop. Hadoop is an open source software framework managed by the Apache Software Foundation that enables distributed parallel processing of huge amounts of data across inexpensive computers. It breaks a big data problem down into sub- problems, distributes them among up to thousands of inexpensive computer processing nodes, and then combines the result into a smaller data set that is easier to analyze. You’ve probably used Hadoop to find the best airfare on the Internet, get directions to a restaurant, do a search on Google, or connect with a friend on Facebook.

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 229

Hadoop consists of several key services, including the Hadoop Distributed File System (HDFS) for data storage and MapReduce for high-performance parallel data processing. HDFS links together the file systems on the numer- ous nodes in a Hadoop cluster to turn them into one big file system. Hadoop’s MapReduce was inspired by Google’s MapReduce system for breaking down processing of huge data sets and assigning work to the various nodes in a clus- ter. HBase, Hadoop’s non-relational database, provides rapid access to the data stored on HDFS and a transactional platform for running high-scale real-time applications.

Hadoop can process large quantities of any kind of data, including struc- tured transactional data, loosely structured data such as Facebook and Twitter feeds, complex data such as web server log files, and unstructured audio and video data. Hadoop runs on a cluster of inexpensive servers, and processors can be added or removed as needed. Companies use Hadoop for analyzing very large volumes of data as well as for a staging area for unstructured and semi-structured data before they are loaded into a data warehouse. Yahoo uses Hadoop to track users’ behavior so it can modify its home page to fit their in- terests. Life sciences research firm NextBio uses Hadoop and HBase to process data for pharmaceutical companies conducting genomic research. Top database vendors such as IBM, Hewlett-Packard, Oracle, and Microsoft have their own Hadoop software distributions. Other vendors offer tools for moving data into and out of Hadoop or for analyzing data within Hadoop.

In-Memory Computing Another way of facilitating big data analysis is to use in-memory computing, which relies primarily on a computer’s main memory (RAM) for data storage. (Conventional DBMS use disk storage systems.) Users access data stored in system primary memory, thereby eliminating bottlenecks from retrieving and reading data in a traditional, disk-based database and dramatically shortening query response times. In-memory processing makes it possible for very large sets of data, amounting to the size of a data mart or small data warehouse, to reside entirely in memory. Complex business calculations that used to take hours or days are able to be completed within seconds, and this can even be ac- complished using handheld devices.

The previous chapter describes some of the advances in contemporary com- puter hardware technology that make in-memory processing possible, such as powerful high-speed processors, multicore processing, and falling computer memory prices. These technologies help companies optimize the use of mem- ory and accelerate processing performance while lowering costs.

Leading in-memory database products include SAP HANA, Oracle Database In-Memory, and Teradata Intelligent Memory. The chapter-opening case on the Charlotte Hornets and the Interactive Session on the Kraft Company show how organizations are benefiting from in-memory technology.

Analytic Platforms Commercial database vendors have developed specialized high-speed analytic platforms using both relational and non-relational technology that are opti- mized for analyzing large data sets. Analytic platforms feature preconfigured hardware-software systems that are specifically designed for query process- ing and analytics. For example, the IBM PureData System for Analytics fea- tures tightly integrated database, server, and storage components that handle complex analytic queries 10 to 100 times faster than traditional systems.

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When the Kraft Foods Group and Heinz finalized their merger in July 2015, it was the marriage of two giants. The new Kraft Heinz Company became the fifth-largest consumer-packaged food and beverage organization in the world. The combined company has more than 200 global brands, $26.5 billion in revenue, and over 40,000 employees. Eight of the brands each have annual revenue exceeding $1 billion: Heinz, Maxwell House, Kraft Lunchables, Planters, Velveeta, Philadelphia, and Oscar Mayer. Running these companies required huge amounts of data from all of these brands. This is clearly the world of big data.

To remain profitable, enterprises in the fast- moving consumer goods industry require very lean operations. The uncertain global economy has damp- ened consumer spending, so companies such as Kraft Heinz must constantly identify opportunities for improving operational efficiencies to protect their profit margins. Kraft Heinz decided to deal with this challenge by focusing on optimizing its supply chain, manufacturing optimal quantities of each of its prod- ucts, and delivering them to retailers at the best time and least cost to capitalize on consumer demand.

Managing a supply chain as large as that of Kraft Heinz requires timely and accurate data on sales forecasts, manufacturing plans, and logistics, often from multiple sources. To ensure that Kraft Heinz would be able to use all of its enterprise business data effectively, management decided to split the data among two large SAP enterprise resource plan- ning (ERP) systems, one for North American busi- ness and the other for all other global business. The combined company also had to rethink its data warehouse.

Before the merger, the North America business had maintained nearly 18 terabytes of data in a SAP Business Warehouse and was using SAP Business Warehouse Accelerator to facilitate operational re- porting. SAP Business Warehouse is SAP’s data ware- house software for consolidating organizational data and supporting data analytics and reporting. The SAP Business Warehouse (BW) Accelerator is used to speed up database queries. Kraft Heinz manage- ment wanted decision makers to obtain more fine- grained views of the data that would reveal new

opportunities for improving efficiency, self-service reporting, and real-time analytics.

SAP BW Accelerator was not suitable for these tasks. It could optimize query runtime (the period of time when a query program is running) only for a specific subset of data in the warehouse, and was limited to reporting on selected views of the data. It could not deal with data load and calcu- lation performance and required replication of Business Warehouse data in a separate accelerator. With mushrooming data on the merged company’s sales, logistics, and manufacturing, the warehouse was too overtaxed to generate timely reports for decision makers. Moreover, Kraft Heinz’s complex data model made building new reports very time- consuming—it could take as much as six months to complete. Kraft Heinz needed a solution that would deliver more detailed reports more quickly without affecting the performance of underlying operational systems.

Kraft Heinz business users had been build- ing some of their own reports using SAP BusinessObjects Analysis edition for Microsoft Office, which integrates with Microsoft Excel and PowerPoint. This tool allows ad hoc multidimen- sional analysis. What these users needed was to be able to build self-service reports from a single source of data and find an efficient way to collate data from multiple sources to obtain an enterprise-wide view of what was going on.

Kraft Heinz decided to migrate its data warehouse from its legacy database to SAP BW powered by SAP HANA, SAP’s in-memory database platform, which dramatically improves the efficiency at which data can be loaded and processed, calculations can be computed, and queries and reports can be run. The new data warehouse would be able to integrate with existing SAP ERP applications driving day-to-day business operations. The company worked with IBM Global Services consultants to cleanse and stream- line its existing databases. It archived and purged unwanted or unused data, with the IT department working closely with business professionals to jointly determine what was essential, what was still being used, and what data thought to be unused had been moved to a different functional area of the company.

INTERACTIVE SESSION TECHNOLOGY

Kraft Heinz Finds a New Recipe for Analyzing Its Data

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 231

1. Identify the problem in this case study. To what extent was it a technology problem? Were any management and organizational fac- tors involved?

2. How was information technology affecting busi- ness performance at Kraft Heinz?

3. How did new technology provide a solution to the problem? How effective was the solution?

4. Identify the management, organizational, and technology factors that had to be addressed in se- lecting and implementing Kraft-Heinz’s new data warehouse solution.

Cleansing and streamlining data reduced the data- base size almost 50 percent, to 9 terabytes.

According to Sundar Dittakavi, Kraft Heinz Group Leader of Global Business Intelligence, in addition to providing better insights, the new data warehouse environment has achieved a 98 percent improve- ment in the production of standard reports. This is due to the 83 percent reduction in load time to exe- cution time to make the data available, and reduction in execution time to complete the analysis. Global key performance indicators for the Kraft side of the business are built into SAP HANA.

Kraft Heinz can now accommodate exploding volumes of data and database queries easily, while

maintaining enough processing power to handle un- expected issues. The company is also able to build new reports much faster and the flexibility of SAP HANA makes it much easier to change the com- pany’s data model. Now Kraft Heinz can produce new reports for business users in weeks instead of months and give decision makers the insights they need to boost efficiency and lower operating costs.

Sources: Ken Murphy, “The Kraft-Heinz Company Unlocks Recipe for Strategic Business Insight,” SAP Insider Profiles, January 25, 2017; “The Kraft Heinz Company Migrates SAP Business Warehouse to the Lightning-Fast SAP HANA Database,” IBM Corp. and SAP SE 2016; and www.kraftheinzcompany.com, accessed February 15, 2018.

CASE STUDY QUESTIONS

Analytic platforms also include in-memory systems and NoSQL non-relational database management systems and are now available as cloud services.

Figure 6.13 illustrates a contemporary business intelligence technology in- frastructure using the technologies we have just described. Current and histori- cal data are extracted from multiple operational systems along with web data, social media data, Internet of Things (IoT) machine-generated data, unstruc- tured audio/visual data, and other data from external sources. Some companies are starting to pour all of these types of data into a data lake. A data lake is a re- pository for raw unstructured data or structured data that for the most part has not yet been analyzed, and the data can be accessed in many ways. The data lake stores these data in their native format until they are needed. The Hadoop Distributed File System (HDFS) is often used to store the data lake contents across a set of clustered computer nodes, and Hadoop clusters may be used to pre-process some of these data for use in the data warehouse, data marts, or an analytic platform, or for direct querying by power users. Outputs include re- ports and dashboards as well as query results. Chapter 12 discusses the various types of BI users and BI reporting in greater detail.

Analytical Tools: Relationships, Patterns, Trends Once data have been captured and organized using the business intelligence technologies we have just described, they are available for further analysis using software for database querying and reporting, multidimensional data analysis (OLAP), and data mining. This section will introduce you to these tools, with more detail about business intelligence analytics and applications in Chapter 12.

232 Part Two Information Technology Infrastructure

Online Analytical Processing (OLAP) Suppose your company sells four different products—nuts, bolts, washers, and screws—in the East, West, and Central regions. If you wanted to ask a fairly straightforward question, such as how many washers were sold during the past quarter, you could easily find the answer by querying your sales database. But what if you wanted to know how many washers were sold in each of your sales regions and compare actual results with projected sales?

To obtain the answer, you would need online analytical processing (OLAP). OLAP supports multidimensional data analysis, enabling users to view the same data in different ways using multiple dimensions. Each aspect of information—product, pricing, cost, region, or time period—represents a dif- ferent dimension. So, a product manager could use a multidimensional data analysis tool to learn how many washers were sold in the East in June, how that compares with the previous month and the previous June, and how it com- pares with the sales forecast. OLAP enables users to obtain online answers to ad hoc questions such as these in a fairly rapid amount of time, even when the data are stored in very large databases, such as sales figures for multiple years.

Figure 6.14 shows a multidimensional model that could be created to rep- resent products, regions, actual sales, and projected sales. A matrix of actual sales can be stacked on top of a matrix of projected sales to form a cube with six faces. If you rotate the cube 90 degrees one way, the face showing will be prod- uct versus actual and projected sales. If you rotate the cube 90 degrees again, you will see region versus actual and projected sales. If you rotate 180 degrees from the original view, you will see projected sales and product versus region.

FIGURE 6.13 CONTEMPORARY BUSINESS INTELLIGENCE INFRASTRUCTURE A contemporary business intelligence infrastructure features capabilities and tools to manage and analyze large quantities and different types of data from multiple sources. Easy-to-use query and reporting tools for casual business users and more sophisticated analytical toolsets for power users are included.

Hadoop Data Lake

Data Warehouse

Data Mart

Casual users • Queries • Reports • Dashboards

Power users • Queries • Reports • OLAP • Data mining

Historical Data

IoT Data

Audio/ Video Data

External Data

Analytic Platform

Extract, transform, load

Operational Data

Web and Social Media Data

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 233

Cubes can be nested within cubes to build complex views of data. A company would use either a specialized multidimensional database or a tool that creates multidimensional views of data in relational databases.

Data Mining Traditional database queries answer such questions as “How many units of product number 403 were shipped in February 2018?” OLAP, or multidimen- sional analysis, supports much more complex requests for information, such as “Compare sales of product 403 relative to plan by quarter and sales region for the past two years.” With OLAP and query-oriented data analysis, users need to have a good idea about the information for which they are looking.

Data mining is more discovery-driven. Data mining provides insights into corporate data that cannot be obtained with OLAP by finding hidden patterns and relationships in large databases and inferring rules from them to predict future behavior. The patterns and rules are used to guide decision making and forecast the effect of those decisions. The types of information obtainable from data mining include associations, sequences, classifications, clusters, and forecasts.

• Associations are occurrences linked to a single event. For instance, a study of supermarket purchasing patterns might reveal that, when corn chips are pur- chased, a cola drink is purchased 65 percent of the time, but when there is a promotion, cola is purchased 85 percent of the time. This information helps managers make better decisions because they have learned the profitability of a promotion.

• In sequences, events are linked over time. We might find, for example, that if a house is purchased, a new refrigerator will be purchased within two weeks 65 percent of the time, and an oven will be bought within one month of the home purchase 45 percent of the time.

• Classification recognizes patterns that describe the group to which an item belongs by examining existing items that have been classified and by infer- ring a set of rules. For example, businesses such as credit card or telephone companies worry about the loss of steady customers. Classification helps discover the characteristics of customers who are likely to leave and can

FIGURE 6.14 MULTIDIMENSIONAL DATA MODEL This view shows product versus region. If you rotate the cube 90 degrees, the face that will show is product versus actual and projected sales. If you rotate the cube 90 degrees again, you will see region versus actual and projected sales. Other views are possible.

Projected

Actual

Nuts

BoltsPRODUCT

Washers

Screws

East

West Central

REGION

234 Part Two Information Technology Infrastructure

provide a model to help managers predict who those customers are so that the managers can devise special campaigns to retain such customers.

• Clustering works in a manner similar to classification when no groups have yet been defined. A data mining tool can discover different groupings within data, such as finding affinity groups for bank cards or partitioning a database into groups of customers based on demographics and types of personal investments.

• Although these applications involve predictions, forecasting uses predictions in a different way. It uses a series of existing values to forecast what other values will be. For example, forecasting might find patterns in data to help managers estimate the future value of continuous variables, such as sales figures.

These systems perform high-level analyses of patterns or trends, but they can also drill down to provide more detail when needed. There are data min- ing applications for all the functional areas of business and for government and scientific work. One popular use for data mining is to provide detailed analyses of patterns in customer data for one-to-one marketing campaigns or for identi- fying profitable customers.

Caesars Entertainment, formerly known as Harrah’s Entertainment, is the largest gaming company in the world. It continually analyzes data about its customers gathered when people play its slot machines or use its casinos and hotels. The corporate marketing department uses this information to build a detailed gambling profile, based on a particular customer’s ongoing value to the company. For instance, data mining lets Caesars know the favorite gaming experience of a regular customer at one of its riverboat casinos along with that person’s preferences for room accommodations, restaurants, and entertain- ment. This information guides management decisions about how to cultivate the most profitable customers, encourage those customers to spend more, and attract more customers with high revenue-generating potential. Business intel- ligence improved Caesars’s profits so much that it became the centerpiece of the firm’s business strategy.

Text Mining and Web Mining Unstructured data, most in the form of text files, is believed to account for more than 80 percent of useful organizational information and is one of the major sources of big data that firms want to analyze. Email, memos, call center tran- scripts, survey responses, legal cases, patent descriptions, and service reports are all valuable for finding patterns and trends that will help employees make better business decisions. Text mining tools are now available to help busi- nesses analyze these data. These tools are able to extract key elements from unstructured natural language text, discover patterns and relationships, and summarize the information.

Businesses might turn to text mining to analyze transcripts of calls to cus- tomer service centers to identify major service and repair issues or to measure customer sentiment about their company. Sentiment analysis software is able to mine text comments in an email message, blog, social media conversation, or survey forms to detect favorable and unfavorable opinions about specific sub- jects. For example, Kraft Foods uses a Community Intelligence Portal and senti- ment analysis to tune into consumer conversations about its products across numerous social networks, blogs, and other websites. Kraft tries to make sense of relevant comments rather than just track brand mentions and can identify customers’ emotions and feelings when they talk about how they barbecue and what sauces and spices they use.

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 235

The web is another rich source of unstructured big data for revealing patterns, trends, and insights into customer behavior. The discovery and analysis of useful patterns and information from the World Wide Web are called web mining. Businesses might turn to web mining to help them understand customer behavior, evaluate the effectiveness of a particular website, or quantify the success of a mar- keting campaign. For instance, marketers use the Google Trends service, which tracks the popularity of various words and phrases used in Google search queries, to learn what people are interested in and what they are interested in buying.

Web mining looks for patterns in data through content mining, structure mining, and usage mining. Web content mining is the process of extracting knowledge from the content of web pages, which may include text, image, audio, and video data. Web structure mining examines data related to the struc- ture of a particular website. For example, links pointing to a document indicate the popularity of the document, while links coming out of a document indicate the richness or perhaps the variety of topics covered in the document. Web usage mining examines user interaction data recorded by a web server when- ever requests for a website’s resources are received. The usage data records the user’s behavior when the user browses or makes transactions on the website and collects the data in a server log. Analyzing such data can help companies determine the value of particular customers, cross-marketing strategies across products, and the effectiveness of promotional campaigns.

The chapter-ending case describes organizations’ experiences as they use the analytical tools and business intelligence technologies we have described to grapple with “big data” challenges.

Databases and the Web Have you ever tried to use the web to place an order or view a product catalog? If so, you were using a website linked to an internal corporate database. Many companies now use the web to make some of the information in their internal databases available to customers and business partners.

Suppose, for example, a customer with a web browser wants to search an on- line retailer’s database for pricing information. Figure 6.15 illustrates how that customer might access the retailer’s internal database over the web. The user accesses the retailer’s website over the Internet using a web browser on his or her client PC or mobile device. The user’s web browser software requests data from the organization’s database, using HTML commands to communicate with the web server. Apps provide even faster access to corporate databases.

Because many back-end databases cannot interpret commands written in HTML, the web server passes these requests for data to software that translates HTML commands into SQL so the commands can be processed by the DBMS

FIGURE 6.15 LINKING INTERNAL DATABASES TO THE WEB Users access an organization’s internal database through the web using their desktop PC browsers or mobile apps.

Internet

Client with web browser

Web server

Application server

Database server Database

236 Part Two Information Technology Infrastructure

working with the database. In a client/server environment, the DBMS resides on a dedicated computer called a database server. The DBMS receives the SQL requests and provides the required data. Middleware transfers information from the organization’s internal database back to the web server for delivery in the form of a web page to the user.

Figure 6.15 shows that the middleware working between the web server and the DBMS is an application server running on its own dedicated computer (see Chapter 5). The application server software handles all application operations, including transaction processing and data access, between browser-based com- puters and a company’s back-end business applications or databases. The ap- plication server takes requests from the web server, runs the business logic to process transactions based on those requests, and provides connectivity to the organization’s back-end systems or databases. Alternatively, the software for handling these operations could be a custom program or a CGI script. A CGI script is a compact program using the Common Gateway Interface (CGI) specifi- cation for processing data on a web server.

There are a number of advantages to using the web to access an organiza- tion’s internal databases. First, web browser software is much easier to use than proprietary query tools. Second, the web interface requires few or no changes to the internal database. It costs much less to add a web interface in front of a legacy system than to redesign and rebuild the system to improve user access.

Accessing corporate databases through the web is creating new efficiencies, opportunities, and business models. ThomasNet.com provides an up-to-date online directory of more than 500,000 suppliers of industrial products, such as chemicals, metals, plastics, rubber, and automotive equipment. Formerly called Thomas Register, the company used to send out huge paper catalogs with this information. Now it provides this information to users online via its website and has become a smaller, leaner company.

Other companies have created entirely new businesses based on access to large databases through the web. One is the social networking service Facebook, which helps users stay connected with each other and meet new people. Facebook features “profiles” with information on over 2.2 billion active users with infor- mation about themselves, including interests, friends, photos, and groups with which they are affiliated. Facebook maintains a very large database to house and manage all of this content. There are also many web-enabled databases in the public sector to help consumers and citizens access helpful information.

6-4 Why are information policy, data administration, and data quality assurance essential for managing the firm’s data resources?

Setting up a database is only a start. In order to make sure that the data for your business remain accurate, reliable, and readily available to those who need them, your business will need special policies and procedures for data management.

Establishing an Information Policy Every business, large and small, needs an information policy. Your firm’s data are an important resource, and you don’t want people doing whatever they want with them. You need to have rules on how the data are to be organized and maintained and who is allowed to view the data or change them.

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 237

An information policy specifies the organization’s rules for sharing, dis- seminating, acquiring, standardizing, classifying, and inventorying informa- tion. Information policy lays out specific procedures and accountabilities, identifying which users and organizational units can share information, where information can be distributed, and who is responsible for updat- ing and maintaining the information. For example, a typical information policy would specify that only selected members of the payroll and human resources department would have the right to change and view sensitive employee data, such as an employee’s salary or social security number, and that these departments are responsible for making sure that such employee data are accurate.

If you are in a small business, the information policy would be established and implemented by the owners or managers. In a large organization, manag- ing and planning for information as a corporate resource often require a formal data administration function. Data administration is responsible for the spe- cific policies and procedures through which data can be managed as an orga- nizational resource. These responsibilities include developing an information policy, planning for data, overseeing logical database design and data dictionary development, and monitoring how information systems specialists and end- user groups use data.

You may hear the term data governance used to describe many of these activities. Promoted by IBM, data governance deals with the policies and processes for managing the availability, usability, integrity, and secu- rity of the data employed in an enterprise with special emphasis on pro- moting privacy, security, data quality, and compliance with government regulations.

A large organization will also have a database design and management group within the corporate information systems division that is responsible for de- fining and organizing the structure and content of the database and maintain- ing the database. In close cooperation with users, the design group establishes the physical database, the logical relations among elements, and the access rules and security procedures. The functions it performs are called database administration.

Ensuring Data Quality A well-designed database and information policy will go a long way toward en- suring that the business has the information it needs. However, additional steps must be taken to ensure that the data in organizational databases are accurate and remain reliable.

What would happen if a customer’s telephone number or account balance were incorrect? What would be the impact if the database had the wrong price for the product you sold or your sales system and inventory system showed different prices for the same product? Data that are inaccurate, untimely, or inconsistent with other sources of information lead to incorrect decisions, product recalls, and financial losses. Gartner, Inc. reported that more than 25 percent of the critical data in large Fortune 1000 companies’ databases is inaccurate or incomplete, including bad product codes and product descrip- tions, faulty inventory descriptions, erroneous financial data, incorrect sup- plier information, and incorrect employee data. Some of these data quality problems are caused by redundant and inconsistent data produced by mul- tiple systems feeding a data warehouse. For example, the sales ordering sys- tem and the inventory management system might both maintain data on the

238 Part Two Information Technology Infrastructure

organization’s products. However, the sales ordering system might use the term Item Number and the inventory system might call the same attribute Product Number. The sales, inventory, or manufacturing systems of a clothing retailer might use different codes to represent values for an attribute. One system might represent clothing size as “medium,” whereas the other system might use the code “M” for the same purpose. During the design process for the warehouse database, data describing entities, such as a customer, prod- uct, or order, should be named and defined consistently for all business areas using the database.

Think of all the times you’ve received several pieces of the same direct mail advertising on the same day. This is very likely the result of having your name maintained multiple times in a database. Your name may have been misspelled or you used your middle initial on one occasion and not on another or the in- formation was initially entered onto a paper form and not scanned properly into the system. Because of these inconsistencies, the database would treat you as different people! We often receive redundant mail addressed to Laudon, Lavdon, Lauden, or Landon.

If a database is properly designed and enterprise-wide data standards are established, duplicate or inconsistent data elements should be minimal. Most data quality problems, however, such as misspelled names, transposed num- bers, or incorrect or missing codes, stem from errors during data input. The in- cidence of such errors is rising as companies move their businesses to the web and allow customers and suppliers to enter data into their websites that directly update internal systems.

Before a new database is in place, organizations need to identify and correct their faulty data and establish better routines for editing data once their data- base is in operation. Analysis of data quality often begins with a data quality audit, which is a structured survey of the accuracy and level of completeness of the data in an information system. Data quality audits can be performed by surveying entire data files, surveying samples from data files, or surveying end users for their perceptions of data quality.

Data cleansing, also known as data scrubbing, consists of activities for de- tecting and correcting data in a database that are incorrect, incomplete, improp- erly formatted, or redundant. Data cleansing not only corrects errors but also enforces consistency among different sets of data that originated in separate information systems. Specialized data-cleansing software is available to auto- matically survey data files, correct errors in the data, and integrate the data in a consistent companywide format.

Data quality problems are not just business problems. They also pose se- rious problems for individuals, affecting their financial condition and even their jobs. For example, inaccurate or outdated data about consumers’ credit histories maintained by credit bureaus can prevent creditworthy individu- als from obtaining loans or lower their chances of finding or keeping a job. And as the Interactive Session on Organization describes, incomplete or inaccurate databases also pose problems for criminal justice and public safety.

A small minority of companies allow individual departments to be in charge of maintaining the quality of their own data. However, best data ad- ministration practices call for centralizing data governance, standardization of organizational data, data quality maintenance, and accessibility to data assets.

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 239

On November 5, 2017 Devin Patrick Kelley walked into the First Baptist Church in Sutherland Springs, Texas toting a Ruger AR-556 semi-automatic rifle and fired round after round into the congregation gathered for Sunday morning services. Within a few minutes, he had killed 26 people and injured 20 others. Kelley was later found dead in his SUV with a self-inflicted gunshot wound. The attack was the deadliest mass shooting by an individual in Texas, the fifth-deadliest mass shooting in the United States, as well as the deadliest shooting in an American place of worship in modern history.

This tragedy could have been avoided. Kelley was prohibited by law from purchasing or possessing firearms and ammunition due to a 2012 domestic vio- lence conviction in a court martial while he was serv- ing in the U.S. Air Force. The Air Force failed to record the conviction in the Federal Bureau of Investigation (FBI) National Crime Information Center (NCIC) da- tabase, which is used by the National Instant Check System (NICS) to flag prohibited gun purchases. This allowed Kelley to pass background checks and pur- chase four guns, one in each of the past four years.

Federally licensed firearm dealers are required to check the credentials of every potential buyer against the NICS system containing millions of crimi- nal history records and protection orders. The sys- tem is supposed to flag any potential gun buyer who falls in various categories prohibiting a sale including fugitives, convicted felons, or those with dishonor- able discharges from the military.

The Air Force acknowledged that it did not inform federal authorities about the domestic violence convic- tion, which should have prevented Kelley from buying firearms. Ann Stefanek, an Air Force spokesperson, stated that the Air Force would conduct a comprehen- sive review to ensure records in other cases have been reported correctly. The Defense Department plans to review how all U.S. military services report such cases into the background-check system. Members of the U.S. Senate have called for legislation to improve the completeness of NICS recordkeeping.

Individuals familiar with how NICS works ob- served that large gaps in information sharing between the military and the Justice Department have created a blind spot in background checks of veterans, al- lowing those barred from possessing weapons to get

clearance. They believed that the failure to flag Kelley more likely reflected a systemic flaw rather than a one-time miss. Robert Belair, a Washington privacy lawyer and expert on the FBI’s background-screening system, said the Air Force and other branches of the military seldom submit court-martial records to the FBI’s screening database when the offense doesn’t lead to a dishonorable discharge because this has never been a priority for the military.

According to a 2016 report by the U.S. Government Accountability Office (GAO), the FBI has struggled to collect domestic abuse records for background checks, in part because incomplete or missing criminal histories make it harder to deter- mine if someone should be banned from obtaining a gun. The GAO focused on reporting by state and local authorities and reported that between 2006 and 2015 about 6,700 firearms were incorrectly trans- ferred to individuals with domestic violence records.

Federal law requires federal departments, in- cluding the military branches, to notify the Justice Department at least quarterly about any records they have showing that someone is disqualified from buy- ing a gun. At the state level, however, compliance is voluntary unless specified by state law or federal funding requirements. It isn’t known how many court-martial records are submitted to the FBI, which said it couldn’t provide the information.

Gaps in databases have also affected other aspects of law enforcement, such as sentencing and parole. The decision to parole O.J. Simpson in October 2017 is an example. Before voting to release O.J. Simpson from prison after nine years, the Nevada parole board discussed in detail the robbery that had put him behind bars and his conduct as an inmate. Members of the Nevada Board of Parole Commissioners stated that before Simpson’s 2008 conviction for a Las Vegas hotel robbery, Simpson had no history of a criminal conviction. Although Simpson was acquitted in 1995 of the murders of his former wife Nicole Brown Simpson and Ronald Goldman, in 1989 he had pleaded no contest in Los Angeles to misdemeanor battery of Ms. Simpson, who was then his wife. The Nevada parole board did not have that information. The 1989 conviction was not considered when a four-member panel voted unanimously to release him in October 2017.

INTERACTIVE SESSION ORGANIZATIONS

Databases Where the Data Aren’t There

6-5 How will MIS help my career? Here is how Chapter 6 and this book can help you find a job as an entry-level data analyst.

The Company Mega Midwest Power, a large diversified energy company headquartered in Cleveland, Ohio, has an open position for an entry-level data analyst. The com- pany is involved in the distribution, transmission, and generation of electricity as well as energy management and other energy-related services for 5 million customers in the Midwest and mid-Atlantic regions.

Position Description Job responsibilities include:

• Maintaining the integrity of substation equipment and related data in mul- tiple databases, including SAP.

• Querying databases in multiple systems.

• Modifying systems for proper data management and procedural controls.

• Recommending and implementing process changes based on data problems that are identified.

• Conducting business-specific research, gathering data, and compiling reports and summaries.

• Expanding knowledge of policies, practices, and procedures.

240 Part Two Information Technology Infrastructure

1. Define the problem described in this case. How serious a problem is it?

2. What management, organization, and technology factors contributed to this problem?

3. What is the political and social impact of incom- plete recordkeeping in the FBI NCIC and NICS databases?

When states such as Nevada weigh the risk posed by an inmate, they routinely look through their own records, and also check with the NCIC. Mr. Simpson’s 1989 conviction did not appear in the NCIC history when Nevada officials prepared a pre-sentencing report after his 2008 conviction. David M. Smith, hearings examiner for the Nevada parole board, said the parole commissioners relied in part on the infor- mation in that 2008 report in assessing whether Mr. Simpson should be released. Smith believed it was impossible to tell whether knowledge of Simpson’s misdemeanor conviction would have made a differ- ence in the Nevada parole board’s decision.

Omission of Simpson’s 1989 conviction in the fed- eral system again highlights the problem of major gaps in federal criminal databases, which rely primarily on accurate and complete reporting by local and state

agencies. The Justice Department has reported, for example, that states fail to transmit most of their active arrest warrants from their own databases into the fed- eral system and often neglect to update records to show whether cases resulted in convictions. Some states still rely on paper files, making it likelier that they will not end up in the federal electronic records database, a problem that is more common with older records.

Sources: Kristina Peterson and Jacob Gershman, “Lapses in Gun Buy- ers’ Records Come Under Scrutiny,” Wall Street Journal, November 7, 2017; Melissa Jeltsen, “Air Force Failed to Enter Church Shoot- er’s Domestic Violence Record In U.S. Database,” Huffington Post, November 6, 2017; Richard Perez-Pena, “Nevada Parole Board Un- aware of O.J. Simpson’s Old Conviction,” New York Times, August 11, 2017; and Eli Rosenberg, Mark Berman, and Wesley Lowery, “Texas Church Gunman Escaped Mental Health Facility in 2012 after Threatening Military Superiors,” Washington Post, November 7, 2017.

CASE STUDY QUESTIONS

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 241

Job Requirements • BA/BS degree in business, finance, accounting, economics, engineering, or

related discipline

• 1–2 years professional work experience desirable

• Knowledge of Microsoft Office tools (Excel, PowerPoint, Access, and Word)

• Strong analytical capabilities, including attention to detail, problem solving, and decision making

• Strong oral and written communication and teamwork skills

• Familiarity with transmission substation equipment desirable

Interview Questions 1. What do you know about substation equipment? Have you ever worked with

SAP for Utilities?

2. What do you know about data management and databases? Have you ever worked with data management software? If so, what exactly have you done with it?

3. Tell us what you can do with Access and Excel. What kinds of problems have you used these tools to solve? Did you take courses in Access or Excel?

4. What experience do you have analyzing problems and developing specific solutions? Can you give an example of a problem you helped solve?

Author Tips 1. Do some research on the electric utility industry equipment mainte-

nance and software for electric utility asset management and predictive maintenance. Read blogs from IBM, Deloitte, and Intel about predictive maintenance and watch YouTube videos from GE and IBM on this topic.

2. Review Chapter 6 of this text on data management and databases, along with the Chapter 12 discussion of operational intelligence. Inquire what you would be expected to do with databases in this job position.

3. Do some research on the capabilities of SAP for Utilities and ask exactly how you would be using this software and what skills would be required. Watch SAP’s YouTube video on SAP for Utilities.

6-1 What are the problems of managing data resources in a traditional file environment? Traditional file management techniques make it difficult for organizations to keep track of all of the

pieces of data they use in a systematic way and to organize these data so that they can be easily ac- cessed. Different functional areas and groups were allowed to develop their own files independently. Over time, this traditional file management environment creates problems such as data redundancy and inconsistency, program-data dependence, inflexibility, poor security, and lack of data sharing and availability. A database management system (DBMS) solves these problems with software that permits centralization of data and data management so that businesses have a single consistent source for all their data needs. Using a DBMS minimizes redundant and inconsistent files.

6-2 What are the major capabilities of database management systens (DBMS), and why is a relational DBMS so powerful?

The principal capabilities of a DBMS include a data definition capability, a data dictionary capability, and a data manipulation language. The data definition capability specifies the structure and content of the

REVIEW SUMMARY

242 Part Two Information Technology Infrastructure

database. The data dictionary is an automated or manual file that stores information about the data in the database, including names, definitions, formats, and descriptions of data elements. The data manipulation language, such as SQL, is a specialized language for accessing and manipulating the data in the database.

The relational database has been the primary method for organizing and maintaining data in in- formation systems because it is so flexible and accessible. It organizes data in two-dimensional tables called relations with rows and columns. Each table contains data about an entity and its attributes. Each row represents a record, and each column represents an attribute or field. Each table also con- tains a key field to uniquely identify each record for retrieval or manipulation. Relational database tables can be combined easily to deliver data required by users, provided that any two tables share a common data element. Non-relational databases are becoming popular for managing types of data that can’t be handled easily by the relational data model. Both relational and non-relational database prod- ucts are available as cloud computing services. A distributed database is one that is stored in multiple physical locations, including remote cloud computing centers.

Designing a database requires both a logical design and a physical design. The logical design mod- els the database from a business perspective. The organization’s data model should reflect its key busi- ness processes and decision-making requirements. The process of creating small, stable, flexible, and adaptive data structures from complex groups of data when designing a relational database is termed normalization. A well-designed relational database will not have many-to-many relationships, and all attributes for a specific entity will only apply to that entity. It will try to enforce referential integrity rules to ensure that relationships between coupled tables remain consistent. An entity-relationship diagram graphically depicts the relationship between entities (tables) in a relational database.

6-3 What are the principal tools and technologies for accessing information from databases to improve business performance and decision making?

Contemporary data management technology has an array of tools for obtaining useful information from all the different types of data used by businesses today, including semi-structured and unstruc- tured big data in vast quantities. These capabilities include data warehouses and data marts, Hadoop, in-memory computing, and analytical platforms. OLAP represents relationships among data as a mul- tidimensional structure, which can be visualized as cubes of data and cubes within cubes of data, enabling more sophisticated data analysis. Data mining analyzes large pools of data, including the contents of data warehouses, to find patterns and rules that can be used to predict future behavior and guide decision making. Text mining tools help businesses analyze large unstructured data sets consist- ing of text. Web mining tools focus on analysis of useful patterns and information from the web, ex- amining the structure of websites and activities of website users, as well as the contents of web pages. Conventional databases can be linked via middleware to the web or a web interface to facilitate user access to an organization’s internal data.

6-4 Why are information policy, data administration, and data quality assurance essential for managing the firm’s data resources?

Developing a database environment requires policies and procedures for managing organizational data as well as a good data model and database technology. A formal information policy governs the maintenance, distribution, and use of information in the organization. In large corporations, a formal data administration function is responsible for information policy as well as for data planning, data dictionary development, and monitoring data usage in the firm.

Data that are inaccurate, incomplete, or inconsistent create serious operational and financial prob- lems for businesses because they may create inaccuracies in product pricing, customer accounts, and inventory data and lead to inaccurate decisions about the actions that should be taken by the firm. Firms must take special steps to make sure they have a high level of data quality. These include using enterprise-wide data standards, databases designed to minimize inconsistent and redundant data, data quality audits, and data cleansing software.

Key Terms Analytic platform, 229 Attribute, 214 Big data, 227 Bit, 213

Blockchain, 225 Byte, 213 Data administration, 237 Data cleansing, 238

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 243

Data definition, 221 Data dictionary, 221 Data governance, 237 Data inconsistency, 215 Data lake, 231 Data manipulation language, 221 Data mart, 228 Data mining, 233 Data quality audit, 238 Data redundancy, 215 Data warehouse, 228 Database, 216 Database administration, 237 Database management system (DBMS), 217 Database server, 236 Distributed database, 225 Entity, 214 Entity-relationship diagram, 224 Field, 213

File, 213 Foreign key, 218 Hadoop, 228 In-memory computing, 229 Information policy, 237 Key field, 218 Non-relational database management systems, 225 Normalization, 223 Online analytical processing (OLAP), 232 Primary key, 218 Program-data dependence, 216 Record, 213 Referential integrity, 224 Relational DBMS, 218 Sentiment analysis, 234 Structured Query Language (SQL), 221 Text mining, 234 Tuple, 218 Web mining, 235

MyLab MIS To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.

Review Questions 6-1 What are the problems of managing data

resources in a traditional file environment?

• List and describe each of the components in the data hierarchy.

• Define and explain the significance of enti- ties, attributes, and key fields.

• List and describe the problems of the tradi- tional file environment.

6-2 What are the major capabilities of database management systems (DBMS), and why is a relational DBMS so powerful?

• Define a database and a database manage- ment system.

• Name and briefly describe the capabilities of a DBMS.

• Define a relational DBMS and explain how it organizes data.

• List and describe the three operations of a relational DBMS.

• Explain why non-relational databases are useful.

• Define and describe normalization and ref- erential integrity and explain how they con- tribute to a well-designed relational database.

• Define and describe an entity-relationship diagram and explain its role in database design.

6-3 What are the principal tools and technologies for accessing information from databases to improve business performance and decision making?

• Define big data and describe the technolo- gies for managing and analyzing it.

• List and describe the components of a contemporary business intelligence infrastructure.

• Describe the capabilities of online analyti- cal processing (OLAP).

• Define data mining, describing how it dif- fers from OLAP and the types of informa- tion it provides.

• Explain how text mining and web mining differ from conventional data mining.

• Describe how users can access informa- tion from a company’s internal databases through the web.

6-4 Why are information policy, data administration, and data quality assurance essential for managing the firm’s data resources?

• Describe the roles of information policy and data administration in information management.

• Explain why data quality audits and data cleansing are essential.

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Discussion Questions 6-5 It has been said there is no bad data, just

bad management. Discuss the implications of this statement.

6-6 To what extent should end users be involved in the selection of a database management system and database design?

MyLab MIS

MyLab MIS

6-7 What are the consequences of an organization not having an information policy?

MyLab MIS

Hands-On MIS Projects The projects in this section give you hands-on experience in analyzing data quality problems, establishing com- panywide data standards, creating a database for inventory management, and using the web to search online databases for overseas business resources. Visit MyLab MIS to access this chapter’s Hands-On MIS Projects.

Management Decision Problems

6-8 Emerson Process Management, a global supplier of measurement, analytical, and monitoring instruments and services based in Austin, Texas, had a new data warehouse designed for analyzing customer activity to improve service and marketing. However, the data warehouse was full of inaccurate and redundant data. The data in the warehouse came from numerous transaction processing systems in Europe, Asia, and other locations around the world. The team that designed the warehouse had assumed that sales groups in all these areas would enter customer names and addresses the same way. In fact, companies in different countries were using multiple ways of entering quote, billing, shipping, and other data. Assess the potential business impact of these data quality problems. What decisions have to be made and steps taken to reach a solution?

6-9 Your industrial supply company wants to create a data warehouse where management can obtain a single corporate-wide view of critical sales information to identify bestselling products, key customers, and sales trends. Your sales and product information are stored in two different systems: a divisional sales system running on a Unix server and a corporate sales system running on an IBM mainframe. You would like to create a single standard format that consolidates these data from both systems. In MyLab MIS, you can review the proposed format along with sample files from the two systems that would supply the data for the data warehouse. Then answer the following questions:

• What business problems are created by not having these data in a single standard format?

• How easy would it be to create a database with a single standard format that could store the data from both systems? Identify the problems that would have to be addressed.

• Should the problems be solved by database specialists or general business managers? Explain.

• Who should have the authority to finalize a single companywide format for this information in the data warehouse?

Achieving Operational Excellence: Building a Relational Database for Inventory Management

Software skills: Database design, querying, and reporting Business skills: Inventory management

6-10 In this exercise, you will use database software to design a database for managing inventory for a small business. Sylvester’s Bike Shop, located in San Francisco, California, sells road, mountain, hybrid, leisure, and children’s bicycles. Currently, Sylvester’s purchases bikes from three suppliers but plans to add new suppliers in the near future. Using the information found in the tables in MyLab MIS, build a simple relational database to manage information about Sylvester’s suppliers and products. Once you have built the database, perform the following activities.

• Prepare a report that identifies the five most expensive bicycles. The report should list the bicycles in descending order from most expensive to least expensive, the quantity on hand for each, and the markup percentage for each.

• Prepare a report that lists each supplier, its products, the quantities on hand, and associated reorder levels. The report should be sorted alphabetically by supplier. For each supplier, the products should be sorted alphabetically.

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 245

• Prepare a report listing only the bicycles that are low in stock and need to be reordered. The report should provide supplier information for the items identified.

• Write a brief description of how the database could be enhanced to further improve management of the business. What tables or fields should be added? What additional reports would be useful?

Improving Decision Making: Searching Online Databases for Overseas Business Resources

Software skills: Online databases Business skills: Researching services for overseas operations

6-11 This project develops skills in searching web-enabled databases with information about products and services in faraway locations. Your company is located in Greensboro, North Carolina, and manufactures office furniture of various

types. You are considering opening a facility to manufacture and sell your products in Australia. You would like to contact organizations that offer many services necessary for you to open your Australian office and manu- facturing facility, including lawyers, accountants, import-export experts, and telecommunications equipment and support firms. Access the following online databases to locate companies that you would like to meet with during your upcoming trip: Australian Business Directory Online, AustraliaTrade Now, and the Nationwide Busi- ness Directory of Australia. If necessary, use search engines such as Yahoo and Google.

• List the companies you would contact on your trip to determine whether they can help you with these and any other functions you think are vital to establishing your office.

• Rate the databases you used for accuracy of name, completeness, ease of use, and general helpfulness.

Collaboration and Teamwork Project Identifying Entities and Attributes in an Online Database

6-12 With your team of three or four other students, select an online database to explore, such as AOL Music, iGo. com, or the Internet Movie Database. Explore one of these websites to see what information it provides. Then list the entities and attributes that the company running the website must keep track of in its databases. Dia- gram the relationship between the entities you have identified. If possible, use Google Docs and Google Drive or Google Sites to brainstorm, organize, and develop a presentation of your findings for the class.

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How Reliable Is Big Data?

CASE STUDY

Today’s companies are dealing with an ava-lanche of data from social media, search, and sensors, as well as from traditional sources. According to one estimate, 2.5 quintillion bytes of data per day are generated around the world. Making sense of “big data” to improve decision making and business performance has become one of the pri- mary opportunities for organizations of all shapes and sizes, but it also represents big challenges.

Businesses such as Amazon, YouTube, and Spotify have flourished by analyzing the big data they collect about customer interests and purchases to create mil- lions of personalized recommendations. A number of online services analyze big data to help consum- ers, including services for finding the lowest price on autos, computers, mobile phone plans, clothing, air- fare, hotel rooms, and many other types of goods and services. Big data is also providing benefits in sports (see the chapter-opening case), education, science, health care, and law enforcement.

Analyzing billions of data points collected on pa- tients, healthcare providers, and the effectiveness of prescriptions and treatments has helped the UK National Health Service (NHS) save about 581 mil- lion pounds (U.S. $784 million). The data are housed in an Oracle Exadata Database Machine, which can quickly analyze very large volumes of data (review this chapter’s discussion of analytic platforms). NHS has used its findings from big data analysis to create dashboards identifying patients taking 10 or more medications at once, and which patients are taking too many antibiotics. Compiling very large amounts of data about drugs and treatments given to cancer patients and correlating that information with pa- tient outcomes has helped NHS identify more effec- tive treatment protocols.

New York City analyzes all the crime-related data it collects to lower the crime rate. Its CompStat crime-mapping program uses a comprehensive city- wide database of all reported crimes or complaints, arrests, and summonses in each of the city’s 76 precincts to report weekly on crime complaint and arrest activity at the precinct, patrol borough, and citywide levels. CompStat data can be displayed on maps showing crime and arrest locations, crime hot spots, and other relevant information to help

precinct commanders quickly identify patterns and trends and deploy police personnel where they are most needed. Big data on criminal activity also pow- ers New York City’s Crime Strategies Unit, which tar- gets the worst offenders for aggressive prosecution. Healthcare companies are currently analyzing big data to determine the most effective and economi- cal treatments for chronic illnesses and common diseases and provide personalized care recommenda- tions to patients.

There are limits to using big data. A number of companies have rushed to start big data projects without first establishing a business goal for this new information or key performance metrics to measure success. Swimming in numbers doesn’t necessarily mean that the right information is being collected or that people will make smarter decisions. Experts in big data analysis believe too many companies, se- duced by the promise of big data, jump into big data projects with nothing to show for their efforts. They start amassing mountains of data with no clear objec- tive or understanding of exactly how analyzing big data will achieve their goal or what questions they are trying to answer. Organizations also won’t benefit from big data that has not been properly cleansed, organized, and managed—think data quality.

Just because something can be measured doesn’t mean it should be measured. Suppose, for instance, that a large company wants to measure its web- site traffic in relation to the number of mentions on Twitter. It builds a digital dashboard to display the results continuously. In the past, the company had generated most of its sales leads and eventual sales from trade shows and conferences. Switching to Twitter mentions as the key metric to measure changes the sales department’s focus. The depart- ment pours its energy and resources into monitoring website clicks and social media traffic, which pro- duce many unqualified leads that never lead to sales.

Although big data is very good at detecting corre- lations, especially subtle correlations that an analysis of smaller data sets might miss, big data analysis doesn’t necessarily show causation or which correla- tions are meaningful. For example, examining big data might show that from 2006 to 2011 the United States murder rate was highly correlated with the

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 247

market share of Internet Explorer, since both de- clined sharply. But that doesn’t necessarily mean there is any meaningful connection between the two phenomena. Data analysts need some business knowledge of the problem they are trying to solve with big data.

Big data predictive models don’t necessarily give you a better idea of what will happen in the future. Meridian Energy Ltd., an electricity genera- tor and distributor operating in New Zealand and Australia, moved away from using an aging predic- tive equipment maintenance system. The software was supposed to predict the maintenance needs of all the large equipment the company owns and operates, including generators, wind turbines, trans- formers, circuit breakers, and industrial batteries. However, the system used outdated modeling techniques and could not actually predict equipment failures. It ran simulations of different scenarios and predicted when assets would fail the simulated tests. The recommendations of the software were use- less because they did not accurately predict which pieces of equipment actually failed in the real world. Meridian eventually replaced the old system with IBM’s Predictive Maintenance and Quality software, which bases predictions on more real-time data from equipment.

All data sets and data-driven forecasting models reflect the biases of the people selecting the data and performing the analysis. Several years ago, Google developed what it thought was a leading-edge algo- rithm using data it collected from web searches to de- termine exactly how many people had influenza and how the disease was spreading. It tried to calculate the number of people with flu in the United States by relating people’s location to flu-related search que- ries on Google. Google consistently overestimated flu rates, when compared to conventional data collected afterward by the U.S. Centers for Disease Control (CDC). Several scientists suggested that Google was “tricked” by widespread media coverage of that year’s severe flu season in the United States, which was fur- ther amplified by social media coverage. The model developed for forecasting flu trends was based on a flawed assumption—that the incidence of flu-related searches on Googles was a precise indicator of the number of people who actually came down with the flu. Google’s algorithm only looked at numbers, not the context of the search results.

In addition to election tampering by hostile na- tions, insufficient attention to context and flawed

assumptions may have played a role in the failure of most political experts to predict Donald Trump’s victory over Hillary Clinton in the 2016 presiden- tial election. Trump’s victory ran counter to almost every major forecast, which had predicted Clinton’s chances of winning to be between 70 to 99 percent.

