Management Information Systems

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Brief Contents

PART ONE Organizations, Management, and the Networked Enterprise 29

Chapter 1 Information Systems in Global Business Today 30 Chapter 2 Global E-business and Collaboration 68 Chapter 3 Information Systems, Organizations, and Strategy 106 Chapter 4 Ethical and Social Issues in Information Systems 150

PART TWO Information Technology Infrastructure 191 Chapter 5 IT Infrastructure and Emerging Technologies 192 Chapter 6 Foundations of Business Intelligence: Databases and Information

Management 238

Chapter 7 Telecommunications, the Internet, and Wireless Technology 276 Chapter 8 Securing Information Systems 320

PART THREE Key System Applications for the Digital Age 363 Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise

Applications 364

Chapter 10 E-commerce: Digital Markets, Digital Goods 398 Chapter 11 Managing Knowledge 444 Chapter 12 Enhancing Decision Making 480

PART FOUR Building and Managing Systems 513 Chapter 13 Building Information Systems 514 Chapter 14 Managing Projects 554 Chapter 15 Managing Global Systems 588

Glossary 619 Indexes 631

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Complete Contents

PART ONE Organizations, Management, and the Networked Enterprise 29

Chapter 1 Information Systems in Global Business Today 30 Opening Case: Rugby Football Union Tries Big Data 31 1-1 How are information systems transforming business, and why are they so

essential for running and managing a business today? 33 How Information Systems Are Transforming Business 34 • What's New in Management Information Systems? 35

Interactive Session: Management The Mobile Pocket Office 37 Globalization Challenges and Opportunities: A Flattened World 39 • The Emerging Digital Firm 40 • Strategic Business Objectives of Information Systems 41

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? 44 What Is an Information System? 44 • Dimensions of Information Systems 46

Interactive Session: Technology Digital Transformation of Healthcare at Singapore's JurongHealth Services 51

It Isn't Just Technology: A Business Perspective on Information Systems 52 • Complementary Assets: Organizational Capital and the Right Business Model 54

1-3 What academic disciplines are used to study information systems, and how does each contribute to an understanding of information systems? 56 Technical Approach 56 • Behavioral Approach 57 • Approach of This Text: Sociotechnical Systems 58

Review Summary 59 • Key Terms 60 • Review Questions 60 • Discussion Questions 61

Hands-On MIS Projects 61 Collaboration and Teamwork Project 62 Case Study: Are Farms Becoming Digital Firms? 62 References: 66

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Chapter 2 Global E-business and Collaboration 68 Opening Case: Enterprise Social Networking Helps ABB Innovate and Grow 69 2-1 What are business processes? How are they related to information

systems? 71 Business Processes 71 • How Information Technology Improves Business Processes 73

2-2 How do systems serve the different management groups in a business, and how do systems that link the enterprise improve organizational performance? 74 Systems for Different Management Groups 74 • Systems for Linking the Enterprise 79

Interactive Session: Organizations New Systems Help Plan International Manage Its Human Resources 80

E-business, E-commerce, and E-government 84

2-3 Why are systems for collaboration and social business so important, and what technologies do they use? 85 What Is Collaboration? 85 • What Is Social Business? 86 • Business Benefits of Collaboration and Social Business 87 • Building a Collaborative Culture and Business Processes 87 • Tools and Technologies for Collaboration and Social Business 89

Interactive Session: Technology Collaborating the Glasscubes Way 91 2-4 What is the role of the information systems function in a business? 95

The Information Systems Department 96 • Organizing the Information Systems Function 97

Review Summary 98 • Key Terms 99 • Review Questions 99 • Discussion Questions 100

Hands-On MIS Projects 100 Collaboration and Teamwork Project 101 Case Study: Social Business: Full Speed Ahead or Proceed with Caution? 101 References: 104

Chapter 3 Information Systems, Organizations, and Strategy 106 Opening Case: Tate & Lyle Devise a Global IT Strategy 107 3-1 Which features of organizations do managers need to know about to

build and use information systems successfully? 109 What Is an Organization? 110 • Features of Organizations 112

3-2 What is the impact of information systems on organizations? 117 Economic Impacts 117 • Organizational and Behavioral Impacts 118