Tons of data had been analyzed by political ex- perts and the candidates’ campaign teams. Clinton ran an overwhelmingly data-driven campaign, and big data had played a large role in Obama’s victo- ries in 2008 and 2012. Clinton’s team added to the database the Obama campaigns had built, which connected personal data from traditional sources, such as reports from pollsters and field workers, with other data from social media posts and other online behavior as well as data used to predict con- sumer behavior. The Clinton team assumed that the same voters who supported Obama would turn out for their candidate, and focused on identifying vot- ers in areas with a likelihood of high voter turnout. However, turnout for Clinton among the key groups who had supported Obama—women, minorities, col- lege graduates, and blue-collar workers—fell short of expectations. (Trump had turned to big data as well, but put more emphasis on tailoring campaign mes- sages to targeted voter groups.)

Political experts were misled into thinking Clinton’s victory was assured because some predic- tive models lacked context in explaining potentially wide margins of error. There were shortcomings in polling, analysis, and interpretation, and analysts did not spend enough time examining how the data used in the predictive models were created. Many polls used in election forecasts underestimated the strength of Trump’s support. State polls were inac- curate, perhaps failing to capture Republicans who initially refused to vote for Trump and then changed their minds at the last moment. Polls from Wisconsin shortly before the election had put Clinton well ahead of Trump. Polls are important for election predictions, but they are only one of many sources of data that should be consulted. Predictive models were unable to fully determine who would actually turn out to vote as opposed to how people thought they would vote. Analysts overlooked signs that Trump was forging ahead in the battleground states. Britain had a similar surprise when polls mistakenly predicted the nation would vote in June 2016 to stay in the European Union.

And let’s not forget that big data poses some challenges to information security and privacy.

248 Part Two Information Technology Infrastructure

As Chapter 4 pointed out, companies are now ag- gressively collecting and mining massive data sets on people’s shopping habits, incomes, hobbies, residences, and (via mobile devices) movements from place to place. They are using such big data to discover new facts about people, to classify them based on subtle patterns, to flag them as “risks” (for example, loan default risks or health risks), to predict their behavior, and to manipulate them for maxi- mum profit.

When you combine someone’s personal infor- mation with pieces of data from many different sources, you can infer new facts about that person (such as the fact that they are showing early signs of Parkinson’s disease, or are unconsciously drawn toward products that are colored blue or green). If asked, most people might not want to disclose such information, but they might not even know such in- formation about them exists. Privacy experts worry that people will be tagged and suffer adverse con- sequences without due process, the ability to fight back, or even knowledge that they have been dis- criminated against.

Sources: Linda Currey Post, “Big Data Helps UK National Health Service Lower Costs, Improve Treatments,” Forbes, February 7, 2018; Michael Jude, “Data Preparation Is the Key to Big Data Success,” InfoWorld, February 8, 2018; Rajkumar Venkatesan and

Christina Black, “Using Big Data: 3 Reasons It Fails and 4 Ways to Make It Work,” University of Virginia Darden School of Business Press Release, February 8, 3018; Ed Burns, “When Predictive Models Are Less Than Presidential,” Business Information, February 2017; Aaron Timms, “Is Donald Trump’s Surprise Win a Failure of Big Data? Not Really,” Fortune, November 14, 2016; Steve Lohr and Natasha Singer, “The Data Said Clinton Would Win. Why You Shouldn’t Have Believed It,” New York Times, November 10, 2016; Nicole Laskowski and Niel Nikolaisen: “Seven Big Data Problems and How to Avoid Them,” TechTarget Inc., 2016; Joseph Stromberg, “Why Google Flu Trends Can’t Track the Flu (Yet),” smithsonianmag.com, March 13, 2014; and Gary Marcus and Ernest Davis, “Eight (No, Nine!) Problems With Big Data,” New York Times, April 6, 2014.

CASE STUDY QUESTIONS 6-13 What business benefits did the organizations

described in this case achieve by analyzing and using big data?

6-14 Identify two decisions at the organizations described in this case that were improved by using big data and two decisions that big data did not improve.

6-15 List and describe the limitations to using big data.

6-16 Should all organizations try to collect and analyze big data? Why or why not? What man- agement, organization, and technology issues should be addressed before a company decides to work with big data?

MyLab MIS Go to the Assignments section of MyLab MIS to complete these writing exercises.

6-17 Identify the five problems of a traditional file environment and explain how a database management system solves them.

6-18 Discuss how the following facilitate the management of big data: Hadoop, in-memory computing, ana- lytic platforms.

Chapter 6 References Aiken, Peter, Mark Gillenson, Xihui Zhang, and David Rafner.

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Beath, Cynthia, Irma Becerra-Fernandez, Jeanne Ross, and James Short. “Finding Value in the Information Explosion.” MIT Sloan Management Review 53, No. 4 (Summer 2012).

Bessens, Bart. “Improving Data Quality Using Data Governance.” Big Data Quarterly (Spring 2018).

Buff, Anne. “Adapting Governance to the Changing Data Land- scape.” Big Data Quarterly 3, No. 4 (Winter 2017).

Bughin, Jacques, John Livingston, and Sam Marwaha. “Seizing the Potential for Big Data.” McKinsey Quarterly (October 2011).

Caserta, Joe, and Elliott Cordo. “Data Warehousing in the Era of Big Data.” Big Data Quarterly (January 19, 2016).

Chai, Sen, and Willy Shih. “Why Big Data Isn’t Enough.” MIT Sloan Management Review (Winter 2017).

Clifford, James, Albert Croker, and Alex Tuzhilin. “On Data Repre- sentation and Use in a Temporal Relational DBMS.” Informa- tion Systems Research 7, No. 3 (September 1996).

DalleMule, Landro, and Thomas H. Davenport. “What’s Your Data Strategy?” MIT Sloan Management Review (Winter 2017).

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 249

Davenport, Thomas H. Big Data at Work: Dispelling the Myths, Uncovering the Opportunities. Boston, MA: Harvard Business School Press (2014).

Devlin, Barry. “The EDW Lives On: The Beating Heart of the Data Lake.” 9Sight Consulting (April 2017).

Eckerson, Wayne W. “Analytics in the Era of Big Data: Exploring a Vast New Ecosystem.” TechTarget (2012).

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Henschen, Doug. “MetLife Uses NoSQL for Customer Service Breakthrough.” Information Week (May 13, 2013).

Hoffer, Jeffrey A., Ramesh Venkataraman, and Heikki Toppi. Modern Database Management (12th ed.). Upper Saddle River, NJ: Pearson (2016).

Imhoff, Claudia. “Data Warehouse Appliances and the New World Order of Analytics.” Intelligent Solutions Inc. (August 2017).

King, Elliot. “Has Data Quality Reached a Turning Point?” Big Data Quarterly 3 No. 4 (Winter 2017).

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Lee, Yang W., and Diane M. Strong. “Knowing-Why About Data Processes and Data Quality.” Journal of Management Informa- tion Systems 20, No. 3 (Winter 2004).

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Marcus, Gary, and Ernest Davis. “Eight (No, Nine!) Problems with Big Data.” New York Times (April 6, 2014).

Martens, David, and Foster Provost. “Explaining Data-Driven Docu- ment Classifications.” MIS Quarterly 38, No. 1 (March 2014).

McAfee, Andrew, and Erik Brynjolfsson. “Big Data: The Manage- ment Revolution.” Harvard Business Review (October 2012).

McKendrick, Joe. “Building a Data Lake for the Enterprise.” Big Data Quarterly (Spring 2018).

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Morrow, Rich. “Apache Hadoop: The Swiss Army Knife of IT.” Global Knowledge (2013).

Mulani, Narendra. “In-Memory Technology: Keeping Pace with Your Data.” Information Management (February 27, 2013).

O’Keefe, Kate. “Real Prize in Caesars Fight: Data on Players.” Wall Street Journal (March 19, 2015).

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___________. “Data’s Credibility Problem.” Harvard Business Review (December 2013).

Ross, Jeanne W., Cynthia M. Beath, and Anne Quaadgras. “You May Not Need Big Data After All.” Harvard Business Review (December 2013).

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Data-Mining Approach to Identification of Risk Factors in Safety Management Systems.” Journal of Management Infor- mation Systems 34 No. 4 (2017).

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MyLab MIS Discussion Questions: 7-5, 7-6, 7-7; Hands-on MIS Projects: 7-8, 7-9, 7-10, 7-11; Writing Assignments: 7-17, 7-18; eText with Conceptual Animations

CHAPTER CASES Tour de France Wins with Wireless

Technology Net Neutrality: The Battle Rages On Monitoring Employees on Networks:

Unethical or Good Business? Google, Apple, and Facebook Battle for Your

Internet Experience

VIDEO CASES Telepresence Moves out of the Boardroom

and into the Field Virtual Collaboration with IBM Sametime

LEARNING OBJECTIVES After reading this chapter, you will be able to answer the following questions:

7-1 What are the principal components of telecommunications networks and key networking technologies?

7-2 What are the different types of networks?

7-3 How do the Internet and Internet technology work, and how do they support communication and e-business?

7-4 What are the principal technologies and standards for wireless networking, communication, and Internet access?

7-5 How will MIS help my career?

Telecommunications, the Internet, and Wireless Technology7CHAPTER

251

Every July about two hundred cyclists race across 2,200 miles of the most difficult terrain in France, including steep roads in the Pyrenees and Alps. The Tour de France is considered the world’s greatest bicycle race. The first Tour de France took place 1903, as a way of promoting sales of

L’Auto newspapers, initially attracting mostly local competitors and spectators. Thanks to newspapers, radio, and television, coverage and prestige of the event expanded. As with other competitive sports, such as football, baseball, tennis, and soccer, today’s Tour de France fans don’t just want to just watch a sport; they want to engage with it, and they expect more information and interaction—data-enhanced viewing, live streaming, video on demand, mobile apps, and social media interaction. Digital technology has become essential for attracting fans, athletes, sponsors, and broadcasters.

Up until 2014, Tour de France was a technology laggard. The sport doesn’t easily generate real-time sta- tistics. The only source of real-time information was a chalkboard held up by a race executive sitting as a passenger on a motorbike ahead of the cyclists. TV viewers could see timings and the race from numerous camera angles, but little more.

Today, data from Tour de France racing bikes are relayed to TV view- ers within two seconds. A small, lightweight tracking sensor is at- tached to a clip below the saddle of every competing rider’s bike. The sensor contains a global positioning system (GPS) chip, a radio frequency (RF) chip, and a rechargeable bat- tery. Each sensor transmits data about the bike’s GPS position and speed every second, generating over 3 billion data points during the course of the race. These real-time data are combined with feeds from other sources, such as weather services, road gradients, and historical race data from the past few years. Race organizers, broadcasters, teams, TV viewers, and fans using the Tour de France mobile app can now access detailed statistics on the progress of the race and in- dividual riders. Riders wear earpiece radios that relay real-time data to them as they are cycling. The system does not include biometric data to monitor riders’ physical performance—the teams keep these data private.

Tour de France Wins with Wireless Technology

© Radu Razvan/Shutterstock

252 Part Two Information Technology Infrastructure

Dimension Data, a global IT services firm headquartered in South Africa, built and operates Tour de France’s digital infrastructure. The sensor data from each racing bike are relayed to planes and helicopters flying overhead to cover the race for television. Race data are transmitted to Dimension Data’s cloud ser- vice, hosted in remote data centers in London and Amsterdam, where powerful algorithms developed by cycling experts analyze the data, including external feeds, to generate real-time information for broadcasters, social media, and the Tour de France race app. Getting the data from bike to viewer only takes two seconds. The system is able to make predictions before and during the race based on current and historic data about riders and the state of the race; for example, the likelihood that the main body of riders might catch up to break- away riders. The system can also generate rider profiles showing each rider’s strengths and weaknesses across different race conditions based on historical race results and performance.

Digital technology has dramatically increased Tour de France fan involve- ment. Fans are able to see live performance information on their TVs and dis- cuss the results on social media. In 2014, there were only 6 million views of video clips put out by the Tour de France organization. By 2016, that num- ber had soared to 55 million. Seventeen million people access the live-tracking website. The goal is to pull you, the fan, into the race, and it appears Tour de France has succeeded.

Sources: www.letour.fr/en, accessed September 12, 2018; Bryan Glick, “Tour de France Pumps Tech,” Computer Weekly, August 15–21, 2017; “Tour de France Behind the Scenes: How Dimension Data Rider Live Tracking Works,” DCRainmaker, July 13, 2017; Dave Michels, “Adding an IoT Dimension to the Tour de France,” Network World, May 23, 2017; and Scott Gibson, “5 Ways Tour de France Is Winning the Digital Race in 2017,” Dimension Data, June 29, 2017.

The experience of the Tour de France illustrates some of the powerful capabilities and opportunities provided by contemporary networking tech- nology. The annual Tour de France bicycle race now uses wireless networking and wireless sensor technology to closely track cyclists’ speed and position in relation to other variables affecting race outcome, and to deliver race informa- tion instantaneously to fans and broadcasters.

The chapter-opening diagram calls attention to important points raised by this case and this chapter. The Tour de France race takes place over a vast and topographically challenging terrain, where it is very difficult to track riders and generate real-time race statistics. This legendary race has many fans, but man- agement realized it could expand its fan base and deepen fan engagement by taking advantage of opportunities presented by wireless networking technology and the Internet of Things (IoT). The Tour de France is thus able to provide real-time race statistics, rider profiles, predictions about race outcomes, and content for TV broadcasts and social media, increasing the popularity of the sport and fans’ interest. Tour de France cyclists and teams can use this informa- tion to improve their performance.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 253

Here are some questions to think about: Why has wireless technology played such a key role at the Tour de France? Describe how the technology changed the way the Tour de France provided and used data from its races.

7-1 What are the principal components of telecommunications networks and key networking technologies?

If you run or work in a business, you can’t do without networks. You need to communicate rapidly with your customers, suppliers, and employees. Until about 1990, businesses used the postal system or telephone system with voice or fax for communication. Today, however, you and your employees use com- puters, email, text messaging, the Internet, mobile phones, and mobile com- puters connected to wireless networks for this purpose. Networking and the Internet are now nearly synonymous with doing business.

Networking and Communication Trends Firms in the past used two fundamentally different types of networks: tele- phone networks and computer networks. Telephone networks historically handled voice communication, and computer networks handled data traffic. Telephone companies built telephone networks throughout the twentieth cen- tury by using voice transmission technologies (hardware and software), and these companies almost always operated as regulated monopolies throughout the world. Computer companies originally built computer networks to transmit data between computers in different locations.

Thanks to continuing telecommunications deregulation and information technology innovation, telephone and computer networks are converging into a single digital network using shared Internet-based standards and technology.

Business Solutions

Management

Organization

Wireless Race Tracking System

Technology

Information System

Business Problem

• Vast topographically challenging location • Opportunities from new technology

• Revise race tracking process • Obtain external data

• Monitor rider progress and location

• Predict race outcome • Generate rider profiles • Generate real-time race statistics

• Increase fan involvement • Expand fan bases

• Tracking sensors • Mobile app • Cloud computing service • Data analytics • Social media

• Select race technology

254 Part Two Information Technology Infrastructure

Telecommunications providers today, such as AT&T and Verizon, offer data transmission, Internet access, mobile phone service, and television program- ming as well as voice service. Cable companies, such as Cablevision and Comcast, offer voice service and Internet access. Computer networks have ex- panded to include Internet telephone and video services.

Both voice and data communication networks have also become more pow- erful (faster), more portable (smaller and mobile), and less expensive. For instance, the typical Internet connection speed in 2000 was 56 kilobits per second, but today the majority of U.S. households have high-speed broadband connections provided by telephone and cable TV companies running at 3 to 20 megabits (millions of bits per second). The cost for this service has fallen ex- ponentially, from 50 cents per kilobit in 2000 to a tiny fraction of a cent today.

Increasingly, voice and data communication, as well as Internet access, are taking place over broadband wireless platforms such as mobile phones, mo- bile handheld devices, and PCs in wireless networks. More than 70 percent of Internet users (232 million people) in the United States use smartphones and tablets to access the Internet, as well as desktop PCs.

What Is a Computer Network? If you had to connect the computers for two or more employees in the same office, you would need a computer network. In its simplest form, a network consists of two or more connected computers. Figure 7.1 illustrates the major hardware, software, and transmission components in a simple network: a cli- ent computer and a dedicated server computer, network interfaces, a con- nection medium, network operating system software, and either a hub or a switch.

FIGURE 7.1 COMPONENTS OF A SIMPLE COMPUTER NETWORK Illustrated here is a simple computer network consisting of computers, a network operating system (NOS) residing on a dedicated server computer, cable (wiring) connecting the devices, switches, and a router.

Switch

Server

Switch

PC

PC

Router

Other Networks Internet

NOS

Chapter 7 Telecommunications, the Internet, and Wireless Technology 255

Each computer on the network contains a network interface device to link the computer to the network. The connection medium for linking network components can be a telephone wire, coaxial cable, or radio signal in the case of cell phone and wireless local area networks (Wi-Fi networks).

The network operating system (NOS) routes and manages communica- tions on the network and coordinates network resources. It can reside on every computer in the network or primarily on a dedicated server computer for all the applications on the network. A server is a computer on a network that per- forms important network functions for client computers, such as displaying web pages, storing data, and storing the network operating system (hence con- trolling the network). Microsoft Windows Server and Linux are the most widely used network operating systems.

Most networks also contain a switch or a hub acting as a connection point between the computers. Hubs are simple devices that connect network com- ponents, sending a packet of data to all other connected devices. A switch has more intelligence than a hub and can filter and forward data to a specified des- tination on the network.

What if you want to communicate with another network, such as the Internet? You would need a router. A router is a communications processor that routes packets of data through different networks, ensuring that the data sent get to the correct address.

Network switches and routers have proprietary software built into their hardware for directing the movement of data on the network. This can cre- ate network bottlenecks and makes the process of configuring a network more complicated and time-consuming. Software-defined networking (SDN) is a networking approach in which many of these control functions are managed by one central program, which can run on inexpensive commodity servers that are separate from the network devices themselves. This is especially helpful in a cloud computing environment with many pieces of hardware because it allows a network administrator to manage traffic loads in a flexible and more efficient manner.

Networks in Large Companies The network we’ve just described might be suitable for a small business, but what about large companies with many locations and thousands of employees? As a firm grows, its small networks can be tied together into a corporate-wide networking infrastructure. The network infrastructure for a large corporation consists of a large number of these small local area networks linked to other local area networks and to firmwide corporate networks. A number of power- ful servers support a corporate website, a corporate intranet, and perhaps an extranet. Some of these servers link to other large computers supporting back- end systems.

Figure 7.2 provides an illustration of these more-complex, larger-scale corporate-wide networks. Here the corporate network infrastructure supports a mobile sales force using mobile phones and smartphones, mobile employees linking to the company website, and internal company networks using mobile wireless local area networks (Wi-Fi networks). In addition to these computer networks, the firm’s infrastructure may include a separate telephone network that handles most voice data. Many firms are dispensing with their traditional telephone networks and using Internet telephones that run on their existing data networks (described later).

As you can see from this figure, a large corporate network infrastructure uses a wide variety of technologies—everything from ordinary telephone service

256 Part Two Information Technology Infrastructure

and corporate data networks to Internet service, wireless Internet, and mobile phones. One of the major problems facing corporations today is how to inte- grate all the different communication networks and channels into a coherent system that enables information to flow from one part of the corporation to another and from one system to another.

Key Digital Networking Technologies Contemporary digital networks and the Internet are based on three key tech- nologies: client/server computing, the use of packet switching, and the de- velopment of widely used communications standards (the most important of which is Transmission Control Protocol/Internet Protocol, or TCP/IP) for link- ing disparate networks and computers.

Client/Server Computing Client/server computing, introduced in Chapter 5, is a distributed computing model in which some of the processing power is located within small, inexpen- sive client computers and resides literally on desktops or laptops or in handheld devices. These powerful clients are linked to one another through a network that is controlled by a network server computer. The server sets the rules of communication for the network and provides every client with an address so others can find it on the network.

Client/server computing has largely replaced centralized mainframe comput- ing in which nearly all the processing takes place on a central large mainframe

FIGURE 7.2 CORPORATE NETWORK INFRASTRUCTURE Today’s corporate network infrastructure is a collection of many networks from the pub- lic switched telephone network to the Internet to corporate local area networks linking workgroups, departments, or office floors.

Internet Service Provider

Telephone System

Mobile Phones/

Smartphones

Corporate Website

Intranet and Extranet

Servers

Internet

Corporate Wired LAN

Mobile Wi-Fi Network

Wireless LAN

Telephone Service Provider

Wireless Internet Service Provider

Chapter 7 Telecommunications, the Internet, and Wireless Technology 257

computer. Client/server computing has extended computing to departments, workgroups, factory floors, and other parts of the business that could not be served by a centralized architecture. It also makes it possible for personal com- puting devices such as PCs, laptops, and mobile phones to be connected to networks such as the Internet. The Internet is the largest implementation of client/server computing.

Packet Switching Packet switching is a method of slicing digital messages into parcels called packets, sending the packets along different communication paths as they be- come available, and then reassembling the packets once they arrive at their destinations (see Figure 7.3). Prior to the development of packet switching, computer networks used leased, dedicated telephone circuits to communicate with other computers in remote locations. In circuit-switched networks, such as the telephone system, a complete point-to-point circuit is assembled, and then communication can proceed. These dedicated circuit-switching techniques were expensive and wasted available communications capacity—the circuit was maintained regardless of whether any data were being sent.

Packet switching is more efficient. Messages are first broken down into small fixed bundles of data called packets. The packets include information for di- recting the packet to the right address and for checking transmission errors along with the data. The packets are transmitted over various communica- tions channels by using routers, each packet traveling independently. Packets of data originating at one source will be routed through many paths and net- works before being reassembled into the original message when they reach their destinations.

TCP/IP and Connectivity In a typical telecommunications network, diverse hardware and software com- ponents need to work together to transmit information. Different components in a network communicate with each other by adhering to a common set of

FIGURE 7.3 PACKET-SWITCHED NETWORKS AND PACKET COMMUNICATIONS

Data are grouped into small packets, which are transmitted independently over various communications channels and reassembled at their final destination.

Packet 2

Reassembled Message

Packet 3

Data

Packet 1 Message

Packet Number Message Number

Destination

258 Part Two Information Technology Infrastructure

rules called protocols. A protocol is a set of rules and procedures governing transmission of information between two points in a network.

In the past, diverse proprietary and incompatible protocols often forced business firms to purchase computing and communications equipment from a single vendor. However, today, corporate networks are increasingly using a single, common, worldwide standard called Transmission Control Protocol/ Internet Protocol (TCP/IP). TCP/IP was developed during the early 1970s to support U.S. Department of Defense Advanced Research Projects Agency (DARPA) efforts to help scientists transmit data among different types of com- puters over long distances.

TCP/IP uses a suite of protocols, the main ones being TCP and IP. TCP re- fers to the Transmission Control Protocol, which handles the movement of data between computers. TCP establishes a connection between the computers, se- quences the transfer of packets, and acknowledges the packets sent. IP refers to the Internet Protocol (IP), which is responsible for the delivery of packets and includes the disassembling and reassembling of packets during transmission. Figure 7.4 illustrates the four-layered Department of Defense reference model for TCP/IP, and the layers are described as follows:

1. Application layer. The Application layer enables client application programs to access the other layers and defines the protocols that applications use to exchange data. One of these application protocols is the Hypertext Transfer Protocol (HTTP), which is used to transfer web page files.

2. Transport layer. The Transport layer is responsible for providing the Applica- tion layer with communication and packet services. This layer includes TCP and other protocols.

3. Internet layer. The Internet layer is responsible for addressing, routing, and packaging data packets called IP datagrams. The Internet Protocol is one of the protocols used in this layer.

4. Network Interface layer. At the bottom of the reference model, the Network Interface layer is responsible for placing packets on and receiving them from the network medium, which could be any networking technology.

Two computers using TCP/IP can communicate even if they are based on different hardware and software platforms. Data sent from one computer to the other passes downward through all four layers, starting with the sending

FIGURE 7.4 THE TRANSMISSION CONTROL PROTOCOL/INTERNET PROTOCOL (TCP/IP) REFERENCE MODEL

This figure illustrates the four layers of the TCP/IP reference model for communications.

Application

Computer A Computer B

Application

Transport Transport

Internet Internet

Network Interface

Network Interface

Chapter 7 Telecommunications, the Internet, and Wireless Technology 259

computer’s Application layer and passing through the Network Interface layer. After the data reach the recipient host computer, they travel up the layers and are reassembled into a format the receiving computer can use. If the receiving computer finds a damaged packet, it asks the sending computer to retransmit it. This process is reversed when the receiving computer responds.

7-2 What are the different types of networks? Let’s look more closely at alternative networking technologies available to businesses.

Signals: Digital Versus Analog There are two ways to communicate a message in a network: an analog signal or a digital signal. An analog signal is represented by a continuous waveform that passes through a communications medium and has been used for audio communication. The most common analog devices are the telephone handset, the speaker on your computer, or your iPhone earphone, all of which create analog waveforms that your ear can hear.

A digital signal is a discrete, binary waveform rather than a continuous wave- form. Digital signals communicate information as strings of two discrete states: 1 bits and 0 bits, which are represented as on-off electrical pulses. Computers use digital signals and require a modem to convert these digital signals into ana- log signals that can be sent over (or received from) telephone lines, cable lines, or wireless media that use analog signals (see Figure 7.5). Modem stands for modulator-demodulator. Cable modems connect your computer to the Internet by using a cable network. DSL modems connect your computer to the Internet using a telephone company’s landline network. Wireless modems perform the same function as traditional modems, connecting your computer to a wireless network that could be a cell phone network or a Wi-Fi network.

Types of Networks There are many kinds of networks and ways of classifying them. One way of looking at networks is in terms of their geographic scope (see Table 7.1).

Local Area Networks If you work in a business that uses networking, you are probably connecting to other employees and groups via a local area network. A local area network (LAN) is designed to connect personal computers and other digital devices

FIGURE 7.5 FUNCTIONS OF THE MODEM A modem is a device that translates digital signals into analog form (and vice versa) so that computers can transmit data over analog networks such as telephone and cable networks.

• Telephone line • Cable system • Wireless media • Analog device

Computer Modem

11

0 0 0

Digital Analog

260 Part Two Information Technology Infrastructure

within a half-mile or 500-meter radius. LANs typically connect a few comput- ers in a small office, all the computers in one building, or all the computers in several buildings in close proximity. LANs also are used to link to long-distance wide area networks (WANs, described later in this section) and other networks around the world, using the Internet.

Review Figure 7.1, which could serve as a model for a small LAN that might be used in an office. One computer is a dedicated network server, providing users with access to shared computing resources in the network, including soft- ware programs and data files.

The server determines who gets access to what and in which sequence. The router connects the LAN to other networks, which could be the Internet, or an- other corporate network, so that the LAN can exchange information with net- works external to it. The most common LAN operating systems are Windows and Linux.

Ethernet is the dominant LAN standard at the physical network level, speci- fying the physical medium to carry signals between computers, access control rules, and a standardized set of bits that carry data over the system. Originally, Ethernet supported a data transfer rate of 10 megabits per second (Mbps). Newer versions, such as Gigabit Ethernet, support a data transfer rate of 1 giga- bit per second (Gbps).

The LAN illustrated in Figure 7.1 uses a client/server architecture in which the network operating system resides primarily on a single server, and the server provides much of the control and resources for the network. Alternatively, LANs may use a peer-to-peer architecture. A peer-to-peer net- work treats all processors equally and is used primarily in small networks with ten or fewer users. The various computers on the network can exchange data by direct access and can share peripheral devices without going through a sep- arate server.

Larger LANs have many clients and multiple servers, with separate serv- ers for specific services such as storing and managing files and databases (file servers or database servers), managing printers (print servers), storing and managing email (mail servers), or storing and managing web pages (web servers).

Metropolitan and Wide Area Networks Wide area networks (WANs) span broad geographical distances—regions, states, continents, or the entire globe. The most universal and powerful WAN is the Internet. Computers connect to a WAN through public networks, such as the telephone system or private cable systems, or through leased lines or satellites. A metropolitan area network (MAN) is a network that spans a metropolitan area, usually a city and its major suburbs. Its geographic scope falls between a WAN and a LAN.

TABLE 7.1 TYPES OF NETWORKS

TYPE AREA

Local area network (LAN) Up to 500 meters (half a mile); an office or floor of a building

Campus area network (CAN) Up to 1,000 meters (a mile); a college campus or corporate facility

Metropolitan area network (MAN) A city or metropolitan area

Wide area network (WAN) A regional, transcontinental, or global area

Chapter 7 Telecommunications, the Internet, and Wireless Technology 261

Transmission Media and Transmission Speed Networks use different kinds of physical transmission media, including twisted pair wire, coaxial cable, fiber-optic cable, and media for wireless transmission. Each has advantages and limitations. A wide range of speeds is possible for any given medium, depending on the software and hardware configuration. Table 7.2 compares these media.

Bandwidth: Transmission Speed The total amount of digital information that can be transmitted through any telecommunications medium is measured in bits per second (bps). One signal change, or cycle, is required to transmit one or several bits; therefore, the trans- mission capacity of each type of telecommunications medium is a function of its frequency. The number of cycles per second that can be sent through that medium is measured in hertz—one hertz is equal to one cycle of the medium.

The range of frequencies that can be accommodated on a particular telecom- munications channel is called its bandwidth. The bandwidth is the difference between the highest and lowest frequencies that can be accommodated on a single channel. The greater the range of frequencies, the greater the bandwidth and the greater the channel’s transmission capacity.

7-3 How do the Internet and Internet technology work, and how do they support communication and e-business?

The Internet has become an indispensable personal and business tool—but what exactly is the Internet? How does it work, and what does Internet technology have to offer for business? Let’s look at the most important Internet features.

What Is the Internet? The Internet is the world’s most extensive public communication system. It’s also the world’s largest implementation of client/server computing and internetworking, linking millions of individual networks all over the world.

TABLE 7.2 PHYSICAL TRANSMISSION MEDIA

TRANSMISSION MEDIUM DESCRIPTION SPEED

Twisted pair wire (CAT 5) Strands of copper wire twisted in pairs for voice and data communications. CAT 5 is the most common 10 Mbps LAN cable. Maximum recommended run of 100 meters.

10–100+ Mbps

Coaxial cable Thickly insulated copper wire, which is capable of high-speed data transmission and less subject to interference than twisted wire. Currently used for cable TV and for networks with longer runs (more than 100 meters).

Up to 1 Gbps

Fiber-optic cable Strands of clear glass fiber, transmitting data as pulses of light generated by lasers. Useful for high-speed transmission of large quantities of data. More expensive than other physical transmission media; used for last-mile delivery to customers and the Internet backbone.

15 Mbps to 6+ Tbps

Wireless transmission media Based on radio signals of various frequencies and includes both terrestrial and satellite microwave systems and cellular networks. Used for long- distance, wireless communication, and Internet access.

Up to 600+ Mbps

262 Part Two Information Technology Infrastructure

This global network of networks began in the early 1970s as a U.S. Department of Defense project to link scientists and university professors around the world.

Most homes and small businesses connect to the Internet by subscribing to an Internet service provider. An Internet service provider (ISP) is a com- mercial organization with a permanent connection to the Internet that sells temporary connections to retail subscribers. EarthLink, NetZero, and AT&T are ISPs. Individuals also connect to the Internet through their business firms, uni- versities, or research centers that have designated Internet domains.

There is a variety of services for ISP Internet connections. Connecting via a traditional telephone line and modem, at a speed of 56.6 kilobits per sec- ond (Kbps), used to be the most common form of connection worldwide, but high-speed broadband connections have largely replaced it. Digital subscriber line, cable, satellite Internet connections, and T lines provide these broadband services.

Digital subscriber line (DSL) technologies operate over existing telephone lines to carry voice, data, and video at transmission rates ranging from 385 Kbps all the way up to 3 Mbps, depending on usage patterns and distance. Fios (Verizon’s fiber optic cable service) can deliver over 900 Mbps, although most home service delivers 100 Mbps. Cable Internet connections provided by cable television vendors use digital cable coaxial lines to deliver high-speed Internet access to homes and businesses. They can provide high-speed access to the Internet of up to 50 Mbps, although most providers offer service rang- ing from 3 Mbps to 20 Mbps. Where DSL and cable services are unavailable, it is possible to access the Internet via satellite, although some satellite Internet connections have slower upload speeds than other broadband services.

T1 and T3 are international telephone standards for digital communication. They are leased, dedicated lines suitable for businesses or government agen- cies requiring high-speed guaranteed service levels. T1 lines offer guaranteed delivery at 1.54 Mbps, and T3 lines offer delivery at 45 Mbps. The Internet does not provide similar guaranteed service levels but, simply, best effort.

Internet Addressing and Architecture The Internet is based on the TCP/IP networking protocol suite described ear- lier in this chapter. Every device connected to the Internet (or another TCP/IP network) is assigned a unique Internet Protocol (IP) address consisting of a string of numbers.

When a user sends a message to another user on the Internet or another TCP/IP network, the message is first decomposed into packets. Each packet contains its destination address. The packets are then sent from the client to the network server and from there on to as many other servers as necessary to arrive at a specific computer with a known address. At the destination address, the packets are reassembled into the original message.

The Domain Name System Because it would be incredibly difficult for Internet users to remember long strings of numbers, an IP address can be represented by a natural language con- vention called a domain name. The Domain Name System (DNS) converts domain names to IP addresses. DNS servers maintain a database containing IP addresses mapped to their corresponding domain names. To access a computer on the Internet, users need only specify its domain name, such as Expedia.com,

DNS has a hierarchical structure (see Figure 7.6). At the top of the DNS hi- erarchy is the root domain. The child domain of the root is called a top-level

Chapter 7 Telecommunications, the Internet, and Wireless Technology 263

domain, and the child domain of a top-level domain is called a second-level domain. Top-level domains are two- and three-character names you are famil- iar with from surfing the web; for example, .com, .edu, .gov, and the various country codes such as .ca for Canada or .it for Italy. Second-level domains have two parts, designating a top-level name and a second-level name—such as buy.com, nyu.edu, or amazon.ca. A host name at the bottom of the hi- erarchy designates a specific computer on either the Internet or a private network.

The following list shows the most common domain extensions currently available and officially approved. Countries also have domain names such as .uk, .au, and .fr (United Kingdom, Australia, and France, respectively), and there is a new class of internationalized top-level domains that use non-English characters. In the future, this list will expand to include many more types of organizations and industries as follows:

.com Commercial organizations/businesses

.edu Educational institutions

.gov U.S. government agencies

.mil U.S. military

.net Network computers

.org Any type of organization

.biz Business firms

.info Information providers

Internet Architecture and Governance Internet data traffic is carried over transcontinental high-speed backbone networks that generally operate in the range of 155 Mbps to 2.5 Gbps (see Figure 7.7). These trunk lines are typically owned by long-distance telephone

FIGURE 7.6 THE DOMAIN NAME SYSTEM The Domain Name System is a hierarchical system with a root domain, top-level domains, second-level domains, and host computers at the third level.

expedia

sales.google.com

computer1.sales.google.com

congress

other domains

“.”

edu

Internet Root Domain

Top-level domains

Second-level domains

Third-level domains Hosts

google

sales

Computer1

gov org netcom

264 Part Two Information Technology Infrastructure

companies (called network service providers) or by national governments. Local connection lines are owned by regional telephone and cable television com- panies in the United States and in other countries that connect retail users in homes and businesses to the Internet. The regional networks lease access to ISPs, private companies, and government institutions.

Each organization pays for its own networks and its own local Internet con- nection services, a part of which is paid to the long-distance trunk line owners. Individual Internet users pay ISPs for using their service, and they generally pay a flat subscription fee, no matter how much or how little they use the Internet. A debate is now raging on whether this arrangement should continue or whether heavy Internet users who download large video and music files should pay more for the bandwidth they consume. The Interactive Session on Organizations explores this topic by examining the pros and cons of net neutrality.

No one owns the Internet, and it has no formal management. However, worldwide Internet policies are established by a number of professional organizations and government bodies, including the Internet Architecture Board (IAB), which helps define the overall structure of the Internet; the Internet Corporation for Assigned Names and Numbers (ICANN), which manages the domain name system; and the World Wide Web Consortium (W3C), which sets Hypertext Markup Language and other programming standards for the web.

FIGURE 7.7 INTERNET NETWORK ARCHITECTURE The Internet backbone connects to regional networks, which in turn provide access to Internet service providers, large firms, and government institutions. Network access points (NAPs) and metropolitan area exchanges (MAEs) are hubs where the backbone intersects regional and local networks and where backbone owners connect with one another.

Regional Hosts

Regional Hubs (MAEs and NAPs)

Domain Local ISP

Regular Phone Line

Domain nyu.edu

T1 Line Regional

Hosts

SMTP Mail

POP3 Mail

MAE

MAE

Client IP Address

Client IP Address

Campus Network

O�ces

Home

Backbone

Chapter 7 Telecommunications, the Internet, and Wireless Technology 265

What kind of Internet user are you? Do you primar- ily use the Net to do a little email and online bank- ing? Or are you online all day, watching YouTube videos, downloading music files, or playing online games? Do you use your iPhone to stream TV shows and movies on a regular basis? If you’re a power Internet or smartphone user, you are consuming a great deal of bandwidth.

To manage all the data flowing over the Internet, it will be necessary to build new networks. Internet service providers (ISPs) assert that expanding their networks would require passing on burdensome costs to consumers. These companies believe differential pricing methods, which include data caps and metered use—charging based on the amount of bandwidth consumed—are the fairest way to finance necessary investments in their network infrastructures. However, metering Internet use is not universally accepted be- cause of an ongoing debate about net neutrality.

Net neutrality is the idea that Internet service pro- viders must allow customers equal access to content and applications, regardless of the source or nature of the content. Until recently, the Internet has been neutral, with all Internet traffic treated equally on a first-come, first-served basis by Internet backbone owners. However, this arrangement prevents tele- communications and cable companies from charging differentiated prices based on the amount of band- width consumed by the content being delivered over the Internet.

Net neutrality advocates include the Electronic Frontier Foundation; data-intensive web businesses such as Netflix, Amazon, and Google; major con- sumer groups; and a host of bloggers and small busi- nesses. They argue that differentiated pricing would impose heavy costs on heavy bandwidth users such as YouTube, Skype, and other innovative services, preventing high-bandwidth startup companies from gaining traction. Net neutrality supporters also argue that without net neutrality, ISPs that are also cable companies, such as Comcast, might block online streaming video from Netflix or Hulu to force cus- tomers to use the cable company’s on-demand movie rental services.

It was thought that the issue of net neutrality had been definitively settled by the 2015 ruling of

the Federal Communications Commission (FCC) under the Obama administration, which considered broadband Internet services as a utility under Title II of the Communications Act. This ruling gave the FCC broad power over Internet providers. Internet service providers could not discriminate against any lawful content by blocking websites or apps, slow the transmission of data based on the nature of the con- tent as long as it was legal, or create an Internet fast lane for companies and consumers who pay premi- ums and a slow lane for those who don’t.

All that changed under the Trump administration, which opposes net neutrality as part of its push for government-wide deregulation. In December 2017, the FCC voted to repeal its net neutrality rules for Internet providers. Trump’s FCC chair, Ajit Pai, has asserted that before net neutrality rules were put into effect in 2015, service providers had not engaged in any of the practices the rules prohibit. Pai believes that ending net neutrality could help lower prices for consumers, because Internet service providers could offset their costs with the use of paid prioritiza- tion deals with websites for faster delivery of their content.

Pro-net neutrality groups immediately countered, predicting that repealing net neutrality would lead to a faster, pricier, and more confusing Internet. Deregulation could create a “two-tier” Internet, in which Internet service providers will start charging fees to websites and apps, and slow down or block the sites that don’t pay up. As a result, users will have unfettered access to only part of the Internet, with the rest either inaccessible or slow.

Consumer advocates have further argued that if net neutrality rules are eliminated, broadband pro- viders will begin selling Internet services in bundles, similar to how cable television is sold today. For ex- ample, if you wanted to access Facebook and Twitter under a bundling system, you might have to pay for a premium social media package. Consumers could suffer from pay-to-play deals. A fast lane could be occupied by big Internet and media companies and affluent households, while everyone else would be relegated to a slow lane.

Some small businesses worry that repealing net neutrality would create an unfair playing field

INTERACTIVE SESSION ORGANIZATIONS

Net Neutrality: The Battle Rages On

266 Part Two Information Technology Infrastructure

1. What is net neutrality? Who’s in favor of net neu- trality? Who’s opposed? Why?

2. What would be the impact on individual users, businesses, and government if Internet providers switched to a tiered service model for transmis- sion over landlines and wireless?

3. It has been said that net neutrality is the most im- portant issue facing the Internet since the advent of the Internet. Discuss the implications of this statement.

4. Are you in favor of enforcing Internet neutrality? Why or why not?

favoring industry giants. Websites and services of e-commerce startups might run slower than those run by the big Internet players such as Netflix or Facebook. Remote workers of all kinds, including freelancers and franchisees could similarly face higher costs to do their jobs from home.

Opponents of net neutrality have countered that the biggest barrier to a company becoming the next Google, Facebook, Netflix, or Amazon isn’t the end of net neutrality but Google, Facebook, Netflix, and Amazon themselves. These compa- nies are already spending vast sums of money to push their ever-higher bandwidth content to

consumers. Many lawsuits challenging the FCC’s new Internet policy have been filed since the new FCC rules took effect. The battle for net neutrality is not over.

Sources: Cecelia Kang, “Flurry of Lawsuits Filed to Fight Repeal of Net Neutrality,” New York Times, January 16, 2018; Nick Piette, “Net Neutrality: Why It’s Vital for Digital Transformation,” Information Week, February 9, 2018; Aaron Byrd and Natalia V. Osipova, “Why Net Neutrality Was Repealed and How It Affects You,” New York Times, December 21, 2017; and “Christopher Mims, Get Ready for a Faster, Pricier, and More Confusing Internet,” Wall Street Journal, December 18, 2017.

CASE STUDY QUESTIONS

These organizations influence government agencies, network owners, ISPs, and software developers with the goal of keeping the Internet operating as effi- ciently as possible. The Internet must also conform to the laws of the sovereign nation-states in which it operates as well as to the technical infrastructures that exist within the nation-states. Although in the early years of the Internet and the web there was very little legislative or executive interference, this situation is changing as the Internet plays a growing role in the distribution of informa- tion and knowledge, including content that some find objectionable.

The Future Internet: IPv6 and Internet2 The Internet was not originally designed to handle billions of users and the transmission of massive quantities of data. Because of sheer Internet popula- tion growth, the world is about to run out of available IP addresses using the old addressing convention. The old system based on 32-bit addresses is being replaced by a new version of IP addressing called IPv6 (Internet Protocol ver- sion 6), which contains 128-bit addresses (2 to the power of 128), or more than a quadrillion possible unique addresses. IPv6 is compatible with most modems and routers sold today, and IPv6 will fall back to the old addressing system if IPv6 is not available on local networks. The transition to IPv6 will take several years as systems replace older equipment.

Internet2 is an advanced networking consortium representing more than 500 U.S. universities, private businesses, and government agencies working with 94,000 institutions across the United States and international network- ing partners from more than 100 countries. To connect these communities, Internet2 developed a high-capacity, 100 Gbps network that serves as a test

Chapter 7 Telecommunications, the Internet, and Wireless Technology 267

bed for leading-edge technologies that may eventually migrate to the public Internet, including large-scale network performance measurement and man- agement tools, secure identity and access management tools, and capabilities such as scheduling high-bandwidth, high-performance circuits.

Internet Services and Communication Tools The Internet is based on client/server technology. Individuals using the Internet control what they do through client applications on their computers, such as web browser software. The data, including email messages and web pages, are stored on servers. A client uses the Internet to request information from a particular web server on a distant computer, and the server sends the re- quested information back to the client over the Internet. Client platforms today include not only PCs and other computers but also smartphones and tablets.

Internet Services A client computer connecting to the Internet has access to a variety of services. These services include email, chatting and instant messaging, electronic dis- cussion groups, Telnet, File Transfer Protocol (FTP), and the web. Table 7.3 provides a brief description of these services.

Each Internet service is implemented by one or more software programs. All the services may run on a single server computer, or different services may be allocated to different machines. Figure 7.8 illustrates one way these services can be arranged in a multitiered client/server architecture.

Email enables messages to be exchanged from computer to computer, with capabilities for routing messages to multiple recipients, forwarding messages, and attaching text documents or multimedia files to messages. Most email today is sent through the Internet. The cost of email is far lower than equiva- lent voice, postal, or overnight delivery costs, and email messages can arrive anywhere in the world in a matter of seconds.

Chatting enables two or more people who are simultaneously connected to the Internet to hold live, interactive conversations. Chat systems now support voice and video chat as well as written conversations. Many online retail busi- nesses offer chat services on their websites to attract visitors, to encourage re- peat purchases, and to improve customer service.

Instant messaging is a type of chat service that enables participants to cre- ate their own private chat channels. The instant messaging system alerts the user whenever someone on his or her private list is online so that the user can initiate a chat session with other individuals. Instant messaging systems for con- sumers include Yahoo! Messenger, Google Hangouts, AOL Instant Messenger,

TABLE 7.3 MAJOR INTERNET SERVICES

CAPABILITY FUNCTIONS SUPPORTED

Email Person-to-person messaging; document sharing

Chatting and instant messaging Interactive conversations

Newsgroups Discussion groups on electronic bulletin boards

Telnet Logging on to one computer system and doing work on another

File Transfer Protocol (FTP) Transferring files from computer to computer

World Wide Web Retrieving, formatting, and displaying information (including text, audio, graphics, and video) by using hypertext links

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and Facebook Messenger. Companies concerned with security use proprietary communications and messaging systems such as IBM Sametime.

Newsgroups are worldwide discussion groups posted on Internet electronic bulletin boards on which people share information and ideas on a defined topic such as radiology or rock bands. Anyone can post messages on these bulletin boards for others to read.

Employee use of email, instant messaging, and the Internet is supposed to increase worker productivity, but the accompanying Interactive Session on Management shows that this may not always be the case. Many company man- agers now believe they need to monitor and even regulate their employees’ online activity, but is this ethical? Although there are some strong business reasons companies may need to monitor their employees’ email and web ac- tivities, what does this mean for employee privacy?

Voice over IP The Internet has also become a popular platform for voice transmission and corporate networking. Voice over IP (VoIP) technology delivers voice infor- mation in digital form using packet switching, avoiding the tolls charged by local and long-distance telephone networks (see Figure 7.9). Calls that would ordinarily be transmitted over public telephone networks travel over the corpo- rate network based on the Internet protocol, or over the public Internet. Voice calls can be made and received with a computer equipped with a microphone and speakers or with a VoIP-enabled telephone.

Cable firms such as Time Warner and Cablevision provide VoIP service bundled with their high-speed Internet and cable offerings. Skype offers free VoIP worldwide using a peer-to-peer network, and Google has its own free VoIP service.

Although up-front investments are required for an IP phone system, VoIP can reduce communication and network management costs by 20 to 30 per- cent. For example, VoIP saves Virgin Entertainment Group $700,000 per year in

FIGURE 7.8 CLIENT/SERVER COMPUTING ON THE INTERNET Client computers running web browsers and other software can access an array of services on servers over the Internet. These services may all run on a single server or on multiple specialized servers.

Sales Production Accounting

HR

• Web browser • Other client software

• Web (HTTP) server • Simple Mail Transfer Protocol (SMTP)

• Domain Name Serving (DNS) utility

• File Transfer Protocol (FTP)

• Network News Transfer Protocol (NNTP)

Smartphone

InternetClient Server

Web pages

Data- bases

Mail files

Application server

Database server

Back-end systems

Chapter 7 Telecommunications, the Internet, and Wireless Technology 269

long-distance bills. In addition to lowering long-distance costs and eliminating monthly fees for private lines, an IP network provides a single voice-data in- frastructure for both telecommunications and computing services. Companies no longer have to maintain separate networks or provide support services and personnel for each type of network.

Unified Communications In the past, each of the firm’s networks for wired and wireless data, voice com- munications, and videoconferencing operated independently of each other and had to be managed separately by the information systems department. Now, however, firms can merge disparate communications modes into a single uni- versally accessible service using unified communications technology. Unified communications integrates disparate channels for voice communications, data communications, instant messaging, email, and electronic conferencing into a single experience by which users can seamlessly switch back and forth between different communication modes. Presence technology shows whether a person is available to receive a call.

CenterPoint Properties, a major Chicago area industrial real estate com- pany, used unified communications technology to create collaborative web- sites for each of its real estate deals. Each website provides a single point for accessing structured and unstructured data. Integrated presence technology lets team members email, instant message, call, or videoconference with one click.

Virtual Private Networks What if you had a marketing group charged with developing new products and services for your firm with members spread across the United States? You would want them to be able to email each other and communicate with the home office without any chance that outsiders could intercept the communica- tions. Large private networking firms offer secure, private, dedicated networks to customers, but this is expensive. A lower-cost solution is to create a virtual private network within the public Internet.

FIGURE 7.9 HOW VOICE OVER IP WORKS A VoIP phone call digitizes and breaks up a voice message into data packets that may travel along different routes before being reassembled at the final destination. A processor nearest the call’s desti- nation, called a gateway, arranges the packets in the proper order and directs them to the telephone number of the receiver or the IP address of the receiving computer.

A A

Y Y

C

C

X

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B

Internet

User

Gateway

How are you?

( )

Fine, thank you!

( )

Gateway

User

B

A CB

How are you?

( )A CB

A CB

Z

Z

YX Z

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( )YX Z

Y XZ

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The Internet has become an extremely valuable business tool, but it’s also a huge distraction for workers on the job. Employees are wasting valuable company time by surfing inappropriate websites (Facebook, shopping, sports, etc.), sending and re- ceiving personal email, texting to friends, and down- loading videos and music. According to a survey by International Data Corp (IDC), 30 to 40 percent of Internet access is spent on non-work-related brows- ing, and a staggering 60 percent of all online pur- chases are made during working hours.

Many companies have begun monitoring employee use of email and the Internet, sometimes without their knowledge. Many tools are now available for this pur- pose, including Veriato Investigator, OsMonitor, Work Examiner, Mobistealth, and Spytech. These products enable companies to record online searches, monitor file downloads and uploads, record keystrokes, keep tabs on emails, create transcripts of chats, or take certain screenshots of images displayed on computer screens. Instant messaging, text messaging, and social media monitoring are also increasing. Microsoft offers software called MyAnalytics, which assembles data from emails, calendars, and other sources to show em- ployees how they spend their time, how often they are in touch with key contacts, and whether they multi- task too much. It also aggregates the data for managers to see how their teams are doing.

Although U.S. companies have the legal right to monitor employee Internet and email activity while they are at work, is such monitoring unethical, or is it simply good business?

Managers worry about the loss of time and em- ployee productivity when employees are focusing on personal rather than company business. Too much time on personal business translates into lost reve- nue. Some employees may even be billing time they spend pursuing personal interests online to clients, thus overcharging them.

If personal traffic on company networks is too high, it can also clog the company’s network so that legitimate business work cannot be performed. GMI Insurance Services, which serves the U.S. transporta- tion industry, found that employees were download- ing a great deal of music and streaming video and storing the files on company servers. GMI’s server backup space was being eaten up.

When employees use email or the web (includ- ing social networks) at employer facilities or with employer equipment, anything they do, includ- ing anything illegal, carries the company’s name. Therefore, the employer can be traced and held lia- ble. Management in many firms fear that racist, sexu- ally explicit, or other potentially offensive material accessed or traded by their employees could result in adverse publicity and even lawsuits for the firm. Even if the company is found not to be liable, responding to lawsuits could run up huge legal bills. Companies also fear leakage of confidential information and trade secrets through email or social networks. U.S. companies have the legal right to monitor what em- ployees are doing with company equipment during business hours. The question is whether electronic surveillance is an appropriate tool for maintaining an efficient and positive workplace. Some companies try to ban all personal activities on corporate networks— zero tolerance. Others block employee access to spe- cific websites or social sites, closely monitor email messages, or limit personal time on the web.

IT Authorities, a Tampa, Florida–based infrastruc- ture management and support organization, is using Veriato 360 employee monitoring software to help improve employee productivity. The company im- plemented the software in 2016 to reduce what it be- lieved to be “inefficient activities.” According to CEO Jason Caras, knowing that managers can see whether employees are working and exactly how they are working is a huge deterrent to wasteful activity. For IT Authorities specifically, Veriato 360 tracks and records the websites employees are visiting, what documents they are transmitting (and how), what they are sending (and to whom) in email and instant messaging, and even how long they might have been away from their computers at any given time. With Veriato 360, companies such as IT Authorities are able to identify “normal” patterns of activity for an individual’s job, as well as any anomalies, so they can quickly address any potential productivity loss before it costs their company thousands or even mil- lions of dollars in lost work.

A Proofpoint survey found that one in five large U.S. companies had fired an employee for violating email policies. Among managers who fired employ- ees for Internet misuse, the majority did so because

INTERACTIVE SESSION MANAGEMENT

Monitoring Employees on Networks: Unethical or Good Business?

Chapter 7 Telecommunications, the Internet, and Wireless Technology 271

1. Should managers monitor employee email and Internet usage? Why or why not?

2. Describe an effective email and web use policy for a company.

3. Should managers inform employees that their web behavior is being monitored? Or should managers monitor secretly? Why or why not?

the employees’ email contained sensitive, confiden- tial, or embarrassing information.

No solution is problem-free, but many consultants believe companies should write corporate policies on employee email, social media, and Internet use. Many workers are unaware that employers have the right to monitor and collect data about them. The policies should include explicit ground rules that state, by posi- tion or level, under what circumstances employees can use company facilities for email, blogging, or web surf- ing. The policies should also inform employees whether these activities are monitored and explain why.

The rules should be tailored to specific business needs and organizational cultures. For example,

investment firms will need to allow many of their employees access to other investment sites. A com- pany dependent on widespread information shar- ing, innovation, and independence could very well find that monitoring creates more problems than it solves.

Sources: “Technology Is Making It Possible for Employers to Monitor More Work Activity than Ever,” Economist, April 3, 2018; www. privacyrights.org, accessed April 5, 2018; “Electronic Surveillance of Employees,” www.thebalance.com, accessed April 5, 2018; “Office Slacker Stats,” www.staffmonitoring.com, accessed May 3, 2017; “How Do Employers Monitor Internet Usage at Work?” wisegeek.org, accessed April 15, 2017; and Veriato,“Veriato 360 Helps IT Authorities Quickly Increase Employee Productivity,” March 15, 2017.

CASE STUDY QUESTIONS

A virtual private network (VPN) is a secure, encrypted, private network that has been configured within a public network to take advantage of the economies of scale and management facilities of large networks, such as the Internet (see Figure 7.10). A VPN provides your firm with secure, encrypted communications at a much lower cost than the same capabilities offered by tra- ditional non-Internet providers that use their private networks to secure com- munications. VPNs also provide a network infrastructure for combining voice and data networks.

Several competing protocols are used to protect data transmitted over the public Internet, including Point-to-Point Tunneling Protocol (PPTP). In a process called tunneling, packets of data are encrypted and wrapped inside IP packets. By adding this wrapper around a network message to hide its content, business firms create a private connection that travels through the public Internet.

The Web The web is the most popular Internet service. It’s a system with universally accepted standards for storing, retrieving, formatting, and displaying informa- tion by using a client/server architecture. Web pages are formatted using hy- pertext, embedded links that connect documents to one another and that also link pages to other objects, such as sound, video, or animation files. When you click a graphic and a video clip plays, you have clicked a hyperlink. A typical website is a collection of web pages linked to a home page.

Hypertext Web pages are based on a standard Hypertext Markup Language (HTML), which formats documents and incorporates dynamic links to other documents and other objects stored in the same or remote computers (see Chapter 5). Web

272 Part Two Information Technology Infrastructure

FIGURE 7.10 A VIRTUAL PRIVATE NETWORK USING THE INTERNET This VPN is a private network of computers linked using a secure tunnel connection over the Internet. It protects data transmitted over the public Internet by encoding the data and wrapping them within the Internet protocol. By adding a wrapper around a network message to hide its content, organizations can create a private connection that travels through the public Internet.

D

CA

B

Internet

Data

Data

pages are accessible through the Internet because web browser software operat- ing your computer can request web pages stored on an Internet host server by using the Hypertext Transfer Protocol (HTTP). HTTP is the communica- tions standard that transfers pages on the web. For example, when you type a web address in your browser, such as http://www.sec.gov, your browser sends an HTTP request to the sec.gov server requesting the home page of sec.gov.

HTTP is the first set of letters at the start of every web address, followed by the domain name, which specifies the organization’s server computer that is storing the web page. Most companies have a domain name that is the same as or closely related to their official corporate name. The directory path and web page name are two more pieces of information within the web address that help the browser track down the requested page. Together, the address is called a uniform resource locator (URL). When typed into a browser, a URL tells the browser software exactly where to look for the information. For example, in the URL http://www.megacorp.com/content/features/082610. html, http names the protocol that displays web pages, www.megacorp.com is the domain name, content/features is the directory path that identifies where on the domain web server the page is stored, and 082610.html is the web page name and the name of the format it is in. (It is an HTML page.)

Web Servers A web server is software for locating and managing stored web pages. It locates the web pages a user requests on the computer where they are stored and delivers the web pages to the user’s computer. Server applications usually run on dedicated computers, although they can all reside on a single computer in small organizations.

The leading web servers in use today are Microsoft Internet Information Services (IIS) and Apache HTTP Server. Apache is an open source product that is free of charge and can be downloaded from the web.

Searching for Information on the Web No one knows for sure how many web pages there really are. The surface web is the part of the web that search engines visit and about which information is recorded. For instance, Google indexed an estimated 35 trillion pages in 2017, and

Chapter 7 Telecommunications, the Internet, and Wireless Technology 273

this reflects a large portion of the publicly accessible web page population, esti- mated to be 60 trillion pages. But there is a deep web that contains an estimated 1 trillion additional pages, many of them proprietary (such as the pages of Wall Street Journal Online, which cannot be visited without a subscription or access code), or that are stored in protected corporate databases. Facebook, with web pages of text, photos, and media for more than 2 billion members, is a closed web, and its pages are not completely searchable by Google or other search engines. A small portion of the deep web called the dark web has been intentionally hid- den from search engines, uses masked IP addresses, and is accessible only with a special web browser in order to preserve anonymity.

Search Engines Obviously, with so many web pages, finding specific ones that can help you or your business, nearly instantly, is an important problem. The ques- tion is, how can you find the one or two pages you really want and need out of bil- lions of indexed web pages? Search engines attempt to solve the problem of finding useful information on the web nearly instantly and, arguably, they are the killer app of the Internet era. Today’s search engines can sift through HTML files; files of Microsoft Office applications; PDF files; and audio, video, and image files. There are hundreds of search engines in the world, but the vast majority of search results come from Google, Baidu, Yahoo, and Microsoft’s Bing (see Figure 7.11). While we typically think of Amazon as an online store, it is also a powerful product search engine.

Web search engines started out in the early 1990s as relatively simple soft- ware programs that roamed the nascent web, visiting pages and gathering in- formation about the content of each page. The first search engines were simple keyword indexes of all the pages they visited, leaving users with lists of pages that may not have been truly relevant to their search.

In 1994, Stanford University computer science students David Filo and Jerry Yang created a hand-selected list of their favorite web pages and called it “Yet Another Hierarchical Officious Oracle,” or Yahoo. Yahoo was not initially a search engine but rather an edited selection of websites organized by categories the edi- tors found useful. Currently, Yahoo relies on Microsoft’s Bing for search results.

In 1998, Larry Page and Sergey Brin, two other Stanford computer science students, released their first version of Google. This search engine was differ- ent. Not only did it index each web page’s words but it also ranked search results

FIGURE 7.11 TOP DESKTOP/LAPTOP WEB SEARCH ENGINES WORLDWIDE Google is the world’s most popular search engine. Source: Based on data from Net Market Share, April 2018.

Google 72.9%

Baidu 12.8%

Bing 7.7%

Yahoo 4.9%

Others 1.7%

274 Part Two Information Technology Infrastructure

based on the relevance of each page. Page patented the idea of a page ranking system (called PageRank System), which essentially measures the popularity of a web page by calculating the number of sites that link to that page as well as the number of pages to which it links. The premise is that popular web pages are more relevant to users. Brin contributed a unique web crawler program that indexed not only keywords on a page but also combinations of words (such as authors and the titles of their articles). These two ideas became the foundation for the Google search engine. Figure 7.12 illustrates how Google works.

Mobile Search Mobile search from smartphones and tablets makes up more than 50 percent of all searches and will expand rapidly in the next few years. Google, Amazon, and Yahoo have developed new search interfaces to make searching and shopping from smartphones more convenient. Google revised its search algorithm to favor sites that look good on smartphone screens. Although smartphones are widely used to shop, actual purchases typically take place on laptops or desktops, followed by tablets.

Semantic Search Another way for search engines to become more discrimi- nating and helpful is to make search engines capable of understanding what we are really looking for. Called semantic search, the goal is to build a search engine that can really understand human language and behavior. Google and other search engine firms are attempting to refine search engine algorithms to capture more of what the user intended and the meaning of a search. Rather

FIGURE 7.12 HOW GOOGLE WORKS The Google search engine is continuously crawling the web, indexing the content of each page, calculating its popularity, and storing the pages so that it can respond quickly to user requests to see a page. The entire process takes about half a second.

6. Results delivered to user, 10 to a page.

5. Small text summaries are prepared for each Web page.

4. Using the PageRank software, the system measures the “importance” or popularity of each page by solving an equation with more than 500 million variables and two billion terms. These are likely the “best” pages for the query.

3. Request is sent to Google’s index servers that describe which pages contain the keywords matching the query and where those pages are stored on the document servers.

2. Google’s Web servers receive the request. Google uses millions of PCs linked together and connected to the Internet to handle incoming requests and produce the results.

1. User enters query.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 275

than evaluate each word separately in a search, Google’s Hummingbird search algorithm tries to evaluate an entire sentence, focusing on the meaning behind the words. For instance, if your search is a long sentence like “Google annual report selected financial data 2018,” Hummingbird should be able to figure out that you really want Google’s parent company Alphabet’s SEC Form 10K report filed with the Securities and Exchange Commission in February 2018.

Google searches also take advantage of Knowledge Graph, an effort of the search algorithm to anticipate what you might want to know more about as you search on a topic. Results of the knowledge graph appear on the right of the screen on many search result pages and contain more information about the topic or person you are searching on. For example, if you search “Lake Tahoe,” the search engine will return basic facts about Tahoe (altitude, average temperature, and local fish), a map, and hotel accommodations. Google has made predictive search part of most search results. This part of the search algorithm guesses what you are looking for and suggests search terms as you type your search words.

Social Search One problem with Google and mechanical search engines is that they are so thorough. Enter a search for “ultra computers” and, in 0.2 seconds, you will receive over 300 million responses! Social search is an effort to provide fewer, more relevant, and trustworthy search results based on a person’s network of social contacts. In contrast to the top search engines that use a mathematical algorithm to find pages that satisfy your query, social search would highlight con- tent that was created or touched by members of your social network.

Facebook Search is a social network search engine that responds to user search queries with information from the user’s social network of friends and connections. Facebook Search relies on the huge amount of data on Facebook that is, or can be, linked to individuals and organizations. You might use Facebook Search to search for Boston restaurants that your friends like or pic- tures of your friends before 2016.

Visual Search and the Visual Web Although search engines were originally designed to search text documents, the explosion of photos and videos on the In- ternet created a demand for searching and classifying these visual objects. Facial recognition software can create a digital version of a human face. Facebook has a tag suggest function to assist users in tagging their friends in photos. You can also search for people on Facebook by using their digital image to find and identify them. Facebook is now using artificial intelligence technology to make its facial recognition capabilities more accurate.

Searching photos, images, and video has become increasingly important as the web becomes more visual. The visual web refers to websites such as Pinterest, where pictures replace text documents, where users search pictures, and where pictures of products replace display ads for products. Pinterest is a social net- working site that provides users (as well as brands) with an online board to which they can pin interesting pictures. Pinterest had 200 million active monthly users worldwide in 2018. Instagram is another example of the visual web. Instagram is a photo and video sharing site that allows users to take pictures, enhance them, and share them with friends on other social sites such as Facebook and Twitter. In 2018, Instagram had 800 million monthly active users.

Intelligent Agent Shopping Bots Chapter 11 describes the capabilities of soft- ware agents with built-in intelligence that can gather or filter information and per- form other tasks to assist users. Shopping bots use intelligent agent software for searching the Internet for shopping information. Shopping bots such as MySimon or PriceGrabber, and travel search tools like Trivago, can help people interested

276 Part Two Information Technology Infrastructure

in making a purchase or renting a vacation room filter and retrieve information according to criteria the users have established, and in some cases negotiate with vendors for price and delivery terms.

Search Engine Marketing Search engines have become major advertising platforms and shopping tools by offering what is now called search engine marketing. Searching for information is one of the web’s most popular activi- ties; it is estimated that 242 million people in the United States will use search engines by 2019 and 215 million will use mobile search by that time. With this huge audience, search engines are the foundation for the most lucrative form of online marketing and advertising: search engine marketing. When users enter a search term on Google, Bing, Yahoo, or any of the other sites serviced by these search engines, they receive two types of listings: sponsored links, for which advertisers have paid to be listed (usually at the top of the search results page), and unsponsored, organic search results. In addition, advertisers can purchase small text boxes on the side of search results pages. The paid, sponsored adver- tisements are the fastest growing form of Internet advertising and are powerful new marketing tools that precisely match consumer interests with advertising messages at the right moment. Search engine marketing monetizes the value of the search process. In 2018, search engine marketing was expected to generate $42 billion, or 44.2 percent of digital ad spending, nearly half of all online ad- vertising ($93 billion) (eMarketer, 2018). About 90 percent of Google’s revenue of $110 billion in 2017 came from online advertising, and 90 percent of that ad revenue came from search engine marketing (Alphabet, 2018).

Because search engine marketing is so effective (it has the highest click- through rate and the highest return on ad investment), companies seek to optimize their websites for search engine recognition. The better optimized the page is, the higher a ranking it will achieve in search engine result listings. Search engine optimization (SEO) is the process of improving the quality and volume of web traffic to a website by employing a series of techniques that help a website achieve a higher ranking with the major search engines when certain keywords and phrases are put into the search field. One technique is to make sure that the keywords used in the website description match the key- words likely to be used as search terms by prospective customers. For example, your website is more likely to be among the first ranked by search engines if it uses the keyword lighting rather than lamps if most prospective customers are searching for lighting. It is also advantageous to link your website to as many other websites as possible because search engines evaluate such links to de- termine the popularity of a web page and how it is linked to other content on the web.

Search engines can be gamed by scammers who create thousands of phony website pages and link them to a single retailer’s site in an attempt to fool Google’s search engine. Firms can also pay so-called link farms to link to their site. Google changed its search algorithm in 2012 to deal with this problem by examining the quality of links more carefully with the intent of down-ranking sites that have a suspicious pattern of sites linking to them.

In general, search engines have been very helpful to small businesses that cannot afford large marketing campaigns. Because shoppers are looking for a specific product or service when they use search engines, they are what mar- keters call hot prospects—people who are looking for information and often intending to buy. Moreover, search engines charge only for click-throughs to a site. Merchants do not have to pay for ads that don’t work, only for ads that receive a click. Consumers benefit from search engine marketing because ads

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for merchants appear only when consumers are looking for a specific prod- uct. Thus, search engine marketing saves consumers cognitive energy and re- duces search costs (including the cost of transportation needed to search for products physically). One study estimated the global value of search to both merchants and consumers to be more than $800 billion, with about 65 percent of the benefit going to consumers in the form of lower search costs and lower prices (McKinsey & Company, 2011).

Sharing Information on the Web Today’s websites don’t just contain static content—they enable people to collab- orate, share information, and create new services and content online. Today’s web can support interactivity, real-time user control, social participation (shar- ing), and user-generated content. The technologies and services behind these features include cloud computing, software mashups and apps, blogs, RSS, wikis, and social networks. We have already described cloud computing, mash- ups, and apps in Chapter 5 and introduced social networks in Chapter 2.

A blog, the popular term for a weblog, is a personal website that typically contains a series of chronological entries (newest to oldest) by its author and links to related web pages. The blog may include a blogroll (a collection of links to other blogs) and trackbacks (a list of entries in other blogs that refer to a post on the first blog). Most blogs allow readers to post comments on the blog entries as well. The act of creating a blog is often referred to as blogging. Blogs can be hosted by a third-party service such as Blogger.com or TypePad.com, and blog- ging features have been incorporated into social networks such as Facebook and collaboration platforms such as IBM Notes. WordPress is a leading open source blogging tool and content management system. Microblogging, used in Twitter or other platforms with serious space or size constraints, is a type of blogging that features very small elements of content such as short sentences, individual images, or video links.

Blog pages are usually based on templates provided by the blogging service or software. Therefore, millions of people without HTML skills of any kind can post their own web pages and share content with others. The totality of blog- related websites is often referred to as the blogosphere. Although blogs have become popular personal publishing tools, they also have business uses (see Chapters 2 and 10).

If you’re an avid blog reader, you might use RSS to keep up with your favor- ite blogs without constantly checking them for updates. RSS, which stands for Really Simple Syndication or Rich Site Summary, pulls specified content from websites and feeds it automatically to users’ computers. RSS reader software gathers material from the websites or blogs that you tell it to scan and brings new information from those sites to you. RSS readers are available through websites such as Google and Yahoo, and they have been incorporated into the major web browsers and email programs.

Blogs allow visitors to add comments to the original content, but they do not allow visitors to change the original posted material. Wikis, in contrast, are col- laborative websites on which visitors can add, delete, or modify content, includ- ing the work of previous authors. Wiki comes from the Hawaiian word for “quick.”

Wiki software typically provides a template that defines layout and elements common to all pages, displays user-editable software program code, and then renders the content into an HTML-based page for display in a web browser. Some wiki software allows only basic text formatting, whereas other tools allow the use of tables, images, or even interactive elements, such as polls or games.

278 Part Two Information Technology Infrastructure

Most wikis provide capabilities for monitoring the work of other users and cor- recting mistakes.

Because wikis make information sharing so easy, they have many business uses. The U.S. Department of Homeland Security’s National Cyber Security Center (NCSC) deployed a wiki to facilitate information sharing with other fed- eral agencies on threats, attacks, and responses and as a repository for technical and standards information. Pixar Wiki is a collaborative community wiki for publicizing the work of Pixar Animation Studios. The wiki format allows any- one to create or edit an article about a Pixar film.

Social networking sites enable users to build communities of friends and professional colleagues. Members typically create a profile—a web page for posting photos, videos, audio files, and text—and then share these profiles with others on the service identified as their friends or contacts. Social networking sites are highly interactive, offer real-time user control, rely on user-generated content, and are broadly based on social participation and sharing of content and opinions. Leading social networking sites include Facebook, Twitter, and LinkedIn (for professional contacts).

Social networking has radically changed how people spend their time online; how people communicate and with whom; how business people stay in touch with customers, suppliers, and employees; how providers of goods and services learn about their customers; and how advertisers reach potential customers. The large social networking sites are also application development platforms where members can create and sell software applications to other members of the community. Facebook alone has more than 7 million apps and websites integrated with it, including applications for gaming, video sharing, and com- municating with friends and family. We talk more about business applications of social networking in Chapters 2 and 10, and you can find social networking discussions in many other chapters of this book.

The Future Web The future Internet is becoming visible. Its key features are more tools for in- dividuals to make sense out of the trillions of pages on the Internet, or the mil- lions of apps available for smartphones and a visual, even three-dimensional (3D) web where you can walk through pages in a 3D environment. (Review the discussion of semantic search and visual search earlier in this chapter.)

Even closer in time is a pervasive web that controls everything from a city’s traffic lights and water usage, to the lights in your living room, to your car’s rear view mirror, not to mention managing your calendar and appointments. This is referred to as the Internet of Things (IoT) and is based on billions of Internet-connected sensors throughout our physical world. Objects, animals, or people are provided with unique identifiers and the ability to transfer data over a network without requiring human-to-human or human-to-computer in- teraction. Firms such as General Electric, IBM, HP, and Oracle, and hundreds of smaller startups, are exploring how to build smart machines, factories, and cities through extensive use of remote sensors and fast cloud computing. We provide more detail on this topic in the following section.

The App Internet is another element in the future web. The growth of apps within the mobile platform is astounding. More than 80 percent of mobile min- utes in the United States are generated through apps, as opposed to browsers. Apps give users direct access to content and are much faster than loading a browser and searching for content.

Other complementary trends leading toward a future web include more widespread use of cloud computing and software as a service (SaaS) business

Chapter 7 Telecommunications, the Internet, and Wireless Technology 279

models, ubiquitous connectivity among mobile platforms and Internet access devices, and the transformation of the web from a network of separate siloed applications and content into a more seamless and interoperable whole.

7-4 What are the principal technologies and standards for wireless networking, communication, and Internet access?

Welcome to the wireless revolution! Cell phones, smartphones, tablets, and wireless-enabled personal computers have morphed into portable media and computing platforms that let you perform many of the computing tasks you used to do at your desk, and a whole lot more. We introduced smartphones in our discussions of the mobile digital platform in Chapters 1 and 5. Smartphones such as the iPhone, Android phones, and BlackBerry combine the functional- ity of a cell phone with that of a mobile laptop computer with Wi-Fi capability. This makes it possible to combine music, video, Internet access, and telephone service in one device. A large part of the Internet is becoming a mobile, access- anywhere, broadband service for the delivery of video, music, and web search.

Cellular Systems Today 81 percent of U.S. adults own mobile phones, and 69 percent own smart- phones (eMarketer, 2018). Mobile is now the leading digital platform, with total activity on smartphones and tablets accounting for two-thirds of digital media time spent, and smartphone apps alone capturing more than half of digital media time (Comscore, 2017).

Digital cellular service uses several competing standards. In Europe and much of the rest of the world outside the United Sates, the standard is Global System for Mobile Communications (GSM). GSM’s strength is its international roaming capability. There are GSM cell phone systems in the United States, including T-Mobile and AT&T.

A competing standard in the United States is Code Division Multiple Access (CDMA), which is the system Verizon and Sprint use. CDMA was developed by the military during World War II. It transmits over several frequencies, occupies the entire spectrum, and randomly assigns users to a range of frequencies over time, making it more efficient than GSM.

Earlier generations of cellular systems were designed primarily for voice and limited data transmission in the form of short text messages. Today wireless carriers offer 3G and 4G networks. 3G networks, with transmission speeds ranging from 144 Kbps for mobile users in, say, a car, to more than 2 Mbps for stationary users, offer transmission speeds appropriate for email and web browsing, but are too slow for videos. 4G networks have much higher speeds, up to 100 Mbps download and 50 Mbps upload, with more than enough capacity for watching high-definition video on your smartphone. Long Term Evolution (LTE) and mobile Worldwide Interoperability for Microwave Access (WiMax— see the following section) are the current 4G standards.

The next generation of wireless technology, called 5G, is still under devel- opment. 5G will support transmission of huge amounts of data in the gigabit range, with fewer transmission delays and the ability to connect many more devices (such as sensors and smart devices) at once than existing cellular sys- tems. 5G technology will be needed for self-driving vehicles, smart cities, and

280 Part Two Information Technology Infrastructure

extensive use of the Internet of Things. AT&T, Verizon, and other carriers are starting to launch 5G networks.

Wireless Computer Networks and Internet Access An array of technologies provides high-speed wireless access to the Internet for PCs and mobile devices. These new high-speed services have extended Internet ac- cess to numerous locations that could not be covered by traditional wired Internet services and have made ubiquitous computing, anywhere, anytime, a reality.

Bluetooth Bluetooth is the popular name for the 802.15 wireless networking standard, which is useful for creating small personal area networks (PANs). It links up to eight devices within a 10-meter area using low-power, radio-based communi- cation and can transmit up to 722 Kbps in the 2.4-GHz band.

Wireless phones, pagers, computers, printers, and computing devices using Bluetooth communicate with each other and even operate each other without direct user intervention (see Figure 7.13). For example, a person could direct a notebook computer to send a document file wirelessly to a printer. Bluetooth connects wireless keyboards and mice to PCs or cell phones to earpieces with- out wires. Bluetooth has low power requirements, making it appropriate for battery-powered handheld computers or cell phones.

Although Bluetooth lends itself to personal networking, it has uses in large corporations. For example, FedEx drivers use Bluetooth to transmit the deliv- ery data captured by their handheld computers to cellular transmitters, which forward the data to corporate computers. Drivers no longer need to spend time docking their handheld units physically in the transmitters, and Bluetooth has saved FedEx $20 million per year.

FIGURE 7.13 A BLUETOOTH NETWORK (PAN) Bluetooth enables a variety of devices, including cell phones, smartphones, wireless keyboards and mice, PCs, and printers, to interact wirelessly with each other within a small, 30-foot (10-meter) area. In addition to the links shown, Bluetooth can be used to network similar devices to send data from one PC to another, for example.

Wireless keyboard

Printer

User computer

Smartphone

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Wi-Fi and Wireless Internet Access The 802.11 set of standards for wireless LANs and wireless Internet access is also known as Wi-Fi. The first of these standards to be widely adopted was 802.11b, which can transmit up to 11 Mbps in the unlicensed 2.4-GHz band and has an effective distance of 30 to 50 meters. The 802.11g standard can transmit up to 54 Mbps in the 2.4-GHz range. 802.11n is capable of transmitting over 100 Mbps. Today’s PCs and tablets have built-in support for Wi-Fi, as do the iPhone, iPad, and other smartphones.

In most Wi-Fi communication, wireless devices communicate with a wired LAN using access points. An access point is a box consisting of a radio receiver/ transmitter and antennas that links to a wired network, router, or hub.

Figure 7.14 illustrates an 802.11 wireless LAN that connects a small number of mobile devices to a larger wired LAN and to the Internet. Most wireless de- vices are client machines. The servers that the mobile client stations need to use are on the wired LAN. The access point controls the wireless stations and acts as a bridge between the main wired LAN and the wireless LAN. The access point also controls the wireless stations.

The most popular use for Wi-Fi today is for high-speed wireless Internet ser- vice. In this instance, the access point plugs into an Internet connection, which could come from a cable service or DSL telephone service. Computers within range of the access point use it to link wirelessly to the Internet.

Hotspots are locations with one or more access points providing wireless Internet access and are often in public places. Some hotspots are free or do not

FIGURE 7.14 AN 802.11 WIRELESS LAN Mobile laptop computers equipped with network interface cards link to the wired LAN by communicating with the access point. The access point uses radio waves to transmit network signals from the wired network to the client adapters, which convert them to data that the mobile device can understand. The client adapter then transmits the data from the mobile device back to the access point, which forwards the data to the wired network.

Router

Internet

Access point

Wired network

282 Part Two Information Technology Infrastructure

require any additional software to use; others may require activation and the establishment of a user account by providing a credit card number over the web.

Businesses of all sizes are using Wi-Fi networks to provide low-cost wire- less LANs and Internet access. Wi-Fi hotspots can be found in hotels, airport lounges, libraries, cafes, and college campuses to provide mobile access to the Internet. Dartmouth College is one of many campuses where students now use Wi-Fi for research, course work, and entertainment.

Wi-Fi technology poses several challenges, however. One is Wi-Fi’s security features, which make these wireless networks vulnerable to intruders. We pro- vide more detail about Wi-Fi security issues in Chapter 8.

Another drawback of Wi-Fi networks is susceptibility to interference from nearby systems operating in the same spectrum, such as wireless phones, mi- crowave ovens, or other wireless LANs. However, wireless networks based on the 802.11n standard solve this problem by using multiple wireless antennas in tandem to transmit and receive data and technology called MIMO (multiple input multiple output) to coordinate multiple simultaneous radio signals.

WiMax A surprisingly large number of areas in the United States and throughout the world do not have access to Wi-Fi or fixed broadband connectivity. The range of Wi-Fi systems is no more than 300 feet from the base station, making it difficult for rural groups that don’t have cable or DSL service to find wireless access to the Internet.

The Institute of Electrical and Electronics Engineers (IEEE) developed a fam- ily of standards known as WiMax to deal with these problems. WiMax, which stands for Worldwide Interoperability for Microwave Access, is the popular term for IEEE Standard 802.16. It has a wireless access range of up to 31 miles and transmission speed of 30–40 Mbps (and up to 1 Gbps for fixed stations).

WiMax antennas are powerful enough to beam high-speed Internet connec- tions to rooftop antennas of homes and businesses that are miles away. Cellular handsets and laptops with WiMax capabilities are appearing in the marketplace. Mobile WiMax is one of the 4G network technologies we discussed earlier in this chapter.

RFID and Wireless Sensor Networks Mobile technologies are creating new efficiencies and ways of working through- out the enterprise. In addition to the wireless systems we have just described, radio frequency identification systems and wireless sensor networks are having a major impact.

Radio Frequency Identification (RFID) and Near Field Communication (NFC) Radio frequency identification (RFID) systems provide a powerful technol- ogy for tracking the movement of goods throughout the supply chain. RFID systems use tiny tags with embedded microchips containing data about an item and its location to transmit radio signals over a short distance to RFID readers. The RFID readers then pass the data over a network to a computer for process- ing. Unlike bar codes, RFID tags do not need line-of-sight contact to be read.

The RFID tag is electronically programmed with information that can uniquely identify an item plus other information about the item such as its loca- tion, where and when it was made, or its status during production. The reader emits radio waves in ranges anywhere from 1 inch to 100 feet. When an RFID tag comes within the range of the reader, the tag is activated and starts sending data.

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The reader captures these data, decodes them, and sends them back over a wired or wireless network to a host computer for further processing (see Figure 7.15). Both RFID tags and antennas come in a variety of shapes and sizes.

In inventory control and supply chain management, RFID systems capture and manage more detailed information about items in warehouses or in pro- duction than bar coding systems. If a large number of items are shipped to- gether, RFID systems track each pallet, lot, or even unit item in the shipment. This technology may help companies such as Walmart improve receiving and storage operations by improving their ability to see exactly what stock is stored in warehouses or on retail store shelves. Macy’s uses RFID technology to track individual items for sale on store shelves.

Walmart has installed RFID readers at store receiving docks to record the arrival of pallets and cases of goods shipped with RFID tags. The RFID reader reads the tags a second time just as the cases are brought onto the sales floor from backroom storage areas. Software combines sales data from Walmart’s point-of-sale systems and the RFID data regarding the number of cases brought out to the sales floor. The program determines which items will soon be de- pleted and automatically generates a list of items to pick in the warehouse to replenish store shelves before they run out. This information helps Walmart reduce out-of-stock items, increase sales, and further shrink its costs.

The cost of RFID tags used to be too high for widespread use, but now it starts at around 7 cents per tag in the United States. As the price decreases, RFID is starting to become cost-effective for many applications.

In addition to installing RFID readers and tagging systems, companies may need to upgrade their hardware and software to process the massive amounts of data produced by RFID systems—transactions that could add up to tens or hundreds of terabytes.

Software is used to filter, aggregate, and prevent RFID data from overloading business networks and system applications. Applications often need to be rede- signed to accept large volumes of frequently generated RFID data and to share those data with other applications. Major enterprise software vendors now offer RFID-ready versions of their supply chain management applications.

FIGURE 7.15 HOW RFID WORKS RFID uses low-powered radio transmitters to read data stored in a tag at distances ranging from 1 inch to 100 feet. The reader captures the data from the tag and sends them over a network to a host computer for processing.

RFID Reader

Has an antenna that constantly transmits. When it senses a tag, it wakes it up, interrogates it, and decodes the data. Then it transmits the data to a host system over wired or wireless connections.

A microchip holds data including an identification number. The rest of the tag is an antenna that transmits data to a reader.

Processes the data from the tag that have been transmitted by the reader.

Host computer

Radio waves

Tag

284 Part Two Information Technology Infrastructure

Tap-and-go services like Apple Pay or Google Wallet use an RFID-related technology called near field communication (NFC). NFC is a short-range wireless connectivity standard that uses electromagnetic radio fields to enable two compatible devices to exchange data when brought within a few centime- ters of each other. A smartphone or other NFC-compatible device sends out radio frequency signals that interact with an NFC tag found in compatible card readers or smart posters. The signals create a current that flows through the NFC tag, allowing the device and the tag to communicate with one another. In most cases the tag is passive and only sends out information while the other device (such as a smartphone) is active and can both send and receive informa- tion. (There are NFC systems where both components are active.)

NFC is used in wireless payment services, to retrieve information, and even to exchange videos or information with friends on the go. You could share a website link by passing your phone over a friend’s phone, while waving the phone in front of a poster or display containing an NFC tag could show informa- tion about what you’re viewing at a museum or exhibit.

Wireless Sensor Networks If your company wanted state-of-the art technology to monitor building secu- rity or detect hazardous substances in the air, it might deploy a wireless sensor network. Wireless sensor networks (WSNs) are networks of interconnected wireless devices that are embedded in the physical environment to provide measurements of many points over large spaces. These devices have built- in processing, storage, and radio frequency sensors and antennas. They are linked into an interconnected network that routes the data they capture to a computer for analysis. These networks range from hundreds to thousands of nodes. Figure 7.16 illustrates one type of wireless sensor network, with data from individual nodes flowing across the network to a server with greater pro- cessing power. The server acts as a gateway to a network based on Internet technology.

FIGURE 7.16 A WIRELESS SENSOR NETWORK The small circles represent lower-level nodes, and the larger circles represent higher- level nodes. Lower-level nodes forward data to each other or to higher-level nodes, which transmit data more rapidly and speed up network performance.

Internet

Chapter 7 Telecommunications, the Internet, and Wireless Technology 285

Wireless sensor networks are valuable for uses such as monitoring environ- mental changes; monitoring traffic or military activity; protecting property; ef- ficiently operating and managing machinery and vehicles; establishing security perimeters; monitoring supply chain management; or detecting chemical, bio- logical, or radiological material.

Output from RFID systems and wireless networks is fueling the Internet of Things (IoT), introduced earlier in this chapter, in which machines such as jet engines, power plant turbines, or agricultural sensors constantly gather data and send the data over the Internet for analysis. The data might signal the need to take action such as replacing a part that’s close to wearing out, restocking a product on a store shelf, starting the watering system for a soybean field, or slowing down a turbine. Over time, more and more everyday physical objects will be connected to the Internet and will be able to identify themselves to other devices, creating networks that can sense and respond as data changes. The Tour de France race tracking system, described in the chapter-opening case, is an example of an IoT application. You’ll find more examples of the Internet of Things in Chapters 2 and 12.

7-5 How will MIS help my career? Here is how Chapter 7 and this book can help you find a job as an automotive digital advisor.

The Company A1 Western Car Dealers, a large and fast-growing southern California automo- bile dealership, is looking for an automotive digital advisor to run its digital marketing program. The company has more than 500 vehicles for sale, 170 em- ployees, and three locations for selling and servicing new and used vehicles.

Position Description The automotive digital assistant will be part of a team assisting the dealership group with online marketing, including search engine optimization (SEO) and search engine marketing (SEM), social media and reputation management, and website management. Job responsibilities include coordinating efforts for the dealership owner, dealership managers, and marketing manager in the following areas:

• Online advertising, SEO, and SEM.

• Social media management, including managing the dealership’s overall social media and content calendar and developing new content.

• Online reputation management.

• Website management.

• Maintaining the dealership’s blog.

Job Requirements • College graduate in marketing

• Knowledge of digital marketing and social media

• Microsoft Office skills

• Knowledge of automotive sales and content management systems desirable

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Interview Questions 1. Have you ever taken any digital marketing courses?

2. Have you any experience running a digital marketing campaign? Did you use SEO and SEM? How did you measure the effectiveness of your social media campaign and audience growth?

3. Do you have any experience with social media management software?

4. Do you have any experience with online reputation management or online inventory management?

5. Have you ever maintained a blog?

6. What is your level of proficiency with Microsoft Office software?

Author Tips 1. Review the discussions of search, search engine marketing, and blogs in this

chapter and also the discussions of e-commerce marketing and building an e-commerce presence in Chapter 10.

2. Use the web to learn more about SEO, SEM, social media management, and online reputation management and software tools used for this work. Look into how to generate metrics reports using standardized tools and how to put together analyses and recommendations based on the social media data.

3. Look at how major auto dealers in large metropolitan areas are using social media channels. Are they creating content on YouTube, Instagram, Face- book, and Twitter? Which channels are generating higher levels of audience engagement?

4. Inquire about exactly what you would have to do for website management and required software skills.

5. Inquire about the Microsoft Office skills you would need for this job. Bring examples of the work you have done with this software.

7-1 What are the principal components of telecommunications networks and key networking technologies? A simple network consists of two or more connected computers. Basic network components include

computers, network interfaces, a connection medium, network operating system software, and either a hub or a switch. The networking infrastructure for a large company includes the traditional telephone system, mobile cellular communication, wireless local area networks, videoconferencing systems, a cor- porate website, intranets, extranets, and an array of local and wide area networks, including the Internet.

Contemporary networks have been shaped by the rise of client/server computing, the use of packet switching, and the adoption of Transmission Control Protocol/Internet Protocol (TCP/IP) as a univer- sal communications standard for linking disparate networks and computers, including the Internet. Protocols provide a common set of rules that enable communication among diverse components in a telecommunications network.

7-2 What are the different types of networks? The principal physical transmission media are twisted copper telephone wire, coaxial copper cable,

fiber-optic cable, and wireless transmission. Local area networks (LANs) connect PCs and other digital devices within a 500-meter radius and are

used today for many corporate computing tasks. Wide area networks (WANs) span broad geographical

REVIEW SUMMARY

Chapter 7 Telecommunications, the Internet, and Wireless Technology 287

distances, ranging from several miles to entire continents and are often private networks that are inde- pendently managed. Metropolitan area networks (MANs) span a single urban area.

Digital subscriber line (DSL) technologies, cable Internet connections, and T1 lines are often used for high-capacity Internet connections.

7-3 How do the Internet and Internet technology work, and how do they support communication and e-business?

The Internet is a worldwide network of networks that uses the client/server model of comput- ing and the TCP/IP network reference model. Every computer on the Internet is assigned a unique numeric IP address. The Domain Name System (DNS) converts IP addresses to more user-friendly domain names. Worldwide Internet policies are established by organizations and government bodies such as the Internet Architecture Board (IAB) and the World Wide Web Consortium (W3C).

Major Internet services include email, newsgroups, chatting, instant messaging, Telnet, FTP, and the web. Web pages are based on Hypertext Markup Language (HTML) and can display text, graphics, video, and audio. Website directories, search engines, and RSS technology help users locate the infor- mation they need on the web. RSS, blogs, social networking, and wikis are current information-sharing capabilities of the web. The future web will feature more semantic search, visual search, prevalence of apps, and interconnectedness of many different devices (Internet of Things).

Firms are also starting to realize economies by using VoIP technology for voice transmission and virtual private networks (VPNs) as low-cost alternatives to private WANs.

7-4 What are the principal technologies and standards for wireless networking, communication, and Internet access?

Cellular networks are evolving toward high-speed, high-bandwidth, digital packet-switched trans- mission. Broadband 3G networks are capable of transmitting data at speeds ranging from 144 Kbps to more than 2 Mbps. 4G networks are capable of transmission speeds of 100 Mbps, and 5G networks capable of transmitting in the gigabit range are starting to be rolled out.

Major cellular standards include Code Division Multiple Access (CDMA), which is used primarily in the United States, and Global System for Mobile Communications (GSM), which is the standard in Europe and much of the rest of the world.

Standards for wireless computer networks include Bluetooth (802.15) for small personal area net- works (PANs), Wi-Fi (802.11) for local area networks (LANs), and WiMax (802.16) for metropolitan area networks (MANs).

Radio frequency identification (RFID) systems provide a powerful technology for tracking the move- ment of goods by using tiny tags with embedded data about an item and its location. RFID readers read the radio signals transmitted by these tags and pass the data over a network to a computer for processing. Wire- less sensor networks (WSNs) are networks of interconnected wireless sensing and transmitting devices that are embedded in the physical environment to provide measurements of many points over large spaces.

Key Terms 3G networks, 279 4G networks, 279 5G networks, 279 Bandwidth, 261 Blog, 277 Blogosphere, 277 Bluetooth, 280 Broadband, 254 Cable Internet connections, 262 Chat, 267 Digital subscriber line (DSL), 262 Domain name, 262 Domain Name System (DNS), 262 Email, 267 File Transfer Protocol (FTP), 267 Hertz, 261 Hotspots, 281

Hubs, 255 Hypertext Transfer Protocol (HTTP), 272 Instant messaging, 267 Internet of Things (IoT), 278 Internet Protocol (IP) address, 262 Internet service provider (ISP), 262 Internet2, 266 IPv6, 266 Local area network (LAN), 259 Metropolitan area network (MAN), 260 Microblogging, 277 Modem, 259 Near field communication (NFC), 284 Network operating system (NOS), 255 Packet switching, 257 Peer-to-peer, 260 Personal area networks (PANs), 280

288 Part Two Information Technology Infrastructure

Predictive search, 275 Protocol, 258 Radio frequency identification (RFID), 282 Router, 255 RSS, 277 Search engine marketing, 276 Search engine optimization (SEO), 276 Search engines, 273 Semantic search, 274 Shopping bots, 275 Smartphones, 279 Social networking, 278 Social search, 275 Software-defined networking (SDN), 255 Switch, 255

T1 lines, 262 Telnet, 267 Transmission Control Protocol/Internet Protocol

(TCP/IP), 258 Unified communications, 269 Uniform resource locator (URL), 272 Virtual private network (VPN), 271 Visual web, 275 Voice over IP (VoIP), 268 Website, 271 Wide area networks (WANs), 260 Wi-Fi, 281 Wiki, 277 WiMax, 282 Wireless sensor networks (WSNs), 284

MyLab MIS To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.

Review Questions 7-1 What are the principal components of

telecommunications networks and key networking technologies?

• Describe the features of a simple network and the network infrastructure for a large company.

• Name and describe the principal technolo- gies and trends that have shaped contempo- rary telecommunications systems.

7-2 What are the different types of networks? • Define an analog and a digital signal.

• Distinguish between a LAN, MAN, and WAN.

7-3 How do the Internet and Internet technology work, and how do they support communication and e-business?

• Define the Internet, describe how it works, and explain how it provides business value.

• Explain how the Domain Name System (DNS) and IP addressing system work.

• List and describe the principal Internet services.

• Define and describe VoIP and virtual pri- vate networks and explain how they pro- vide value to businesses.

• List and describe alternative ways of locat- ing information on the web.

• Describe how online search technologies are used for marketing.

7-4 What are the principal technologies and standards for wireless networking, communication, and Internet access?

• Define Bluetooth, Wi-Fi, WiMax, and 3G, 4G, and 5G networks.

• Describe the capabilities of each and for which types of applications each is best suited.

• Define RFID, explain how it works, and de- scribe how it provides value to businesses.

• Define WSNs, explain how they work, and de- scribe the kinds of applications that use them.

Discussion Questions 7-5 It has been said that within the next few

years, smartphones will become the single most important digital device we own. Discuss the implications of this statement.

7-6 Should all major retailing and manufacturing companies switch to RFID? Why or why not?

MyLab MIS

MyLab MIS

7-7 What are some of the issues to consider in determining whether the Internet would provide your business with a competitive advantage?

MyLab MIS

Hands-On MIS Projects The projects in this section give you hands-on experience evaluating and selecting communications technology, using spreadsheet software to improve selection of telecommunications services, and using web search engines for business research. Visit MyLab MIS to access this chapter’s Hands-On MIS Projects.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 289

Management Decision Problems

7-8 Your company supplies ceramic floor tiles to Home Depot, Lowe’s, and other home improvement stores. You have been asked to start using radio frequency identification tags on each case of tiles you ship to help your customers improve the management of your products and those of other suppliers in their warehouses. Use the web to identify the cost of hardware, software, and networking components for an RFID system for your company. What factors should be considered? What are the key decisions that have to be made in determining whether your firm should adopt this technology?

7-9 BestMed Medical Supplies Corporation sells medical and surgical products and equipment from more than 700 manufacturers to hospitals, health clinics, and medical offices. The company employs 500 people at seven locations in western and midwestern states, including account managers, customer service and support representatives, and warehouse staff. Employees communicate by traditional telephone voice services, email, instant messaging, and cell phones. Management is inquiring about whether the company should adopt a system for unified communications. What factors should be considered? What are the key decisions that must be made in determining whether to adopt this technology? Use the web, if necessary, to find out more about unified communications and its costs.

Improving Decision Making: Using Spreadsheet Software to Evaluate Wireless Services

Software skills: Spreadsheet formulas, formatting Business skills: Analyzing telecommunications services and costs

7-10 In this project, you’ll use the web to research alternative wireless services and use spreadsheet software to calculate wireless service costs for a sales force. You would like to equip your sales force of 35, based in St. Louis, Missouri, with mobile phones that have

capabilities for voice transmission, text messaging, Internet access, and taking and sending photos. Use the web to select two wireless providers that offer nationwide voice and data service as well as good service in your home area. Examine the features of the mobile handsets and wireless plans offered by each of these vendors. Assume that each of the 35 salespeople will need to spend three hours per weekday between 8 a.m. and 6 p.m. on mobile voice communication, send 30 text messages per weekday, use 1 gigabyte of data per month, and send five photos per week. Use your spreadsheet software to determine the wireless service and handset that will offer the best pricing per user over a two-year period. For the purposes of this exercise, you do not need to consider corporate discounts.