Interactive Session: Management Can Technology Replace Managers? 120 The Internet and Organizations 122 • Implications for the Design and Understanding of Information Systems 122

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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? 123 Porter's Competitive Forces Model 123 • Information System Strategies for Dealing with Competitive Forces 125 • The Internet's Impact on Competitive Advantage 128 • The Business Value Chain Model 129

Interactive Session: Technology Smart Products, Smart Companies 130 Synergies, Core Competencies, and Network-Based Strategies 134

3-4 What are the challenges posed by strategic information systems, and how should they be addressed? 138 Sustaining Competitive Advantage 138 • Aligning IT with Business Objectives 139 • Managing Strategic Transitions 140

Review Summary 140 • Key Terms 141 • Review Questions 141 • Discussion Questions 142

Hands-On MIS Projects 142 Collaboration and Teamwork Project 143 Case Study: Deutsche Bank: The Cost of Legacy Systems 144 References: 147

Chapter 4 Ethical and Social Issues in Information Systems 150 Opening Case: The Dark Side of Big Data 151 4-1 What ethical, social, and political issues are raised by information

systems? 153 A Model for Thinking About Ethical, Social, and Political Issues 155 • Five Moral Dimensions of the Information Age 156 • Key Technology Trends that Raise Ethical Issues 156

4-2 What specific principles for conduct can be used to guide ethical decisions? 158 Basic Concepts: Responsibility, Accountability, and Liability 159 • Ethical Analysis 160 • Candidate Ethical Principles 160 • Professional Codes of Conduct 161 • Some Real-World Ethical Dilemmas 161

4-3 Why do contemporary information systems technology and the Internet pose challenges to the protection of individual privacy and intellectual property? 162 Information Rights: Privacy and Freedom in the Internet Age 162 • Property Rights: Intellectual Property 169

4-4 How have information systems affected laws for establishing accountability and liability and the quality of everyday life? 172 Computer-Related Liability Problems 173 • System Quality: Data Quality and System Errors 174 • Quality of Life: Equity, Access, and Boundaries 174

Interactive Session: Technology Monitoring in the Workplace 178 Health Risks: RSI, CVS, and Cognitive Decline 180

Interactive Session: Organizations Are We Relying Too Much on Computers to Think for Us? 181

Review Summary 183 • Key Terms 184 • Review Questions 184 • Discussion Questions 185

Hands-On MIS Projects 185

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Collaboration and Teamwork Project 186 Case Study: Facebook Privacy: What Privacy? 186 References: 190

PART TWO Information Technology Infrastructure 191

Chapter 5 IT Infrastructure and Emerging Technologies 192 Opening Case: EasyJet Flies High with Cloud Computing 193 5-1 What is IT infrastructure, and what are the stages and drivers of IT

infrastructure evolution? 195 Defining IT Infrastructure 195 • Evolution of IT Infrastructure 197 • Technology Drivers of Infrastructure Evolution 201

5-2 What are the components of IT infrastructure? 206 Computer Hardware Platforms 207 • Operating System Platforms 208 • Enterprise Software Applications 208 • Data Management and Storage 209 • Networking/Telecommunications Platforms 209 • Internet Platforms 209 • Consulting and System Integration Services 210

5-3 What are the current trends in computer hardware platforms? 210 The Mobile Digital Platform 210

Interactive Session: Technology Wearable Computers Change How We Work 211 Consumerization of IT and BYOD 212 • Quantum Computing 213 • Virtualization 213 • Cloud Computing 213

Interactive Session: Organizations Glory Finds Solutions in the Cloud 216 Green Computing 219 • High-Performance and Power-Saving Processors 220

5-4 What are the current computer software platforms and trends? 220 Linux and Open Source Software 220 • Software for the Web: Java, HTML, and HTML5 221 • Web Services and Service-Oriented Architecture 222 • Software Outsourcing and Cloud Services 224

5-5 What are the challenges of managing IT infrastructure and management solutions? 226 Dealing with Platform and Infrastructure Change 226 • Management and Governance 227 • Making Wise Infrastructure Investments 227

Review Summary 230 • Key Terms 231 • Review Questions 232 • Discussion Questions 232

Hands-On MIS Projects 232 Collaboration and Teamwork Project 233 Case Study: BYOD: Business Opportunity or Big Headache? 234 References: 237

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 238 Opening Case: BAE Systems 239 6-1 What are the problems of managing data resources in a traditional file

environment? 241

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File Organization Terms and Concepts 242 • Problems with the Traditional File Environment 243

6-2 What are the major capabilities of database management systems (DBMS), and why is a relational DBMS so powerful? 245 Database Management Systems 245 • Capabilities of Database Management Systems 248 • Designing Databases 250 • Non-relational Databases and Databases in the Cloud 253

6-3 What are the principal tools and technologies for accessing information from databases to improve business performance and decision making? 254 The Challenge of Big Data 254 • Business Intelligence Infrastructure 255

Interactive Session: Organizations Data-Driven Crime Fighting Goes Global 256

Analytical Tools: Relationships, Patterns, Trends 260 • Databases and the Web 263

6-4 Why are information policy, data administration, and data quality assurance essential for managing the firm's data resources? 264 Establishing an Information Policy 264 • Ensuring Data Quality 265

Interactive Session: Management Societe Generale Builds an Intelligent System to Manage Information Flow 267

Review Summary 268 • Key Terms 269 • Review Questions 270 • Discussion Questions 270

Hands-On MIS Projects 270 Collaboration and Teamwork Project 272 Case Study: Lego's Enterprise Software Spurs Growth 272 References: 275

Chapter 7 Telecommunications, the Internet, and Wireless Technology 276 Opening Case: Wireless Technology Makes Dundee Precious Metals Good as

Gold 277

7-1 What are the principal components of telecommunications networks and key networking technologies? 279 Networking and Communication Trends 279 • What is a Computer Network? 280 • Key Digital Networking Technologies 282

7-2 What are the different types of networks? 285 Signals: Digital Versus Analog 285 • Types of Networks 285 • Transmission Media and Transmission Speed 287

7-3 How do the Internet and Internet technology work, and how do they support communication and e-business? 287 What is the Internet? 288 • Internet Addressing and Architecture 288

Interactive Session: Organizations The Battle over Net Neutrality 291 Internet Services and Communication Tools 293

Interactive Session: Management Monitoring Employees on Networks: Unethical or Good Business? 296

The Web 298

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7-4 What are the principal technologies and standards for wireless networking, communication, and Internet access? 306 Cellular Systems 306 • Wireless Computer Networks and Internet Access 307 • RFID and Wireless Sensor Networks 309

Review Summary 312 • Key Terms 313 • Review Questions 314 • Discussion Questions 314

Hands-On MIS Projects 314 Collaboration and Teamwork Project 315 Case Study: RFID Propels the Angkasa Library Management System 316 References: 319

Chapter 8 Securing Information Systems 320 Opening Case: Hackers Attack Singapore's Telecom Infrastructure 321 8-1 Why are information systems vulnerable to destruction, error, and

abuse? 323 Why Systems are Vulnerable 323 • Malicious Software: Viruses, Worms, Trojan Horses, and Spyware 326 • Hackers and Computer Crime 329 • Internal Threats: Employees 333 • Software Vulnerability 334

8-2 What is the business value of security and control? 335 Legal and Regulatory Requirements for Electronic Records Management 335 • Electronic Evidence and Computer Forensics 336

8-3 What are the components of an organizational framework for security and control? 337 Information Systems Controls 337 • Risk Assessment 338

Interactive Session: Organizations Stuxnet and the Changing Face of Cyberwarfare 339

Security Policy 341 • Disaster Recovery Planning and Business Continuity Planning 342 • The Role of Auditing 343

8-4 What are the most important tools and technologies for safeguarding information resources? 343 Identity Management and Authentication 344 • Firewalls, Intrusion Detection Systems, and Antivirus Software 346 • Securing Wireless Networks 348 • Encryption and Public Key Infrastructure 348 • Ensuring System Availability 350 • Security Issues for Cloud Computing and the Mobile Digital Platform 351 • Ensuring Software Quality 352

Interactive Session: Technology BYOD: A Security Nightmare? 353 Review Summary 354 • Key Terms 355 • Review Questions 356 • Discussion

Questions 357 Hands-On MIS Projects 357 Collaboration and Teamwork Project 358 Case Study: Information Security Threats and Policies in Europe 358 References: 361