Achieving Operational Excellence: Using Web Search Engines for Business Research

Software skills: Web search tools Business skills: Researching new technologies

7-11 This project will help develop your Internet skills in using web search engines for business research. Use Google and Bing to obtain information about ethanol as an alternative fuel for motor vehicles. If you

wish, try some other search engines as well. Compare the volume and quality of information you find with each search tool. Which tool is the easiest to use? Which produced the best results for your research? Why?

Collaboration and Teamwork Project Evaluating Smartphones

7-12 Form a group with three or four of your classmates. Compare the capabilities of Apple’s iPhone with a smartphone from another vendor with similar features. Your analysis should consider the purchase cost of each device, the wireless networks where each device can operate, plan and handset costs, and the services available for each device. You should also consider other capabilities of each device, including available software, security features, and the ability to integrate with existing corporate or PC applica- tions. Which device would you select? On what criteria would you base your selection? If possible, use Google Docs and Google Drive or Google Sites to brainstorm, organize, and develop a presentation of your findings for the class.

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always played a large part in the Apple ecosystem, and they have emerged as a major revenue source. Apple has more than 1.3 billion active devices in cir- culation, creating a huge installed base of users will- ing to purchase services and a source of new revenue streams. Apple’s services business, which includes Apple’s music (both downloads and subscriptions), video sales and rentals, books, apps (including in-app purchases, subscriptions and advertising), iCloud storage, and payments, has been growing at a double- digit rate.

As Apple rolls out more gadgets, such as the Watch and HomePod, its services revenue will continue to expand and diversify. According to CEO Tim Cook, Apple has become one of the larg- est service businesses in the world. This service- driven strategy is not without worry because both Google and Facebook offer stiff competition in the services area.

Google continues to be the world’s leading search engine, accounting for about 75 percent of web searches from laptop and desktop devices and over 90 percent of the mobile search market. (Google is also the default search engine for the iPhone). About 84 percent of the revenue from Google’s par- ent company Alphabet comes from ads, most of them on Google’s search engine. Google dominates online advertising. However, Google is slipping in its position as the gateway to the Internet. New search startups focus on actions and apps instead of the web. Facebook has become an important gateway to the web as well. In 2005, Google had purchased the Android open source mobile operating system to compete in mobile computing. Google provides Android at no cost to smartphone manufacturers, generating revenue indirectly through app purchases and advertising. Many different manufacturers have adopted Android as a standard. In contrast, Apple al- lows only its own devices to use its proprietary oper- ating system, and all the apps it sells can run only on Apple products. Android is deployed on over 80 per- cent of smartphones worldwide; is the most common operating system for tablets; and runs on watches, car dashboards, and TVs—more than 4,000 distinct devices. Google wants to extend Android to as many devices as possible.

Three Internet titans—Google, Apple, and Facebook—are in an epic struggle to dominate your Internet experience, and caught in the crossfire are search, music, video, and other media along with the devices you use for all of these things. Mobile devices with advanced functionality and ubiq- uitous Internet access are rapidly overtaking tradi- tional desktop machines as the most popular form of computing. Today, people spend more than half their time online using mobile devices that take advantage of a growing cloud of computing capacity. It’s no sur- prise, then, that today’s tech titans are aggressively battling for control of this brave new online world.

Apple, which started as a personal computer com- pany, quickly expanded into software and consumer electronics. Since upending the music industry with its iPod MP3 player, and the iTunes digital music ser- vice, Apple took mobile computing by storm with the iPhone, iPod Touch, and iPad. Now Apple wants to be the computing platform of choice for the Internet.

Apple’s competitive strength is based not on its hardware platform alone but on its superior user in- terface and mobile software applications, in which it is a leader. Apple’s App Store offers more than 2 mil- lion apps for mobile and tablet devices. Applications greatly enrich the experience of using a mobile device, and whoever creates the most appealing set of devices and applications will derive a significant competitive advantage over rival companies. Apps are the new equivalent of the traditional browser.

Apple thrives on its legacy of innovation. In 2011, it unveiled Siri (Speech Interpretation and Recognition Interface), a combination search/navi- gation tool and personal assistant. Siri promises per- sonalized recommendations that improve as it gains user familiarity—all from a verbal command. Google countered by quickly releasing its own AI tool, Google Now. Facebook has developed an intelligent assistant called M.

Apple faces strong competition for its phones and tablets both in the United States and in developing markets like China from inexpensive Chinese smart- phones and from Samsung Android phones that have larger screens and lower prices. iPhone sales have started to slow, but Apple is not counting on hard- ware devices alone for future growth. Services have

Google, Apple, and Facebook Battle for Your Internet Experience

CASE STUDY

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People use Facebook to stay connected with their friends and family and to express what matters most to them. Facebook Platform enables developers to build applications and websites that integrate with Facebook to reach its global network of users and to build personalized and social products. Facebook is so pervasive and appealing that it has become users’ primary gateway to the Internet. For a lot of people, Facebook is the Internet. Whatever they do on the Internet is through Facebook.

Facebook has persistently worked on ways to con- vert its popularity and trove of user data into adver- tising dollars, with the expectation that these dollars will increasingly come from mobile smartphones and tablets. As of early 2018, over 95 percent of ac- tive user accounts worldwide accessed the social network via smartphone. Facebook ads allow compa- nies to target its users based on their real identities and expressed interests rather than educated guesses derived from web-browsing habits and other online behavior.

At the end of the first quarter of 2018, 98 percent of Facebook’s global revenue came from advertising, and 89 percent of that ad revenue was from mobile advertising. Many of those ads are highly targeted by age, gender, and other demographics. Facebook is now a serious competitor to Google in the mobile ad market and is even trying to compete with emerg- ing mobile platforms. Together, Facebook and Google dominate the digital ad industry and have been re- sponsible for almost all of its growth. Facebook has overhauled its home page to give advertisers more opportunities and more information with which to target markets. The company is expanding ad- vertising in products such as the Instagram feed, Stories, WhatsApp, Facebook Watch, and Messenger, although the majority of ad revenue still comes from its news feed. Facebook has its own personal- ized search tool to challenge Google’s dominance of search. Facebook CEO Mark Zuckerberg is convinced that social networking is the ideal way to use the web and to consume all of the other content people might desire, including news and video. That makes it an ideal marketing platform for companies. But he also knows that Facebook can’t achieve long-term growth and prosperity based on social networking alone. During the past few years Facebook has moved into virtual reality, messaging, video, and more.

Facebook is challenging YouTube as the premier destination for personal videos, developing its own TV programming, and making its messages “smarter”

Google’s Android could gain even more market share in the coming years, which could be problem- atic for Apple as it tries to maintain customer loyalty and keep software developers focused on the iOS platform. Whoever has the dominant smartphone op- erating system will have control over the apps where smartphone users spend most of their time and built-in channels for serving ads to mobile devices. Although Google search technology can’t easily navi- gate the mobile apps where users are spending most of their time, Google is starting to index the content inside mobile apps and provide links pointing to that content featured in Google’s search results on smart- phones. Since more than half of global search que- ries come from mobile devices, the company revised its search algorithms to add “mobile friendliness” to the 200 or so factors it uses to rank websites on its search engine. This favors sites that look good on smartphone screens. The cost-per-click paid for mo- bile ads has trailed desktop ads, but the gap between computer and mobile ads fees is narrowing. Google instituted a design change to present a cleaner mo- bile search page.

Seven Google products and services, including Search, YouTube, and Maps, have more than a billion users each. The Android operating system software has over 2 billion monthly active users. Google’s ulti- mate goal is to knit its services and devices together so that Google users will interact with the company seamlessly all day long and everyone will want to use Google. Much of Google’s efforts to make its search and related services more powerful and user-friendly in the years ahead are based on the company’s invest- ments in artificial intelligence and machine learning (see Chapter 11). These technologies already have been implemented in applications such as voice search, Google Translate, and spam filtering. The goal is to evolve search into more of a smart assistance capability, where computers can understand what people are saying and respond conversationally with the right information at the right moment. Allo is a smart messaging app for iOS and Android that can learn your texting patterns over time to make conver- sations more expressive and productive. It suggests automatic replies to incoming messages, and you can get suggestions and even book a restaurant reserva- tion without leaving the chat. Google Assistant is meant to provide a continuing, conversational dia- logue between users and the search engine.

Facebook is the world’s largest social networking service, with over 2 billion monthly active users.

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by deploying chatbots. Chatbots are stripped-down software agents that understand what you type or say and respond by answering questions or executing tasks, and they run in the background of Facebook’s Messenger service (see Chapter 11). Within Facebook Messenger, you can order a ride from Uber, get news updates, check your flight status, or use augmented reality to imagine what a new Nike sneaker looks like by superimposing a 3-D model of that sneaker atop images or video. A new standalone app will allow users to stream videos in their news feed through set-top boxes such as Apple Inc.’s Apple TV and Amazon.com Inc.’s Fire TV, as well as Samsung Internet-connected TVs.

Zuckerberg has said that he intends to help bring the next billion people online by attracting users in developing countries with affordable web con- nectivity. Facebook has launched several services in emerging markets, such as the Free Basics service designed to get people online so they can explore web applications, including its social network. Facebook wants to beam the Internet to underserved areas through the use of drones and satellites along with other technologies. Zuckerberg thinks that Facebook could eventually be an Internet service provider to underserved areas.

Monetization of personal data drives both Facebook and Google’s business models. However, this prac- tice also threatens individual privacy. The consumer surveillance underlying Facebook and Google’s free services has come under siege from users, regulators, and legislators on both sides of the Atlantic. Calls for restricting Facebook and Google’s collection and use of personal data have gathered steam, especially after recent revelations about Russian agents trying to use Facebook to sway American voters and Facebook’s uncontrolled sharing of user data with third-party companies (see the Chapter 4 ending case study). Both companies will have to come to terms with the European Union’s new privacy law, called the General Data Protection Regulation (GDPR), that re- quires companies to obtain consent from users before processing their data, and which may inspire more stringent privacy legislation in the United States. Business models that depend less on ads and more on subscriptions have been proposed, although any effort to curb the use of consumer data would put the business model of the ad-supported Internet—and

possibly Facebook and Google—at risk. Apple em- phasizes its privacy protection features and does not share customer data with others.

These tech giants are also being scrutinized for monopolistic behavior. In the United States, Google drives 89 percent of Internet search, 95 percent of young adults on the Internet use a Facebook prod- uct, and Google and Apple provide 99 percent of mobile phone operating systems. Critics have called for breaking up these mega-companies or regulating them as Standard Oil and AT&T once were. In July 2018 European regulators fined Google $5 billion for forcing cellphone makers that use the company’s Android operating system to install Google search and browser apps. Have these companies become so large that they are squeezing consumers and innova- tion? How governments answer this question will also affect how Apple, Google, and Facebook will fare and what kind of Internet experience they will be able to provide.

Sources: Associated Press, “EU Fines Google a Record $5 Million over Mobile Practices,” July 18, 2018; Christopher Mims, “How Apps, Music and More Can Buoy Apple Beyond the iPhone,” Wall Street Journal, February 4, 2018; “Search Engine Market Share,” www.netmarketshare.com, accessed April 16, 2018; “Facebook’s Advertising Revenue Worldwide from 2009 to 2017 (in Million U.S. Dollars),” statista.com, accessed April 17, 2018; David Streitfeld, Natasha Singer, and Steven Erlanger, “How Calls for Privacy May Upend Business for Facebook and Google,” New York Times, March 24, 2018; Natasha Singer, “Timeline: Facebook and Google Under Regulators’ Glare,” New York Times, March 24, 2018; David Streitfeld, “Google Wants to Be Everywhere with Everyone,” New York Times, May 17, 2017; Tim Bajarin, “Learning This 1 Thing Helped Me Understand Apple’s Strategy,” Time, April 3, 2017; and Mathew Ingram, “How Google and Facebook Have Taken Over the Digital Ad Industry,” Fortune, January 4, 2017.

CASE STUDY QUESTIONS 7-13 Compare the business models and core compe-

tencies of Google, Apple, and Facebook.

7-14 Why is mobile computing so important to these three firms? Evaluate the mobile strate- gies of each firm.

7-15 Which company and business model do you think is most likely to dominate the Internet, and why?

7-16 What difference would it make to a business or to an individual consumer if Apple, Google, or Facebook dominated the Internet experience? Explain your answer.

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Chapter 7 References Alphabet, Inc. “Form 10K for the Fiscal Year Ending December 31,

2017.” Securities and Exchange Commission, filed February 1, 2018.

Chiang, I. Robert, and Jhih-Hua Jhang-Li. “Delivery Consolidation and Service Competition Among Internet Service Providers.” Journal of Management Information Systems 34, No. 3 (Winter 2014).

Comscore. “The 2017 Mobile App Report.” (2017). Eliason, Andy. “23 Search Engine Facts and Stats You Oughta

Know.” SEO.com, accessed May 8, 2017. eMarketer. “US Ad Spending: The eMarketer Forecast for 2018.”

(2018). “Facebook Company Statistics.” www.statisticbrain.com, accessed

April 18, 2018. IBM Global Technology Services. “Software-Defined Networking in

the New Business Frontier.” (July 2015). Iyer, Bala. “To Project the Trajectory of the Internet of Things,

Look to the Software Industry.” Harvard Business Review (February 25, 2016).

Manyika, James, Michael Chui, Peter Bisson, Jonathan Woetzel, Richard Dobbs, Jacques Bughin, and Dan Aharon. “ Unlocking

MyLab MIS Go to the Assignments section of MyLab MIS to complete these writing exercises.

7-17 Compare the capabilities of today’s web with those of the future web.

7-18 How do social search, semantic search, and mobile search differ from searching for information on the web using conventional search engines?

the Potential of the Internet of Things.” McKinsey Global Institute (2015).

McKinsey & Company. “The Impact of Internet Technologies: Search.” (July 2011).

Miller, Rich. “5G Wireless: A New Network to Enable the Data Deluge.” Data Center Frontier (July 13, 2017).

National Telecommunications and Information Agency. “NTIA Announces Intent to Transition Key Internet Domain Name Functions.” (March 14, 2014).

Panko, Raymond R., and Julia L. Panko. Business Data Networks and Security, 11th ed. (Upper Saddle River, NJ: Prentice-Hall, 2018).

Pew Research Center. “Mobile Fact Sheet.” (January 12, 2017). Segan, Sascha. “What Is 5G?” PC Magazine (May 1, 2017). Varian, Hal. “Executive Assistants for Everyone.” MIT Sloan

Management Review (Fall 2016). Wang, Weiquan, and Izak Benbasat. “Empirical Assessment of

Alternative Designs for Enhancing Different Types of Trust- ing Beliefs in Online Recommendation Agents.” Journal of Management Information Systems 33, No. 3 (2016).

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MyLab MIS Discussion Questions: 8-5, 8-6, 8-7; Hands-on MIS Projects: 8-8, 8-9, 8-10, 8-11; Writing Assignments: 8-17, 8-18; eText with Conceptual Animations

CHAPTER CASES Hackers Target the U.S. Presidential Election:

What Happened? Meltdown and Spectre Haunt the World’s

Computers How Secure Is the Cloud? Is the Equifax Hack the Worst Ever—and Why?

VIDEO CASES Stuxnet and Cyberwarfare Cyberespionage: The Chinese Threat

Instructional Videos: Sony PlayStation Hacked; Data Stolen from

77 Million Users Meet the Hackers: Anonymous Statement on

Hacking Sony

LEARNING OBJECTIVES After reading this chapter, you will be able to answer the following questions:

8-1 Why are information systems vulnerable to destruction, error, and abuse?

8-2 What is the business value of security and control?

8-3 What are the components of an organizational framework for security and control?

8-4 What are the most important tools and technologies for safeguarding information resources?

8-5 How will MIS help my career?

Securing Information Systems8CHAPTER

295

In September 2015, Special Agent Adrian Hawkins of the U.S. Federal Bureau of Investigation (FBI) phoned the Democratic National Committee (DNC) with troubling news about its computer network: At least one DNC com- puter system had been penetrated by hackers linked to the Russian govern- ment. Yared Tamene, the DNC tech-support contractor who fielded the calls, conducted a cursory search of the DNC computer system logs to look for signs of hacking. He stated that he did not look too hard, even after Special Agent Hawkins called back and left messages repeatedly over the next several weeks, because he thought the call might be a prank call from an imposter.

The DNC hack was the first sign of a Russian-led cyberwarfare campaign to disrupt the 2016 presidential election. DNC chairwoman Debbie Wasserman Schultz was forced to resign, and a torrent of confidential documents from the DNC and the Clinton campaign were released by WikiLeaks to the press during the campaign. In a stunning upset, Donald Trump won the presidential election, and his victory may have been facilitated by revela- tions in the leaked documents.

Several Russian hacker groups associated with Russian intelligence were identified as the source of the cyberattacks. The Russian hackers had moved freely through the DNC network for nearly 7 months before top DNC officials were alerted to the attack and hired cybersecurity firm CrowdStrike to beef up their system protection. The DNC computer system was replaced, and all laptops were turned in and their hard drives wiped clean to get rid of infected information.

In the meantime, the hackers gained ac- cess to systems of the Clinton campaign. The hackers did not have to use any sophisticated tools to gain access and were able to deploy phishing emails to trick legitimate system users into revealing pass- words for accessing the system. Clinton campaign aide Charles Delavan clicked on an email sent to the personal account of campaign chairman John Podesta thinking it was legitimate and opened another door for the Russians. Whenever someone clicked on a phishing message, the Russians would enter the network, “exfiltrate” documents of interest, and stockpile them for intelligence purposes. By the summer of 2016, Democrats’ private emails and confidential documents were posted on WikiLeaks and other websites day after day and reported by the media.

Hackers Target the U.S. Presidential Election: What Happened?

© Andriy Popov/123RF

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The DNC thought it was well protected against cyberattacks but only had a fraction of the security budget that a corporation its size would have. It had a standard email spam-filtering service for blocking phishing attacks and malware created to resemble legitimate email, but it did not have the most advanced sys- tems in place to track suspicious traffic.

Hacking during the 2016 presidential election went beyond the DNC and the Clinton campaign. Russian hackers tried to infiltrate at least 21 states’ election systems and to delete or alter voter data in Illinois. (Officials don’t believe the attackers changed any result.)

On July 13, 2018 a federal grand jury indicted 12 Russian intelligence of- ficers as part of special counsel Robert Mueller’s investigation into alleged Russian meddling during the 2016 presidential campaign. The officers were charged with engaging in a sustained effort to hack networks of the Democratic Congressional Campaign Committee, the Democratic National Committee, and Hillary Clinton’s campaign. There is mounting evidence that Russian hackers are continuing to target U.S. state election systems, looking for opportunities to influence primaries, the 2018 midterm Congressional elections, and eventually the 2020 presidential campaign. Russian hackers have also been actively trying to influence elections in Europe as well.

Sources: Lucien Bruggeman and Mike Levine, “Mueller indicts 12 Russian Intel Officers for Hacking Democrats,” Good Morning America, July 13, 2018; Joseph O’Sullivan, “With Russian Hacking Fresh in Mind, Washington State Beefs Up Elections Cybersecurity,” Seattle Times, July 8, 2018; Erin Kelly, “Russia So Far Not Mounting Robust Hacking Effort Against U.S. Election, Official Says,” USA Today, July 11, 2018; Harold Stark, “How Russia ‘Hacked’ Us in 2016 [And What We did Wrong],” Forbes, January 24, 2017; Sue Marquette Poremba, “Data Security Lessons from the DNC Hack,” ITBusinessEdge, March 7, 2017; Mark Moore, “Russian Hackers Infiltrated Voter Databases in Dozens of States,” New York Post, June 13,  2017; and Eric Lipton, David E. Sanger, and Scott Shane, “The Perfect Weapon: How Russian Cyberpower Invaded the U.S.,” New York Times, December 13, 2016.

Efforts to disrupt the 2016 U.S presidential election and other recent elec-tions illustrate some of the reasons why organizations need to pay special attention to information systems security. IT security breaches that enabled Russian hackers to penetrate information systems used by the Democratic Party have the potential to change the course of elections—and possibly the fate of nations. Weak IT security has been responsible for many billions of dollars of corporate and consumer financial losses as well.

The chapter-opening diagram calls attention to important points raised by this case and this chapter. The DNC and the Clinton campaign lacked IT security awareness, tools, and expertise to prevent employees from naively responding to hackers’ phishing attacks. Also at work were human ignorance, error, and careless- ness, evidenced by the DNC’s unwillingness to respond quickly to the FBI’s hacker attack warning and DNC and Clinton campaign members’ inability to identify bogus phishing emails. Although the DNC and the Clinton campaign thought they had sufficient security tools to fend off unwanted intruders, they were not enough to protect them and the presidential campaign from Russian influence. Eventually the Democrats hired outside security experts to beef up system protection.

Chapter 8 Securing Information Systems 297

Business Solutions

Management

Organization

IT Security Systems

Technology

Information System

Business Problem

• Weak network security • Limited financial resources

• Develop manual procedures for security systems • Deploy IT security consultants

• Prevent data theft • Prevent unauthorized system access

• Protect political reputation? • Protect voting systems?

• Malware detection technology • Isolate systems and networks

• Develop security policies and plan • Select security technologies

We will probably never really know exactly how much revelations from the emails exposed by the hackers affected the 2016 election outcome. But we do know that what happened was very serious and most likely a preview of future electoral trouble around the world. Equally disturbing, the security vulnerabili- ties that facilitated the DNC and Clinton campaign hacks are commonplace in businesses and other organizations as well.

Here are some questions to think about: What security vulnerabilities were exploited by the hackers? What management, organizational, and technologi- cal factors contributed to these security weaknesses? What was the business impact of these problems? Could the election hacking have been prevented?

8-1 Why are information systems vulnerable to destruction, error, and abuse?

Can you imagine what would happen if you tried to link to the Internet without a firewall or antivirus software? Your computer would be disabled within a few seconds, and it might take you many days to recover. If you used the computer to run your business, you might not be able to sell to your customers or place orders with your suppliers while it was down. And you might find that your computer system had been penetrated by outsiders, who perhaps stole or de- stroyed valuable data, including confidential payment data from your custom- ers. If too much data was destroyed or divulged, your business might never be able to recover!

In short, if you operate a business today, you need to make security and control a top priority. Security refers to the policies, procedures, and techni- cal measures used to prevent unauthorized access, alteration, theft, or physical damage to information systems. Controls are methods, policies, and organi- zational procedures that ensure the safety of the organization’s assets, the ac- curacy and reliability of its records, and operational adherence to management standards.

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Why Systems are Vulnerable When large amounts of data are stored in electronic form, they are vulnerable to many kinds of threats. Through communications networks, information sys- tems in different locations are interconnected. The potential for unauthorized access or damage is not limited to a single location but can occur at many access points in the network. Figure 8.1 illustrates the most common threats against contemporary information systems. They can stem from technical, organizational, and environmental factors compounded by poor management decisions. In the multitier client/server computing environment illustrated here, vulnerabilities exist at each layer and in the communications between the layers. Users at the client layer can cause harm by introducing errors or by accessing systems without authorization. It is possible to access data flowing over networks, steal valuable data during transmission, or alter data with- out authorization. Radiation may disrupt a network at various points as well. Intruders can launch denial-of-service attacks or malicious software to disrupt the operation of websites. Those capable of penetrating corporate systems can steal, destroy, or alter corporate data stored in databases or files.

Systems malfunction if computer hardware breaks down, is not configured properly, or is damaged by improper use or criminal acts. Errors in program- ming, improper installation, or unauthorized changes cause computer software to fail. Power failures, floods, fires, or other natural disasters can also disrupt computer systems.

Domestic or offshore partnering with another company contributes to sys- tem vulnerability if valuable information resides on networks and computers outside the organization’s control. Without strong safeguards, valuable data could be lost, be destroyed, or fall into the wrong hands, revealing important trade secrets or information that violates personal privacy.

Portability makes cell phones, smartphones, and tablet computers easy to lose or steal. Smartphones share the same security weaknesses as other Internet de- vices and are vulnerable to malicious software and penetration from outsiders. Smartphones that corporate employees use often contain sensitive data such as

FIGURE 8.1 CONTEMPORARY SECURITY CHALLENGES AND VULNERABILITIES

The architecture of a web-based application typically includes a web client, a server, and corporate information systems linked to databases. Each of these components presents security challenges and vulnerabilities. Floods, fires, power failures, and other electrical problems can cause disruptions at any point in the network.

• Unauthorized access

Client (User)

Communications Lines

Corporate Servers

Corporate Systems

Hardware Operating Systems Software

• Errors

• Tapping • Hacking • Theft of data • Copying data • Alteration of data • Hardware failure • Software failure

• Malware • Theft and fraud • Vandalism • Denial-of-service attacks

• Sniffing

• Theft and fraud • Radiation

• Message alteration

Data- bases

Chapter 8 Securing Information Systems 299

sales figures, customer names, phone numbers, and email addresses. Intruders may also be able to access internal corporate systems through these devices.

Internet Vulnerabilities Large public networks, such as the Internet, are more vulnerable than internal networks because they are virtually open to anyone. The Internet is so huge that when abuses do occur, they can have an enormously widespread impact. When the Internet links to the corporate network, the organization’s informa- tion systems are even more vulnerable to actions from outsiders.

Vulnerability has also increased from widespread use of email, instant mes- saging (IM), and peer-to-peer (P2P) file-sharing programs. Email may contain attachments that serve as springboards for malicious software or unauthorized access to internal corporate systems. Employees may use email messages to transmit valuable trade secrets, financial data, or confidential customer infor- mation to unauthorized recipients. Instant messaging activity over the Internet can in some cases be used as a back door to an otherwise secure network. Sharing files over P2P networks, such as those for illegal music sharing, can also transmit malicious software or expose information on either individual or corporate computers to outsiders.

Wireless Security Challenges Both Bluetooth and Wi-Fi networks are susceptible to hacking by eavesdroppers. Local area networks (LANs) using the 802.11 standard can be easily penetrated by outsiders armed with laptops, wireless cards, external antennae, and hack- ing software. Hackers use these tools to detect unprotected networks, monitor network traffic, and, in some cases, gain access to the Internet or to corporate networks.

Wi-Fi transmission technology was designed to make it easy for stations to find and hear one another. The service set identifiers (SSIDs) that identify the access points in a Wi-Fi network are broadcast multiple times and can be picked up fairly easily by intruders’ sniffer programs (see Figure 8.2). Wireless net- works in many locations do not have basic protections against war driving, in which eavesdroppers drive by buildings or park outside and try to intercept wireless network traffic.

An intruder who has associated with an access point by using the correct SSID is capable of accessing other resources on the network. For example, the intruder could use the Windows operating system to determine which other users are connected to the network, access their computer hard drives, and open or copy their files.

Intruders also use the information they have gleaned to set up rogue access points on a different radio channel in physical locations close to users to force a user’s radio network interface controller (NIC) to associate with the rogue ac- cess point. Once this association occurs, hackers using the rogue access point can capture the names and passwords of unsuspecting users.

Malicious Software: Viruses, Worms, Trojan Horses, and Spyware Malicious software programs are referred to as malware and include a variety of threats such as computer viruses, worms, and Trojan horses. (See Table 8.1.) A computer virus is a rogue software program that attaches itself to other software programs or data files to be executed, usually without user knowledge or permission. Most computer viruses deliver a payload. The payload may be

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relatively benign, such as instructions to display a message or image, or it may be highly destructive—destroying programs or data, clogging computer mem- ory, reformatting a computer’s hard drive, or causing programs to run improp- erly. Viruses typically spread from computer to computer when humans take an action, such as sending an email attachment or copying an infected file.

Worms are independent computer programs that copy themselves from one computer to other computers over a network. Unlike viruses, worms can oper- ate on their own without attaching to other computer program files and rely

TABLE 8.1 EXAMPLES OF MALICIOUS CODE

NAME TYPE DESCRIPTION

Cryptolocker Ransomware/Trojan Hijacks users’ photos, videos, and text documents; encrypts them with virtually unbreakable asymmetric encryption; and demands ransom payment for them.

Conficker Worm First detected in November 2008 and still a problem. Uses flaws in Windows software to take over machines and link them into a virtual computer that can be commanded remotely. Had more than 5 million computers worldwide under its control. Difficult to eradicate.

Sasser.ftp Worm First appeared in May 2004. Spread over the Internet by attacking random IP addresses. Causes computers to continually crash and reboot and infected computers to search for more victims. Affected millions of computers worldwide and caused an estimated $14.8 billion to $18.6 billion in damages.

ILOVEYOU Virus First detected on May 3, 2000. Script virus written in Visual Basic script and transmitted as an attachment to email with the subject line ILOVEYOU. Overwrites music, image, and other files with a copy of itself and did an estimated $10 billion to $15 billion in damage.

FIGURE 8.2 WI-FI SECURITY CHALLENGES Many Wi-Fi networks can be penetrated easily by intruders using sniffer programs to obtain an address to access the resources of a network without authorization.

Legitimate user

Authentication request

Intruder

Success

Response

Challenge

Chapter 8 Securing Information Systems 301

less on human behavior to spread rapidly from computer to computer. Worms destroy data and programs as well as disrupt or even halt the operation of com- puter networks.

Worms and viruses are often spread over the Internet from files of downloaded software; from files attached to email transmissions; or from compromised email messages, online ads, or instant messaging. Viruses have also invaded comput- erized information systems from infected external storage devices or infected machines. Especially prevalent today are drive-by downloads, consisting of malware that comes with a downloaded file that a user intentionally or unin- tentionally requests.

Hackers can do to a smartphone just about anything they can do to any Internet-connected device: request malicious files without user intervention, delete files, transmit files, install programs running in the background to moni- tor user actions, and potentially convert the smartphone to a robot in a botnet to send email and text messages to anyone. According to IT security experts, mobile devices now pose the greatest security risks, outpacing those from larger computers. Kaspersky Lab reported that it had detected 5.7 million mo- bile malicious installation packages in 2017 (Kaspersky Lab, 2018).

Android, which is the world’s leading mobile operating system, is the mobile platform targeted by most hackers. Mobile device viruses pose serious threats to enterprise computing because so many wireless devices are now linked to corporate information systems.

Blogs, wikis, and social networking sites such as Facebook, Twitter, and LinkedIn have emerged as new conduits for malware. Members are more likely to trust messages they receive from friends, even if this communication is not legitimate. For example, a malware strain called FacexWorm appeared inside Facebook Messenger in 2018. Clicking a link via Facebook Messenger takes the victim to a fake YouTube page, which tries to trick the user into installing a YouTube extension for the popular Chrome browser. From there the malware can steal passwords or try to steal cryptocurrency funds such as Bitcoin.

The Internet of Things (IoT) introduces additional security challenges from the Internet-linked devices themselves, their platforms and operating systems, their communications, and even the systems to which they’re connected. New security tools will be required to protect IoT devices and platforms from both information attacks and physical tampering, to encrypt their communications, and to address new challenges such as attacks that drain batteries. Many IoT devices such as sensors have simple processors and operating systems that may not support sophisticated security approaches.

Panda Security reported that in 2017 it had identified and neutralized a total of 75 million malware files, about 285,000 new samples a day (Panda Security, 2017).

Many malware infections are Trojan horses. A Trojan horse is a software program that appears to be benign but then does something other than ex- pected. The Trojan horse is not itself a virus because it does not replicate, but it is often a way for viruses or other malicious code to be introduced into a computer system. The term Trojan horse is based on the huge wooden horse the Greeks used to trick the Trojans into opening the gates to their fortified city during the Trojan War.

An example of a modern-day Trojan horse is the ZeuS (Zbot) Trojan, which infected more than 3.6 million computers in 2009 and still poses a threat. It has been used to steal login credentials for banking by surreptitiously capturing people’s keystrokes as they use their computers. Zeus is spread mainly through drive-by downloads and phishing, and recent variants have been difficult to eradicate.

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SQL injection attacks exploit vulnerabilities in poorly coded web application software to introduce malicious program code into a company’s systems and networks. These vulnerabilities occur when a web application fails to validate properly or filter data a user enters on a web page, which might occur when order- ing something online. An attacker uses this input validation error to send a rogue SQL query to the underlying database to access the database, plant malicious code, or access other systems on the network. Malware known as ransomware is proliferating on both desktop and mobile devices. Ransomware tries to extort money from users by taking control of their computers, blocking access to files, or displaying annoying pop-up messages. For example, the ransomware called WannaCry that attacked computers in more than 150 countries in May 2017 encrypts an infected computer’s files, forcing users to pay hundreds of dollars to regain access. You can get ransomware from downloading an infected attach- ment, clicking a link inside an email, or visiting the wrong website.

Some types of spyware also act as malicious software. These small programs install themselves surreptitiously on computers to monitor user web-surfing ac- tivity and serve up advertising. Thousands of forms of spyware have been docu- mented. Many users find such spyware annoying and an infringement on their privacy. Some forms of spyware are especially nefarious. Keyloggers record every keystroke made on a computer to steal serial numbers for software, to launch Internet attacks, to gain access to email accounts, to obtain passwords to protected computer systems, or to pick up personal information such as credit card or bank account numbers. The Zeus Trojan described earlier uses keylog- ging. Other spyware programs reset web browser home pages, redirect search requests, or slow performance by taking up too much computer resources.

Hackers and Computer Crime A hacker is an individual who intends to gain unauthorized access to a com- puter system. Within the hacking community, the term cracker is typically used to denote a hacker with criminal intent, although in the public press, the terms hacker and cracker are used interchangeably. Hackers gain unauthorized access by finding weaknesses in the security protections websites and computer sys- tems employ. Hacker activities have broadened beyond mere system intru- sion to include theft of goods and information as well as system damage and cybervandalism, the intentional disruption, defacement, or even destruction of a website or corporate information system.

Spoofing and Sniffing Hackers attempting to hide their true identities often spoof, or misrepresent, them- selves by using fake email addresses or masquerading as someone else. Spoofing may also involve redirecting a web link to an address different from the intended one, with the site masquerading as the intended destination. For example, if hackers redirect customers to a fake website that looks almost exactly like the true site, they can then collect and process orders, effectively stealing business as well as sensitive customer information from the true site. We will provide more detail about other forms of spoofing in our discussion of computer crime.

A sniffer is a type of eavesdropping program that monitors information trav- eling over a network. When used legitimately, sniffers help identify potential network trouble spots or criminal activity on networks, but when used for crim- inal purposes, they can be damaging and very difficult to detect. Sniffers enable hackers to steal proprietary information from anywhere on a network, includ- ing email messages, company files, and confidential reports.

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Denial-of-Service Attacks In a denial-of-service (DoS) attack, hackers flood a network server or web server with many thousands of false communications or requests for services to crash the network. The network receives so many queries that it cannot keep up with them and is thus unavailable to service legitimate requests. A distributed denial-of-service (DDoS) attack uses numerous computers to in- undate and overwhelm the network from numerous launch points.

Although DoS attacks do not destroy information or access restricted areas of a company’s information systems, they often cause a website to shut down, making it impossible for legitimate users to access the site. For busy e-commerce sites, these attacks are costly; while the site is shut down, customers cannot make purchases. Especially vulnerable are small and midsize businesses whose networks tend to be less protected than those of large corporations.

Perpetrators of DDoS attacks often use thousands of zombie PCs infected with malicious software without their owners’ knowledge and organized into a botnet. Hackers create these botnets by infecting other people’s computers with bot malware that opens a back door through which an attacker can give instructions. The infected computer then becomes a slave, or zombie, serving a master computer belonging to someone else. When hackers infect enough computers, they can use the amassed resources of the botnet to launch DDoS attacks, phishing campaigns, or unsolicited spam email.

Ninety percent of the world’s spam and 80 percent of the world’s malware are delivered by botnets. A recent example is the Mirai botnet, which infected numerous IoT devices (such as Internet-connected surveillance cameras) in October 2016 and then used them to launch a DDoS attack against Dyn, whose servers monitor and reroute Internet traffic. The Mirai botnet overwhelmed the Dyn servers, taking down Etsy, GitHub, Netflix, Shopify, SoundCloud, Spotify, Twitter, and a number of other major websites. A Mirai botnet variant attacked financial firms in January 2018.

Computer Crime Most hacker activities are criminal offenses, and the vulnerabilities of systems we have just described make them targets for other types of computer crime as well. Computer crime is defined by the U.S. Department of Justice as “any violations of criminal law that involve a knowledge of computer technology for their perpetration, investigation, or prosecution.” Table 8.2 provides examples of the computer as both a target and an instrument of crime.

No one knows the magnitude of computer crime—how many systems are invaded, how many people engage in the practice, or the total economic dam- age. According to the Ponemon Institute’s 2017 Annual Cost of Cyber Crime Study, the average annualized cost of cybercrime security for benchmarked companies in seven different countries was $11.7 million (Ponemon Institute, 2017a). Many companies are reluctant to report computer crimes because the crimes may involve employees or that publicizing vulnerability will hurt their reputations. The most economically damaging kinds of computer crime are DoS attacks, activities of malicious insiders, and web-based attacks.

Identity Theft With the growth of the Internet and electronic commerce, identity theft has be- come especially troubling. Identity theft is a crime in which an imposter ob- tains key pieces of personal information, such as social security numbers, driver’s license numbers, or credit card numbers, to impersonate someone else. The information may be used to obtain credit, merchandise, or services in the name

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of the victim or to provide the thief with false credentials. Identity theft has flour- ished on the Internet, with credit card files a major target of website hackers (see the chapter-ending case study). According to the 2018 Identity Fraud Study by Javelin Strategy & Research, identity fraud affected 16.7 million U.S. consumers in 2017, and they lost nearly $17 billion to identity fraud that year (Javelin, 2018).

One increasingly popular tactic is a form of spoofing called phishing. Phishing involves setting up fake websites or sending email messages that look like those of legitimate businesses to ask users for confidential personal data. The email mes- sage instructs recipients to update or confirm records by providing social security numbers, bank and credit card information, and other confidential data, either by responding to the email message, by entering the information at a bogus website, or by calling a telephone number. eBay, PayPal, Amazon.com, Walmart, and a variety of banks have been among the top spoofed companies. In a more targeted form of phishing called spear phishing, messages appear to come from a trusted source, such as an individual within the recipient’s own company or a friend.

Phishing techniques called evil twins and pharming are harder to detect. Evil twins are wireless networks that pretend to offer trustworthy Wi-Fi connec- tions to the Internet, such as those in airport lounges, hotels, or coffee shops. The bogus network looks identical to a legitimate public network. Fraudsters try to capture passwords or credit card numbers of unwitting users who log on to the network.

Pharming redirects users to a bogus web page, even when the individual types the correct web page address into his or her browser. This is possible if pharming perpetrators gain access to the Internet address information Internet service providers (ISPs) store to speed up web browsing and flawed software on ISP servers allows the fraudsters to hack in and change those addresses.

According to the Ponemon Institute’s 2017 Cost of a Data Breach Study, the average cost of a data breach among the 419 companies it surveyed globally was $3.62 million (Ponemon, 2017b). Moreover, brand damage can be significant although hard to quantify. In addition to the data breaches described in case studies for this chapter, Table 8.3 describes other major data breaches.

The U.S. Congress addressed the threat of computer crime in 1986 with the Computer Fraud and Abuse Act, which makes it illegal to access a computer

TABLE 8.2 EXAMPLES OF COMPUTER CRIME

COMPUTERS AS TARGETS OF CRIME

Breaching the confidentiality of protected computerized data

Accessing a computer system without authority

Knowingly accessing a protected computer to commit fraud

Intentionally accessing a protected computer and causing damage negligently or deliberately

Knowingly transmitting a program, program code, or command that intentionally causes damage to a protected computer

Threatening to cause damage to a protected computer

COMPUTERS AS INSTRUMENTS OF CRIME

Theft of trade secrets

Unauthorized copying of software or copyrighted intellectual property, such as articles, books, music, and video

Schemes to defraud

Using email or messaging for threats or harassment

Intentionally attempting to intercept electronic communication

Illegally accessing stored electronic communications, including email and voice mail

Transmitting or possessing child pornography by using a computer

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system without authorization. Most states have similar laws, and nations in Europe have comparable legislation. Congress passed the National Information Infrastructure Protection Act in 1996 to make malware distribution and hacker attacks to disable websites federal crimes.

U.S. legislation, such as the Wiretap Act, Wire Fraud Act, Economic Espionage Act, Electronic Communications Privacy Act, CAN-SPAM Act, and Protect Act of 2003, covers computer crimes involving intercepting electronic communica- tion, using electronic communication to defraud, stealing trade secrets, illegally accessing stored electronic communications, using email for threats or harass- ment, and transmitting or possessing child pornography. A proposed federal Data Security and Breach Notification Act would mandate organizations that possess personal information to put in place “reasonable” security procedures to keep the data secure and notify anyone affected by a data breach, but it has not been enacted.

Click Fraud When you click an ad displayed by a search engine, the advertiser typically pays a fee for each click, which is supposed to direct potential buyers to its products. Click fraud occurs when an individual or computer program fraudu- lently clicks an online ad without any intention of learning more about the advertiser or making a purchase. Click fraud has become a serious problem at Google and other websites that feature pay-per-click online advertising.

Some companies hire third parties (typically from low-wage countries) to click a competitor’s ads fraudulently to weaken them by driving up their mar- keting costs. Click fraud can also be perpetrated with software programs doing the clicking, and botnets are often used for this purpose. Search engines such as Google attempt to monitor click fraud and have made some changes to curb it.

TABLE 8.3 MAJOR DATA BREACHES

DATA BREACH DESCRIPTION

Yahoo In September and December 2016, Yahoo disclosed that it had been the target of two of the biggest data breaches ever, with sensitive information stolen from more than 1 billion user accounts in 2013 and 500 million in 2014. State-sponsored hackers found a way to forge credentials to log into some users’ accounts without a password. These data breaches forced Yahoo to lower its selling price by $300 million when it was acquired by Verizon in June 2017. In October 2017, Verizon reported that every single Yahoo account had actually been hacked—3 billion accounts, including email, Tumblr, Flickr, and Fantasy.

Anthem Health Insurance In February 2015, hackers stole the personal information on more than 80 million customers of the giant health insurer, including names, birthdays, medical IDs, social security numbers, and income data. No medical or credit information was stolen. This was the largest healthcare breach ever recorded.

Sony In November 2014, hackers stole more than 100 terabytes of corporate data, including trade secrets, email, personnel records, and copies of films for future release. Malware erased data from Sony’s corporate systems, leading to hundreds of millions of dollars in losses as well as a tarnished brand image. Sony was hacked earlier in April 2011 when intruders obtained personal information, including credit, debit, and bank account numbers, from more than 100 million PlayStation Network users and Sony Online Entertainment users.

Home Depot Hacked in 2014 with a malicious software program that plundered store registers while disguising itself as antivirus software. Fifty-six million credit card accounts were compromised, and 53 million customer email addresses were stolen.

eBay Cyberattack on eBay servers during February and March 2014 compromised a database containing customer names, encrypted passwords, email addresses, physical addresses, phone numbers, and birthdates; 145 million people were affected.

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Global Threats: Cyberterrorism and Cyberwarfare The cyber criminal activities we have described—launching malware, DoS attacks, and phishing probes—are borderless. Attack servers for malware are now hosted in more than 200 countries and territories. The leading sources of malware attacks include the United States, China, Brazil, India, Germany, and Russia. The global nature of the Internet makes it possible for cybercriminals to operate—and to do harm—anywhere in the world.

Internet vulnerabilities have also turned individuals and even entire nation-states into easy targets for politically motivated hacking to conduct sabo- tage and espionage. Cyberwarfare is a state-sponsored activity designed to crip- ple and defeat another state or nation by penetrating its computers or networks to cause damage and disruption. One example is the efforts of Russian hackers to disrupt the U.S. elections described in the chapter-opening case. The infa- mous 2014 hack on Sony has been attributed to state actors from North Korea. In 2017, the WannaCry and Petya cyber attacks, masquerading as ransomware, caused large-scale disruptions in Ukraine as well as to the UK’s National Health Service, pharmaceutical giant Merck, and other organizations around the world. Russians were suspected of conducting a cyberattack on Ukraine during a pe- riod of political turmoil in 2014. Cyberwarfare also includes defending against these types of attacks.

Cyberwarfare is more complex than conventional warfare. Although many potential targets are military, a country’s power grids, dams, financial systems, communications networks, and even voting systems can also be crippled. Non-state actors such as terrorists or criminal groups can mount attacks, and it is often difficult to tell who is responsible. Nations must constantly be on the alert for new malware and other technologies that could be used against them, and some of these technologies developed by skilled hacker groups are openly for sale to interested governments.

Cyberwarfare attacks have become much more widespread, sophisticated, and potentially devastating. Between 2011 and 2015, foreign hackers stole source code and blueprints to the oil and water pipelines and power grid of the United States and infiltrated the Department of Energy’s networks 150 times. Over the years, hackers have stolen plans for missile tracking systems, satellite navigation devices, surveillance drones, and leading-edge jet fighters.

According to U.S. intelligence, more than 30 countries are developing offen- sive cyberattack capabilities, including Russia, China, Iran, and North Korea. Their cyberarsenals include collections of malware for penetrating industrial, military, and critical civilian infrastructure controllers; email lists and text for phishing attacks on important targets; and algorithms for DoS attacks. U.S. cyberwarfare efforts are concentrated in the United States Cyber Command, which coordinates and directs the operations and defense of Department of Defense information networks and prepares for military cyberspace operations. Cyberwarfare poses a serious threat to the infrastructure of modern societies, since their major financial, health, government, and industrial institutions rely on the Internet for daily operations.

Internal Threats: Employees We tend to think the security threats to a business originate outside the or- ganization. In fact, company insiders pose serious security problems. Studies have found that user lack of knowledge is the single greatest cause of network security breaches. Many employees forget their passwords to access computer systems or allow coworkers to use them, which compromises the system.

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Malicious intruders seeking system access sometimes trick employees into re- vealing their passwords by pretending to be legitimate members of the com- pany in need of information. This practice is called social engineering, and the chapter-opening case shows how it was used to gain access to the Clinton campaign system.

Software Vulnerability Software errors pose a constant threat to information systems, causing untold losses in productivity and sometimes endangering people who use or depend on systems. Growing complexity and size of software programs, coupled with demands for rapid delivery to markets, have contributed to an increase in soft- ware flaws or vulnerabilities. For example, in February 2017 Cloudflare, a ser- vice provider that helps optimize website performance and security, reported that it had just fixed a software defect that had leaked sensitive data for months. The data included user passwords, cookies, and other authentication data. Although the amount of data leaked appeared to be small, the bug could have affected any of Cloudflare’s 5.5 million customers (McMillan, 2017).

A major problem with software is the presence of hidden bugs or program code defects. Studies have shown that it is virtually impossible to eliminate all bugs from large programs. The main source of bugs is the complexity of decision-making code. A relatively small program of several hundred lines will contain tens of decisions leading to hundreds or even thousands of paths. Important programs within most corporations are usually much larger, contain- ing tens of thousands or even millions of lines of code, each with many times the choices and paths of the smaller programs.

Zero defects cannot be achieved in larger programs. Complete testing simply is not possible. Fully testing programs that contain thousands of choices and millions of paths would require thousands of years. Even with rigorous testing, you would not know for sure that a piece of software was dependable until the product proved itself after much operational use.

Flaws in commercial software not only impede performance but also cre- ate security vulnerabilities that open networks to intruders. Each year security firms identify thousands of software vulnerabilities in Internet and PC software. An example is the Heartbleed bug, which is a flaw in OpenSSL, an open-source encryption technology that an estimated two-thirds of web servers use. Hackers could exploit the bug to access visitors’ personal data as well as a site’s encryp- tion keys, which can be used to collect even more protected data.

Especially troublesome are zero-day vulnerabilities, which are holes in the software unknown to its creator. Hackers then exploit this security hole before the vendor becomes aware of the problem and hurries to fix it. This type of vulnerability is called zero-day because the author of the software has zero days after learning about it to patch the code before it can be exploited in an attack. Sometimes security researchers spot the software holes, but more often, they remain undetected until an attack has occurred.

To correct software flaws once they are identified, the software vendor cre- ates small pieces of software called patches to repair the flaws without disturb- ing the proper operation of the software. It is up to users of the software to track these vulnerabilities, test, and apply all patches. This process is called patch management.

Because a company’s IT infrastructure is typically laden with multiple busi- ness applications, operating system installations, and other system services, maintaining patches on all devices and services a company uses is often

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time-consuming and costly. Malware is being created so rapidly that compa- nies have very little time to respond between the time a vulnerability and a patch are announced and the time malicious software appears to exploit the vulnerability.

Newly Discovered Vulnerabilities in Microprocessor Design The Interactive Session on Technology describes newly discovered vulner- abilities stemming from flaws in the design of computer microprocessor chips, which enable hackers using malicious software programs to gain access to data that were thought to be completely protected. These vulnerabilities affect nearly every computer chip manufactured in the last 20 years.

8-2 What is the business value of security and control?

Companies have very valuable information assets to protect. Systems often house confidential information about individuals’ taxes, financial assets, medi- cal records, and job performance reviews. They also can contain information on corporate operations, including trade secrets, new product development plans, and marketing strategies. Government systems may store information on weapons systems, intelligence operations, and military targets. These infor- mation assets have tremendous value, and the repercussions can be devastating if they are lost, destroyed, or placed in the wrong hands. Systems that are un- able to function because of security breaches, disasters, or malfunctioning tech- nology can have permanent impacts on a company’s financial health. Some experts believe that 40 percent of all businesses will not recover from applica- tion or data losses that are not repaired within three days.

Inadequate security and control may result in serious legal liability. Businesses must protect not only their own information assets but also those of customers, employees, and business partners. Failure to do so may open the firm to costly litigation for data exposure or theft. An organization can be held liable for needless risk and harm created if the organization fails to take appro- priate protective action to prevent loss of confidential information, data corrup- tion, or breach of privacy. For example, Target had to pay $39 million to several U.S. banks servicing Mastercard that were forced to reimburse Target customers millions of dollars when those customers lost money due to a massive 2013 hack of Target’s payment systems affecting 40 million people. Target also paid $67 million to Visa for the data hack and $10 million to settle a class-action lawsuit brought by Target customers. Developing a sound security and control framework that protects business information assets is of critical importance to the entire enterprise, including senior management. It can no longer be limited to the IT department (Rothrock et al., 2018).

Legal and Regulatory Requirements for Electronic Records Management U.S. government regulations are forcing companies to take security and con- trol more seriously by mandating the protection of data from abuse, exposure, and unauthorized access. Firms face new legal obligations for the retention and storage of electronic records as well as for privacy protection.

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In early January 2018, computer users all over the world were shocked to learn that nearly every computer chip manufactured in the last 20 years contained fundamental security flaws that make it possible for attackers to obtain access to data that were thought to be completely protected. Security researchers had discovered the flaws in late 2017. The flaws arise from features built into the chips that help them run faster. The vulnerability enables a ma- licious program to gain access to data it should never be able to see.

There are two specific variations of these flaws, called Meltdown and Spectre. Meltdown was so named because it “melts” security boundar- ies normally enforced by hardware. By exploiting Meltdown, an attacker can use a program running on a computer to gain access to data from all over that machine that the program shouldn’t normally be able to see, including data belonging to other pro- grams and data to which only administrators should have access. (A system administrator is responsible for the upkeep, configuration, and reliable operation of computer systems.) Meltdown only affects specific kinds of Intel chips produced since 1995.

Spectre is not manufacturer-specific and affects nearly all modern processors. It requires more in- timate knowledge of the victim program’s inner workings. Spectre’s name comes from speculative execution, in which a chip is able to start work on predicted future operations in order to work faster. In this case, the system is tricked into incorrectly anticipating application behavior. The name also suggests that Spectre will be much more difficult to neutralize. Other attacks in the same family will no doubt be discovered, and Spectre will be haunting us for some time.

With both Meltdown and Spectre, an attacker can make a program reveal some of its own data that should have been kept secret. For example, Spectre could harness JavaScript code on a website to trick a web browser into revealing user and password in- formation. Meltdown could be exploited to view data owned by other users and also virtual servers hosted on the same hardware, which is especially danger- ous for cloud computing host computers. The most worrisome aspect of Meltdown and Spectre is that

security vulnerabilities are not from flawed software but from the fundamental design of hardware plat- forms beneath the software.

There is no evidence that Spectre and Meltdown have been exploited, but this would be difficult to de- tect. Moreover, the security flaws are so fundamental and widespread that they could become catastrophic, especially for cloud computing services where many users share machines. According to researchers at global security software firm McAfee, these vulner- abilities are especially attractive to malicious ac- tors because the attack surface is so unprecedented and the impacts of leaking highly sensitive data are so harmful. According to Forester, performance of laptops, desktops, tablets, and smartphones will be less affected. The fundamental vulnerability behind Meltdown and Spectre is at the hardware level, and thus cannot be patched directly. Technology software vendors are only able to release software fixes that work around the problems. Such fixes mitigate vul- nerabilities by altering or disabling the way software code makes use of speculative execution and caching features built into the underlying hardware. (Caching is a technique to speed computer memory access by locating a small amount of memory storage on the CPU chip rather than from a separate RAM chip for memory.) Since these features were designed to improve system performance, working around them can slow systems down. Experts initially predicted system performance could be degraded as much as 30 percent, but a slowdown of 5 to 10 percent seems more typical.

Major software vendors have rolled out work- around patches. Cloud vendors have taken measures to patch their underlying infrastructures, with their customers expected to install the patches for their op- erating systems and applications. Microsoft released operating system patches for Windows 7 and all later versions, which also apply to Microsoft’s Internet Explorer and Edge browsers. Apple released patched versions of its Safari browser and iOS, macOS, and tvOS operating systems. Google provided a list of which Chromebook models will or won’t need patches and released a patch for its Chrome browser. Older operating systems such as Windows XP and millions of third-party low-cost Android phones that

INTERACTIVE SESSION TECHNOLOGY

Meltdown and Spectre Haunt the World’s Computers

If you work in the healthcare industry, your firm will need to comply with the Health Insurance Portability and Accountability Act (HIPAA) of 1996. HIPAA outlines medical security and privacy rules and procedures for sim- plifying the administration of healthcare billing and automating the transfer of healthcare data between healthcare providers, payers, and plans. It requires members of the healthcare industry to retain patient information for six years and ensure the confidentiality of those records. It specifies privacy, security, and electronic transaction standards for healthcare providers handling patient information, providing penalties for breaches of medical privacy, disclosure of patient records by email, or unauthorized network access.

If you work in a firm providing financial services, your firm will need to com- ply with the Financial Services Modernization Act of 1999, better known as the Gramm-Leach-Bliley Act after its congressional sponsors. This act requires financial institutions to ensure the security and confidentiality of customer data. Data must be stored on a secure medium, and special security measures must be enforced to protect such data on storage media and during transmittal.

If you work in a publicly traded company, your company will need to com- ply with the Public Company Accounting Reform and Investor Protection Act of 2002, better known as the Sarbanes-Oxley Act after its sponsors Senator Paul Sarbanes of Maryland and Representative Michael Oxley of Ohio. This act was designed to protect investors after the financial scandals at Enron, WorldCom, and other public companies. It imposes responsibility on companies and their management to safeguard the accuracy and integrity of financial information that is used internally and released externally. One of the Learning Tracks for this chapter discusses Sarbanes-Oxley in detail.

1. How dangerous are Spectre and Meltdown? Explain your answer.

2. Compare the threats of Spectre and Meltdown to cloud computing centers, corporate data centers, and individual computer and smartphone users.

3. How would you protect against Spectre and Meltdown if you were running a public cloud com- puting center, if you ran a corporate data center, and if you were an individual computer user?

don’t get security updates from Google will most likely never be patched. Organizations should apply updates and patches to browser software as soon as they are available. And since these vulnerabilities could enable attackers to steal passwords from user device memory when running JavaScript from a web page, it is recommended that users be instructed to always close their web browsers when not in use. Forrester also recommends that enterprises should use other techniques to protect data from users and organizations that have not applied the fixes.

However, the only way to truly fix Meltdown and Spectre is to replace affected processors. Redesigning

and producing new processors and architectures may take five to ten years to hit the market. If anything good can be said about Spectre and Meltdown, it is that they have focused more global attention on software and hardware security and the need to develop more robust system architectures for secure computing.

Sources: Josh Fruhlinger, “Spectre and Meltdown Explained: What They Are, How They Work, What’s at Risk,” CSO, January 15, 2018; Warwick Ashford, “Meltdown and Spectre a Big Deal for Enterprises,” Computer Weekly, January 9, 2018; Laura Hautala, “Spectre and Meltdown: Details You Need on Those Big Chip Flaws,” CNET, January 8, 2018.

CASE STUDY QUESTIONS

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Sarbanes-Oxley is fundamentally about ensuring that internal controls are in place to govern the creation and documentation of information in financial statements. Because information systems are used to generate, store, and trans- port such data, the legislation requires firms to consider information systems security and other controls required to ensure the integrity, confidentiality, and accuracy of their data. Each system application that deals with critical financial reporting data requires controls to make sure the data are accurate. Controls to secure the corporate network, prevent unauthorized access to systems and data, and ensure data integrity and availability in the event of disaster or other disruption of service are essential as well.

Electronic Evidence and Computer Forensics Security, control, and electronic records management have become essential for responding to legal actions. Much of the evidence today for stock fraud, embezzlement, theft of company trade secrets, computer crime, and many civil cases is in digital form. In addition to information from printed or typewritten pages, legal cases today increasingly rely on evidence represented as digital data stored on portable storage devices, CDs, and computer hard disk drives as well as in email, instant messages, and e-commerce transactions over the Internet.

In a legal action, a firm is obligated to respond to a discovery request for access to information that may be used as evidence, and the company is re- quired by law to produce those data. The cost of responding to a discovery request can be enormous if the company has trouble assembling the required data or the data have been corrupted or destroyed. Courts now impose severe financial and even criminal penalties for improper destruction of electronic documents.

An effective electronic document retention policy ensures that electronic documents, email, and other records are well organized, accessible, and neither retained too long nor discarded too soon. It also reflects an awareness of how to preserve potential evidence for computer forensics. Computer forensics is the scientific collection, examination, authentication, preservation, and analysis of data held on or retrieved from computer storage media in such a way that the information can be used as evidence in a court of law. It deals with the follow- ing problems:

• Recovering data from computers while preserving evidential integrity

• Securely storing and handling recovered electronic data

• Finding significant information in a large volume of electronic data

• Presenting the information to a court of law

Electronic evidence may reside on computer storage media in the form of computer files and as ambient data, which are not visible to the average user. An example might be a file that has been deleted on a PC hard drive. Data that a computer user may have deleted on computer storage media can often be re- covered through various techniques. Computer forensics experts try to recover such hidden data for presentation as evidence.

An awareness of computer forensics should be incorporated into a firm’s contingency planning process. The CIO, security specialists, information sys- tems staff, and corporate legal counsel should all work together to have a plan in place that can be executed if a legal need arises. You can find out more about computer forensics in the Learning Tracks for this chapter.

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8-3 What are the components of an organizational framework for security and control?

Even with the best security tools, your information systems won’t be reliable and secure unless you know how and where to deploy them. You’ll need to know where your company is at risk and what controls you must have in place to protect your information systems. You’ll also need to develop a security pol- icy and plans for keeping your business running if your information systems aren’t operational.

Information Systems Controls Information systems controls are both manual and automated and consist of general and application controls. General controls govern the design, secu- rity, and use of computer programs and the security of data files in general throughout the organization’s information technology infrastructure. On the whole, general controls apply to all computerized applications and consist of a combination of hardware, software, and manual procedures that create an over- all control environment.

General controls include software controls, physical hardware controls, com- puter operations controls, data security controls, controls over the systems development process, and administrative controls. Table 8.4 describes the func- tions of each of these controls.

Application controls are specific controls unique to each computerized application, such as payroll or order processing. They include both auto- mated and manual procedures that ensure that only authorized data are com- pletely and accurately processed by that application. Application controls can be classified as (1) input controls, (2) processing controls, and (3) output controls.

Input controls check data for accuracy and completeness when they enter the system. There are specific input controls for input authorization, data conver- sion, data editing, and error handling. Processing controls establish that data are complete and accurate during updating. Output controls ensure that the results of

TABLE 8.4 GENERAL CONTROLS

TYPE OF GENERAL CONTROL DESCRIPTION

Software controls Monitor the use of system software and prevent unauthorized access and use of software programs, system software, and computer programs.

Hardware controls Ensure that computer hardware is physically secure and check for equipment malfunction. Organizations that are critically dependent on their computers also must make provisions for backup or continued operation to maintain constant service.

Computer operations controls Oversee the work of the computer department to ensure that programmed procedures are consistently and correctly applied to the storage and processing of data. They include controls over the setup of computer processing jobs and backup and recovery procedures for processing that ends abnormally.

Data security controls Ensure that valuable business data files maintained internally or by an external hosting service are not subject to unauthorized access, change, or destruction while they are in use or in storage.

Implementation controls Audit the systems development process at various points to ensure that the process is properly controlled and managed.

Administrative controls Formalize standards, rules, procedures, and control disciplines to ensure that the organization’s general and application controls are properly executed and enforced.

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computer processing are accurate, complete, and properly distributed. You can find more detail about application and general controls in our Learning Tracks.

Information systems controls should not be an afterthought. They need to be incorporated into the design of a system and should consider not only how the system will perform under all possible conditions but also the behavior of organizations and people using the system.

Risk Assessment Before your company commits resources to security and information systems controls, it must know which assets require protection and the extent to which these assets are vulnerable. A risk assessment helps answer these questions and determine the most cost-effective set of controls for protecting assets.

A risk assessment determines the level of risk to the firm if a specific activ- ity or process is not properly controlled. Not all risks can be anticipated and measured, but most businesses will be able to acquire some understanding of the risks they face. Business managers working with information systems spe- cialists should try to determine the value of information assets, points of vul- nerability, the likely frequency of a problem, and the potential for damage. For example, if an event is likely to occur no more than once a year, with a maxi- mum of a $1000 loss to the organization, it is not wise to spend $20,000 on the design and maintenance of a control to protect against that event. However, if that same event could occur at least once a day, with a potential loss of more than $300,000 a year, $100,000 spent on a control might be entirely appropriate.

Table 8.5 illustrates sample results of a risk assessment for an online order processing system that processes 30,000 orders per day. The likelihood of each exposure occurring over a one-year period is expressed as a percentage. The next column shows the highest and lowest possible loss that could be expected each time the exposure occurred and an average loss calculated by adding the highest and lowest figures and dividing by two. The expected annual loss for each exposure can be determined by multiplying the average loss by its prob- ability of occurrence.

This risk assessment shows that the probability of a power failure occurring in a one-year period is 30 percent. Loss of order transactions while power is down could range from $5000 to $200,000 (averaging $102,500) for each occurrence, depending on how long processing is halted. The probability of embezzlement occurring over a yearly period is about 5 percent, with potential losses ranging from $1000 to $50,000 (and averaging $25,500) for each occurrence. User errors have a 98 percent chance of occurring over a yearly period, with losses ranging from $200 to $40,000 (and averaging $20,100) for each occurrence.

After the risks have been assessed, system builders will concentrate on the control points with the greatest vulnerability and potential for loss. In this case, controls should focus on ways to minimize the risk of power failures and user errors because anticipated annual losses are highest for these areas.

TABLE 8.5 ONLINE ORDER PROCESSING RISK ASSESSMENT

EXPOSURE PROBABILITY OF OCCURRENCE (%) LOSS RANGE/AVERAGE ($)

EXPECTED ANNUAL LOSS ($)

Power failure 30% $5000–$200,000 ($102,500) $30,750

Embezzlement 5% $1000–$50,000 ($25,500) $1275

User error 98% $200–$40,000 ($20,100) $19,698

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Security Policy After you’ve identified the main risks to your systems, your company will need to develop a security policy for protecting the company’s assets. A security policy consists of statements ranking information risks, identifying acceptable security goals, and identifying the mechanisms for achieving these goals. What are the firm’s most important information assets? Who generates and controls this information in the firm? What existing security policies are in place to protect the information? What level of risk is management willing to accept for each of these assets? Is it willing, for instance, to lose customer credit data once every 10 years? Or will it build a security system for credit card data that can withstand the once-in-a-hundred-years disaster? Management must estimate how much it will cost to achieve this level of acceptable risk.

The security policy drives other policies determining acceptable use of the firm’s information resources and which members of the company have access to its information assets. An acceptable use policy (AUP) defines acceptable uses of the firm’s information resources and computing equipment, including desktop and laptop computers, mobile devices, telephones, and the Internet. A good AUP defines unacceptable and acceptable actions for every user and speci- fies consequences for noncompliance.

Figure 8.3 is one example of how an organization might specify the access rules for different levels of users in the human resources function. It specifies what portions of a human resource database each user is permitted to access, based on the information required to perform that person’s job. The database contains sensitive personal information such as employees’ salaries, benefits, and medical histories.

FIGURE 8.3 ACCESS RULES FOR A PERSONNEL SYSTEM These two examples represent two security profiles or data security patterns that might be found in a personnel system. Depending on the security profile, a user would have certain restrictions on access to various systems, locations, or data in an organization.

User: Personnel Dept. Clerk SECURITY PROFILE 1

SECURITY PROFILE 2

Location: Division 1

00753, 27834, 37665, 44116

27321

Type of Access

Type of Access

Read Only

Read and Update

None None None

Employee Identification Codes with This Profile: Data Field Restrictions All employee data for Division 1 only

User: Divisional Personnel Manager Location: Division 1 Employee Identification Codes with This Profile: Data Field Restrictions

All employee data for Division 1 only

• Medical history data • Salary • Pensionable earnings

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The access rules illustrated here are for two sets of users. One set of users consists of all employees who perform clerical functions, such as inputting employee data into the system. All individuals with this type of profile can update the system but can neither read nor update sensitive fields, such as sal- ary, medical history, or earnings data. Another profile applies to a divisional manager, who cannot update the system but who can read all employee data fields for his or her division, including medical history and salary. We pro- vide more detail about the technologies for user authentication later on in this chapter.

Disaster Recovery Planning and Business Continuity Planning If you run a business, you need to plan for events, such as power outages, floods, earthquakes, or terrorist attacks, that will prevent your information sys- tems and your business from operating. Disaster recovery planning devises plans for the restoration of disrupted computing and communications services. Disaster recovery plans focus primarily on the technical issues involved in keeping systems up and running, such as which files to back up and the main- tenance of backup computer systems or disaster recovery services.

For example, MasterCard maintains a duplicate computer center in Kansas City, Missouri, to serve as an emergency backup to its primary computer center in St. Louis. Rather than build their own backup facilities, many firms contract with cloud-based disaster recovery services or firms such as SunGard Availability Services that provide sites with spare computers around the country where subscribing firms can run their critical applications in an emergency.

Business continuity planning focuses on how the company can restore business operations after a disaster strikes. The business continuity plan iden- tifies critical business processes and determines action plans for handling mission-critical functions if systems go down. For example, Healthways, a well-being improvement company headquartered in Franklin, Tennessee, im- plemented a business continuity plan that identified the business processes of nearly 70 departments across the enterprise and the impact of system down- time on those processes. Healthways pinpointed its most critical processes and worked with each department to devise an action plan.

Business managers and information technology specialists need to work to- gether on both types of plans to determine which systems and business pro- cesses are most critical to the company. They must conduct a business impact analysis to identify the firm’s most critical systems and the impact a systems outage would have on the business. Management must determine the maxi- mum amount of time the business can survive with its systems down and which parts of the business must be restored first.

The Role of Auditing How does management know that information systems security and controls are effective? To answer this question, organizations must conduct comprehen- sive and systematic audits. An information systems audit examines the firm’s overall security environment as well as controls governing individual informa- tion systems. The auditor should trace the flow of sample transactions through the system and perform tests, using, if appropriate, automated audit software. The information systems audit may also examine data quality.

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Security audits review technologies, procedures, documentation, training, and personnel. A thorough audit will even simulate an attack or disaster to test the response of the technology, information systems staff, and business employees.

The audit lists and ranks all control weaknesses and estimates the probabil- ity of their occurrence. It then assesses the financial and organizational impact of each threat. Figure 8.4 is a sample auditor’s listing of control weaknesses for a loan system. It includes a section for notifying management of such weak- nesses and for management’s response. Management is expected to devise a plan for countering significant weaknesses in controls.

8-4 What are the most important tools and technologies for safeguarding information resources?

Businesses have an array of technologies for protecting their information resources. They include tools for managing user identities, preventing unau- thorized access to systems and data, ensuring system availability, and ensuring software quality.

Identity Management and Authentication Midsize and large companies have complex IT infrastructures and many sys- tems, each with its own set of users. Identity management software auto- mates the process of keeping track of all these users and their system privileges,

FIGURE 8.4 SAMPLE AUDITOR’S LIST OF CONTROL WEAKNESSES This chart is a sample page from a list of control weaknesses that an auditor might find in a loan system in a local commercial bank. This form helps auditors record and evaluate control weaknesses and shows the results of discussing those weaknesses with management as well as any corrective actions management takes.

Nature of Weakness and Impact

User accounts with missing passwords

Network configured to allow some sharing of system files

Software patches can update production programs without final approval from Standards and Controls group

Function: Loans Location: Peoria, IL

Chance for Error/Abuse

JustificationYes/ No

Yes

Yes

No

Leaves system open to unauthorized outsiders or attackers

Exposes critical system files to hostile parties connected to the network

All production programs require management approval; Standards and Controls group assigns such cases to a temporary production status

Prepared by: J. Ericson Date: June 16, 2018

Notification to Management

Management responseReport date

5/10/18

5/10/18

Eliminate accounts without passwords

Ensure only required directories are shared and that they are protected with strong passwords

Received by: T. Benson Review date: June 28, 2018

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assigning each user a unique digital identity for accessing each system. It also includes tools for authenticating users, protecting user identities, and control- ling access to system resources.

To gain access to a system, a user must be authorized and authenticated. Authentication refers to the ability to know that a person is who he or she claims to be. Authentication is often established by using passwords known only to authorized users. An end user uses a password to log on to a computer system and may also use passwords for accessing specific systems and files. However, users often forget passwords, share them, or choose poor passwords that are easy to guess, which compromises security. Password systems that are too rigorous hinder employee productivity. When employees must change complex passwords frequently, they often take shortcuts, such as choosing passwords that are easy to guess or keeping their passwords at their worksta- tions in plain view. Passwords can also be sniffed if transmitted over a network or stolen through social engineering.

New authentication technologies, such as tokens, smart cards, and biometric authentication, overcome some of these problems. A token is a physical de- vice, similar to an identification card, that is designed to prove the identity of a single user. Tokens are small gadgets that typically fit on key rings and display passcodes that change frequently. A smart card is a device about the size of a credit card that contains a chip formatted with access permission and other data. (Smart cards are also used in electronic payment systems.) A reader de- vice interprets the data on the smart card and allows or denies access.

Biometric authentication uses systems that read and interpret individual human traits, such as fingerprints, irises, and voices to grant or deny access. Biometric authentication is based on the measurement of a physical or behav- ioral trait that makes each individual unique. It compares a person’s unique characteristics, such as the fingerprints, face, voice, or retinal image, against a stored profile of these characteristics to determine any differences between these characteristics and the stored profile. If the two profiles match, access is granted. Fingerprint and facial recognition technologies are just beginning

This smartphone has a biometric fingerprint reader for fast yet secure access to files and networks. New models of PCs and smart- phones are starting to use biometric identification to authenticate users.

© Andreypopov/123RF

318 Part Two Information Technology Infrastructure

to be used for security applications, with many PC laptops (and some smart- phones) equipped with fingerprint identification devices and some models with built-in webcams and face recognition software. Financial service firms such as Vanguard and Fidelity have implemented voice authentication systems for their clients.

The steady stream of incidents in which hackers have been able to access traditional passwords highlights the need for more secure means of authentica- tion. Two-factor authentication increases security by validating users through a multistep process. To be authenticated, a user must provide two means of identification, one of which is typically a physical token, such as a smartcard or chip-enabled bank card, and the other of which is typically data, such as a password or personal identification number (PIN). Biometric data, such as fingerprints, iris prints, or voice prints, can also be used as one of the authenti- cating mechanisms. A common example of two-factor authentication is a bank card; the card itself is the physical item, and the PIN is the other piece of data that goes with it.

Firewalls, Intrusion Detection Systems, and Anti-malware Software Without protection against malware and intruders, connecting to the Internet would be very dangerous. Firewalls, intrusion detection systems, and anti- malware software have become essential business tools.

Firewalls Firewalls prevent unauthorized users from accessing private networks. A firewall is a combination of hardware and software that controls the flow of incoming and outgoing network traffic. It is generally placed between the orga- nization’s private internal networks and distrusted external networks, such as the Internet, although firewalls can also be used to protect one part of a com- pany’s network from the rest of the network (see Figure 8.5).

The firewall acts like a gatekeeper that examines each user’s credentials be- fore it grants access to a network. The firewall identifies names, IP addresses, applications, and other characteristics of incoming traffic. It checks this infor- mation against the access rules that the network administrator has programmed into the system. The firewall prevents unauthorized communication into and out of the network.

In large organizations, the firewall often resides on a specially designated computer separate from the rest of the network, so no incoming request directly accesses private network resources. There are a number of firewall screening technologies, including static packet filtering, stateful inspection, Network Address Translation, and application proxy filtering. They are frequently used in combination to provide firewall protection.

Packet filtering examines selected fields in the headers of data packets flow- ing back and forth between the trusted network and the Internet, examining individual packets in isolation. This filtering technology can miss many types of attacks.

Stateful inspection provides additional security by determining whether pack- ets are part of an ongoing dialogue between a sender and a receiver. It sets up state tables to track information over multiple packets. Packets are accepted or rejected based on whether they are part of an approved conversation or at- tempting to establish a legitimate connection.

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Network Address Translation (NAT) can provide another layer of protection when static packet filtering and stateful inspection are employed. NAT con- ceals the IP addresses of the organization’s internal host computer(s) to prevent sniffer programs outside the firewall from ascertaining them and using that information to penetrate internal systems.

Application proxy filtering examines the application content of packets. A proxy server stops data packets originating outside the organization, inspects them, and passes a proxy to the other side of the firewall. If a user outside the company wants to communicate with a user inside the organization, the out- side user first communicates with the proxy application, and the proxy appli- cation communicates with the firm’s internal computer. Likewise, a computer user inside the organization goes through the proxy to talk with computers on the outside.

To create a good firewall, an administrator must maintain detailed internal rules identifying the people, applications, or addresses that are allowed or re- jected. Firewalls can deter, but not completely prevent, network penetration by outsiders and should be viewed as one element in an overall security plan.

Intrusion Detection Systems In addition to firewalls, commercial security vendors now provide intrusion detection tools and services to protect against suspicious network traffic and attempts to access files and databases. Intrusion detection systems feature full-time monitoring tools placed at the most vulnerable points or hot spots of corporate networks to detect and deter intruders continually. The system

FIGURE 8.5 A CORPORATE FIREWALL The firewall is placed between the firm’s private network and the public Internet or another distrusted network to protect against unauthorized traffic.

Internet Outer firewall

Web server

Inner firewall

Corporate systems

LANs

Policy rules

Databases

320 Part Two Information Technology Infrastructure

generates an alarm if it finds a suspicious or anomalous event. Scanning soft- ware looks for patterns indicative of known methods of computer attacks such as bad passwords, checks to see whether important files have been removed or modified, and sends warnings of vandalism or system administration errors. The intrusion detection tool can also be customized to shut down a particularly sensitive part of a network if it receives unauthorized traffic.

Anti-malware Software Defensive technology plans for both individuals and businesses must include anti-malware protection for every computer. Anti-malware software prevents, detects, and removes malware, including computer viruses, computer worms, Trojan horses, spyware, and adware. However, most anti-malware software is effective only against malware already known when the software was written. To remain effective, the software must be continually updated. Even then it is not always effective because some malware can evade detection. Organizations need to use additional malware detection tools for better protection.

Unified Threat Management Systems To help businesses reduce costs and improve manageability, security vendors have combined into a single appliance various security tools, including firewalls, virtual private networks, intrusion detection systems, and web content filtering and anti-spam software. These comprehensive security management products are called unified threat management (UTM) systems. UTM products are available for all sizes of networks. Leading UTM vendors include Fortinent, Sophos, and Check Point, and networking vendors such as Cisco Systems and Juniper Networks provide some UTM capabilities in their products.

Securing Wireless Networks The initial security standard developed for Wi-Fi, called Wired Equivalent Privacy (WEP), is not very effective because its encryption keys are relatively easy to crack. WEP provides some margin of security, however, if users remem- ber to enable it. Corporations can further improve Wi-Fi security by using it in conjunction with virtual private network (VPN) technology when accessing internal corporate data.

In June 2004, the Wi-Fi Alliance industry trade group finalized the 802.11i specification (also referred to as Wi-Fi Protected Access 2 or WPA2) that re- places WEP with stronger security standards. Instead of the static encryption keys used in WEP, the new standard uses much longer keys that continually change, making them harder to crack. The most recent specification is WPA3, introduced in 2018.

Encryption and Public Key Infrastructure Many businesses use encryption to protect digital information that they store, physically transfer, or send over the Internet. Encryption is the process of transforming plain text or data into cipher text that cannot be read by anyone other than the sender and the intended receiver. Data are encrypted by using a secret numerical code, called an encryption key, that transforms plain data into cipher text. The message must be decrypted by the receiver.

Two methods for encrypting network traffic on the web are SSL and S-HTTP. Secure Sockets Layer (SSL) and its successor, Transport Layer Security (TLS), enable client and server computers to manage encryption and decryption

Chapter 8 Securing Information Systems 321

activities as they communicate with each other during a secure web session. Secure Hypertext Transfer Protocol (S-HTTP) is another protocol used for encrypting data flowing over the Internet, but it is limited to individual mes- sages, whereas SSL and TLS are designed to establish a secure connection be- tween two computers.

The capability to generate secure sessions is built into Internet client browser software and servers. The client and the server negotiate what key and what level of security to use. Once a secure session is established between the client and the server, all messages in that session are encrypted.

Two methods of encryption are symmetric key encryption and public key encryption. In symmetric key encryption, the sender and receiver establish a secure Internet session by creating a single encryption key and sending it to the receiver so both the sender and receiver share the same key. The strength of the encryption key is measured by its bit length. Today, a typical key will be 56 to 256 bits long (a string of from 56 to 256 binary digits) depending on the level of security desired. The longer the key, the more difficult it is to break the key. The downside is that the longer the key, the more computing power it takes for legitimate users to process the information.

The problem with all symmetric encryption schemes is that the key itself must be shared somehow among the senders and receivers, which exposes the key to outsiders who might just be able to intercept and decrypt the key. A more secure form of encryption called public key encryption uses two keys: one shared (or public) and one totally private as shown in Figure 8.6. The keys are mathematically related so that data encrypted with one key can be decrypted using only the other key. To send and receive messages, communica- tors first create separate pairs of private and public keys. The public key is kept in a directory, and the private key must be kept secret. The sender encrypts a message with the recipient’s public key. On receiving the message, the recipi- ent uses his or her private key to decrypt it.

Digital certificates are data files used to establish the identity of users and electronic assets for protection of online transactions (see Figure 8.7). A digital certificate system uses a trusted third party, known as a certificate authority (CA), to validate a user’s identity. There are many CAs in the United States and around the world, including Symantec, GoDaddy, and Comodo.

The CA verifies a digital certificate user’s identity offline. This information is put into a CA server, which generates an encrypted digital certificate contain- ing owner identification information and a copy of the owner’s public key. The certificate authenticates that the public key belongs to the designated owner.

FIGURE 8.6 PUBLIC KEY ENCRYPTION A public key encryption system can be viewed as a series of public and private keys that lock data when they are transmitted and unlock data when they are received. The sender locates the recipient’s public key in a di- rectory and uses it to encrypt a message. The message is sent in encrypted form over the Internet or a private network. When the encrypted message arrives, the recipient uses his or her private key to decrypt the data and read the message.

Decrypt with

private key

Encrypt with

public key

Sender ScrambledMessage Recipient

322 Part Two Information Technology Infrastructure

The CA makes its own public key available either in print or perhaps on the Internet. The recipient of an encrypted message uses the CA’s public key to decode the digital certificate attached to the message, verifies it was issued by the CA, and then obtains the sender’s public key and identification informa- tion contained in the certificate. By using this information, the recipient can send an encrypted reply. The digital certificate system would enable, for exam- ple, a credit card user and a merchant to validate that their digital certificates were issued by an authorized and trusted third party before they exchange data. Public key infrastructure (PKI), the use of public key cryptography working with a CA, is now widely used in e-commerce.

Securing Transactions with Blockchain Blockchain, which we introduced in Chapter 6, is gaining attention as an alter- native approach for securing transactions and establishing trust among mul- tiple parties. A blockchain is a chain of digital “blocks” that contain records of transactions. Each block is connected to all the blocks before and after it, and the blockchains are continually updated and kept in sync This makes it difficult to tamper with a single record because one would have to change the block con- taining that record as well as those linked to it to avoid detection.

Once recorded, a blockchain transaction cannot be changed. The records in a blockchain are secured through cryptography, and all transactions are encrypted. Blockchain network participants have their own private keys that are assigned to the transactions they create and act as a personal digital signature. If a record is altered, the signature will become invalid, and the blockchain network will know immediately that something is amiss. Because blockchains aren’t contained in a central location, they don’t have a single point of failure and cannot be changed from a single computer. Blockchain is especially suitable for environments with high security requirements and mutually unknown actors.

FIGURE 8.7 DIGITAL CERTIFICATES Digital certificates help establish the identity of people or electronic assets. They protect online transactions by providing secure, encrypted, online communication.

Institution/ individual subject

Request certificate

Transaction partner: online merchant

or customer

Certification Authorities

(CAs) Certificate received

Digital Certificate Serial Number Version Issuer Name Issuance/Expiration Date Subject Name Subject Public Key CA Signature Other Information

Internet

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Ensuring System Availability As companies increasingly rely on digital networks for revenue and opera- tions, they need to take additional steps to ensure that their systems and applications are always available. Firms such as those in the airline and finan- cial services industries with critical applications requiring online transaction processing have traditionally used fault-tolerant computer systems for many years to ensure 100 percent availability. In online transaction processing, transactions entered online are immediately processed by the computer. Multitudinous changes to databases, reporting, and requests for information occur each instant.

Fault-tolerant computer systems contain redundant hardware, software, and power supply components that create an environment that provides continuous, uninterrupted service. Fault-tolerant computers use special soft- ware routines or self-checking logic built into their circuitry to detect hard- ware failures and automatically switch to a backup device. Parts from these computers can be removed and repaired without disruption to the computer or downtime. Downtime refers to periods of time in which a system is not operational.

Controlling Network Traffic: Deep Packet Inspection Have you ever tried to use your campus network and found that it was very slow? It may be because your fellow students are using the network to down- load music or watch YouTube. Bandwidth-consuming applications such as file-sharing programs, Internet phone service, and online video can clog and slow down corporate networks, degrading performance. A technology called deep packet inspection (DPI) helps solve this problem. DPI examines data files and sorts out low-priority online material while assigning higher prior- ity to business-critical files. Based on the priorities established by a network’s operators, it decides whether a specific data packet can continue to its destina- tion or should be blocked or delayed while more important traffic proceeds.

Security Outsourcing Many companies, especially small businesses, lack the resources or expertise to provide a secure high-availability computing environment on their own. They can outsource many security functions to managed security service providers (MSSPs) that monitor network activity and perform vulnerability testing and intrusion detection. SecureWorks, AT&T, Verizon, IBM, Perimeter eSecurity, and Symantec are leading providers of MSSP services.

Security Issues for Cloud Computing and the Mobile Digital Platform Although cloud computing and the emerging mobile digital platform have the potential to deliver powerful benefits, they pose new challenges to system se- curity and reliability. We now describe some of these challenges and how they should be addressed.

Security in the Cloud When processing takes place in the cloud, accountability and responsibility for protection of sensitive data still reside with the company owning that data. Understanding how the cloud computing provider organizes its services and manages the data is critical (see the Interactive Session on Management).

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Over the last several years, many companies have altered their IT strategies to shift an increasing share of their applications and data to public-cloud infra- structure and platforms. However, using the public cloud disrupts traditional cybersecurity models that many companies have built up over years. As a re- sult, as companies make use of the public cloud, they need to revise their cybersecurity practices in order to consume public-cloud services in a way that enables them both to protect critical data and to fully exploit the speed and agility that these services provide.

Managing security and privacy for cloud services is similar to managing traditional IT infrastructures. However, the risks may be different because some, but not all, responsibilities shift to the cloud service provider. The category of cloud service (IaaS, PaaS, or SaaS) affects exactly how these responsibilities are shared. For IaaS, the provider typically supplies and is responsible for securing basic IT resources such as machines, storage systems, and networks. The cloud services customer is typically responsible for its operating system, applications, and corporate data placed into the cloud computing environment. This means that most of the responsibility for securing the applications and the corporate data falls on the customer.

Cloud service customers should carefully review their cloud services agreement with their cloud provider to make sure their applications and data hosted in cloud services are secured in accordance with their security and compliance policies. But that’s not all. Although many organizations know how to manage security for their own data center— they’re unsure of exactly what they need to do when they shift computing work to the cloud. They need new tool sets and skill sets to manage cloud security from their end to configure and launch cloud instances, manage identity and access con- trols, update security controls to match configu- ration changes, and protect workloads and data. There’s a misconception among many IT depart- ments that whatever happens in the cloud is not their responsibility. It is essential to update security requirements developed for enterprise data centers to produce requirements suitable for the use of

cloud services. Organizations using cloud services often need to apply additional controls at the user, application, and data level.

Cloud service providers have made great strides in tightening security for their areas of responsibility. Amazon’s security for its cloud service leaves little to chance. The company keeps careful constraints around its staff, watches what they do every day, and instructs service teams to restrict access to data through tooling and automation. Amazon also rotates security credentials for authentication and verifi- cation of identity and changes them frequently— sometimes in a matter of hours.

The biggest threats to cloud data for most com- panies involve lack of software patching or miscon- figuration. Many organizations have been breached because they neglected to apply software patches to newly identified security vulnerabilities when they became available or waited too long to do so. (See the discussion of patch management earlier in this chapter.) Companies have also experienced security breaches because they did not configure aspects of cloud security that were their responsibility. Some users forget to set up AWS bucket password protection. (A bucket is a logical unit of storage in Amazon Web Services [AWS] Simple Storage Solution S3 storage service. Buckets are used to store objects, which consist of data and metadata that describes the data.) Others don’t understand basic security features in Amazon such as resource-based access policies (access control lists) or bucket permissions checks, unwittingly exposing data to the public Internet.

Financial publisher Dow Jones & Co. confirmed reports in July 2017 that it may have publicly exposed personal and financial information of 2.2  million customers, including subscribers to The Wall Street Journal and Barron’s. The leak was traced back to a configuration error in a reposi- tory in AWS S3 security. Dow Jones had intended to provide semi-public access to select customers over the Internet. However, it wound up granting access to download the data via a URL to “authen- ticated users,” which included anyone who reg- istered (for free) for an AWS account. Accenture, Verizon, Viacom, Tesla, and Uber Technologies are

INTERACTIVE SESSION MANAGEMENT

How Secure Is the Cloud?

Chapter 8 Securing Information Systems 325

1. What kinds of security problems does cloud com- puting pose? How serious are they? Explain your answer.

2. What management, organization, and technology factors are responsible for cloud security prob- lems? To what extent is cloud security a manage- ment issue?

3. What steps can organizations take to make their cloud-based systems more secure?

4. Should companies use the public cloud to run their mission-critical systems? Why or why not?

other high-profile names in the steady stream of companies that have exposed sensitive information via AWS S3 security misconfigurations. Such mis- configurations were often performed by employ- ees who lacked security experience when security configurations should have been handled by skilled IT professionals. Stopping AWS bucket miscon- figurations may also require enacting policies that limit the damage caused by careless or untrained employees.

Although customers have their choice of secu- rity configurations for the cloud, Amazon has been taking its own steps to prevent misconfigurations. In November 2017, the company updated its AWS dashboard, encasing public in bright orange on the AWS S3 console so that cloud customers could eas- ily see the status of access permissions to buckets and their objects. This helps everyone see more

easily when an Amazon S3 bucket is open to the public. Amazon also added default encryption to all objects when they are stored in an AWS bucket and access control lists for cross-region replication. Another new tool called Zelkova examines AWS S3 security policies to help users identify which one is more permissive than the others. Amazon Macie is a managed service that uses machine learning to detect personally identifiable information and intellectual property, and has been available for S3 since August 2017.

Sources: Kathleen Richards, “New Cloud Threats as Attackers Embrace the Power of the Cloud,” SearchCloudSecurity.com, April 3, 2018; “AWS S3 Security Falls Short at High-profile Companies,” SearchCloudSecurity.com, April 2018; “Making a Secure Transition to the Public Cloud,” McKinsey & Company, January 2018; and “Security for Cloud Computing: Ten Steps to Ensure Success,” Cloud Standards Customer Council, December 2017.

CASE STUDY QUESTIONS

Cloud computing is highly distributed. Cloud applications reside in large remote data centers and server farms that supply business services and data management for multiple corporate clients. To save money and keep costs low, cloud computing providers often distribute work to data centers around the globe where work can be accomplished most efficiently. When you use the cloud, you may not know precisely where your data are being hosted.

Virtually all cloud providers use encryption to secure the data they handle while the data are being transmitted. However, if the data are stored on devices that also store other companies’ data, it’s important to ensure that these stored data are encrypted as well. DDoS attacks are especially harmful because they render cloud services unavailable to legitimate customers.

Companies expect their systems to be running 24/7. Cloud providers still experience occasional outages, but their reliability has increased to the point where a number of large companies are using cloud services for part of their IT infrastructures. Most keep their critical systems in-house or in private clouds.

Cloud users need to confirm that regardless of where their data are stored, they are protected at a level that meets their corporate requirements. They

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should stipulate that the cloud provider store and process data in specific ju- risdictions according to the privacy rules of those jurisdictions. Cloud clients should find how the cloud provider segregates their corporate data from those of other companies and ask for proof that encryption mechanisms are sound. It’s also important to know how the cloud provider will respond if a disaster strikes, whether the provider will be able to restore your data completely, and how long this should take. Cloud users should also ask whether cloud provid- ers will submit to external audits and security certifications. These kinds of controls can be written into the service level agreement (SLA) before signing with a cloud provider. The Cloud Security Alliance (CSA) has created indus- trywide standards for cloud security, specifying best practices to secure cloud computing.

Securing Mobile Platforms If mobile devices are performing many of the functions of computers, they need to be secured like desktops and laptops against malware, theft, acci- dental loss, unauthorized access, and hacking attempts. Mobile devices ac- cessing corporate systems and data require special protection. Companies should make sure that their corporate security policy includes mobile de- vices, with additional details on how mobile devices should be supported, protected, and used. They will need mobile device management tools to au- thorize all devices in use; to maintain accurate inventory records on all mo- bile devices, users, and applications; to control updates to applications; and to lock down or erase lost or stolen devices so they can’t be compromised. Data loss prevention technology can identify where critical data are saved, who is accessing the data, how data are leaving the company, and where the data are going. Firms should develop guidelines stipulating approved mobile platforms and software applications as well as the required software and pro- cedures for remote access of corporate systems. The organization’s mobile security policy should forbid employees from using unsecured, consumer- based applications for transferring and storing corporate documents and files or sending such documents and files to oneself by email without encryption. Companies should encrypt communication whenever possible. All mobile device users should be required to use the password feature found in every smartphone.

Ensuring Software Quality In addition to implementing effective security and controls, organizations can improve system quality and reliability by employing software metrics and rig- orous software testing. Software metrics are objective assessments of the sys- tem in the form of quantified measurements. Ongoing use of metrics allows the information systems department and end users to measure the performance of the system jointly and identify problems as they occur. Examples of software metrics include the number of transactions that can be processed in a specified unit of time, online response time, the number of payroll checks printed per hour, and the number of known bugs per hundred lines of program code. For metrics to be successful, they must be carefully designed, formal, objective, and used consistently.

Early, regular, and thorough testing will contribute significantly to system quality. Many view testing as a way to prove the correctness of work they have done. In fact, we know that all sizable software is riddled with errors, and we must test to uncover these errors.

Chapter 8 Securing Information Systems 327

Good testing begins before a software program is even written, by using a walkthrough—a review of a specification or design document by a small group of people carefully selected based on the skills needed for the particular ob- jectives being tested. When developers start writing software programs, cod- ing walkthroughs can also be used to review program code. However, code must be tested by computer runs. When errors are discovered, the source is found and eliminated through a process called debugging. You can find out more about the various stages of testing required to put an information system into operation in Chapter 12. Our Learning Tracks also contain descriptions of methodologies for developing software programs that contribute to software quality.

8-5 How will MIS help my career? Here is how Chapter 8 and this book can help you find an entry-level job as an identity access and management support specialist.

The Company No. 1 Value Supermarkets, a major supermarket grocery store chain headquar- tered in Plano, Texas, is looking to fill an entry-level position for an identity access and management support specialist. The company has 59 retail loca- tions in 23 Texas cities, more than 8,000 workers, and nearly a million weekly shoppers.

Position Description The identity access and management support specialist will be responsible for monitoring the company’s identity management system to ensure that the company is meeting its audit and compliance controls. This position reports to the company’s security operations manager. Job responsibilities include:

• Performing data integrity testing of identity management system integrations with business applications.

• Integrating Windows Active Directory files with the identity management system.

• Maintaining information on system user roles and privileges.

Job Requirements • Bachelor’s degree

• Proficiency with computers

• Ability to multitask and work independently

• Attention to detail

• Strong time management skills

• Ability to communicate with both technical and non-technical staff

Interview Questions 1. What do you know about authentication and identity management? Have

you ever worked with identity management or other IT security systems? What did you do with this software?

328 Part Two Information Technology Infrastructure

2. Have you ever worked with Windows Active Directory? What exactly did you do with this software?

3. What knowledge and experience do you have with ensuring data integrity?

4. Can you give an example of a situation where you had to multitask and man- age your time and how you handled it?

5. Can you tell us about the computer experience you’ve had? What software tools have you worked with?

Author Tips 1. Review the last two sections of this chapter, especially the discussions of

identity management and authentication. Also review the Chapter 6 discus- sions of data integrity and data quality.

2. Use the web to find out more about identity management, data integrity testing, leading identity management software tools, and Windows Active Directory.

3. Use the web to find out more about the company, the kinds of systems it uses, and who might be using those systems.

8-1 Why are information systems vulnerable to destruction, error, and abuse? Digital data are vulnerable to destruction, misuse, error, fraud, and hardware or software fail-

ures. The Internet is designed to be an open system and makes internal corporate systems more vulnerable to actions from outsiders. Hackers can unleash denial-of-service (DoS) attacks or pen- etrate corporate networks, causing serious system disruptions. Wi-Fi networks can easily be pen- etrated by intruders using sniffer programs to obtain an address to access the resources of the network. Malware can disable systems and websites, with mobile devices a major target. The dispersed nature of cloud computing makes it difficult to track unauthorized activity or to apply controls from afar. Software presents problems because software bugs may be impossible to elimi- nate and because software vulnerabilities can be exploited by hackers and malicious software. End users often introduce errors.

8-2 What is the business value of security and control? Lack of sound security and control can cause firms relying on computer systems for their core

business functions to lose sales and productivity. Information assets, such as confidential employee records, trade secrets, or business plans, lose much of their value if they are revealed to outsiders or if they expose the firm to legal liability. Laws, such as HIPAA, the Sarbanes-Oxley Act, and the Gramm- Leach-Bliley Act, require companies to practice stringent electronic records management and adhere to strict standards for security, privacy, and control. Legal actions requiring electronic evidence and computer forensics also require firms to pay more attention to security and electronic records manage- ment.

8-3 What are the components of an organizational framework for security and control? Firms need to establish a good set of both general and application controls for their information sys-

tems. A risk assessment evaluates information assets, identifies control points and control weaknesses, and determines the most cost-effective set of controls. Firms must also develop a coherent corporate security policy and plans for continuing business operations in the event of disaster or disruption.

REVIEW SUMMARY

Chapter 8 Securing Information Systems 329

Key Terms Acceptable use policy (AUP), 314 Anti-malware software, 320 Application controls, 312 Authentication, 317 Biometric authentication, 317 Botnet, 303 Bugs, 307 Business continuity planning, 315 Click fraud, 305 Computer crime, 303 Computer forensics, 311 Computer virus, 299 Controls, 297 Cybervandalism, 302 Cyberwarfare, 306 Deep packet inspection (DPI), 323 Denial-of-service (DoS) attack, 303 Digital certificates, 321 Disaster recovery planning, 315 Distributed denial-of-service (DDoS) attack, 303 Downtime, 323 Drive-by download, 301 Encryption, 320 Evil twin, 304 Fault-tolerant computer systems, 323 Firewall, 318 General controls, 312 Gramm-Leach-Bliley Act, 310 Hacker, 302 HIPAA, 310 Identity management, 316 Identity theft, 303

Information systems audit, 315 Intrusion detection systems, 319 Keyloggers, 302 Malware, 299 Managed security service providers (MSSPs), 323 Online transaction processing, 323 Password, 317 Patches, 307 Pharming, 304 Phishing, 304 Public key encryption, 321 Public key infrastructure (PKI), 322 Ransomware, 302 Risk assessment, 313 Sarbanes-Oxley Act, 310 Secure Hypertext Transfer Protocol (S-HTTP), 321 Secure Sockets Layer (SSL), 320 Security, 297 Security policy, 314 Smart card, 317 Sniffer, 302 Social engineering, 307 Spoofing, 302 Spyware, 302 SQL injection attack, 302 Token, 317 Trojan horse, 301 Two-factor authentication, 318 Unified threat management (UTM), 320 War driving, 299 Worm, 300 Zero-day vulnerabilities, 307

MyLab MIS To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.