Contents 11

PART THREE Key System Applications for the Digital Age 363

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 364 Opening Case: Alimentation Couche-Tard Competes Using Enterprise Systems

365

9-1 How do enterprise systems help businesses achieve operational excellence? 367 What are Enterprise Systems? 368 • Enterprise Software 369 • Business Value of Enterprise Systems 370

9-2 How do supply chain management systems coordinate planning, production, and logistics with suppliers? 371 The Supply Chain 371 • Information Systems and Supply Chain Management 372 • Supply Chain Management Software 373 • Global Supply Chains and the Internet 375 • Business Value of Supply Chain Management Systems 376

9-3 How do customer relationship management systems help firms achieve customer intimacy? 377 What is Customer Relationship Management? 377

Interactive Session: Management Unilever Unifies Globally with Enhanced ERP 378

Customer Relationship Management Software 381 • Operational and Analytical CRM 383

Interactive Session: Organizations DP World Takes Port Management to the Next Level with RFID 385

Business Value of Customer Relationship Management Systems 387

9-4 What are the challenges that enterprise applications pose, and how are enterprise applications taking advantage of new technologies? 387 Enterprise Application Challenges 387 • Next-Generation Enterprise Applications 388

Review Summary 390 • Key Terms 391 • Review Questions 391 • Discussion Questions 392

Hands-On MIS Projects 392 Collaboration and Teamwork Project 393 Case Study: Customer Relationship Management Helps Celcom Become Number

One 394

References: 397

Chapter 10 E-commerce: Digital Markets, Digital Goods 398 Opening Case: Uber Storms Europe: Europe Strikes Back 399 10-1 What are the unique features of e-commerce, digital markets, and digital

goods? 401

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E-commerce Today 402 • The New E-commerce: Social, Mobile, Local 403 • Why E-commerce is Different 405 • Key Concepts in E-commerce: Digital Markets and Digital Goods in a Global Marketplace 408

10-2 What are the principal e-commerce business and revenue models? 412 Types of E-commerce 412 • E-commerce Business Models 412 • E-commerce Revenue Models 415

10-3 How has e-commerce transformed marketing? 417 Behavioral Targeting 418 • Social E-Commerce and Social Network Marketing 422

Interactive Session: Technology Getting Social with Customers 424 10-4 How has e-commerce affected business-to-business transactions? 426

Electronic Data Interchange (EDI) 426 • New Ways of B2B Buying and Selling 427

10-5 What is the role of m-commerce in business, and what are the most important m-commerce applications? 429 Location-Based Services and Applications 430

Interactive Session: Organizations Can Instacart Deliver? 431 Other Mobile Commerce Services 433

10-6 What issues must be addressed when building an e-commerce presence? 433 Develop an E-Commerce Presence Map 434 • Develop a Timeline: Milestones 435

Review Summary 435 • Key Terms 436 • Review Questions 437 • Discussion Questions 437

Hands-On MIS Projects 437 Collaboration and Teamwork Project 438 Case Study: Walmart and Amazon Duke It Out for E-commerce Supremacy 439 References: 442

Chapter 11 Managing Knowledge 444 Opening Case: Fiat: Real Time Management with Business Intelligence 445 11-1 What is the role of knowledge management systems in business? 447

Important Dimensions of Knowledge 448 • The Knowledge Management Value Chain 449 • Types of Knowledge Management Systems 452

11-2 What types of systems are used for enterprise-wide knowledgge management, and how do they provide value for businesses? 453 Enterprise Content Management Systems 453

Interactive Session: Organizations ECM in the Cloud Empowers New Zealand Department of Conservation 454

Locating and Sharing Expertise 456 • Learning Management Systems 456

11-3 What are the major types of knowledge work systems, and how do they provide value for firms? 457 Knowledge Workers and Knowledge Work 457 • Requirements of Knowledge Work Systems 457 • Examples of Knowledge Work Systems 458

11-4 What are the business benefits of using intelligent techniques for knowledge management? 460

Contents 13

Capturing Knowledge: Expert Systems 460

Interactive Session: Technology Will Robots Replace People in Manufacturing? 461

Organizational Intelligence: Case-Based Reasoning 464 • Fuzzy Logic Systems 465 • Machine Learning 467 • Intelligent Agents 470 • Hybrid AI Systems 471