The security policy includes policies for acceptable use and identity management. Comprehensive and systematic information systems auditing helps organizations determine the effectiveness of security and controls for their information systems.

8-4 What are the most important tools and technologies for safeguarding information resources? Firewalls prevent unauthorized users from accessing a private network when it is linked to the Internet.

Intrusion detection systems monitor private networks for suspicious network traffic and attempts to access corporate systems. Passwords, tokens, smart cards, and biometric authentication are used to authenticate system users. Anti-malware software checks computer systems for infections by viruses and worms and often eliminates the malicious software. Encryption, the coding and scrambling of messages, is a widely used technology for securing electronic transmissions over unprotected networks. Blockchain technology enables companies to create and verify tamper-proof transactions on a network without a central authority. Digital certificates combined with public key encryption provide further protection of electronic transac- tions by authenticating a user’s identity. Companies can use fault-tolerant computer systems to make sure that their information systems are always available. Use of software metrics and rigorous software testing help improve software quality and reliability.

330 Part Two Information Technology Infrastructure

Discussion Questions 8-5 Security isn’t simply a technology issue, it’s

a business issue. Discuss.

8-6 If you were developing a business continuity plan for your company, where would you start? What aspects of the business would the plan address?

MyLab MIS

MyLab MIS

8-7 Suppose your business had an e-commerce website where it sold goods and accepted credit card payments. Discuss the major security threats to this website and their potential impact. What can be done to minimize these threats?

MyLab MIS

Hands-On MIS Projects The projects in this section give you hands-on experience analyzing security vulnerabilities, using spreadsheet software for risk analysis, and using web tools to research security outsourcing services. Visit MyLab MIS to access this chapter’s Hands-On MIS Projects.

• Define computer crime. Provide two examples of crime in which computers are targets and two examples in which computers are used as instruments of crime.

• Define identity theft and phishing and explain why identity theft is such a big problem today.

• Describe the security and system reliability problems employees create.

• Explain how software defects affect system reliability and security.

8-2 What is the business value of security and control? • Explain how security and control provide

value for businesses.

• Describe the relationship between security and control and recent U.S. government regu- latory requirements and computer forensics.

8-3 What are the components of an organizational framework for security and control?

• Define general controls and describe each type of general control.

• Define application controls and describe each type of application control.

• Describe the function of risk assessment and explain how it is conducted for infor- mation systems.

• Define and describe the following: security policy, acceptable use policy, and identity management.

• Explain how information systems auditing promotes security and control.

8-4 What are the most important tools and technologies for safeguarding information resources?

• Name and describe three authentication methods.

• Describe the roles of firewalls, intrusion detection systems, and anti-malware software in promoting security.

• Explain how encryption protects information.

• Describe the role of encryption and digital certificates in a public key infrastructure.

• Distinguish between disaster recov- ery  planning and business continuity planning.

• Identify and describe the security problems cloud computing poses.

• Describe measures for improving software quality and reliability.

Review Questions 8-1 Why are information systems vulnerable to

destruction, error, and abuse?

• List and describe the most common threats against contemporary information systems.

• Define malware and distinguish among a virus, a worm, and a Trojan horse.

• Define a hacker and explain how hackers create security problems and damage systems.

Chapter 8 Securing Information Systems 331

Management Decision Problems

8-8 Zynga is a leading online gaming company, offering web and mobile versions of games such as Farmville, Zynga Poker, Hit it Rich!, and CSR Racing. Zynga’s games are available on a number of global platforms, including Apple iOS, Google Android, Facebook, and Zynga.com, and have been played by over 1 billion people. Prepare a security analysis for this Internet-based business. What kinds of threats should it anticipate? What would be their impact on the business? What steps can it take to prevent damage to its websites and continuing operations?’

8-9 A survey of your firm’s IT infrastructure has identified a number of security vulnerabilities. Review the data about these vulnerabilities, which can be found in a table in MyLab MIS. Use the table to answer the following questions:

• Calculate the total number of vulnerabilities for each platform. What is the potential impact on the or- ganization of the security problems for each computing platform?

• If you only have one information systems specialist in charge of security, which platforms should you address first in trying to eliminate these vulnerabilities? Second? Third? Last? Why?

• Identify the types of control problems these vulnerabilities illustrate and explain the measures that should be taken to solve them.

• What does your firm risk by ignoring the security vulnerabilities identified?

Improving Decision Making: Using Spreadsheet Software to Perform a Security Risk Assessment

Software skills: Spreadsheet formulas and charts Business skills: Risk assessment

8-10 This project uses spreadsheet software to calculate anticipated annual losses from various security threats identified for a small company. Mercer Paints is a paint manufacturing company located in Alabama that uses a network to link its busi-

ness operations. A security risk assessment that management requested identified a number of potential expo- sures. These exposures, their associated probabilities, and average losses are summarized in a table, which can be found in MyLab MIS. Use the table to answer the following questions:

• In addition to the potential exposures listed, identify at least three other potential threats to Mercer Paints, assign probabilities, and estimate a loss range.

• Use spreadsheet software and the risk assessment data to calculate the expected annual loss for each exposure.

• Present your findings in the form of a chart. Which control points have the greatest vulnerability? What recommendations would you make to Mercer Paints? Prepare a written report that summarizes your findings and recommendations.

Improving Decision Making: Evaluating Security Outsourcing Services

Software skills: Web browser and presentation software Business skills: Evaluating business outsourcing services

8-11 This project will help develop your Internet skills in using the web to research and evaluate security outsourcing services. You have been asked to help your company’s management decide whether to outsource security or keep

the security function within the firm. Search the web to find information to help you decide whether to out- source security and to locate security outsourcing services.

• Present a brief summary of the arguments for and against outsourcing computer security for your company.

• Select two firms that offer computer security outsourcing services and compare them and their services.

332 Part Two Information Technology Infrastructure

• Prepare an electronic presentation for management, summarizing your findings. Your presentation should make the case of whether your company should outsource computer security. If you believe your company should outsource, the presentation should identify which security outsourcing service you selected and justify your decision.

Collaboration and Teamwork Project Evaluating Security Software Tools

8-12 With a group of three or four students, use the web to research and evaluate security products from two competing vendors, such as for anti-malware software, firewalls, or antispyware software. For each prod- uct, describe its capabilities, for what types of businesses it is best suited, and its cost to purchase and install. Which is the best product? Why? If possible, use Google Docs and Google Drive or Google Sites to brainstorm, organize, and develop a presentation of your findings for the class.

Chapter 8 Securing Information Systems 333

Is the Equifax Hack the Worst Ever—and Why?

CASE STUDY

Equifax (along with TransUnion and Experian) is one of the three main U.S. credit bureaus, which maintain vast repositories of personal and financial data used by lenders to determine credit-worthiness when consumers apply for a credit card, mortgage, or other loans. The company handles data on more than 820 million consumers and more than 91 million businesses worldwide and manages a database with employee information from more than 7,100 employers, according to its website. These data are provided by banks and other companies directly to Equifax and the other credit bureaus. Consumers have little choice over how credit bureaus collect and store their personal and financial data.

Equifax has more data on you than just about any- one else. If any company needs airtight security for its information systems, it should be credit reporting bureaus such as Equifax. Unfortunately this has not been the case.

On September 7, 2017 Equifax reported that from mid-May through July 2017 hackers had gained access to some of its systems and potentially the personal information of about 143 million U.S. consumers, including Social Security numbers and driver’s license numbers. Credit card numbers for 209,000 consumers and personal information used in disputes for 182,000 people were also compromised. Equifax reported the breach to law enforcement and also hired a cybersecurity firm to investigate. The size of the breach, importance, and quantity of per- sonal information compromised by this breach are considered unprecedented.

Immediately after Equifax discovered the breach, three top executives, including Chief Financial Officer John Gamble, sold shares worth a combined $1.8 million, according to Securities and Exchange Commission filings. A company spokesman claimed the three executives had no knowledge that an intrusion had occurred at the time they sold their shares on August 1 and August 2. Bloomberg re- ported that the share sales were not planned in advance. On October 4, 2017 Equifax CEO Richard Smith testified before Congress and apologized for the breach.

The size of the Equifax data breach was second only to the Yahoo breach of 2013, which affected data

of all of Yahoo’s 3 billion customers. The Equifax breach was especially damaging because of the amount of sensitive personal and financial data stored by Equifax that was stolen, and the role such data play in securing consumers’ bank accounts, medical histories, and access to financing. In one swoop the hackers gained access to several essential pieces of personal information that could help attack- ers commit fraud. According to Avivah Litan, a fraud analyst at Gartner Inc., on a scale of risk to consum- ers of 1 to 10, this is a 10.

After taking Equifax public in 2005, CEO Smith transformed the company from a slow-growing credit-reporting company (1–2 percent organic growth per year) into a global data powerhouse. Equifax bought companies with databases housing information about consumers’ employment histories, savings, and salaries, and expanded internationally. The company bought and sold pieces of data that en- abled lenders, landlords, and insurance companies to make decisions about granting credit, hiring job seek- ers, and renting an apartment. Equifax was trans- formed into a lucrative business housing $12 trillion of consumer wealth data. In 2016, the company gen- erated $3.1 billion in revenue.

Competitors privately observed that Equifax did not upgrade its technological capabilities to keep pace with its aggressive growth. Equifax ap- peared to be more focused on growing data it could commercialize.

Hackers gained access to Equifax systems contain- ing customer names, Social Security numbers, birth dates, and addresses. These four pieces of data are generally required for individuals to apply for vari- ous types of consumer credit, including credit cards and personal loans. Criminals who have access to such data could use it to obtain approval for credit using other people’s names. Credit specialist and for- mer Equifax manager John Ulzheimer calls this is a “nightmare scenario” because all four critical pieces of information for identity theft are in one place.

The hack involved a known vulnerability in Apache Struts, a type of open-source software Equifax and other companies use to build websites. This software vulnerability had been publicly identi- fied in March 2017, and a patch to fix it was released

334 Part Two Information Technology Infrastructure

at that time. That means Equifax had the information to eliminate this vulnerability two months before the breach occurred. It did nothing.

Weaknesses in Equifax security systems were evident well before the big hack. A hacker was able to access credit-report data between April 2013 and January 2014. The company discovered that it mis- takenly exposed consumer data as a result of a “tech- nical error” that occurred during a 2015 software change. Breaches in 2016 and 2017 compromised in- formation on consumers’ W-2 forms that were stored by Equifax units. Additionally, Equifax disclosed in February 2017 that a “technical issue” compromised credit information of some consumers who used identity-theft protection services from LifeLock.

Analyses earlier in 2017 performed by four com- panies that rank the security status of companies based on publicly available information showed that Equifax was behind on basic maintenance of web- sites that could have been involved in transmitting sensitive consumer information. Cyberrisk analysis firm Cyence rated the danger of a data breach at Equifax during the next 12 months at 50 percent. It also found the company performed poorly when compared with other financial-services companies. The other analyses gave Equifax a higher overall ranking, but the company fared poorly in overall web-services security, application security, and soft- ware patching.

A security analysis by Fair Isaac Corporation (FICO), a data analytics company focusing on credit scoring services, found that by July 14 public-facing websites run by Equifax had expired certificates, er- rors in the chain of certificates, or other web-security issues. Certificates are used to validate that a user’s connection with a website is legitimate and secure.

The findings of the outside security analyses ap- pear to conflict with public declarations by Equifax executives that cybersecurity was a top priority. Senior executives had previously said cybersecurity was one of the fastest-growing areas of expense for the company. Equifax executives touted Equifax’s focus on security in an investor presentation that took place weeks after the company had discovered the attack.

Equifax has not revealed specifics about the at- tack, but either its databases were not encrypted or hackers were able to exploit an application vulnera- bility that provided access to data in an unencrypted state. Experts think—and hope—that the hackers were unable to access all of Equifax’s encrypted

databases to match up information such as driver li- cense or Social Security numbers needed to create a complete data profile for identity theft.

Equifax management stated that although the hack potentially accessed data on approximately 143 million U.S. consumers, it had found no evidence of unauthorized activity in the company’s core credit reporting databases. The hack triggered an uproar among consumers, financial organizations, privacy advocates, and the press. Equifax lost one-third of its stock market value. Equifax CEO Smith resigned, with the CSO (chief security officer) and CIO depart- ing the company as well. Banks will have to replace approximately 209,000 credit cards that were stolen in the breach, a major expense. Lawsuits are in the works.

Unfortunately the worst impact will be on con- sumers themselves, because the theft of uniquely identifying personal information such as Social Security numbers, address history, debt history, and birth dates could have a permanent effect. These pieces of critical personal data could be floating around the Dark Web for exploitation and identity theft for many years. Such information would help hackers answer the series of security questions that are often required to access financial accounts. According to Pamela Dixon, executive director of the World Privacy Forum, “This is about as bad as it gets.” If you have a credit report, there’s at least a 50 percent chance or more that your data were stolen in this breach.

The data breach exposed Equifax to legal and financial challenges, although the regulatory envi- ronment is likely to become more lenient under the current presidential administration. It already is too lenient. Credit reporting bureaus such as Equifax are very lightly regulated. Given the scale of the data compromised, the punishment for breaches is close to nonexistent. There is no federally sanctioned insurance or audit system for data storage, the way the Federal Deposit Insurance Corporation provides insurance for banks after losses. For many types of data, there are few licensing requirements for hous- ing personally identifiable information. In many cases, terms-of-service documents indemnify compa- nies against legal consequences for breaches.

Experts said it was highly unlikely that any regulatory body would shut Equifax down over this breach. The company is considered too critical to the American financial system. The two regulators that do have jurisdiction over Equifax, the Federal Trade

Chapter 8 Securing Information Systems 335

Commission and the Consumer Financial Protection Bureau, declined to comment on any potential pun- ishments over the credit agency’s breach.

Even after one of the most serious data breaches in history, no one is really in a position to stop Equifax from continuing to do business as usual. And the scope of the problem is much wider. Public policy has no good way to heav- ily punish companies that fail to safeguard our data. The United States and other countries have allowed the emergence of huge phenomenally detailed databases full of personal information available to financial companies, technology com- panies, medical organizations, advertisers, insur- ers, retailers, and the government.

Equifax has offered very weak remedies for con- sumers. People can go to the Equifax website to see if their information has been compromised. The site asks customers to provide their last name and the last six digits of their Social Security number. However, even if they do that, they do not neces- sarily learn whether they were affected. Instead, the site provides an enrollment date for its protec- tion service. Equifax offered a free year of credit protection service to consumers enrolling before November 2017. Obviously, all of these measures won’t help much because stolen personal data will be available to hackers on the Dark Web for years to come. Governments involved in state-sponsored cyberwarfare are able to use the data to populate databases of detailed personal and medical informa- tion that can be used for blackmail or future attacks. Ironically, the credit-protection service that Equifax is offering requires subscribers to waive their legal rights to seek compensation from Equifax for their losses in order to use the service, while Equifax goes unpunished. On March 1, 2018, Equifax announced that the breach had compromised an additional 2.4 million more Americans’ names and driver’s license numbers.

Harmful data breaches keep happening. In al- most all cases, even when the data concerns tens or hundreds of millions of people, companies such as Equifax and Yahoo that were hacked continue to op- erate. There will be hacks—and afterward, there will be more. Companies need to be even more diligent about incorporating security into every aspect of their IT infrastructure and systems development ac- tivities. According to Litan, to prevent data breaches such as Equifax’s, organizations need many layers of security controls. They need to assume that preven- tion methods are going to fail.

Sources: Selena Larson, “Equifax Says Hackers Stole More than Previously Reported,” CNN, March 1, 2018; AnnaMaria Andriotis and Michael Rapoport, “Equifax Upends CEO’s Drive to Be a Data Powerhouse,” Wall Street Journal, September 22, 2017; AnnaMaria Andriotis and Robert McMillan, “Equifax Security Showed Signs of Trouble Months Before Hack,” Wall Street Journal, September 26, 2017; AnnaMaria Andriotis and Ezequiel Minaya, “Equifax Reports Data Breach Possibly Affecting 143 Million Consumers,” Wall Street Journal, September 7, 2017; Tara Siegel Bernard and Stacy Cowley, “Equifax Hack Exposes Regulatory Gaps, Leaving Customers Vulnerable,” New York Times, September 8, 2017; Farhad Manjoo, “Seriously, Equifax? This Is a Breach No One Should Get Away With,” New York Times, September 8, 2017; Eileen Chang, “Why Equifax Breach of 143 Million Consumers Should Freak You Out,” thestreet.com, September 8, 2017; Tara Siegel Bernard, Tiffany Hsu, Nicole Perlroth, and Ron Lieber, “Equifax Says Cyberattack May Have Affected 143 Million Customers,” New York Times, September 7, 2017; and Nicole Perlroth and Cade Metz, “What We Know and Don’t Know About the Equifax Hack,” New York Times, September 14, 2017.

CASE STUDY QUESTIONS 8-13 Identify and describe the security and control

weaknesses discussed in this case.

8-14 What management, organization, and technol- ogy factors contributed to these problems?

8-15 Discuss the impact of the Equifax hack. 8-16 How can future data breaches like this one be

prevented? Explain your answer.

MyLab MIS Go to the Assignments section of MyLab MIS to complete these writing exercises.

8-17 Describe three spoofing tactics employed in identity theft by using information systems.

8-18 Describe four reasons mobile devices used in business are difficult to secure.

336 Part Two Information Technology Infrastructure

Chapter 8 References Anderson, Chad, Richard L. Baskerville, and Mala Kaul. “Infor-

mation Security Control Theory: Achieving a Sustainable Reconciliation Between Sharing and Protecting the Privacy of Information.” Journal of Management Information Systems 34 No. 4 (2017).

Bauer, Harald, Ondrej Burkacky, and Christian Knochenhauer. “Security in the Internet of Things.” McKinsey and Company (May 2017).

Carson, Brant, Giulio Romanelli, Patricia Walsh, and Askhat Zhu- maev. “Blockchain Beyond the Hype: What Is the Strategic Business Value?” McKinsey and Company (June 2018).

Cloud Standards Customer Council. “Security for Cloud Computing: Ten Steps to Ensure Success, Version 3.0” (December 2017).

Esteves, Jose, Elisabete Ramalho, and Guillermo de Haro. “To Improve Cybersecurity, Think Like a Hacker.” MIT Sloan Management Review (Spring 2017).

Goode, Sigi, Hartmut Hoehle, Viswanath Venkatesh, and Susan A. Brown. “User Compensation as a Data Breach Recovery Action: An Investigation of the Sony PlayStation Network Breach.” MIS Quarterly 41 No. 3 (September 2017).

Gwebu, Kholekile L., Jing Wang, and Li Wang. “The Role of Corpo- rate Reputation and Crisis Response Strategies in Data Breach Management.” Journal of Management Information Systems 35 No. 2 (2018).

Hui, Kai-Lung, Seung Hyun Kim, and Qiu-Hong Wang. “Cyber- crime Deterrence and International Legislation: Evidence from Distributed Denial of Service Attacks.” MIS Quarterly 41, No. 2 (June 2017).

Iansiti, Marco, and Karim R. Lakhani. “The Truth About Block- chain.” Harvard Business Review (January–February 2017).

Javelin Strategy & Research. “2018 Identity Fraud Study.” (Febru- ary 6, 2018).

Kaminski, Piotr, Chris Rezek, Wolf Richter, and Marc Sorel. “Protect- ing Your Digital Assets.” McKinsey & Company (January 2017).

Kaspersky Lab. “Mobile Malware Evolution 2017.” (2018). McMillan, Robert. “Software Bug at Internet Service Provider

Sparks Privacy Concerns.” Wall Street Journal (February 24, 2017).

Menard, Philip, Gregory J. Bott, and Robert E. Crossler. “User Mo- tivations in Protecting Information Security: Protection Moti- vation Theory Versus Self-Determination Theory.” Journal of Management Information Systems 34 No. 4 (2017).

Moody, Gregory D., Mikko Siponen, and Seppo Pahnila. “Toward a Unified Model of Information Security Policy Compliance.” MIS Quarterly 42 No. 1 (March 2018).

Panda Security. “Cybersecurity Predictions 2018.” (2017). Panko, Raymond R., and Julie L. Panko. Business Data Networks

and Security, 11th ed. (Upper Saddle River, NJ: Pearson, 2019). Ponemon Institute. “2017 Cost of Cybercrime Study and the Risk

of Business Innovation.” (2017a). ___________. “2017 Cost of Data Breach Study: Global Analysis.”

(2017b). Rothrock, Ray A., James Kaplan, and Friso Van der Oord. “The

Board’s Role in Managing Cybersecurity Risks.” MIT Sloan Management Review (Winter 2018).

Samtani, Sagar, Ryan Chinn, Hsinchun Chen, and Jay F. Nuna- maker. “Exploring Emerging Hacker Assets and Key Hackers for Proactive Cyber Threat Intelligence.” Journal of Manage- ment Information Systems 34 No. 4 (2017).

Symantec Corporation. “Internet Security Threat Report.” (2018). Tapscott, Don, and Alex Tapscott. “How Blockchain Will Change

Organizations.” MIT Sloan Management Review (Winter 2017). Verizon. “2018 Data Breach Investigations Report.” (2018). Wang, Jingguo, Manish Gupta, and H. Raghav Rao.

“Insider Threats in a Financial Institution: Analysis of Attack-Proneness of Information Systems Applications.” MIS Quarterly 39, No. 1 (March 2015).

Young, Carl S. “The Enemies of Data Security: Convenience and Collaboration.” Harvard Business Review (February 11, 2015).

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Key System Applications for the Digital Age

PART THREE examines the core information system applications businesses are using today

to improve operational excellence and decision making. These applications include enterprise

systems; systems for supply chain management, customer relationship management, artificial

intelligence, and knowledge management; e-commerce applications; and business intelligence

systems. This part answers questions such as: How can enterprise applications improve busi-

ness performance? How do firms use e-commerce to extend the reach of their businesses?

How can systems improve decision making and help companies benefit from artificial intel-

ligence and knowledge management?

PART THREE

CHAPTER 9

Achieving Operational Excellence and Customer Intimacy: Enterprise Applications

CHAPTER 10

E-commerce: Digital Markets, Digital Goods

CHAPTER 11

Managing Knowledge and Artificial Intelligence

CHAPTER 12

Enhancing Decision Making

338

MyLab MIS Discussion Questions: 9-5, 9-6, 9-7; Hands-on MIS Projects: 9-8, 9-9, 9-10, 9-11; Writing Assignments: 9-17, 9-18; eText with Conceptual Animations

CHAPTER CASES Avon Beautifies Its Supply Chain Soma Bay Prospers with ERP in the Cloud Kenya Airways Flies High with Customer

Relationship Management Clemens Food Group Delivers with New

Enterprise Applications

VIDEO CASES Life Time Fitness Gets in Shape with

Salesforce CRM

Instructional Video: GSMS Protects Patients by Serializing Every

Bottle of Drugs

LEARNING OBJECTIVES After reading this chapter, you will be able to answer the following questions:

9-1 How do enterprise systems help businesses achieve operational excellence?

9-2 How do supply chain management systems coordinate planning, production, and logistics with suppliers?

9-3 How do customer relationship management systems help firms achieve customer intimacy?

9-4 What are the challenges that enterprise applications pose, and how are enterprise applications taking advantage of new technologies?

9-5 How will MIS help my career?

Achieving Operational Excellence and Customer Intimacy: Enterprise Applications9CHAPTER

339

Avon Products Inc. is the oldest beauty company in the United States, and has been in business for over 130 years. It manufactures and sells cosmetics, fragrances, toiletries, accessories, apparel, and various decorative home furnishings. Avon is also the world’s leading direct seller of beauty and related products, with 6 million independent door-to-door sales representatives in 143 countries and over $8 billion in annual revenue. Avon also sells through other channels, including the Internet, catalog, and physi- cal outlets.

To survive in a highly competitive, fast-changing industry, motivate repre- sentatives, and stimulate sales, Avon launches marketing campaigns with fresh products and promotions every few weeks. To be successful, Avon must be able to anticipate and react quickly to market trends and customer preferences. Avon processes 50,000 orders each day and there is little margin for error. Avon’s warehouses must stock the items customers want and deliver them quickly, often to remote locations around the globe.

Until recently, Avon’s global sup- ply chain was not up to the task. Avon had recently expanded operations in Europe, the Middle East, and Africa, but there was no central planning function responsible for demand, in- ventory, and supply planning across the enterprise. Production planning at Avon’s three factories in Germany, the United Kingdom, and Poland was highly manual, inflexible, and incapa- ble of supporting Avon’s growth in new markets.

To improve how the company dealt with product availability and inventory, Avon implemented JDA Software’s Manufacturing and Intelligent Fulfillment solutions to centralize planning for demand, inven- tory, and supply across its entire global enterprise. The software helps Avon achieve consistent forecast accuracy in an environment that includes chal- lenges of shorter product lifecycles, seasonality, multiple sales channels, frequent promotions, and continuously changing localized shopper prefer- ences. JDA Intelligent Fulfillment helps companies make intelligent and profitable distribution decisions. The software helps reduce inventory lev- els and costs, improve customer service, and support more agile, profitable,

Avon Beautifies Its Supply Chain

© Casimiro PT/Shutterstock

340 Part Three Key System Applications for the Digital Age

and responsive operations, meeting the needs of many different types of Avon markets in a single implementation.

The JDA software collects supply chain data about inventory, future sales de- mands, transport schedules, and sales history from Avon’s many markets. The system uses these data along with JDA advanced planning parameters to create a strategic distribution and manufacturing plan. The system also provides Avon with a list of inventory imbalances, service risks, and shipping requirements. Avon can now streamline order processing across borders and respond more quickly to changes in customer demand.

JDA’s capabilities for advanced planning and distribution, coupled with its flexibility, made it possible for Avon to meet the needs of many different types of Avon markets with a single system. Avon implemented the JDA soft- ware across 29 markets in Europe, Middle East, and Africa (EMEA) within four months, delivering training across the EMEA region in eight languages. Since Avon implemented the JDA supply chain solution, its cost of servicing cus- tomers has been reduced, while its customer service rating has increased to 99.5 percent. Inventory levels have dropped by 17 percent in just six months, providing immediate savings of $20 million. Avon now has complete visibility into all aspects of its supply chain and will be able to enter new countries and markets much more easily.

Sources: https://jda.com, accessed January 21, 2018; https://about.avon.com, accessed January 20, 2018; and “Avon Supply Chain Makeover,” JDA Software Group, 2016.

Avon’s problems with planning, inventory, and supply in a global mul-tichannel marketplace illustrate the critical role of supply chain man- agement systems in business. Avon’s business performance was impeded because it could not balance supply and constantly changing demand for its products in many different markets around the world. Avon’s existing systems were highly manual and lacked the flexibility to support Avon’s growth in new markets. Products were not always available when customers ordered them. Sometimes this left the company holding too much inventory it couldn’t sell or not enough at the right time or place to fulfill customer orders.

The chapter-opening diagram calls attention to important points raised by this case and this chapter. Avon competes in the global beauty industry where customer tastes change rapidly, demand is very volatile, and the company is expected to come up quickly with enticing new products. The company’s sup- ply chain is far-reaching and complex, servicing customers ordering items in many different locations around the globe. Avon’s legacy systems were unable to coordinate demand, inventory, and supply planning across its entire global enterprise. Implementing JDA software tools for supply chain planning and fulfillment has made it much easier for Avon’s management to access and ana- lyze demand data for forecasting, inventory planning, and fulfillment, greatly improving both decision making and operational efficiency across the global enterprise.

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 341

Here are some questions to think about: How is Avon’s business model affected by having an inefficient supply chain? How did JDA software tools improve the way Avon ran its business?

9-1 How do enterprise systems help businesses achieve operational excellence?

Around the globe, companies are increasingly becoming more connected, both internally and with other companies. If you run a business, you’ll want to be able to react instantaneously when a customer places a large order or when a shipment from a supplier is delayed. You may also want to know the impact of these events on every part of the business and how the business is performing at any point in time, especially if you’re running a large company. Enterprise systems provide the integration to make this possible. Let’s look at how they work and what they can do for the firm.

What are Enterprise Systems? Imagine that you had to run a business based on information from tens or even hundreds of databases and systems, none of which could speak to one another. Imagine your company had 10 major product lines, each produced in separate factories, and each with separate and incompatible sets of systems controlling production, warehousing, and distribution.

At the very least, your decision making would often be based on manual hard-copy reports, often out of date, and it would be difficult to understand what is happening in the business as a whole. Sales personnel might not be able to tell at the time they place an order whether the ordered items are in inventory, and manufacturing could not easily use sales data to plan for new production. You now have a good idea of why firms need a special enterprise system to integrate information.

Business Solutions

Management

Organization

Centralized Planning & Distribution

Technology

Information System

Business Problem

• Volatile demand • Global operations • Complex supply chain • Manual processes

• Revise supply chain processes

• Forecast demand more accurately • Centralize planning globally for demand, inventory, and supply • Create strategic distribution & manufacturing plan

• Reduce costs • Increase sales • Increase customer satisfaction

• Deploy JDA Manufacturing and Intelligent Fulfillment

• Plan production • Establish inventory requirements • Select new technology

342 Part Three Key System Applications for the Digital Age

Chapter 2 introduced enterprise systems, also known as enterprise resource planning (ERP) systems, which are based on a suite of integrated software mod- ules and a common central database. The database collects data from many divisions and departments in a firm and from a large number of key business processes in manufacturing and production, finance and accounting, sales and marketing, and human resources, making the data available for applications that support nearly all an organization’s internal business activities. When new information is entered by one process, the information is made immediately available to other business processes (see Figure 9.1).

If a sales representative places an order for tire rims, for example, the sys- tem verifies the customer’s credit limit, schedules the shipment, identifies the best shipping route, and reserves the necessary items from inventory. If inven- tory stock is insufficient to fill the order, the system schedules the manufacture of more rims, ordering the needed materials and components from suppliers. Sales and production forecasts are immediately updated. General ledger and corporate cash levels are automatically updated with the revenue and cost in- formation from the order. Users can tap into the system and find out where that particular order is at any minute. Management can obtain information at any point in time about how the business is operating. The system can also generate enterprise-wide data for management analyses of product cost and profitability.

Enterprise Software Enterprise software is built around thousands of predefined business pro- cesses that reflect best practices. Table 9.1 describes some of the major business processes that enterprise software supports.

Companies implementing this software first have to select the functions of the system they wish to use and then map their business processes to the predefined

FIGURE 9.1 HOW ENTERPRISE SYSTEMS WORK Enterprise systems feature a set of integrated software modules and a central database by which business processes and functional areas throughout the enterprise can share data.

• Materials

• Orders • Hours worked

• Cash on hand • Accounts receivable • Customer credit • Revenue

• Labor cost • Job skills

• Sales forecasts • Return requests • Price changes

• Production schedules • Shipment dates • Production capacity • Purchases

Finance & Accounting

Manufacturing & Production

Centralized Database

Sales & Marketing

Human Resources

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 343

business processes in the software. (One of our Learning Tracks shows how SAP enterprise software handles the procurement process for a new piece of equip- ment.) Configuration tables provided by the software manufacturer enable the firm to tailor a particular aspect of the system to the way it does business. For example, the firm could use these tables to select whether it wants to track rev- enue by product line, geographical unit, or distribution channel.

If the enterprise software does not support the way the organization does business, companies can rewrite some of the software to support the way their business processes work. However, enterprise software is unusually complex, and extensive customization may degrade system performance, compromising the information and process integration that are the main benefits of the sys- tem. If companies want to reap the maximum benefits from enterprise soft- ware, they must change the way they work to conform to the business pro- cesses defined by the software.

To implement a new enterprise system, Tasty Baking Company identified its existing business processes and then translated them into the business pro- cesses built into the SAP ERP software it had selected. To ensure that it obtained the maximum benefits from the enterprise software, Tasty Baking Company de- liberately planned for customizing less than 5 percent of the system and made very few changes to the SAP software itself. It used as many tools and features that were already built into the SAP software as it could. SAP has more than 3,000 configuration tables for its enterprise software.

Leading enterprise software vendors include SAP, Oracle, IBM, Infor Global Solutions, and Microsoft. Versions of enterprise software packages are designed for small and medium-sized businesses and on-demand software services run- ning in the cloud (see the chapter-opening case and Section 9-4).

Business Value of Enterprise Systems Enterprise systems provide value by both increasing operational efficiency and providing firmwide information to help managers make better decisions. Large companies with many operating units in different locations have used enter- prise systems to enforce standard practices and data so that everyone does busi- ness the same way worldwide.

Coca-Cola, for instance, implemented a SAP enterprise system to standardize and coordinate important business processes in 200 countries. Lack of stan- dard, companywide business processes had prevented the company from using its worldwide buying power to obtain lower prices for raw materials and from reacting rapidly to market changes.

TABLE 9.1 BUSINESS PROCESSES SUPPORTED BY ENTERPRISE SYSTEMS

Financial and accounting processes, including general ledger, accounts payable, accounts receivable, fixed assets, cash management and forecasting, product-cost accounting, cost-center accounting, asset accounting, tax accounting, credit management, and financial reporting

Human resources processes, including personnel administration, time accounting, payroll, personnel planning and development, benefits accounting, applicant tracking, time management, compensation, workforce planning, performance management, and travel expense reporting

Manufacturing and production processes, including procurement, inventory management, purchasing, shipping, production planning, production scheduling, material requirements planning, quality control, distribution, transportation execution, and plant and equipment maintenance

Sales and marketing processes, including order processing, quotes, contracts, product configuration, pricing, billing, credit checking, incentive and commission management, and sales planning

344 Part Three Key System Applications for the Digital Age

Enterprise systems help firms respond rapidly to customer requests for in- formation or products. Because the system integrates order, manufacturing, and delivery data, manufacturing is better informed about producing only what customers have ordered, procuring exactly the right number of components or raw materials to fill actual orders, staging production, and minimizing the time that components or finished products are in inventory.

Alcoa, the world’s leading producer of aluminum and aluminum products with operations spanning 31 countries and more than 200 locations, had ini- tially been organized around lines of business, each of which had its own set of information systems. Many of these systems were redundant and inefficient. Alcoa’s costs for executing requisition-to-pay and financial processes were much higher, and its cycle times were longer than those of other companies in its in- dustry. (Cycle time refers to the total elapsed time from the beginning to the end of a process.) The company could not operate as a single worldwide entity.

After implementing enterprise software from Oracle, Alcoa eliminated many redundant processes and systems. The enterprise system helped Alcoa reduce requisition-to-pay cycle time by verifying receipt of goods and automatically gen- erating receipts for payment. Alcoa’s accounts payable transaction processing dropped 89 percent. Alcoa was able to centralize financial and procurement activ- ities, which helped the company reduce nearly 20 percent of its worldwide costs.

Enterprise systems provide much valuable information for improving management decision making. Corporate headquarters has access to up-to- the- minute data on sales, inventory, and production and uses this information to create more accurate sales and production forecasts. Enterprise software includes analytical tools to use data the system captures to evaluate overall organizational performance. Enterprise system data have common standard- ized definitions and formats that are accepted by the entire organization. Performance figures mean the same thing across the company. Enterprise sys- tems allow senior management to find out easily at any moment how a par- ticular organizational unit is performing, determine which products are most or least profitable, and calculate costs for the company as a whole. For example, Alcoa’s enterprise system includes functionality for global human resources management that shows correlations between investment in employee train- ing and quality, measures the companywide costs of delivering services to employees, and measures the effectiveness of employee recruitment, compen- sation, and training. The Interactive Session on Management describes more of these benefits in detail.

9-2 How do supply chain management systems coordinate planning, production, and logistics with suppliers?

If you manage a small firm that makes a few products or sells a few services, chances are you will have a small number of suppliers. You could coordinate your supplier orders and deliveries by using just a telephone and fax machine. But if you manage a firm that produces more complex products and services, you will have hundreds of suppliers, and each of your suppliers will have its own set of suppliers. Suddenly, you will need to coordinate the activities of hun- dreds or even thousands of other firms to produce your products and services. Supply chain management (SCM) systems, which we introduced in Chapter 2, are an answer to the problems of supply chain complexity and scale.

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 345

Soma Bay is a 10-million-square-mile resort com- munity on the Egyptian shore of the Red Sea. It has many attractions that make it a first-class vacation paradise, including five hotels, a championship golf course, water sport facilities, a world-class spa, and luxury vacation homes. Soma Bay Development Company is headquartered in Hurghada, Egypt and has more than 2,000 employees.

Unfortunately, political upheavals and economic conditions have taken a toll on occupancy rates and profitability. When President Hosni Mubarak was overthrown during the Egyptian revolution of 2011, there was a sharp devaluation of Egyptian currency. In the years that followed, political conditions stabi- lized and the Egyptian economy recovered, but the tourism industry lost U.S. $1.3 billion after the down- ing of a commercial airliner over the Sinai Desert in late 2015. Soma Bay Development Company’s hotel occupancy rates plummeted from more than 50 per- cent in 2015 to 25 percent in the first quarter of 2016.

Foreign exchange fluctuations and political up- heavals are forces beyond Soma Bay’s control, but what the company’s management can do during downturns is react intelligently by closely monitor- ing operations and costs. This is possible thanks to the company’s use of a JD Edwards Enterprise One ERP system from Oracle with applications and data residing in Oracle’s Cloud Infrastructure as a Service (Oracle Cloud IaaS).

In the past, Soma Bay Development Company had tried to run much of the company using unwieldy Excel-based systems. Managers had to manually ma- nipulate spreadsheets to understand the basic drivers of profitability, and it often took too long to obtain the information needed for sound decision making. These systems made it difficult for Soma Bay to man- age its aggressive growth plans, which included con- struction of 1000 new homes over a five-year period.

Mohammed Serry, Soma Bay Company’s CFO, and his team selected JD Edwards Enterprise One for a solution because it could create standardized busi- ness processes across functional areas and provide timely reports that explain the profitability of each business unit using a standard chart of accounts. The software can identify the profitability drivers and growth drivers of a business. Enterprise One

seamlessly combines data from the general ledger and other financial systems with data from opera- tional systems.

Soma Bay’s Enterprise One cloud platform makes it easy to create cash flow reports, project manage- ment reports, accounts receivable aging reports, facility management reports, and key performance indicator reports throughout Soma Bay’s distributed organization. Company management also appreci- ates Oracle Cloud IaaS disaster recovery capabilities. Several years ago, water from an upper floor flooded Soma Bay’s Cairo data center. The company was able to restore data and resume operations quickly be- cause it had backups stored in Oracle Cloud.

JD Edwards Enterprise One contains more than 80 separate application modules designed to sup- port a wide range of business processes. The soft- ware suite also features mobile applications that support both iOS and Android and can be used on smartphones and tablets. Soma Bay uses the JD Edwards Enterprise One modules for Financials, Procurement, Inventory Management, Job Cost, Real Estate Management, Homebuilder Management, Capital Asset Maintenance, Service Management, and Time and Labor. JD Edwards Enterprise One Homebuilder Management helps Soma Bay coordi- nate activities and analyze profitability throughout its home-building cycle down to the lot level. JD Edwards Enterprise One Real Estate Management streamlines financial, operational, and facilities man- agement processes for finished properties, coordinat- ing tasks among teams and providing a comprehen- sive management view of each unit. The Job Cost module shows ongoing costs for the real estate busi- ness, which helps management allocate expenses for materials, labor, and other needs and also track ex- penses against the budgets and forecasts established at the outset of each facilities management project. Managers can identify projects with codes and merge them with financial account numbers to determine budget expenses versus actual expenses. They can thereby verify if complex projects are on track and share expense data among divisions.

The Enterprise One software creates currency- neutral financial reports. This helps reconcile revenue from Soma Bay’s tourism division (which

INTERACTIVE SESSION MANAGEMENT

Soma Bay Prospers with ERP in the Cloud

1. Identify and describe the problem discussed in this case. What management, organization, and technology factors contributed to the problem?

2. Why was an ERP system required for a solution? How did having a cloud-based ERP system con- tribute to the solution?

3. What were the business benefits of Soma Bay’s new enterprise system? How did it change deci- sion making and the way the company operated?

caters to Germany and other parts of Europe) with its home sales division (which is aimed primarily at Egyptians) to neutralize the effect of different cur- rencies on financial results. Home building accounts for about 25 percent of corporate revenue.

Having a dual revenue stream mitigates risks. If the tourism business is slow, Soma Bay still has rev- enue from the real estate business, and vice versa. The ERP system provides the data required to closely track costs. For example, in 2017 Soma Bay spent 100 million Egyptian pounds (equivalent to approxi- mately U.S. $5.7 million) on new construction. The Enterprise One system provided the information about cash management and cash flow for sustain- ing this level of expansion. Soma Bay can carefully monitor cash flow and payments to contractors.

During the 2016 downturn, Soma Bay used the Enterprise One cost management and profitability capabilities to provide detailed financial data that helped managers carefully control fixed operating expenses, helping to minimize losses. Enterprise

One provided a solid understanding of costs and profitability, even though revenue came from differ- ent currencies and markets. It was able to show the impact of falling occupancy rates on the business, ex- cluding foreign exchange effect, to help management measure overall performance by legal entity. This knowledge helped Soma Bay weather the downturn and implement an aggressive turnaround plan.

Today, 95 percent of Soma Bay staff members use the Enterprise One software in some capacity. The company has a more stable operating model. Occupancy rates at its five hotels are rising. Soma Bay Development Company is building 500 vaca- tion homes in six seaside communities. According to Cherif Samir, Financial Controller for Soma Bay, being able to track every penny the company spends on a project has revolutionized the business.

Sources: www.searchoracle.com, accessed January 30, 2018; David Baum, “Destination: Cloud,” Profit Magazine, Fall 2017; and www. somabay.com, accessed January 31, 2018.

CASE STUDY QUESTIONS

346 Part Three Key System Applications for the Digital Age

The Supply Chain A firm’s supply chain is a network of organizations and business processes for procuring raw materials, transforming these materials into intermediate and finished products, and distributing the finished products to customers. It links suppliers, manufacturing plants, distribution centers, retail outlets, and custom- ers to supply goods and services from source through consumption. Materials, information, and payments flow through the supply chain in both directions.

Goods start out as raw materials and, as they move through the supply chain, are transformed into intermediate products (also referred to as components or parts) and, finally, into finished products. The finished products are shipped to distribution centers and from there to retailers and customers. Returned items flow in the reverse direction from the buyer back to the seller.

Let’s look at the supply chain for Nike sneakers as an example. Nike designs, markets, and sells sneakers, socks, athletic clothing, and accessories through- out the world. Its primary suppliers are contract manufacturers with factories in China, Thailand, Indonesia, Brazil, and other countries. These companies fashion Nike’s finished products.

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 347

Nike’s contract suppliers do not manufacture sneakers from scratch. They obtain components for the sneakers—the laces, eyelets, uppers, and soles— from other suppliers and then assemble them into finished sneakers. These suppliers in turn have their own suppliers. For example, the suppliers of soles have suppliers for synthetic rubber, suppliers for chemicals used to melt the rubber for molding, and suppliers for the molds into which to pour the rubber. Suppliers of laces have suppliers for their thread, for dyes, and for the plastic lace tips.

Figure 9.2 provides a simplified illustration of Nike’s supply chain for sneak- ers; it shows the flow of information and materials among suppliers, Nike, Nike’s distributors, retailers, and customers. Nike’s contract manufacturers are its primary suppliers. The suppliers of soles, eyelets, uppers, and laces are the secondary (Tier 2) suppliers. Suppliers to these suppliers are the tertiary (Tier 3) suppliers.

The upstream portion of the supply chain includes the company’s suppli- ers, the suppliers’ suppliers, and the processes for managing relationships with them. The downstream portion consists of the organizations and processes for distributing and delivering products to the final customers. Companies that manufacture, such as Nike’s contract suppliers of sneakers, also manage their own internal supply chain processes for transforming materials, components, and services their suppliers furnish into finished products or intermediate products (components or parts) for their customers and for managing materials and inventory.

The supply chain illustrated in Figure 9.2 has been simplified. It only shows two contract manufacturers for sneakers and only the upstream supply chain for sneaker soles. Nike has hundreds of contract manufacturers turning out fin- ished sneakers, socks, and athletic clothing, each with its own set of suppliers.

FIGURE 9.2 NIKE’S SUPPLY CHAIN This figure illustrates the major entities in Nike’s supply chain and the flow of information upstream and downstream to coordinate the activities involved in buying, making, and moving a product. Shown here is a simplified supply chain, with the upstream portion focusing only on the suppliers for sneakers and sneaker soles.

Capacity, inventory level, delivery schedule, payment terms

Orders, return requests, repair and service requests, payments

Downstream

Tier 3 Suppliers

Tier 2 Suppliers

Upstream

Tier 1 Suppliers

Contract Supplier

Nike Distributor Retailer Customer

Contract Supplier

348 Part Three Key System Applications for the Digital Age

The upstream portion of Nike’s supply chain actually comprises thousands of entities. Nike also has numerous distributors and many thousands of retail stores where its shoes are sold, so the downstream portion of its supply chain is also large and complex.

Information Systems and Supply Chain Management Inefficiencies in the supply chain, such as parts shortages, underused plant capacity, excessive finished goods inventory, or high transportation costs, are caused by inaccurate or untimely information. For example, manufactur- ers may keep too many parts in inventory because they do not know exactly when they will receive their next shipments from their suppliers. Suppliers may order too few raw materials because they do not have precise information on demand. These supply chain inefficiencies waste as much as 25 percent of a company’s operating costs.

If a manufacturer had perfect information about exactly how many units of product customers wanted, when they wanted them, and when they could be produced, it would be possible to implement a highly efficient just-in-time strategy. Components would arrive exactly at the moment they were needed, and finished goods would be shipped as they left the assembly line.

In a supply chain, however, uncertainties arise because many events can- not be foreseen—uncertain product demand, late shipments from suppliers, defective parts or raw materials, or production process breakdowns. To satisfy customers, manufacturers often deal with such uncertainties and unforeseen events by keeping more material or products in inventory than they think they may actually need. The safety stock acts as a buffer for the lack of flexibility in the supply chain. Although excess inventory is expensive, low fill rates are also costly because business may be lost from canceled orders.

One recurring problem in supply chain management is the bullwhip effect, in which information about the demand for a product gets distorted as it passes from one entity to the next across the supply chain. A slight rise in demand for an item might cause different members in the supply chain—distributors, man- ufacturers, suppliers, secondary suppliers (suppliers’ suppliers), and tertiary suppliers (suppliers’ suppliers’ suppliers)—to stockpile inventory so each has enough just in case. These changes ripple throughout the supply chain, mag- nifying what started out as a small change from planned orders and creating excess inventory, production, warehousing, and shipping costs (see Figure 9.3).

For example, Procter & Gamble (P&G) found it had excessively high inven- tories of its Pampers disposable diapers at various points along its supply chain because of such distorted information. Although customer purchases in stores were fairly stable, orders from distributors spiked when P&G offered aggressive price promotions. Pampers and Pampers’ components accumulated in ware- houses along the supply chain to meet demand that did not actually exist. To eliminate this problem, P&G revised its marketing, sales, and supply chain pro- cesses and used more accurate demand forecasting.

The bullwhip effect is tamed by reducing uncertainties about demand and supply when all members of the supply chain have accurate and up-to-date information. If all supply chain members share dynamic information about inventory levels, schedules, forecasts, and shipments, they have more precise knowledge about how to adjust their sourcing, manufacturing, and distribution plans. Supply chain management systems provide the kind of information that helps members of the supply chain make better purchasing and scheduling decisions.

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 349

Supply Chain Management Software Supply chain software is classified as either software to help businesses plan their supply chains (supply chain planning) or software to help them execute the supply chain steps (supply chain execution). Supply chain planning systems enable the firm to model its existing supply chain, generate demand forecasts for products, and develop optimal sourcing and manufacturing plans. Such systems help companies make better decisions, such as determining how much of a specific product to manufacture in a given time period; establishing inventory levels for raw materials, intermediate products, and finished goods; determining where to store finished goods; and identifying the transportation mode to use for product delivery.

For example, if a large customer places a larger order than usual or changes that order on short notice, it can have a widespread impact throughout the supply chain. Additional raw materials or a different mix of raw materials may need to be ordered from suppliers. Manufacturing may have to change job scheduling. A transportation carrier may have to reschedule deliveries. Supply chain planning software makes the necessary adjustments to production and

FIGURE 9.3 THE BULLWHIP EFFECT Inaccurate information can cause minor fluctuations in demand for a product to be amplified as one moves further back in the supply chain. Minor fluctuations in retail sales for a product can create excess inventory for distributors, manufacturers, and suppliers.

Downstream

Tier 3 Suppliers

Tier 2 Suppliers

Upstream

Tier 1 Suppliers

Manufacturer Distributor Retailer Customer

350 Part Three Key System Applications for the Digital Age

distribution plans. Information about changes is shared among the relevant supply chain members so that their work can be coordinated. One of the most important—and complex—supply chain planning functions is demand planning, which determines how much product a business needs to make to satisfy all its customers’ demands. JDA Software, SAP, and Oracle all offer sup- ply chain management solutions.

Supply chain execution systems manage the flow of products through dis- tribution centers and warehouses to ensure that products are delivered to the right locations in the most efficient manner. They track the physical status of goods, the management of materials, warehouse and transportation operations, and financial information involving all parties. An example is the Warehouse Management System (WMS) that Haworth Incorporated uses. Haworth is a world-leading manufacturer and designer of office furniture, with distribution centers in four states. The WMS tracks and controls the flow of finished goods from Haworth’s distribution centers to its customers. Acting on shipping plans for customer orders, the WMS directs the movement of goods based on immedi- ate conditions for space, equipment, inventory, and personnel.

Global Supply Chains and the Internet Before the Internet, supply chain coordination was hampered by the difficulties of making information flow smoothly among disparate internal supply chain systems for purchasing, materials management, manufacturing, and distribu- tion. It was also difficult to share information with external supply chain part- ners because the systems of suppliers, distributors, or logistics providers were based on incompatible technology platforms and standards. Enterprise and supply chain management systems enhanced with Internet technology supply some of this integration.

A manager uses a web interface to tap into suppliers’ systems to determine whether inventory and production capabilities match demand for the firm’s products. Business partners use web-based supply chain management tools to collaborate online on forecasts. Sales representatives access suppliers’ produc- tion schedules and logistics information to monitor customers’ order status.

Global Supply Chain Issues More and more companies are entering international markets, outsourcing manufacturing operations, and obtaining supplies from other countries as well as selling abroad. Their supply chains extend across multiple countries and regions. There are additional complexities and challenges to managing a global supply chain.

Global supply chains typically span greater geographic distances and time differences than domestic supply chains and have participants from a number of countries. Performance standards may vary from region to region or from nation to nation. Supply chain management may need to reflect foreign govern- ment regulations and cultural differences.

The Internet helps companies manage many aspects of their global supply chains, including sourcing, transportation, communications, and international finance. Today’s apparel industry, for example, relies heavily on outsourcing to contract manufacturers in China and other low-wage countries. Apparel com- panies are starting to use the web to manage their global supply chain and pro- duction issues. (Review the discussion of Li & Fung in Chapter 3.)

In addition to contract manufacturing, globalization has encouraged out- sourcing warehouse management, transportation management, and related

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 351

operations to third-party logistics providers, such as UPS Supply Chain Solutions and Schneider National. These logistics services offer web-based software to give their customers a better view of their global supply chains. Customers can check a secure website to monitor inventory and shipments, helping them run their global supply chains more efficiently.

Demand-Driven Supply Chains: From Push to Pull Manufacturing and Efficient Customer Response In addition to reducing costs, supply chain management systems facilitate ef- ficient customer response, enabling the workings of the business to be driven more by customer demand. (We introduced efficient customer response sys- tems in Chapter 3.)

Earlier supply chain management systems were driven by a push-based model (also known as build-to-stock). In a push-based model, production mas- ter schedules are based on forecasts or best guesses of demand for products, and products are pushed to customers. With new flows of information made possible by web-based tools, supply chain management more easily follows a pull-based model. In a pull-based model, also known as a demand-driven or build-to-order model, actual customer orders or purchases trigger events in the supply chain. Transactions to produce and deliver only what customers have ordered move up the supply chain from retailers to distributors to manufacturers and eventually to suppliers. Only products to fulfill these orders move back down the supply chain to the retailer. Manufacturers use only actual order demand information to drive their production schedules and the procurement of components or raw materials, as illustrated in Figure 9.4. Walmart’s continuous replenishment sys- tem described in Chapter 3 is an example of the pull-based model.

The Internet and Internet technology make it possible to move from sequen- tial supply chains, where information and materials flow sequentially from company to company, to concurrent supply chains, where information flows in many directions simultaneously among members of a supply chain network. Complex supply networks of manufacturers, logistics suppliers, outsourced manufacturers, retailers, and distributors can adjust immediately to changes in schedules or orders. Ultimately, the Internet will enable a digital logistics ner- vous system for supply chains (see Figure 9.5).

FIGURE 9.4 PUSH- VERSUS PULL-BASED SUPPLY CHAIN MODELS The difference between push- and pull-based models is summarized by the slogan “Make what we sell, not sell what we make.”

Supplier DistributorManufacturer Retailer Customer

Supplier

Supply to order

Supply to forecast

Production based on forecasts

Inventory based on forecasts

Push-Based Model

Pull-Based Model

Stock based on forecasts

Purchase what is on shelves

Produce to order

Automatically replenish

warehouse

Automatically replenish stock

Customer orders

DistributorManufacturer Retailer Customer

352 Part Three Key System Applications for the Digital Age

Business Value of Supply Chain Management Systems You have just seen how supply chain management systems enable firms to streamline both their internal and external supply chain processes and provide management with more accurate information about what to produce, store, and move. By implementing a networked and integrated supply chain management system, companies match supply to demand, reduce inventory levels, improve delivery service, speed product time to market, and use assets more effectively.

Total supply chain costs represent the majority of operating expenses for many businesses and in some industries approach 75 percent of the total operat- ing budget. Reducing supply chain costs has a major impact on firm profitability.

In addition to reducing costs, supply chain management systems help in- crease sales. If a product is not available when a customer wants it, customers often try to purchase it from someone else. More precise control of the supply chain enhances the firm’s ability to have the right product available for cus- tomer purchases at the right time.

9-3 How do customer relationship management systems help firms achieve customer intimacy?

You’ve probably heard phrases such as “the customer is always right” or “the cus- tomer comes first.” Today these words ring truer than ever. Because competitive advantage based on an innovative new product or service is often very short lived, companies are realizing that their most enduring competitive strength may be their relationships with their customers. Some say that the basis of competition

FIGURE 9.5 THE EMERGING INTERNET-DRIVEN SUPPLY CHAIN The emerging Internet-driven supply chain operates like a digital logistics nervous system. It provides multidirectional communication among firms, networks of firms, and e-marketplaces so that entire networks of supply chain partners can immediately adjust inventories, orders, and capacities.

Distributors

Retailers

CustomersLogisticsProviders

Virtual Manufacturers

Contract Manufacturers

Logistics Exchanges

Private Industrial Networks

Net Marketplaces

Manufacturers

Suppliers

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 353

has switched from who sells the most products and services to who “owns” the customer and that customer relationships represent a firm’s most valuable asset.

What Is Customer Relationship Management? What kinds of information would you need to build and nurture strong, long- lasting relationships with customers? You’d want to know exactly who your cus- tomers are, how to contact them, whether they are costly to service and sell to, what kinds of products and services they are interested in, and how much money they spend on your company. If you could, you’d want to make sure you knew each of your customers well, as if you were running a small-town store. And you’d want to make your good customers feel special.

In a small business operating in a neighborhood, it is possible for business owners and managers to know their customers well on a personal, face-to-face basis, but in a large business operating on a metropolitan, regional, national, or even global basis, it is impossible to know your customer in this intimate way. In these kinds of businesses, there are too many customers and too many ways that customers interact with the firm (over the web, the phone, email, blogs, and in person). It becomes especially difficult to integrate information from all these sources and deal with the large number of customers.

A large business’s processes for sales, service, and marketing tend to be highly compartmentalized, and these departments do not share much essential customer information. Some information on a specific customer might be stored and orga- nized in terms of that person’s account with the company. Other pieces of informa- tion about the same customer might be organized by products that were purchased. In this traditional business environment, there is no convenient way to consolidate all this information to provide a unified view of a customer across the company.

This is where customer relationship management systems help. Customer relationship management (CRM) systems, which we introduced in Chapter 2, capture and integrate customer data from all over the organization, consolidate the data, analyze the data, and then distribute the results to various systems and customer touch points across the enterprise. A touch point (also known as a contact point) is a method of interaction with the customer, such as tele- phone, email, customer service desk, conventional mail, Facebook, Twitter, website, wireless device, or retail store. Well-designed CRM systems provide a single enterprise view of customers that is useful for improving both sales and customer service (see Figure 9.6.)

Good CRM systems provide data and analytical tools for answering questions such as these: What is the value of a particular customer to the firm over his or her lifetime? Who are our most loyal customers? Who are our most profitable customers? What do these profitable customers want to buy? Firms use the an- swers to these questions to acquire new customers, provide better service and support to existing customers, customize their offerings more precisely to cus- tomer preferences, and provide ongoing value to retain profitable customers.

Customer Relationship Management Software Commercial CRM software packages range from niche tools that perform limited functions, such as personalizing websites for specific customers, to large-scale enterprise applications that capture myriad interactions with customers, ana- lyze them with sophisticated reporting tools, and link to other major enterprise applications, such as supply chain management and enterprise systems. The more comprehensive CRM packages contain modules for partner relationship management (PRM) and employee relationship management (ERM).

354 Part Three Key System Applications for the Digital Age

PRM uses many of the same data, tools, and systems as customer relation- ship management to enhance collaboration between a company and its selling partners. If a company does not sell directly to customers but rather works through distributors or retailers, PRM helps these channels sell to customers directly. It provides a company and its selling partners with the ability to trade information and distribute leads and data about customers, integrating lead generation, pricing, promotions, order configurations, and availability. It also provides a firm with tools to assess its partners’ performances so it can make sure its best partners receive the support they need to close more business.

ERM software deals with employee issues that are closely related to CRM, such as setting objectives, employee performance management, performance- based compensation, and employee training. Major CRM application software vendors include Oracle, SAP, Salesforce.com, and Microsoft Dynamics CRM.

Customer relationship management systems typically provide software and online tools for sales, customer service, and marketing. We briefly describe some of these capabilities.

Sales Force Automation Sales force automation (SFA) modules in CRM systems help sales staff increase productivity by focusing sales efforts on the most profitable customers, those who are good candidates for sales and services. SFA modules provide sales prospect and contact information, product information, product configuration capabilities, and sales quote generation capabilities. Such software can assemble information about a particular customer’s past purchases to help the salesperson make per- sonalized recommendations. SFA modules enable sales, marketing, and shipping departments to share customer and prospect information easily. SFA increases each salesperson’s efficiency by reducing the cost per sale as well as the cost of acquiring new customers and retaining old ones. SFA modules also provide capa- bilities for sales forecasting, territory management, and team selling.

FIGURE 9.6 CUSTOMER RELATIONSHIP MANAGEMENT (CRM) CRM systems examine customers from a multifaceted perspective. These systems use a set of integrated applications to address all aspects of the customer relationship, includ- ing customer service, sales, and marketing.

Sales • Telephone sales • Web sales • Retail store sales • Field sales

Service Marketing • Call center data • Campaign data

Customer

• Content • Data analysis

• Web self-service data • Wireless data • Field service data • Social networking data

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 355

Customer Service Customer service modules in CRM systems provide information and tools to increase the efficiency of call centers, help desks, and customer support staff. They have capabilities for assigning and managing customer service requests.

One such capability is an appointment or advice telephone line. When a cus- tomer calls a standard phone number, the system routes the call to the correct service person, who inputs information about that customer into the system only once. When the customer’s data are in the system, any service representative can handle the customer relationship. Improved access to consistent and accurate customer information helps call centers handle more calls per day and decrease the duration of each call. Thus, call centers and customer service groups achieve greater productivity, reduced transaction time, and higher quality of service at lower cost. The customer is happier because he or she spends less time on the phone restating his or her problem to customer service representatives.

CRM systems may also include web-based self-service capabilities: The com- pany website can be set up to provide inquiring customers personalized support information as well as the option to contact customer service staff by phone for additional assistance.

Marketing CRM systems support direct-marketing campaigns by providing capabilities for capturing prospect and customer data, for providing product and service infor- mation, for qualifying leads for targeted marketing, and for scheduling and track- ing direct-marketing mailings or email (see Figure 9.7). Marketing modules also include tools for analyzing marketing and customer data, identifying profitable and unprofitable customers, designing products and services to satisfy specific customer needs and interests, and identifying opportunities for cross-selling.

Cross-selling is the marketing of complementary products to customers. (For example, in financial services, a customer with a checking account might be sold a money market account or a home improvement loan.) CRM tools also

FIGURE 9.7 HOW CRM SYSTEMS SUPPORT MARKETING Customer relationship management software provides a single point for users to manage and evaluate marketing campaigns across multiple channels, including email, direct mail, telephone, the web, and social media.

Responses by Channel for January 2019 Promotional Campaign

Social Media 6.7%

Telephone 30.8%

Direct Mail 29.2%

Email 17.3%

Web 16.0%

356 Part Three Key System Applications for the Digital Age

help firms manage and execute marketing campaigns at all stages, from plan- ning to determining the rate of success for each campaign.

Figure 9.8 illustrates the most important capabilities for sales, service, and marketing processes found in major CRM software products. Like enterprise soft- ware, this software is business-process driven, incorporating hundreds of business processes thought to represent best practices in each of these areas. To achieve maximum benefit, companies need to revise and model their business processes to conform to the best-practice business processes in the CRM software.

Figure 9.9 illustrates how a best practice for increasing customer loyalty through customer service might be modeled by CRM software. Directly servic- ing customers provides firms with opportunities to increase customer reten- tion by singling out profitable long-term customers for preferential treatment. CRM software can assign each customer a score based on that person’s value and loyalty to the company and provide that information to help call centers route each customer’s service request to agents who can best handle that cus- tomer’s needs. The system would automatically provide the service agent with a detailed profile of that customer that includes his or her score for value and loyalty. The service agent would use this information to present special offers or additional services to the customer to encourage the customer to keep trans- acting business with the company. You will find more information on other best-practice business processes in CRM systems in our Learning Tracks.

FIGURE 9.8 CRM SOFTWARE CAPABILITIES The major CRM software products support business processes in sales, service, and marketing, integrating customer information from many sources. Included is support for both the operational and analytical aspects of CRM.

Sales

Account Management

Marketing

Customer Data

Service

Campaign Management

Service Delivery

Lead Management

Channel Promotions Management

Customer Satisfaction Management

Order Management

Events Management

Returns Management

Sales Planning

Market Planning

Service Planning

Field Sales

Marketing Operations

Call Center & Help Desk

Sales Analytics

Marketing Analytics

Service Analytics

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 357

Operational and Analytical CRM All of the applications we have just described support either the operational or analytical aspects of customer relationship management. Operational CRM includes customer-facing applications, such as tools for sales force automa- tion, call center and customer service support, and marketing automation. Analytical CRM includes applications that analyze customer data generated by operational CRM applications to provide information for improving business performance.

Analytical CRM applications are based on data from operational CRM sys- tems, customer touch points, and other sources that have been organized in data warehouses or analytic platforms for use in online analytical process- ing (OLAP), data mining, and other data analysis techniques (see Chapter 6). Customer data collected by the organization might be combined with data from other sources, such as customer lists for direct-marketing campaigns purchased from other companies or demographic data. Such data are analyzed to identify buying patterns, to create segments for targeted marketing, and to pinpoint profitable and unprofitable customers (see Figure 9.10).

Another important output of analytical CRM is the customer’s lifetime value to the firm. Customer lifetime value (CLTV) is based on the relationship be- tween the revenue produced by a specific customer, the expenses incurred in acquiring and servicing that customer, and the expected life of the relationship between the customer and the company.

Business Value of Customer Relationship Management Systems Companies with effective customer relationship management systems realize many benefits, including increased customer satisfaction, reduced direct- marketing costs, more effective marketing, and lower costs for customer acqui- sition and retention. Information from CRM systems increases sales revenue

FIGURE 9.9 CUSTOMER LOYALTY MANAGEMENT PROCESS MAP This process map shows how a best practice for promoting customer loyalty through customer service would be modeled by customer relationship management software. The CRM software helps firms identify high-value customers for preferential treatment.

Receive service request

Obtain customer information

Customer database

No

Yes Yes

No

Resolve service issue

Score customer

High value and loyalty?

Provide special oers and service

Customer information available?

Route to best agent

358 Part Three Key System Applications for the Digital Age

by identifying the most profitable customers and segments for focused market- ing and cross-selling (see the Interactive Session on Organizations).

Customer churn is reduced as sales, service, and marketing respond better to customer needs. The churn rate measures the number of customers who stop using or purchasing products or services from a company. It is an important indicator of the growth or decline of a firm’s customer base.

9-4 What are the challenges that enterprise applications pose, and how are enterprise applications taking advantage of new technologies?

Many firms have implemented enterprise systems and systems for supply chain and customer relationship management because they are such powerful instruments for achieving operational excellence and enhancing decision making. But precisely because they are so powerful in changing the way the or- ganization works, they are challenging to implement. Let’s briefly examine some of these challenges as well as new ways of obtaining value from these systems.

Enterprise Application Challenges Promises of dramatic reductions in inventory costs, order-to-delivery time, more efficient customer response, and higher product and customer profitabil- ity make enterprise systems and systems for SCM and CRM very alluring. But to obtain this value, you must clearly understand how your business has to change to use these systems effectively.

Enterprise applications involve complex pieces of software that are very ex- pensive to purchase and implement. It might take a large Fortune 500 company several years to complete a large-scale implementation of an enterprise system

FIGURE 9.10 ANALYTICAL CRM Analytical CRM uses a customer data warehouse or analytic platform and tools to analyze customer data collected from the firm’s customer touch points and from other sources.

Channels

Other sources

Customer data

Customer data warehouse

or analytic platform

• Call center • Website • Wireless • Field sales • Direct mail • Email • Retail store • Partner • Social media

• Legacy systems

• OLAP

• Profitable customers • Market segments • Customer profiles • Churn rates

• Data mining • Other data analysis tools

• Demographic data • Third-party data • Marketing campaign data

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 359

Kenya Airways is the flag carrier of Kenya and ranks among the top ten African airlines in terms of seat capacity, with a fleet of 33 aircraft covering 53 destinations domestically and abroad. It is the only African airline in the SkyTeam alliance, whose 20 members include Delta Airlines, Air France, Alitalia, Aeromexico, China Airlines, and Korean Air, and is expected to live up to a very high global standard.

One area of the business that needed improve- ment was the airline’s relationship to its customers. Africa’s current population of 1 billion is expected to reach 1.5 billion within a decade, with a rapidly growing middle class in many countries. Until re- cently, Kenya Airways was unable to fully capitalize on this market opportunity because it didn’t know enough about its customers. Although the airline had added more planes, passenger numbers had been decreasing, partly due to the fear of Ebola virus out- breaks, regional terrorism, and increased competi- tion from Persian Gulf carriers. Profitability suffered.

The airline didn’t know who clicked on its email campaigns. It was advertising mostly on billboards, in newspapers, and on flyers, with no way to measure the effectiveness of those campaigns. Management could not tell what its sales representatives in differ- ent offices were doing. Data on customers were lo- cated in many different repositories, such as spread- sheets and files in company and partner travel agent offices, reservation systems, and airport check-ins, and the data were not integrated. Without a single repository for customer data, Kenya Airways was unable to identify the preferences, special needs, or other personal characteristics of its “guests,” who in- cluded commercial traders, business executives, gov- ernment officials, students, missionaries, and medical tourists. Marketing, sales, and customer service ac- tivities were operating in the dark. For example, each May the airline would send every customer in its scattered data repositories a Mother’s Day greeting, although many of the recipients were not mothers.

In 2014 Kenya Airways initiated a multiyear pro- gram to automate and integrate all of its customer data so that it could engage in effective customer relationship management using Oracle’s Marketing, Sales, Data, and Service Clouds. Oracle Marketing Cloud provides a cloud-based platform to connect

firms’ marketing data, centrally orchestrate cross- channel customer interactions, engage the right audi- ence, and analyze performance. It includes tools for managing marketing automation campaigns, provid- ing cross-channel customer experiences, creating and managing engaging content, “listening” to customer conversations about a product, brand or service, and engaging with messaging (social marketing).

A few weeks after implementing Oracle Marketing Cloud, the airline ran its first automated marketing campaign, which directed emails, SMS texts, and so- cial media posts about special holiday season fares to Kenyan emigrants in Dubai. Kenya Airways then cre- ated campaigns to promote new and expanded routes to Hanoi and Zanzibar. As time went on, the airline’s marketing team became more skillful at tracking revenue flows generated by those campaigns and identifying new sources of data to target the cam- paigns more effectively. Kenya Airways Marketing Automation Lead, Harriet Luyai, reported in early 2015 that “reachable contacts” rose from 40 percent to 89 percent, open rates on marketing emails rose from 40 percent to 65 percent, and the airline’s “ac- quisition rate”—the percentage of respondents who opt in to its campaigns—was up to 20 percent. The airline can measure the impact of marketing cam- paigns on ticket sales. Campaigns that previously took three days to execute using an agency now take 30 minutes and are much less expensive.

After implementing Oracle Marketing Cloud, Kenya Airways started using Oracle Sales Cloud to au- tomate its sales activities and Oracle RightNow Cloud Service for its customer service activities, linking all three clouds in one central data repository. Marketing, sales, and service could now integrate their customer data and coordinate business processes. The airline pulled together information on age, income, educa- tion level, job function, job level, revenue generated for the airline, geography, status, preferences, interest areas, service calls, email activity, form submissions, and purchase history to help it create very detailed customer profiles for personalizing offerings.

To help the Kenya Airways marketing team drive additional revenue by converting leads to ticket sales, increasing website traffic, and increasing social fol- lowers, the airline implemented Oracle Social Cloud.

INTERACTIVE SESSION ORGANIZATIONS

Kenya Airways Flies High with Customer Relationship Management

1. What was the problem at Kenya Airways described in this case? What management, organization, and technology factors contributed to this problem?

2. What was the relationship of customer relation- ship management to Kenya Airways’ business per- formance and business strategy?

3. Describe Kenya Airway’s solution to its problem. What management, organization, and technology issues had to be addressed by the solution?

4. How effective was this solution? How did it affect the way Kenya Airways ran its business and its business performance?

This tool helps the Kenya Airways customer service team follow social media posts and discussions about the airline’s services and respond to questions and problems within 30 minutes. It also helps agents pri- oritize their follow-up posts and manage workflows for the appropriate approvals and for troubleshooting.

Although Kenya Airways had a customer loyalty program, it had previously been unable to identify high-value customers. Now Kenya Airways can track all its high-value customers and show how much revenue each customer generates. It can also segment customers across the customer life cycle, making it possible to distinguish a new cus- tomer from a longtime high-value customer. Kenya Airways now has a 360-degree view of each of its customers.

It took much more time to implement the Oracle Cloud suite than Kenya Airways had

originally estimated—more than a year instead of six months. The required data, which resided in many different applications, needed to be cleansed to make sure they were all in the right format before they could be transferred to the new data repository. Much of this work was manual. Airline staff had to be trained in new ways of working with digital CRM tools because so much of its work had previously been manual. Kenya Airways man- agement feels the airline has been richly rewarded for this effort.

Sources: “Company View of Kenya Airways PLC,” www. bloomberg. com, accessed January 31, 2018; Rob Preston, “First-Class Flight,” Profit Magazine, August 2016; www.kenya-airways.com, accessed January 31, 2018; “Kenya Airways Turns to McKinsey for Turn- around Strategy,” Consultancy.uk, February 8, 2016; and Tilde Herrera, “Kenya Airways Fuels with Data to Lift Marketing,” October 29, 2015.

CASE STUDY QUESTIONS

360 Part Three Key System Applications for the Digital Age

or a system for SCM or CRM. According to a 2018 survey of 237 ERP users con- ducted by Panorama Consulting Solutions, ERP projects took an average of 17.4 months to complete, and 44 percent of the projects delivered 50 percent or less of the expected benefits. Approximately 64 percent of these projects experi- enced cost overruns, and 79 percent exceeded their initial timelines (Panorama Consulting Solutions, 2018). Changes in project scope and additional customiza- tion work add to implementation delays and costs.

Enterprise applications require not only deep-seated technological changes but also fundamental changes in the way the business operates. Companies must make sweeping changes to their business processes to work with the software. Employees must accept new job functions and responsibilities. They must learn how to perform a new set of work activities and understand how the information they enter into the system can affect other parts of the company. This requires new organizational learning and should also be factored into ERP implementation costs.

SCM systems require multiple organizations to share information and busi- ness processes. Each participant in the system may have to change some of its processes and the way it uses information to create a system that best serves the supply chain as a whole.

Some firms experienced enormous operating problems and losses when they first implemented enterprise applications because they didn’t understand how much organizational change was required. For example, Kmart had trouble

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 361

getting products to store shelves when it first implemented i2 Technologies (now JDA Software) SCM software. The i2 software did not work well with Kmart’s promotion-driven business model, which created sharp spikes in demand for prod- ucts. Supermarket giant Woolworth’s Australia encountered data-related problems when it transitioned from an antiquated home-grown ERP system to SAP. Weekly profit-and-loss reports tailored for individual stores couldn’t be generated for nearly 18 months. The company had to change its data collection procedures, but failed to understand its own processes or properly document these business processes.

Enterprise applications also introduce switching costs. When you adopt an enterprise application from a single vendor, such as SAP, Oracle, or others, it is very costly to switch vendors, and your firm becomes dependent on the vendor to upgrade its product and maintain your installation.

Enterprise applications are based on organization-wide definitions of data. You’ll need to understand exactly how your business uses its data and how the data would be organized in a CRM, SCM, or ERP system. CRM systems typically require some data cleansing work.

Enterprise software vendors are addressing these problems by offering pared- down versions of their software and fast-start programs for small and medium- sized businesses and best-practice guidelines for larger companies. Companies are also achieving more flexibility by using cloud applications for functions not addressed by the basic enterprise software so that they are not constrained by a single do-it-all type of system.

Companies adopting enterprise applications can also save time and money by keeping customizations to a minimum. For example, Kennametal, a $2 billion metal-cutting tools company in Pennsylvania, had spent $10 million over 13 years maintaining an ERP system with more than 6,400 customiza- tions. The company replaced it with a plain-vanilla, uncustomized version of SAP enterprise software and changed its business processes to conform to the software. Office Depot avoided customization when it moved from in-house systems to the Oracle ERP Cloud. The retailer is using best practices embedded in Oracle’s Supply Chain Management Cloud and in its cloud-based Human Capital Management (HCM) and Enterprise Performance Management (EPM) systems. By not customizing its Oracle ERP applications, Office Depot simpli- fied its information systems and reduced the cost of maintaining and managing them (Thibodeau, 2018).

Next-Generation Enterprise Applications Today, enterprise application vendors are delivering more value by becoming more flexible, user-friendly, web-enabled, mobile, and capable of integration with other systems. Stand-alone enterprise systems, customer relationship manage- ment systems, and SCM systems are becoming a thing of the past. The major enterprise software vendors have created what they call enterprise solutions, enter- prise suites, or e-business suites to make their CRM, SCM, and ERP systems work closely with each other and link to systems of customers and suppliers.

Next-generation enterprise applications also include cloud solutions as well as more functionality available on mobile platforms. Large enterprise software vendors such as SAP, Oracle, Microsoft, and Epicor now feature cloud ver- sions of their flagship ERP systems and also cloud-based products for small and medium-sized businesses (as described earlier in the Interactive Session on Management). SAP, for example, offers SAP S/4HANA Cloud for large compa- nies, and SAP Business ByDesign and SAP Business One enterprise software for medium-sized and small businesses. Microsoft offers the Dynamics 365 cloud

362 Part Three Key System Applications for the Digital Age

version of its ERP and CRM software. Cloud-based enterprise systems are also offered by smaller vendors such as NetSuite.

The undisputed global market leader in cloud-based CRM systems is Salesforce.com, which we described in Chapter 5. Salesforce.com delivers its ser- vice through Internet-connected computers or mobile devices, and it is widely used by small, medium-sized, and large enterprises. As cloud-based products mature, more companies, including very large Fortune 500 firms, are choosing to run all or part of their enterprise applications in the cloud.

Social CRM CRM software vendors are enhancing their products to take advantage of social networking technologies. These social enhancements help firms identify new ideas more rapidly, improve team productivity, and deepen interactions with customers (see Chapter 10). Using social CRM tools, businesses can better en- gage with their customers by, for example, analyzing their sentiments about their products and services.

Social CRM tools enable a business to connect customer conversations and re- lationships from social networking sites to CRM processes. The leading CRM ven- dors now offer such tools to link data from social networks to their CRM software. SAP, Salesforce.com, and Oracle CRM products now feature technology to monitor, track, and analyze social media activity on Facebook, LinkedIn, Twitter, YouTube, and other sites. Business intelligence and analytics software vendors such as SAS also have capabilities for social media analytics (with several measures of customer engagement across a variety of social networks) along with campaign management tools for testing and optimizing both social and traditional web-based campaigns.

Salesforce.com connected its system for tracking leads in the sales process with social-listening and social-media marketing tools, enabling users to tailor their social-marketing dollars to core customers and observe the resulting com- ments. If an ad agency wants to run a targeted Facebook or Twitter ad, these capabilities make it possible to aim the ad specifically at people in the client’s lead pipeline who are already being tracked in the CRM system. Users will be able to view tweets as they take place in real time and perhaps uncover new leads. They can also manage multiple campaigns and compare them all to fig- ure out which ones generate the highest click-through rates and cost per click.

Business Intelligence in Enterprise Applications Enterprise application vendors have added business intelligence features to help managers obtain more meaningful information from the massive amounts of data these systems generate, including data from the Internet of Things (IoT). SAP now makes it possible for its enterprise applications to use HANA in-memory computing technology so that they are capable of much more rapid and complex data analysis. Included are tools for flexible reporting; ad hoc analysis; interactive dashboards; what-if scenario analysis; data visualization; and machine learning to analyze very large bodies of data, make connections, make predictions, and provide recommendations for operations optimization. For example, SAP created a machine learning and neural network application (see Chapter 11) that recognizes patterns associated with machine performance in the oil and gas industry. The software automatically generates notifications of potential machine failures and sends them to SAP Plant Maintenance, which planners use to schedule machine repair and replacement (Franken, 2018).

The major enterprise application vendors offer portions of their prod- ucts that work on mobile handhelds. You can find out more about this topic in our Learning Track on Wireless Applications for Customer Relationship Management, Supply Chain Management, and Healthcare.

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 363

9-5 How will MIS help my career? Here is how Chapter 9 and this book can help you find a job as a manufacturing management trainee.

The Company XYZ Global Industrial Components is a large Michigan-headquartered company with 40 global manufacturing facilities and more than 4,000 employees world- wide, and it has an open position for a new college graduate in its Manufacturing Management Program. The company produces fastener, engineered, and link- age and suspension components for automotive, heavy-duty trucks, aerospace, electric utility, telecommunications, and other industries worldwide.

Position Description The Manufacturing Management Program is a rotational, two-year program de- signed to nurture and train future managers by enabling recent college gradu- ates to acquire critical skills and industry experience in plant, technical, and corporate environments. Job responsibilities include:

• Working with business units and project teams on systems implementation, including implementation of ERP and JDA manufacturing systems.

• Understanding business processes and data requirements for each business unit.

• Proficiency in supporting and conducting business requirement analysis sessions.

• Tracking and documenting changes to functional and business specifications.

• Writing user documentation, instructions, and procedures.

• Monitoring and documenting post-implementation problems and revision requests.

Job Requirements • Bachelor’s degree in IT, MIS, engineering, or related field or equivalent, with

a GPA higher than 3.0

• Demonstrated skills in Microsoft Office Suite

• Strong written and verbal communication skills

• Proven track record of accomplishments both inside and outside the educational setting

• Experience in a leadership role in a team

Interview Questions • Describe the projects you have worked on in a team. Did you play a leader-

ship role? Exactly what did you do to help your team achieve its goal? Were any of these projects IT projects?

• What do you know about ERP or JDA manufacturing systems? Have you ever worked with them? What exactly did you do with these systems?

• Tell us what you can do with Microsoft Office software. Which tools have you used? Do you have any Access and Excel skills? What kinds of problems have you used these tools to solve? Did you take courses in Access or Excel?

364 Part Three Key System Applications for the Digital Age

Author Tips 1. Do some research on the company, its industry, and the kinds of challenges

it faces. Look through the company’s LinkedIn page and read their posts over the past twelve months. Are there any key trends in the LinkedIn posts for this company?

2. Review this text’s Chapter 9 on enterprise applications, Chapter 13 on develop- ing systems, and Chapter 14 on IT project management and implementation.

3. View YouTube videos created by major IT consulting firms that discuss the latest trends in manufacturing technology and enterprise systems.

4. Inquire how you would be using Microsoft Office tools for the job and what Excel and Access skills you would be expected to demonstrate. Bring ex- amples of the work you have done with this software. Show that you would be eager to learn what you don’t know about these tools to fulfill your job assignments.

5. Bring examples of your writing (including some from your Digital Portfolio described in MyLab MIS) demonstrating your analytical skills and project experience.

9-1 How do enterprise systems help businesses achieve operational excellence? Enterprise software is based on a suite of integrated software modules and a common central data-

base. The database collects data from and feeds the data into numerous applications that can support nearly all of an organization’s internal business activities. When one process enters new information, the information is made available immediately to other business processes.

Enterprise systems support organizational centralization by enforcing uniform data standards and business processes throughout the company and a single unified technology platform. The firmwide data that enterprise systems generate help managers evaluate organizational performance.

9-2 How do supply chain management systems coordinate planning, production, and logistics with suppliers?

Supply chain management (SCM) systems automate the flow of information among members of the supply chain so they can use it to make better decisions about when and how much to purchase, pro- duce, or ship. More accurate information from supply chain management systems reduces uncertainty and the impact of the bullwhip effect.

Supply chain management software includes software for supply chain planning and for supply chain execution. Internet technology facilitates the management of global supply chains by providing the connectivity for organizations in different countries to share supply chain information. Improved communication among supply chain members also facilitates efficient customer response and move- ment toward a demand-driven model.

9-3 How do customer relationship management systems help firms achieve customer intimacy? Customer relationship management (CRM) systems integrate and automate customer-facing pro-

cesses in sales, marketing, and customer service, providing an enterprise-wide view of customers. Companies can use this customer knowledge when they interact with customers to provide them with better service or sell new products and services. These systems also identify profitable or unprofitable customers or opportunities to reduce the churn rate.

The major customer relationship management software packages provide capabilities for both oper- ational CRM and analytical CRM. They often include modules for managing relationships with selling partners (partner relationship management) and for employee relationship management.

REVIEW SUMMARY

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 365

9-4 What are the challenges that enterprise applications pose, and how are enterprise applications taking advantage of new technologies?

Enterprise applications are difficult to implement. They require extensive organizational change, large new software investments, and careful assessment of how these systems will enhance organizational per- formance. Enterprise applications cannot provide value if they are implemented atop flawed processes or if firms do not know how to use these systems to measure performance improvements. Employees require training to prepare for new procedures and roles. Attention to data management is essential.

Enterprise applications are now more flexible, web-enabled, and capable of integration with other systems, using web services and service-oriented architecture (SOA). They also can run in cloud infrastructures or on mobile platforms. CRM software has added social networking capabilities to enhance internal collaboration, deepen interactions with customers, and use data from social networking sites. Enterprise applications are incorporating business intelligence capabilities for analyzing the large quantities of data they generate.

Key Terms Analytical CRM, 357 Bullwhip effect, 348 Churn rate, 358 Cross-selling, 355 Customer lifetime value (CLTV), 357 Demand planning, 350 Employee relationship management (ERM), 353 Enterprise software, 342 Just-in-time strategy, 348 Operational CRM, 357

Partner relationship management (PRM), 353 Pull-based model, 351 Push-based model, 351 Sales force automation (SFA), 354 Social CRM, 362 Supply chain, 346 Supply chain execution systems, 350 Supply chain planning systems, 349 Touch point, 353

MyLab MIS To complete the problems with MyLab MIS, go to the EOC Discussion Questions in MyLab MIS.

Review Questions 9-1 How do enterprise systems help businesses

achieve operational excellence?

• Define an enterprise system and explain how enterprise software works.

• Describe how enterprise systems provide value for a business.

9-2 How do supply chain management systems coordinate planning, production, and logistics with suppliers?

• Define a supply chain and identify each of its components.

• Explain how supply chain management sys- tems help reduce the bullwhip effect and how they provide value for a business.

• Define and compare supply chain plan- ning systems and supply chain execution systems.

• Describe the challenges of global supply chains and how Internet technology can help companies manage them better.

• Distinguish between a push-based and a pull-based model of supply chain manage- ment and explain how contemporary sup- ply chain management systems facilitate a pull-based model.

9-3 How do customer relationship management systems help firms achieve customer intimacy?

• Define customer relationship management and explain why customer relationships are so important today.

• Describe how partner relationship manage- ment (PRM) and employee relationship management (ERM) are related to customer relationship management (CRM).

• Describe the tools and capabilities of cus- tomer relationship management software for sales, marketing, and customer service.

• Distinguish between operational and ana- lytical CRM.

366 Part Three Key System Applications for the Digital Age

9-4 What are the challenges that enterprise applications pose, and how are enterprise applications taking advantage of new technologies?

• List and describe the challenges enterprise applications pose.

• Explain how these challenges can be addressed.

• Describe how enterprise applications are taking advantage of cloud computing and business intelligence.

• Define social CRM and explain how cus- tomer relationship management systems are using social networking.

Discussion Questions 9-5 Supply chain management is less about

managing the physical movement of goods and more about managing information. Discuss the implications of this statement.

9-6 If a company wants to implement an enterprise application, it had better do

MyLab MIS

MyLab MIS

its homework. Discuss the implications of this statement.

9-7 Which enterprise application should a business install first: ERP, SCM, or CRM? Explain your answer.

MyLab MIS

Hands-On MIS Projects The projects in this section give you hands-on experience analyzing business process integration, suggesting sup- ply chain management and customer relationship management applications, using database software to manage customer service requests, and evaluating supply chain management business services. Visit MyLab MIS to ac- cess this chapter’s Hands-On MIS Projects,

Management Decision Problems

9-8 Toronto-based Mercedes-Benz Canada, with a network of 55 dealers, did not know enough about its customers. Dealers provided customer data to the company on an ad hoc basis. Mercedes did not force dealers to report this information. There was no real incentive for dealers to share information with the company. How could CRM and PRM systems help solve this problem?

9-9 Office Depot sells a wide range of office supply products and services in the United States and internationally. The company tries to offer a wider range of office supplies at lower cost than other retailers by using just-in-time replenishment and tight inventory control systems. It uses information from a demand forecasting system and point-of-sale data to replenish its inventory in its 1,600 retail stores. Explain how these systems help Office Depot minimize costs and any other benefits they provide. Identify and describe other supply chain management applications that would be especially helpful to Office Depot.

Improving Decision Making: Using Database Software to Manage Customer Service Requests

Software skills: Database design; querying and reporting Business skills: Customer service analysis

9-10 In this exercise, you’ll use database software to develop an application that tracks customer service requests and analyzes customer data to identify customers meriting priority treatment. Prime Service is a large service company that provides maintenance and repair services for close to 1,200

commercial businesses in New York, New Jersey, and Connecticut. Its customers include businesses of all sizes. Customers with service needs call into its customer service department with requests for repairing heating ducts, broken windows, leaky roofs, broken water pipes, and other problems. The company assigns each request a num- ber and writes down the service request number, the identification number of the customer account, the date of the request, the type of equipment requiring repair, and a brief description of the problem. The service requests

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 367

are handled on a first-come-first-served basis. After the service work has been completed, Prime calculates the cost of the work, enters the price on the service request form, and bills the client. This arrangement treats the most important and profitable clients—those with accounts of more than $70,000—no differently from its clients with small accounts. Management would like to find a way to provide its best customers with better service. It would also like to know which types of service problems occur most frequently so that it can make sure it has adequate resources to address them.

Prime Service has a small database with client account information, which can be found in MyLab MIS. Use database software to design a solution that would enable Prime’s customer service representatives to identify the most important customers so that they could receive priority service. Your solution will require more than one table. Populate your database with at least 10 service requests. Create several reports that would be of inter- est to management, such as a list of the highest—and lowest—priority accounts and a report showing the most frequently occurring service problems. Create a report listing service calls that customer service representatives should respond to first on a specific date.

Achieving Operational Excellence: Evaluating Supply Chain Management Services

Software skills: Web browser and presentation software Business skills: Evaluating supply chain management services

9-11 In addition to carrying goods from one place to another, some trucking companies provide supply chain management services and help their customers manage their information. In this project, you’ll use the web to research and evaluate two of these business services. Investigate the websites of two companies, UPS and Schneider National, to see how these companies’ services can be used for supply chain management. Then respond to the following questions:

• What supply chain processes can each of these companies support for its clients?

• How can customers use the websites of each company to help them with supply chain management?

• Compare the supply chain management services these companies provide. Which company would you select to help your firm manage its supply chain? Why?

Collaboration and Teamwork Project Analyzing Enterprise Application Vendors

9-12 With a group of three or four other students, use the web to research and evaluate the products of two vendors of enterprise application software. You could compare, for example, the SAP and Oracle enterprise systems, the supply chain management systems from JDA Software and SAP, or the customer relationship management systems of Oracle and Salesforce.com. Use what you have learned from these companies’ websites to compare the software products you have selected in terms of business functions supported, technology platforms, cost, and ease of use. Which vendor would you select? Why? Would you select the same vendor for a small business (50–300 employees) as well as for a large one? If possible, use Google Docs and Google Drive or Google Sites to brainstorm, organize, and develop a presentation of your findings for the class.

368 Part Three Key System Applications for the Digital Age

Clemens Food Group Delivers with New Enterprise Applications

CASE STUDY

Clemens Food Group is known for helping its customers bring home the bacon, and other products as well. Based in Hatfield, Pennsylvania, Clemons Food is a vertically coor- dinated company that includes antibiotic-free hog farming, food production, logistical services, and transportation. Using a responsive pork produc- tion system, the company focuses on supplying the highest-quality products to its partners as well as ad- vanced solutions that simplify partners’ operations.

The Clemens Food Group family of services and brands include pork product producers Hatfield Quality Meats and Nick’s Sausage Company, as well as logistics and transportation firms (PV Transport), and CFC Logistics Country View Family Farms, a hog procurement and production company managing over 100 family farms raising hogs under contract. Clemons Food Group products are sold by grocers and food service operators in the northeastern and mid-Atlantic regions of the United States. The Clemens Food Group raises and processes about five million hogs per year, managing procurement, pro- duction, and logistics services from birth to finished food products. Clemens has 3,350 employees.

For a company in the perishable goods industry such as Clemens Food to be profitable, it must have a firm grasp on the timeliness and accuracy of orders and very precise information about the status of its products and warehouse activities throughout its network of farms and production facilities. Accuracy in determining yields, costs, and prices in a wildly fluctuating market can make a difference of millions of dollars. Unfortunately, Clemens Food’s legacy sys- tems were no longer able to keep up with production and support future growth. Management realized the company needed a new platform to provide better visibility into production, more efficient planning, and tighter control of available-to-promise processes. (Available-to-promise [ATP] provides a response to customer order inquiries, generating available quantities of the requested product and delivery due dates.) Clemens Food also wanted real-time informa- tion about plant profitability, including daily profit- ability margins on an order-by-order basis.

In 2010, Clemens Food created a five-year plan to modernize its IT infrastructure with an integrated

platform for systems to optimize its supply network and improve scheduling, optimization, and margin vis- ibility in its multi-business operations. The plan gained steam in 2014 when Clemens Food announced it would develop a third pork processing plant comprising 550,000 square feet in Coldwater Township, Michigan. The addition of this facility could significantly increase volume and double revenue if it was backed by a more modern IT platform. Clemens Food’s existing ERP sys- tem needed to be replaced by one that could handle increased volume and multi-plant complexities.

Joshua Rennells, Senior Vice President at Clemens Food Group, and his team extensively researched new technologies. A key requirement was to use proven best technology for what works in the perishable food industry. Where there is market volatility and inher- ent risks in selling a perishable product, precise in- formation on yields and costs is especially important. Clemens Food believed SAP software was the best so- lution for helping the company achieve growth targets and share data across organizational boundaries with a fully integrated state-of-the-art system, and Rennells believed that the SAP S/4HANA platform would not require another significant upgrade for 15 years.

SAP S/4HANA is a business suite that is based on the SAP HANA in-memory computing platform. It features enterprise resource planning software meant to cover all day-to-day processes of an enter- prise and also integrates portions of SAP Business Suite products for customer relationship manage- ment, supplier relationship management, and supply chain management. SAP S/4HANA is available in on- premises, cloud, and hybrid computing platforms.

Rather than implement the new system incre- mentally, Clemens Food chose to implement SAP S/4HANA Finance, along with functionality for ma- terials management and production planning in a sweeping “big-bang” approach across the enterprise. The new system needed to be operational in time for the opening of the Coldwater plant. According to Rennells, Clemens Food had used a phased approach for its previous ERP implementation 15 years ear- lier. That prior rollout ended up taking several years and resulted in heavy customization. By the time Clemens Food migrated to SAP S/4HANA, its legacy ERP system was linked to more than 70 applications.

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 369

Taking a big-bang approach was the only way to be up and running before the Coldwater plant went live.

Being in the perishables industry made it impera- tive for Clemens Food to have master data in place when the new system went live to avoid disruptions to production or shipping capabilities. (Master data play a key role in the core operation of a business, such as data about customers, employees, inventory, or suppliers, and are typically shared by multiple users and groups across an organization.) The master data in Clemens Food’s legacy system had quite a few flaws that showed up in testing. Clemens Food needed a rigorous master data cleansing effort.

Clemens Food selected itelligence Group imple- mentation consultants to help with its master data and other migration issues. itelligence Group is a global SAP Platinum Partner with over 25 years of experience. It offers a full range of services from implementation consulting to managed services for its clients. Clemens Food Group identified itelligence as a partner with deep SAP food-specific knowledge and experience, includ- ing fresh and processed meat. itelligence Group had a proprietary Hog Procurement solution available for Clemens that helped deliver an on-time and on- budget project with minimal disruption to the business.

itelligence Group had experience guiding other meat-processing companies through similar large- scale implementations. Rennells wanted itelligence to act as business process experts to help Clemens Food re-examine the way it did things. Clemens Food followed itelligence’s suggestions about modifica- tions, budget management, the overall testing cycle, and the philosophy of implementation.

One especially valuable piece of project guidance from itelligence was to encourage project members to see the implementation as being led by the busi- ness rather than just an IT project. Clemens Foods started out with the project being IT-led, but after five months assigned internal leaders of the business to be the project leads. That switch forced the proj- ect team to be more objective through all the differ- ent testing phases. After each testing cycle, they had objective scoring from the dedicated team leads who viewed the project as a business process improve- ment. That helped the project team move closer to a finished product, rather than waiting until going live to find out it missed the mark. Including the busi- ness as equal partners when updates were instituted helped ensure that customizations were avoided.

Two Clemens Food production plants went live on SAP S/4HANA in May 2017, three months before the

Coldwater facility began operations. There were no business disruptions. To avoid disruption of produc- tion or shipping capabilities, the company had built in some planned downtime for production to address any issues with shipping or procurement, which are tied to the Coldwater plant’s main distribution system. The planned downtime also ensured that any master data flaws potentially discovered through testing would be cleaned up and master data would be in place before the system actually went live. Management had antici- pated it would take about six months to stabilize the new system, and that turned out to be accurate.

Sales forecasting in the meat-processing industry has unique challenges because of the many variables from dealing with perishable products, raw material by- products, and seasonality considerations. Every Thursday, Clemens Food had run a sales report on its old legacy system that showed the previous week’s sales. Information about actual profitability was delayed. Now, the company can measure profitability on an invoice-by-invoice basis, and it knows the profitability of each order right away. Prices change daily in the per- ishable food business, so the importance of having real- time information about profitability can’t be overstated.

Deeper insights and visibility from the new sys- tem have improved customer service. With available- to-promise processes running on SAP S/4HANA and with SAP S/4HANA integrated with the company’s warehouse management system, Clemens Food can assure customers placing a phone order whether there is inventory available. In the pork industry, this can be an extremely complicated task, since a single hog can be broken down into hundreds of by-products. Before implementing SAP S/4HANA, Clemens Food was able to provide the same assur- ance only when an order was ready for shipment.

Once the new system is fully stabilized, Clemens Food plans a reporting upgrade, using SAP HANA Live views with its existing SAP BusinessObjects Business Intelligence suite. The company now has a single “source of truth,” and data are integrated, whereas in the past it had to deal with similar data spread over multiple systems. With a single source of truth and the ability to put information at people’s fingertips, Clemens Foods can create dashboards and focus on making reporting far simpler than it’s ever been.