Review Summary 472 • Key Terms 473 • Review Questions 473 • Discussion Questions 474

Hands-On MIS Projects 474 Collaboration and Teamwork Project 475 Case Study: Knowledge Management and Collaboration at Tata Consulting

Services 475

References: 479

Chapter 12 Enhancing Decision Making 480 Opening Case: Roche: Managing Diabetes with Big Data and Mobile Apps 481 12-1 What are the different types of decisions, and how does the decision-

making process work? 483 Business Value of Improved Decision Making 483 • Types of Decisions 483 • The Decision-Making Process 485

12-2 How do information systems support the activities of managers and management decision making? 486 Managerial Roles 486 • Real-World Decision Making 488 • High-Velocity Automated Decision Making 489

12-3 How do business intelligence and business analytics support decision making? 490 What is Business Intelligence? 490 • The Business Intelligence Environment 491 • Business Intelligence and Analytics Capabilities 492

Interactive Session: Technology Singapore Sports Institute Uses Analytics for SEA Games 495

Management Strategies for Developing BI and BA Capabilities 497

Interactive Session: Management Britain's National Health Service Jettisons Choose and Book System 498

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? 500 Decision Support for Operational And Middle Management 500 • Decision Support for Senior Management: Balanced Scorecard and Enterprise Performance Management Methods 503 • Group Decision-Support Systems (GDSS) 504

Review Summary 505 • Key Terms 506 • Review Questions 506 • Discussion Questions 507

Hands-On MIS Projects 507 Collaboration and Teamwork Project 507 Case Study: GE Bets on the Internet of Things and Big Data Analytics 508 References: 512

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PART FOUR Building and Managing Systems 513

Chapter 13 Building Information Systems 514 Opening Case: Angostura Builds a Mobile Sales System 515 13-1 How does building new systems produce organizational change? 517

Systems Development and Organizational Change 517 • Business Process Redesign 519

13-2 What are the core activities in the systems development process? 522 Systems Analysis 523 • Systems Design 524 • Completing the Systems Development Process 525

13-3 What are the principal methodologies for modeling and designing systems? 528 Structured Methodologies 528 • Object-Oriented Development 530 • Computer-Aided Software Engineering 532

13-4 What are alternative methods for building information systems? 532 Traditional Systems Life Cycle 533 • Prototyping 534 • End-User Development 535 • Application Software Packages, Software Services, and Outsourcing 536

Interactive Session: Organizations Fujitsu Selects a SaaS Solution to Simplify the Sales Process 537

13-5 What are new approaches for system building in the digital firm era? 540 Rapid Application Development (RAD), Agile Development, and DevOps 541 • Component-Based Development and Web Services 542 • Mobile Application Development: Designing for A Multiscreen World 542

Interactive Session: Technology Developing Mobile Apps: What's Different 544 Review Summary 545 • Key Terms 547 • Review Questions 547 • Discussion

Questions 548 Hands-On MIS Projects 548 Collaboration and Teamwork Project 549 Case Study: ConAgra's Recipe for a Better Human Resources System 550 References: 553

Chapter 14 Managing Projects 554 Opening Case: Intuit Counts on Project Management 555 14-1 What are the objectives of project management, and why is it so

essential in developing information systems? 557 Runaway Projects and System Failure 557 • Project Management Objectives 558

14-2 What methods can be used for selecting and evaluating information systems projects and aligning them with the firm's business goals? 559 Management Structure for Information Systems Projects 559 • Linking Systems Projects to The Business Plan 560 • Information Requirements and Key Performance Indicators 562 • Portfolio Analysis 562 • Scoring Models 563

14-3 How can firms assess the business value of information systems? 564 Information System Costs and Benefits 564 • Capital Budgeting for Information Systems 565 • Limitations of Financial Models 566

Contents 15

14-4 What are the principal risk factors in information systems projects, and how can they be managed? 566 Dimensions of Project Risk 566 • Change Management and the Concept of Implementation 567

Interactive Session: Management Can the National Health Service Go Paperless? 568

Controlling Risk Factors 571

Interactive Session: Technology Hilti AG: Putting Things Together with New Project Management Tools 575