Sources: Ken Murphy, “Clemens Food Group Corrals the Power of the Digital Core,” SAP Insider, January 24, 2018; www. itelligencegroup.com, accessed March 27, 2018; “Clemens Food Group LLC,” www.vault.com, accessed March 27, 2018; and www. clemensfoodgroup.com, accessed March 27, 2018.

MyLab MIS Go to the Assignments section of MyLab MIS to complete these writing exercises.

9-17 What are three reasons a company would want to implement an enterprise resource planning (ERP) system and two reasons it might not want to do so?

9-18 What are the sources of data for analytical CRM systems? Provide three examples of outputs from ana- lytical CRM systems.

Chapter 9 References Bowers, Melissa R., Adam G. Petrie, and Mary C. Holcomb.”

Unleashing the Potential of Supply Chain Analytics.” MIT Sloan Management Review (Fall 2017).

Bozarth, Cecil, and Robert B. Handfield. Introduction to Operations and Supply Chain Management, 5th ed. (Upper Saddle River, NJ: Prentice-Hall, 2019).

D’Avanzo, Robert, Hans von Lewinski, and Luk N. van Wassen- hove. “The Link Between Supply Chain and Financial Perfor- mance.” Supply Chain Management Review (November 1, 2003).

Davenport, Thomas H. Mission Critical: Realizing the Promise of Enterprise Systems. (Boston: Harvard Business School Press, 2000).

Franken, Govert. “SAP AI: Machine Learning in Oil and Gas.” blogs.sap.com, accessed April 11, 2018.

Fruhlinger, Josh, and Thomas Wailgum. “15 Famous ERP Disas- ters, Dustups and Disappointments.” CIO (July 10, 2017).

Hitt, Lorin, D. J. Wu, and Xiaoge Zhou. “Investment in Enterprise Resource Planning: Business Impact and Productivity Mea- sures.” Journal of Management Information Systems 19, No. 1 (Summer 2002).

Hu, Michael, and Sean T. Monahan. “Sharing Supply Chain Data in the Digital Era.” MIT Sloan Management Review (Fall 2015).

Kitchens, Brent, David, Dobolyi, Jingjing Li, and Ahmed Abbasi. “Advanced Customer Analytics: Strategic Value Through Integration of Relationship-Oriented Big Data.” Journal of Management Information Systems 35, No. 2 (2018).

Klein, Richard, and Arun Rai. “Interfirm Strategic Information Flows in Logistics Supply Chain Relationships.” MIS Quarterly 33, No. 4 (December 2009).

Laudon, Kenneth C. “The Promise and Potential of Enterprise Sys- tems and Industrial Networks.” Working paper, The Concours Group. Copyright Kenneth C. Laudon (1999).

Lee, Hau L., V. Padmanabhan, and Seugin Whang. “The Bullwhip Effect in Supply Chains.” Sloan Management Review (Spring 1997).

Liang, Huigang, Zeyu Peng, Yajiong Xue, Xitong Guo, and Neng- min Wang. “Employees’ Exploration of Complex Systems: An

Integrative View.” Journal of Management Information Systems 32, No. 1 (2015).

Maklan, Stan, Simon Knox, and Joe Peppard. “When CRM Fails.” MIT Sloan Management Review 52, No. 4 (Summer 2011).

Malik, Yogesh, Alex Niemeyer, and Brian Ruwadi. “Building the Sup- ply Chain of the Future.” McKinsey Quarterly (January 2011).

Nadeau, Michael. “ERP Heads for the Cloud.” CIO (September 20 2016).

___________. “Hybrid ERP Matures as Companies Develop Better Strategies.” CIO (February 22, 2017).

Oracle Corporation. “Alcoa Implements Oracle Solution 20% Below Projected Cost, Eliminates 43 Legacy Systems.” www. oracle.com, accessed August 21, 2005.

Panorama Consulting Solutions. “2018 ERP Report” (2018). Rai, Arun, Paul A. Pavlou, Ghiyoung Im, and Steve Du. “Interfirm

IT Capability Profiles and Communications for Cocreating Relational Value: Evidence from the Logistics Industry.” MIS Quarterly 36, No. 1 (March 2012).

Ranganathan, C., and Carol V. Brown. “ERP Investments and the Market Value of Firms: Toward an Understanding of Influen- tial ERP Project Variables.” Information Systems Research 17, No. 2 (June 2006).

Sarker, Supreteek, Saonee Sarker, Arvin Sahaym, and Bjørn-Andersen. “Exploring Value Cocreation in Relationships Between an ERP Vendor and Its Partners: A Revelatory Case Study.” MIS Quarterly 36, No. 1 (March 2012).

Seldon, Peter B., Cheryl Calvert, and Song Yang. “A Multi-Project Model of Key Factors Affecting Organizational Benefits from Enterprise Systems.” MIS Quarterly 34, No. 2 (June 2010).

Sodhi, ManMohan S., and Christopher S. Tang. “Supply Chains Built for Speed and Customization.” MIT Sloan Management Review (Summer 2017).

Strong, Diane M., and Olga Volkoff. “Understanding Organization- Enterprise System Fit: A Path to Theorizing the Information Technology Artifact.” MIS Quarterly 34, No. 4 (December 2010).

Sykes, Tracy Ann, Viswanath Venkatesh, and Jonathan L. John- son. “Enterprise System Implementation and Employee Job

CASE STUDY QUESTIONS 9-13 Why would supply chain management be so

important for Clemens Food Group?

9-14 What problem was the company facing? What management, organization, and technology factors contributed to the problem?

9-15 Was SAP S/4HANA a good solution for Clemens Food Group? Explain your answer.

9-16 What management, organization, and technol- ogy issues had to be addressed to implement SAP S/4HANA at Clemens Food Group?

370 Part Three Key System Applications for the Digital Age

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 371

Performance: Understanding the Role of Advice Networks.” MIS Quarterly 38, No. 1 (March 2014).

Tate, Wendy L., Diane Mollenkopf, Theodore Stank, and Andrea Lago da Silva. “Integrating Supply and Demand.” MIT Sloan Management Review (Summer 2015).

Thibodeau, Patrick. “Office Depot Says ‘No’ to Oracle ERP Cloud Customizations.” TechTarget (February 1, 2018).

Tian, Feng, and Sean Xin Xu. “How Do Enterprise Resource Planning Systems Affect Firm Risk? Post-Implementation Impact.” MIS Quarterly 39, No. 1 (March 2015).

“Top 5 Reasons ERP Implementations Fail and What You Can Do About It.” Ziff Davis (2013).

Van Caeneghem, Alexander, and Jean-Marie Becquevort. “Turn- ing on ERP Systems Can Turn Off People.” CFO (February 5, 2016).

Wailgum, Thomas. “What Is ERP? A Guide to Enterprise Resource Planning Systems.” CIO (July 27, 2017).

Wong, Christina W. Y., Kee-Hung Lai, and T. C. E. Cheng. “Value of Information Integration to Supply Chain Management: Roles of Internal and External Contingencies.” Journal of Manage- ment Information Systems 28, No. 3 (Winter 2012).

Zhang, Jonathan Z., George F. Watson IV, and Robert W. Palma- tier. “Customer Relationships Evolve—So Must Your CRM Strategy.” MIT Sloan Management Review (May 1, 2018).

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MyLab MIS Discussion Questions: 10-7, 10-8, 10-9; Hands-on MIS Projects: 10-10, 10-11, 10-12, 10-13; Writing Assignments: 10-18, 10-19; eText with Conceptual Animations

CHAPTER CASES YouTube Transforms the Media Landscape Uber: Digital Disruptor “Socializing” with Customers A Nasty Ending for Nasty Gal

VIDEO CASES Walmart Takes On Amazon: A Battle of IT

and Management Systems Groupon: Deals Galore Etsy: A Marketplace and Community

Instructional Videos: Walmart’s E-commerce Fulfillment Center

Network Behind the Scenes of an Amazon Warehouse

LEARNING OBJECTIVES After reading this chapter, you will be able to answer the following questions:

10-1 What are the unique features of e-commerce, digital markets, and digital goods?

10-2 What are the principal e-commerce business and revenue models?

10-3 How has e-commerce transformed marketing?

10-4 How has e-commerce affected business-to-business transactions?

10-5 What is the role of m-commerce in business, and what are the most important m-commerce applications?

10-6 What issues must be addressed when building an e-commerce presence?

10-7 How will MIS help my career?

E-commerce: Digital Markets, Digital Goods10CHAPTER

373

The first video posted on YouTube was a 19-second clip from 2005 of one of the company’s founders standing in front of the San Diego Zoo ele-phant cage. Who would have thought that the online video-sharing ser- vice would mushroom into the world’s second most popular website, with more than 1.8 billion monthly users? YouTube viewers worldwide now watch more than 5  billion YouTube videos per day. Three hundred hours of video are up- loaded to YouTube every minute.

YouTube allows users to view, rate, share, add to favorites, report, and com- ment on videos and subscribe to other users’ video channels. Although hundreds of millions of people love to post YouTube videos of their growing children, dogs, and cats, YouTube offers much more: clips from major motion pictures and TV shows, music videos, sports videos, videos from companies promot- ing their brands, and numerous “how-to” videos about home repair, gardening, and computer troubleshooting. Most YouTube content has been uploaded by individuals, but media corporations such as CBS, the BBC, Vevo, and Hulu offer some of their material via YouTube as part of a partner- ship program.

YouTube maintains very large databases for video content and tracking the behav- ior of its users. It carefully mines data to give each user personalized video recom- mendations that will entice that person to watch longer. There are so many eye- balls affixed to YouTube—it’s a gold mine for marketers, and YouTube content gets richer by the minute. More than half of YouTube views come from mobile devices.

YouTube was purchased by Google in 2006 and benefits from Google’s enormous reach, since Google handles about 80 percent of global Internet searches. YouTube revenue comes from ads ac- companying videos that are targeted to site content and audiences. YouTube also offers subscription-based premium channels, film rentals, and a subscrip- tion service called YouTube Red that provides ad-free access to the website and some exclusive content. It is unclear if YouTube is actually profitable at this point. Experts believe that annual costs for running and maintaining YouTube exceed $6 billion.

Once known as a magnet for pirated video, YouTube has been embraced by Hollywood and the entertainment world. Almost every movie trailer or music

Youtube Transforms the Media Landscape

© Bloomicon/Shutterstock

374 Part Three Key System Applications for the Digital Age

video is released onto YouTube; all major sports leagues upload highlights there; and networks supplement traditional programming with videos that can be shared, like the talk show host James Corden’s “Carpool Karaoke” series. YouTube has become a major destination entertainment site, and it is about to alter the media landscape even further.

YouTube has joined services targeting consumers who want to give up cable or satellite TV without losing access to live television. In early 2017, YouTube announced a subscription service called YouTube TV. For $40 per month, the service offers more than 60 channels, including the major networks, FX, ESPN, and the Disney Channel, as well as the ability to store an unlimited number of programs on a cloud-based digital video recorder for up to six accounts. YouTube TV subscribers will be able to watch content on any platform, including PCs, tablets, smartphones, and big-screen TVs.

After the cost of acquiring all this television content is considered, Google may not make much on YouTube TV subscription revenue. That’s fine right now, because Google is using YouTube TV to break into the television advertis- ing market, selling targeted advertising in ad slots that typically went to cable operators. In the long term, that could be significant: Roughly $70 billion is spent annually in the United States on TV ads.

Sources: David Pierce, “Why You Should Cut Cable—and What You’ll Miss,” Wall Street Journal, February 14, 2018; Douglas MacMillan, “Investors Want More Transparency about YouTube’s Sales, Profit,” Wall Street Journal, April 10, 2018; “37 Mind Blowing YouTube Facts, Figures and Statistics—2018,” MerchDope, August 4, 2018; www.tv.youtube.com, accessed July 30, 2018; Jack Nicas, “YouTube Tops 1 Billion Hours of Video a Day, on Pace to Eclipse TV,” Wall Street Journal, February 27, 2017; Jack Nicas and Shalini Ramachandran, “Google’s YouTube to Launch $35-a-Month Web-TV Service,” Wall Street Journal, February 28, 2017; and Peter Kafka and Rani Molla, “2017 Was the Year Digital Ad Spending Finally Beat TV,” Recode, December 4, 2017.

YouTube exemplifies some of the major trends in e-commerce today. It does not sell a product, it sells an innovative service, as e-commerce busi- nesses are increasingly trying to do. YouTube’s service delivers streaming video content either for free (supported by advertising) or by subscription, and also enables users to upload and store their own videos. YouTube makes use of advanced data mining and search technology to generate revenue from adver- tising. YouTube is “social,” linking people to each other through their shared interests and fascination with video. And it is mobile: YouTube can be viewed on smartphones and tablets as well as conventional computers and TV screens, and more than half of YouTube views are on mobile devices.

The chapter-opening diagram calls attention to important points raised by this case and this chapter. YouTube’s primary business challenge is how to take advantage of opportunities presented by the Internet and new developments in search and data mining technology to wring profits from the billions of videos it streams to viewers. Obviously YouTube had to make major investments in tech- nology to support video uploads and downloads, gigantic databases of videos and users, tagging images, and social networking tools. YouTube generates rev- enue from ads targeted to video viewers and from subscriptions to its streaming content services, including its new lineup of major TV channels. It is unclear

Chapter 10 E-commerce: Digital Markets, Digital Goods 375

whether YouTube has achieved long-term profitability, but it is very valuable to Google as another outlet for its advertising.

Here are some questions to think about: How does YouTube provide value? Why is YouTube an expensive business to operate? Is it a viable business model? Why or why not?

10-1 What are the unique features of e-commerce, digital markets, and digital goods?

In 2019, purchasing goods and services online by using smartphones, tablets, and desktop computers is ubiquitous. In 2019, an estimated 224 million Americans (about 92 percent of the Internet population) will shop online, and 195 million will purchase something online, as did millions of others worldwide. Although most purchases still take place through traditional channels, e-commerce con- tinues to grow rapidly and to transform the way many companies do business (eMarketer, 2018h). E-commerce is composed of three major segments: retail goods, travel and services, and online content. In 2019, e-commerce consumer sales of goods ($598 billion), travel and services ($213 billion), and online con- tent ($23 billion) will total about $830 billion. Sales of retail goods alone will be about 11 percent of total U.S. retail sales of $5.9 trillion, and are growing at 12 percent annually (compared with 3.3 percent for traditional retailers) (eMar- keter, 2018e; 2018c). E-commerce is still a small part of the much larger retail goods market that takes place in physical stores. E-commerce has expanded from the desktop and home computer to mobile devices, from an isolated ac- tivity to a new social commerce, and from a Fortune 1000 commerce with a na- tional audience to local merchants and consumers whose location is known to mobile devices. At the top 100 e-commerce retail sites, more than half of online shoppers arrive from their smartphones, and 48 percent of e-commerce sales are now mobile, while 52 percent of purchases occur on the desktop. The key words for understanding this new e-commerce in 2019 are “social, mobile, local” (eMarketer, 2018d).

• Opportunities presented by new technology

• Maintain social networks

• Partner with content providers

• Personalize streaming video • Piggyback advertising • Provide content subscription service

• Increase revenue

• Databases • Social networking tools

• Data mining • Video streaming

• Design business and revenue model

Business Solutions

Management

Organization

Video Content Serving Platform

Technology

Information System

Business Challenges

376 Part Three Key System Applications for the Digital Age

E-commerce Today E-commerce refers to the use of the Internet and the web to transact business. More formally, e-commerce is about digitally enabled commercial transactions between and among organizations and individuals. For the most part, this re- fers to transactions that occur over the Internet and the web. Commercial trans- actions involve the exchange of value (e.g., money) across organizational or individual boundaries in return for products and services.

E-commerce began in 1995 when one of the first Internet portals, Netscape.com, accepted the first ads from major corporations and popular- ized the idea that the web could be used as a new medium for advertising and sales. No one envisioned at the time what would turn out to be an expo- nential growth curve for e-commerce retail sales, which doubled and tripled in the early years. E-commerce grew at double-digit rates until the recession of 2008–2009, when growth slowed to a crawl and revenues flattened (see Figure 10.1), which is not bad considering that traditional retail sales were shrinking by 5 percent annually. Since then, offline retail sales have in- creased only a few percentage points a year, whereas online e-commerce has been a stellar success.

The very rapid growth in e-commerce in the early years created a market bubble in e-commerce stocks, which burst in March 2001. A large number of e-commerce companies failed during this process. Yet for many others, such as Amazon, eBay, Expedia, and Google, the results have been more positive: soaring revenues, fine-tuned business models that produce profits, and rising stock prices. By 2006, e-commerce revenues returned to solid growth and have continued to be the fastest-growing form of retail trade in the United States, Europe, and Asia.

• Online consumer sales (including travel and digital content) will grow to an estimated $830 billion in 2019, an increase of more than 12 percent over 2018 with 195 million people purchasing online and an additional 224 million shopping and gathering information but not purchasing (eMarketer, 2017b).

FIGURE 10.1 THE GROWTH OF E-COMMERCE Retail e-commerce revenues grew 15–25 percent per year until the recession of 2008–2009, when they slowed measurably. In 2018, e-commerce revenues grew at an estimated 12 percent annually. Sources: Based on data from eMarketer, “US Retail Ecommerce Sales, 2018–2022,” 2018c; eMarketer, “US Digital Travel Sales, 2018–2022,” 2018a; and eMarketer chart, “US Mobile Downloads and In-App Revenues, 2013–2017,” 2017a.

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Chapter 10 E-commerce: Digital Markets, Digital Goods 377

The Internet influences more than $2 trillion in retail commerce that takes place in physical stores, about 40 percent of all retail sales.

• The number of individuals of all ages online in the United States is expected to grow to 279 million in 2018, up from 147 million in 2004. In the world, more than 3.7 billion people are now connected to the Internet. Growth in the overall Internet population has spurred growth in e-commerce (Internet World Stats, 2018).

• Approximately 106 million U.S. households will have broadband access to the Internet in 2018, representing about 82 percent of all households.

• About 232 million Americans will access the Internet by using a smart- phone in 2019. Mobile e-commerce has begun a rapid growth based on apps, ringtones, downloaded entertainment, and location-based services. Mobile e-commerce will account for about $267 billion in 2019, 44 percent of all e-commerce. Mobile phones and tablets are becoming the most common Internet access device. Currently, more than 80 percent of all mobile phone users access the Internet using their phones, although they also use their desktops (eMarketer, 2018b).

• B2B e-commerce (use of the Internet for business-to-business commerce and collaboration among business partners) expanded to more than $7.7 trillion. Table 10.1 highlights these new e-commerce developments.

The New E-commerce: Social, Mobile, Local One of the biggest changes is the extent to which e-commerce has become more social, mobile, and local. Online marketing once consisted largely of creating a corporate website, buying display ads on Yahoo, purchasing search-related ads on Google, and sending email messages. The workhorse of online market- ing was the display ad. It still is, but it’s increasingly being replaced by video ads, which are far more effective. Display ads from the very beginning of the Internet were based on television ads, where brand messages were flashed be- fore millions of users who were not expected to respond immediately, ask ques- tions, or make observations. If the ads did not work, the solution was often to repeat the ad. The primary measure of success was how many eyeballs (unique visitors) a website produced and how many impressions a marketing campaign generated. (An impression was one ad shown to one person.) Both of these measures were carryovers from the world of television, which measures mar- keting in terms of audience size and ad views.

From Eyeballs to Conversations: Conversational Commerce After 2007, all this changed with the rapid growth of Facebook and other social sites, the explosive growth of smartphones beginning with the Apple iPhone, and the growing interest in local marketing. What’s different about the new world of social-mobile-local e-commerce is the dual and related concepts of conversations and engagement. In the popular literature, this is often referred to as conversational commerce. Marketing in this new period is based on firms engaging in multiple online conversations with their customers, potential cus- tomers, and even critics. Your brand is being talked about on the web and social media (that’s the conversation part), and marketing your firm, building, and restoring your brands require you to locate, identify, and participate in these conversations. Social marketing means all things social: listening, discussing, interacting, empathizing, and engaging. The emphasis in online marketing has shifted from a focus on eyeballs to a focus on participating in customer-oriented conversations. In this sense, social marketing is not simply a new ad channel

378 Part Three Key System Applications for the Digital Age

but a collection of technology-based tools for communicating with shoppers. The leading social commerce platforms are Facebook, Instagram, Twitter, and Pinterest.

In the past, firms could tightly control their brand messaging and lead con- sumers down a funnel of cues that ended in a purchase. That is not true of social marketing. Consumer purchase decisions are increasingly driven by the

TABLE 10.1 THE GROWTH OF E-COMMERCE

BUSINESS TRANSFORMATION

E-commerce remains the fastest-growing form of commerce when compared to physical retail stores, services, and entertainment. Social, mobile, and local commerce have become the fastest-growing forms of e-commerce.

The breadth of e-commerce offerings grows, especially in the services economy of social networking, travel, entertainment, retail apparel, jewelry, appliances, and home furnishings.

The online demographics of shoppers broaden to match that of ordinary shoppers.

Pure e-commerce business models are refined further to achieve higher levels of profitability, and traditional retail firms, such as Walmart, JCPenney, L.L.Bean, and Macy’s, are developing omnichannel business models to strengthen their dominant physical retail assets. Walmart, the world’s largest retailer, has decided to take on Amazon with a more than $1 billion investment in its e-commerce efforts.

Small businesses and entrepreneurs continue to flood the e-commerce marketplace, often riding on the infrastructures created by industry giants, such as Amazon, Apple, and Google, and increasingly taking advantage of cloud-based computing resources.

Mobile e-commerce has taken off in the United States with location-based services and entertainment downloads, including e-books, movies, music, and television shows. Mobile e-commerce will generate more than $267 billion in 2019.

TECHNOLOGY FOUNDATIONS

Wireless Internet connections (Wi-Fi, WiMax, and 4G smartphones) continue to expand.

Powerful smartphones and tablet computers provide access to music, web surfing, and entertainment as well as voice communication. Podcasting and streaming take off as platforms for distribution of video, radio, and user-generated content.

Mobile devices expand to include wearable computers such as Apple Watch and Fitbit trackers.

The Internet broadband foundation becomes stronger in households and businesses as communication prices fall.

Social networking apps and sites such as Facebook, Twitter, LinkedIn, Instagram, and others seek to become a major new platform for e-commerce, marketing, and advertising. Facebook has 2.2 billion users worldwide and 214 million in the United States (Facebook, 2018).

Internet-based models of computing, such as smartphone apps, cloud computing, software as a service (SaaS), and database software greatly reduce the cost of e-commerce websites.

NEW BUSINESS MODELS EMERGE

More than 70 percent of the Internet population has joined an online social network, created blogs, and shared photos and music. Together, these sites create an online audience as large as that of television that is attractive to marketers. In 2018, social networking will account for an estimated 15 percent of online time. Social sites have become the primary gateway to the Internet in news, music, and, increasingly, products and services. (eMarketer, 2018f)

The traditional advertising industry is disrupted as online advertising grows twice as fast as TV and print advertising; Google, Yahoo, and Facebook display more than 1 trillion ads a year.

On-demand service e-commerce sites such as Uber, Lyft, and Airbnb extend the market creator business model (on-demand model) to new areas of the economy.

Newspapers and other traditional media adopt online, interactive models but are losing advertising revenues to the online players despite gaining online readers. The New York Times succeeds in capturing more than 2.8 million subscribers, growing at 25 percent annually and adding 400,000 new digital subscribers in 2018. Book publishing continues to grow slowly at 5 percent because of the growth in e-books and the continuing appeal of traditional books.

Online entertainment business models offering television, movies, music, and games grow with cooperation among the major copyright owners in Hollywood and New York and with Internet distributors such as Apple, Amazon, Google, YouTube, and Facebook. Increasingly, the online distributors are moving into movie and TV production. Cable television is in modest decline, as some viewers cut or reduce their cable subscriptions and rely on Internet-based alternatives such as Roku or YouTube TV.

Chapter 10 E-commerce: Digital Markets, Digital Goods 379

conversations, choices, tastes, and opinions of their social network. Social mar- keting is all about firms participating in and shaping this social process.

From the Desktop to the Smartphone Traditional online marketing (browser-based, search, display ads, video ads, email, and games) still constitutes the majority (58 percent) of all online mar- keting ($107 billion), but it’s growing much more slowly than social-mobile- local marketing. Mobile marketing now constitutes 70 percent of all online market- ing. The marketing dollars are following customers and shoppers from the PC to mobile devices (eMarketer, 2018g)

Social, mobile, and local e-commerce are connected. As mobile devices be- come more powerful, they are more useful for accessing Facebook and other social sites. As mobile devices become more widely adopted, customers can use them to find local merchants, and merchants can use them to alert customers in their neighborhood of special offers.

Why E-commerce Is Different Why has e-commerce grown so rapidly? The answer lies in the unique nature of the Internet and the web. Simply put, the Internet and e-commerce technol- ogies are much richer and more powerful than previous technology revolutions such as radio, television, and the telephone. Table 10.2 describes the unique features of the Internet and web as a commercial medium. Let’s explore each of these unique features in more detail.

Ubiquity In traditional commerce, a marketplace is a physical place, such as a retail store, that you visit to transact business. E-commerce is ubiquitous, meaning

TABLE 10.2 EIGHT UNIQUE FEATURES OF E-COMMERCE TECHNOLOGY

E-COMMERCE TECHNOLOGY DIMENSION BUSINESS SIGNIFICANCE

Ubiquity. Internet/web technology is available everywhere: at work, at home, and elsewhere by desktop and mobile devices. Mobile devices extend service to local areas and merchants.

The marketplace is extended beyond traditional boundaries and is removed from a temporal and geographic location. Marketspace is created; shopping can take place anytime, anywhere. Customer convenience is enhanced, and shopping costs are reduced.

Global Reach. The technology reaches across national boundaries, around the earth.

Commerce is enabled across cultural and national boundaries seamlessly and without modification. The marketspace includes, potentially, billions of consumers and millions of businesses worldwide.

Universal Standards. There is one set of technology standards, namely Internet standards.

With one set of technical standards across the globe, disparate computer systems can easily communicate with each other.

Richness. Video, audio, and text messages are possible.

Video, audio, and text marketing messages are integrated into a single marketing message and consumer experience.

Interactivity. The technology works through interaction with the user.

Consumers are engaged in a dialogue that dynamically adjusts the experience to the individual and makes the consumer a participant in the process of delivering goods to the market.

Information Density. The technology reduces information costs and raises quality.

Information processing, storage, and communication costs drop dramatically, whereas currency, accuracy, and timeliness improve greatly. Information becomes plentiful, cheap, and more accurate.

Personalization/Customization. The technology allows personalized messages to be delivered to individuals as well as to groups.

Personalization of marketing messages and customization of products and services are based on individual characteristics.

Social Technology. The technology supports content generation and social networking.

New Internet social and business models enable user content creation and distribution and support social networks.

380 Part Three Key System Applications for the Digital Age

that it is available just about everywhere all the time. It makes it possible to shop from your desktop, at home, at work, or even from your car, using smart- phones. The result is called a marketspace—a marketplace extended beyond traditional boundaries and removed from a temporal and geographic location.

From a consumer point of view, ubiquity reduces transaction costs—the costs of participating in a market. To transact business, it is no longer necessary to spend time or money traveling to a market, and much less mental effort is required to make a purchase.

Global Reach E-commerce technology permits commercial transactions to cross cultural and national boundaries far more conveniently and cost effectively than is true in traditional commerce. As a result, the potential market size for e-commerce merchants is roughly equal to the size of the world’s online population (esti- mated to be more than 3 billion).

In contrast, most traditional commerce is local or regional—it involves local merchants or national merchants with local outlets. Television, radio stations, and newspapers, for instance, are primarily local and regional institutions with limited, but powerful, national networks that can attract a national audience but not easily cross national boundaries to a global audience.

Universal Standards One strikingly unusual feature of e-commerce technologies is that the technical standards of the Internet and, therefore, the technical standards for conducting e-commerce are universal standards. All nations around the world share them and enable any computer to link with any other computer regardless of the technology platform each is using. In contrast, most traditional commerce tech- nologies differ from one nation to the next. For instance, television and radio standards differ around the world, as does cellular telephone technology.

The universal technical standards of the Internet and e-commerce greatly lower market entry costs—the cost merchants must pay simply to bring their goods to market. At the same time, for consumers, universal standards reduce search costs—the effort required to find suitable products.

Richness Information richness refers to the complexity and content of a message. Traditional markets, national sales forces, and small retail stores have great richness; they can provide personal, face-to-face service, using aural and vi- sual cues when making a sale. The richness of traditional markets makes them powerful selling or commercial environments. Prior to the development of the web, there was a trade-off between richness and reach; the larger the audi- ence reached, the less rich the message. The web makes it possible to deliver rich messages with text, audio, and video simultaneously to large numbers of people.

Interactivity Unlike any of the commercial technologies of the twentieth century, with the possible exception of the telephone, e-commerce technologies are interactive, meaning they allow for two-way communication between merchant and con- sumer and peer-to-peer communication among friends. Television, for instance, cannot ask viewers any questions or enter conversations with them, and it can- not request customer information to be entered on a form. In contrast, all these activities are possible on an e-commerce website or mobile app. Interactivity

Chapter 10 E-commerce: Digital Markets, Digital Goods 381

allows an online merchant to engage a consumer in ways similar to a face- to-face experience but on a massive, global scale.

Information Density The Internet and the web vastly increase information density—the total amount and quality of information available to all market participants, consum- ers, and merchants alike. E-commerce technologies reduce information collec- tion, storage, processing, and communication costs while greatly increasing the currency, accuracy, and timeliness of information.

Information density in e-commerce markets make prices and costs more transparent. Price transparency refers to the ease with which consumers can find out the variety of prices in a market; cost transparency refers to the abil- ity of consumers to discover the actual costs merchants pay for products.

There are advantages for merchants as well. Online merchants can discover much more about consumers than in the past. This allows merchants to seg- ment the market into groups that are willing to pay different prices and permits the merchants to engage in price discrimination—selling the same goods, or nearly the same goods, to different targeted groups at different prices. For instance, an online merchant can discover a consumer’s avid interest in expen- sive, exotic vacations and then pitch high-end vacation plans to that consumer at a premium price, knowing this person is willing to pay extra for such a va- cation. At the same time, the online merchant can pitch the same vacation plan at a lower price to a more price-sensitive consumer. Information density also helps merchants differentiate their products in terms of cost, brand, and quality.

Personalization/Customization E-commerce technologies permit personalization. Merchants can target their marketing messages to specific individuals by adjusting the message to a per- son’s clickstream behavior, name, interests, and past purchases. The technol- ogy also permits customization—changing the delivered product or service based on a user’s preferences or prior behavior. Given the interactive nature of e- commerce technology, much information about the consumer can be gath- ered in the marketplace at the moment of purchase. With the increase in in- formation density, a great deal of information about the consumer’s past pur- chases and behavior can be stored and used by online merchants.

The result is a level of personalization and customization unthinkable with traditional commerce technologies. For instance, you may be able to shape what you see on television by selecting a channel, but you cannot change the content of the channel you have chosen. In contrast, online news outlets such as the Wall Street Journal Online allow you to select the type of news stories you want to see first and give you the opportunity to be alerted when certain events happen.

Social Technology: User Content Generation and Social Networking In contrast to previous technologies, the Internet and e-commerce technologies have evolved to be much more social by allowing users to create and share with their friends (and a larger worldwide community) content in the form of text, videos, music, or photos. By using these forms of communication, users can create new social networks and strengthen existing ones.

All previous mass media, including the printing press, use a broadcast model (one-to-many) in which content is created in a central location by experts

382 Part Three Key System Applications for the Digital Age

(professional writers, editors, directors, and producers), with audiences concen- trated in huge numbers to consume a standardized product. The new Internet and e-commerce empower users to create and distribute content on a large scale and permit users to program their own content consumption. The Internet pro- vides a unique many-to-many model of mass communications.

Key Concepts in E-commerce: Digital Markets and Digital Goods in a Global Marketplace The location, timing, and revenue models of business are based in some part on the cost and distribution of information. The Internet has created a digital marketplace where millions of people all over the world can exchange massive amounts of information directly, instantly, and free. As a result, the Internet has changed the way companies conduct business and increased their global reach.

The Internet reduces information asymmetry. An information asymmetry exists when one party in a transaction has more information that is impor- tant for the transaction than the other party. That information helps determine their relative bargaining power. In digital markets, consumers and suppliers can see the prices being charged for goods, and in that sense, digital markets are said to be more transparent than traditional markets.

For example, before automobile retailing sites appeared on the web, there was significant information asymmetry between auto dealers and customers. Only the auto dealers knew the manufacturers’ prices, and it was difficult for consumers to shop around for the best price. Auto dealers’ profit margins de- pended on this asymmetry of information. Today’s consumers have access to a legion of websites providing competitive pricing information, and three-fourths of U.S. auto buyers use the Internet to shop around for the best deal. Thus, the web has reduced the information asymmetry surrounding an auto purchase. The Internet has also helped businesses seeking to purchase from other busi- nesses reduce information asymmetries and locate better prices and terms.

Digital markets are very flexible and efficient because they operate with reduced search and transaction costs, lower menu costs (merchants’ costs of changing prices), greater price discrimination, and the ability to change prices dynamically based on market conditions. In dynamic pricing, the price of a product varies depending on the demand characteristics of the cus- tomer or the supply situation of the seller. For instance, online retailers from Amazon to Walmart change prices on thousands of products based on time of day, demand for the product, and users’ prior visits to their sites. Using big data analytics, some online firms can adjust prices at the individual level based on behavioral targeting parameters such as whether the consumer is a price haggler (who will receive a lower price offer) versus a person who accepts offered prices and does not search for lower prices. Prices can also vary by zip code. Uber, along with other ride services, uses surge pricing to adjust prices of a ride based on demand (which always rises during storms and major conventions).

These new digital markets can either reduce or increase switching costs, de- pending on the nature of the product or service being sold, and they might cause some extra delay in gratification due to shipping times. Unlike a physical market, you can’t immediately consume a product such as clothing purchased over the web (although immediate consumption is possible with digital music downloads and other digital products).

Chapter 10 E-commerce: Digital Markets, Digital Goods 383

Digital markets provide many opportunities to sell directly to the consumer, bypassing intermediaries such as distributors or retail outlets. Eliminating inter- mediaries in the distribution channel can significantly lower purchase transac- tion costs. To pay for all the steps in a traditional distribution channel, a product may have to be priced as high as 135 percent of its original cost to manufacture.

Figure 10.2 illustrates how much savings result from eliminating each of these layers in the distribution process. By selling directly to consumers or reducing the number of intermediaries, companies can raise profits while charging lower prices. The removal of organizations or business process layers responsible for intermediary steps in a value chain is called disintermediation. E-commerce has also given rise to a completely new set of new intermediaries such as Amazon, eBay, PayPal, and Blue Nile. Therefore, disintermediation differs from one industry to another.

Disintermediation is affecting the market for services. Airlines and hotels operating their own reservation sites online earn more per ticket because they have eliminated travel agents as intermediaries. Table 10.3 summarizes the dif- ferences between digital markets and traditional markets.

Digital Goods The Internet digital marketplace has greatly expanded sales of digital goods— goods that can be delivered over a digital network. Music tracks, video, Hollywood movies, software, newspapers, magazines, and books can all be expressed, stored, delivered, and sold as purely digital products. For the most part, digital goods are intellectual property, which is defined as “works of the mind.” Intellectual prop- erty is protected from misappropriation by copyright, patent, trademark, and trade secret laws (see Chapter 4). Today, all these products are delivered as digital streams or downloads while their physical counterparts decline in sales.

In general, for digital goods, the marginal cost of producing another unit is about zero (it costs nothing to make a copy of a music file). However, the cost of producing the original first unit is relatively high—in fact, it is nearly the total cost of the product because there are few other costs of inventory and distribu- tion. Costs of delivery over the Internet are very low, marketing costs often

FIGURE 10.2 THE BENEFITS OF DISINTERMEDIATION TO THE CONSUMER The typical distribution channel has several intermediary layers, each of which adds to the final cost of a product, such as a sweater. Removing layers lowers the final cost to the customer.

Manufacturer

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Manufacturer Distributor Retailer Customer $48.50

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$20.45

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384 Part Three Key System Applications for the Digital Age

remain the same, and pricing can be highly variable. On the Internet, the mer- chant can change prices as often as desired because of low menu costs.

The impact of the Internet on the market for these kinds of digital goods is nothing short of revolutionary, and we see the results around us every day. Businesses dependent on physical products for sales—such as bookstores, music stores, book publishers, music labels, and film studios—face the possibil- ity of declining sales and even destruction of their businesses. Newspaper and magazine subscriptions to hard copies are declining, while online readership and subscriptions are expanding.

Total record label industry revenues fell nearly 50 percent from $14 billion in 1999 to about $7.7 billion in 2016, due almost entirely to the rapid decline in CD album sales and the growth of digital music services (both legal and illegal music piracy). But revenues increased in 2017 by 16 percent to $8.7 billion pri- marily through the growth of paid subscriptions (RIAA.com, 2018). The Apple iTunes Store has sold more than 50 billion songs for 99 cents each since opening in 2003, providing a digital distribution model that has restored some of the rev- enues lost to digital music channels. Yet the download business is rapidly fading at Apple, down more than 25 percent in recent years, as streaming becomes the dominant consumer path to music. Since iTunes, illegal downloading has been cut in half, and legitimate online music sales (both downloads and streaming) amounted to $5.7 billion in 2017. As cloud streaming services expand, illegal downloading will decline further. Digital music sales, both digital download and streaming, account for more than 80 percent of all music revenues. The music labels make only about 32 cents from a single track download and only 0.5 cents for a streamed track. Although the record labels make revenue from ownership of the song (both words and music), the artists who perform the music make virtually nothing from streamed music. Artists’ earnings on a streamed song on an ad-supported platform like Spotify are pennies per million streams.

Hollywood has been less severely disrupted than the music industry by il- legal digital distribution platforms, because it is more difficult to download high-quality, pirated copies of full-length movies and because of the avail- ability of low-cost, high-quality legal movies. Hollywood has struck lucrative distribution deals with Netflix, Google, Hulu, Amazon, and Apple, making it convenient to download and pay for high-quality movies and television series.

TABLE 10.3 DIGITAL MARKETS COMPARED WITH TRADITIONAL MARKETS

DIGITAL MARKETS TRADITIONAL MARKETS

Information asymmetry Asymmetry reduced Asymmetry high

Search costs Low High

Transaction costs Low (sometimes virtually nothing) High (time, travel)

Delayed gratification High (or lower in the case of a digital good)

Lower: purchase now

Menu costs Low High

Dynamic pricing Low cost, instant High cost, delayed

Price discrimination Low cost, instant High cost, delayed

Market segmentation Low cost, moderate precision High cost, less precision

Switching costs Higher/lower (depending on product characteristics)

High

Network effects Strong Weaker

Disintermediation More possible/likely Less possible/unlikely

Chapter 10 E-commerce: Digital Markets, Digital Goods 385

These arrangements are not enough to compensate entirely for the loss in DVD sales, which fell 60 percent from 2006 to 2017. Digital format streaming and downloads grew by 20 percent in 2017 and, for the first time, consumers viewed more downloaded movies than DVDs or related physical products. As with tele- vision series, the demand for feature-length Hollywood movies appears to be expanding, in part because of the growth of smartphones, tablets, and smart TVs, making it easier to watch movies in more locations.

In 2019, about 258 million Internet users are expected to view movies, about 82 percent of the adult Internet population. There is little doubt that the Internet is becoming a major movie distribution and television channel that rivals cable television, and someday may replace cable television entirely (see the chapter-opening case).

Table 10.4 describes digital goods and how they differ from traditional physi- cal goods (eMarketer, 2018i)

10-2 What are the principal e-commerce business and revenue models?

E-commerce is a fascinating combination of business models and new infor- mation technologies. Let’s start with a basic understanding of the types of e- commerce and then describe e-commerce business and revenue models.

Types of E-commerce There are many ways to classify electronic commerce transactions—one is by looking at the nature of the participants. The three major electronic commerce categories are business-to-consumer (B2C) e-commerce, business-to-business (B2B) e-commerce, and consumer-to-consumer (C2C) e-commerce.

• Business-to-consumer (B2C) electronic commerce involves retailing prod- ucts and services to individual shoppers. Amazon, Walmart, and iTunes are examples of B2C commerce. BarnesandNoble.com, which sells books, soft- ware, and music to individual consumers, is an example of B2C e-commerce.

• Business-to-business (B2B) electronic commerce involves sales of goods and services among businesses. Elemica’s website for buying and selling chemicals and energy is an example of B2B e-commerce.

• Consumer-to-consumer (C2C) electronic commerce involves consumers selling directly to consumers. For example, eBay, the giant web auction site,

TABLE 10.4 HOW THE INTERNET CHANGES THE MARKETS FOR DIGITAL GOODS

DIGITAL GOODS TRADITIONAL GOODS

Marginal cost/unit Zero Greater than zero, high

Cost of production High (most of the cost) Variable

Copying cost Approximately zero Greater than zero, high

Distributed delivery cost Low High

Inventory cost Low High

Marketing cost Variable Variable

Pricing More variable (bundling, random pricing games)

Fixed, based on unit costs

386 Part Three Key System Applications for the Digital Age

enables people to sell their goods to other consumers by auctioning their mer- chandise off to the highest bidder or for a fixed price. eBay acts as a middleman by creating a digital platform for peer-to-peer commerce. Craigslist is the plat- form most consumers use to buy from and sell directly to others.

Another way of classifying electronic commerce transactions is in terms of the platforms participants use in a transaction. Until recently, most e- commerce transactions took place using a desktop PC connected to the Internet over a wired network. Several wireless mobile alternatives have emerged, such as smartphones and tablet computers. The use of handheld wireless devices for purchasing goods and services from any location is termed mobile commerce or m-commerce. All three types of e-commerce transactions can take place using m-commerce technology, which we discuss in detail in Section 10.3.

E-commerce Business Models Changes in the economics of information described earlier have created the conditions for entirely new business models to appear while destroying older business models. Table 10.5 describes some of the most important Internet busi- ness models that have emerged. All, in one way or another, use the Internet (including apps on mobile devices) to add extra value to existing products and services or to provide the foundation for new products and services.

Portal Portals are gateways to the web and are often defined as those sites that users set as their home page. Some definitions of a portal include search engines such as

TABLE 10.5 INTERNET BUSINESS MODELS

CATEGORY DESCRIPTION EXAMPLES

E-tailer Sells physical products directly to consumers or to individual businesses. Amazon

Blue Nile

Transaction broker Saves users money and time by processing online sales transactions and generating a fee each time a transaction occurs.

ETrade.com

Expedia

Market creator Provides a digital environment where buyers and sellers can meet, search for products, display products, and establish prices for those products; can serve consumers or B2B e-commerce, generating revenue from transaction fees.

eBay

Priceline.com

Exostar

Elemica

Content provider Creates revenue by providing digital content, such as news, music, photos, or video, over the web. The customer may pay to access the content, or revenue may be generated by selling advertising space.

WSJ.com

GettyImages.com

iTunes.com

MSN Games

Community provider Provides an online meeting place where people with similar interests can communicate and find useful information.

Facebook

Twitter

Portal Provides initial point of entry to the web along with specialized content and other services.

Yahoo

MSN

AOL

Service provider Provides applications such as photo sharing, video sharing, and user-generated content as services; provides other services such as online data storage and backup.

Google Docs

Photobucket.com

Dropbox

Chapter 10 E-commerce: Digital Markets, Digital Goods 387

Google and Bing even if few make these sites their home page. Portals such as Yahoo, Facebook, MSN, and AOL offer web search tools as well as an integrated package of content and services such as news, email, instant messaging, maps, cal- endars, shopping, music downloads, video streaming, and more all in one place. The portal business model now provides a destination site where users start their web searching and linger to read news, find entertainment, meet other people, and, of course, be exposed to advertising. Facebook is a very different kind of por- tal based on social networking, and in 2018 Americans will spend more than half their online time at Facebook, about two hours per day! Portals generate revenue primarily by attracting very large audiences, charging advertisers for display ad placement (similar to traditional newspapers), collecting referral fees for steering customers to other sites, and charging for premium services. In 2019, portals (not including Google, Facebook, or Bing) will generate an estimated $10 billion in dis- play ad revenues. Although there are hundreds of portal/search engine sites, the top portals (Yahoo, MSN, and AOL) gather more than 80 percent of the Internet portal traffic because of their superior brand recognition.

E-tailer Online retail stores, often called e-tailers, come in all sizes, from giant Amazon with 2017 retail sales revenues of more than $178 billion to tiny local stores that have websites. An e-tailer is similar to the typical brick-and-mortar storefront, ex- cept that customers only need to connect to the Internet to check their inventory and place an order. Altogether, online retail (the sale of physical goods online) will generate about $598 billion in revenues in 2019. The value proposition of e-tailers is to provide convenient, low-cost shopping 24/7; large selections; and  con- sumer choice. Some e-tailers, such as Walmart.com or Staples.com, referred to as bricks-and-clicks, are subsidiaries or divisions of existing physical stores and carry the same products. Others, however, operate only in the virtual world, without any ties to physical locations. Ashford.com and eVitamins.com are examples of this type of e-tailer. Several other variations of e-tailers—such as online versions of direct-mail catalogs, online malls, and manufacturer-direct online sales—also exist.

Content Provider E-commerce has increasingly become a global content channel. Content is de- fined broadly to include all forms of intellectual property. Intellectual property refers to tangible and intangible products of the mind for which the creator claims a property right. Content providers distribute information content— such as digital video, music, photos, text, and artwork—over the web. The value proposition of online content providers is that consumers can conveniently find a wide range of content online and purchase this content inexpensively to be played or viewed on multiple computer devices or smartphones.

Providers do not have to be the creators of the content (although sometimes they are, like Disney.com) and are more likely to be Internet-based distribu- tors of content produced and created by others. For example, Apple sells music tracks at its iTunes Store, but it does not create or commission new music.

The phenomenal popularity of Internet-connected mobile devices such as the iPhone, iPod, and iPad has enabled new forms of digital content delivery from podcasting to mobile streaming. Podcasting is a method of publishing audio or video broadcasts through the Internet, allowing subscribing users to download audio or video files onto their personal computers, smartphones, tab- lets, or portable music players. Streaming is a publishing method for music and video files that flows a continuous stream of content to a user’s device with- out being stored locally on the device.

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Estimates vary, but total online content will generate about $23 billion in 2019, one of the fastest-growing e-commerce segments, growing at an estimated 18 percent annual rate.

Transaction Broker Sites that process transactions for consumers normally handled in person, by phone, or by mail are transaction brokers. The largest industries using this model are financial services and travel services. The online transaction bro- ker’s primary value propositions are savings of money and time and providing an extraordinary inventory of financial products or travel packages in a single location. Online stockbrokers and travel booking services charge fees that are considerably less than traditional versions of these services. Fidelity Financial Services and Expedia are the largest online financial and travel service firms based on a transaction broker model.

Market Creator Market creators build a digital environment in which buyers and sellers can meet, display products, search for products, and establish prices. The value proposition of online market creators is that they provide a platform where sellers can easily display their wares and purchasers can buy directly from sell- ers. Online auction markets such as eBay and Priceline are good examples of the market creator business model. Another example is Amazon’s Merchants platform (and similar programs at eBay), where merchants are allowed to set up stores on Amazon’s website and sell goods at fixed prices to consum- ers. The so-called on-demand economy (mistakenly often referred to as the sharing economy), exemplified by Uber (described in the Interactive Session on Organizations) and Airbnb, is based on the idea of a market creator build- ing a digital platform where supply meets demand; for instance, spare auto or room rental capacity finds individuals who want transportation or lodging. Crowdsource funding markets such as Kickstarter.com bring together private equity investors and entrepreneurs in a funding marketplace.

Service Provider Whereas e-tailers sell products online, service providers offer services online. Photo sharing and online sites for data backup and storage all use a service provider business model. Software is no longer a physical product with a CD in a box but, increasingly, software as a service (SaaS) that you subscribe to online rather than purchase from a retailer, such as Office 365. Google has led the way in developing online software service applications such as G Suite, Google Sites, Gmail, and online data storage services. Salesforce.com is a major provider of cloud-based software for customer management (see Chapter 5).

Community Provider (Social Networks) Community providers are sites that create a digital online environment where people with similar interests can transact (buy and sell goods); share interests, photos, and videos; communicate with like-minded people; receive interest-related information; and even play out fantasies by adopting online per- sonalities called avatars. Social networking sites Facebook, Tumblr, Instagram, LinkedIn, and Twitter and hundreds of other smaller, niche sites all offer users community-building tools and services. Social networking sites have been the fastest-growing websites in recent years, often doubling their audience size in a year.

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