Designing for the Organization 577 • Project Management Software Tools 577

Review Summary 578 • Key Terms 579 • Review Questions 579 • Discussion Questions 580

Hands-On MIS Projects 580 Collaboration and Teamwork Project 581 Case Study: A Shaky Start for Healthcare.gov 581 References: 585

Chapter 15 Managing Global Systems 588 Opening Case: The Bel Group: Laughing All the Way to Success 589 15-1 What major factors are driving the internationalization of business? 591

Developing an International Information Systems Architecture 592 • The Global Environment: Business Drivers and Challenges 593 • State of the Art 596

15-2 What are the alternative strategies for developing global businesses? 597 Global Strategies and Business Organization 597 • Global Systems to Fit the Strategy 598 • Reorganizing the Business 599

15-3 What are the challenges posed by global information systems and management solutions for these challenges? 600 A Typical Scenario: Disorganization on a Global Scale 600 • Global Systems Strategy 601 • The Management Solution: Implementation 603

15-4 What are the issues and technical alternatives to be considered when developing international information systems? 604 Computing Platforms and Systems Integration 605 • Connectivity 605

Interactive Session: Organizations Indian E-commerce: Obstacles to Opportunity 607

Software Localization 608

Interactive Session: Management Steelcase Designs Goes for Global Talent Management 609

Review Summary 611 • Key Terms 612 • Review Questions 612 • Discussion Questions 612

Hands-On MIS Projects 613 Collaboration and Teamwork Project 614 Case Study: Crocs Clambers to Global Efficiency 614 References: 618

Glossary 619

Indexes 631

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 Rugby Football Union Tries Big Data The Mobile Pocket Office Digital Transformation of Healthcare at Singapore's JurongHealth Services Are Farms Becoming Digital Firms?

Chapter 2: Global E-Business and Collaboration Enterprise Social Networking Helps ABB Innovate and Grow New Systems Help Plan International Manage Its Human Resources Collaborating the Glasscubes Way Social Business: Full Speed Ahead or Proceed with Caution?

Chapter 3: Information Systems, Organizations, and Strategy Tate & Lyle Devise a Global IT Strategy Can Technology Replace Managers? Smart Products, Smart Companies Deutsche Bank: The Cost of Legacy Systems

Chapter 4: Ethical and Social Issues in Information Systems The Dark Side of Big Data Monitoring in the Workplace Are We Relying Too Much on Computers to Think for Us? Facebook Privacy: What Privacy?

Chapter 5: IT Infrastructure and Emerging Technologies EasyJet Flies High with Cloud Computing Wearable Computers Change How We Work Glory Finds Solutions in the Cloud BYOD: Business Opportunity or Big Headache?

Chapter 6: Foundations of Business Intelligence: Databases and Information Management BAE Systems Data-Driven Crime Fighting Goes Global Societe Generale Builds an Intelligent System to Manage Information Flow Lego's Enterprise Software Spurs Growth

Chapter 7: Telecommunications, the Internet and Wireless Technology Wireless Technology Makes Dundee Precious Metals Good as Gold The Global Battle over Net Neutrality Monitoring Employees on Networks: Unethical or Good Business? RFID Propels the Angkasa Library Management System

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Chapter 8: Securing Information Systems Hackers Attack Singapore's Telecom Infrastructure Stuxnet and the Changing Face of Cyberwarfare BYOD: A Security Nightmare? Information Security Threats and Policies in Europe

Chapter 9: Achieving Operational Excellence and Customer Intimacy: Enterprise Applications Alimentation Couche-Tard Competes Using Enterprise Systems Unilever Unifies Globally with Enhanced ERP DP World Takes Port Management to the Next Level with RFID Customer Relationship Management Helps Celcom Become Number One

Chapter 10: E-commerce: Digital Markets, Digital Goods Uber Storms Europe: Europe Strikes Back Getting Social with Customers Can Instacart Deliver? Walmart and Amazon Duke It Out for E-commerce Supremacy

Chapter 11: Managing Knowledge Fiat: Real Time Management with Business Intelligence ECM in the Cloud Empowers New Zealand Department of Conservation Will Robots Replace People in Manufacturing? Knowledge Management and Collaboration at Tata Consulting Services

Chapter 12: Enhancing Decision Making Roche: Managing Diabetes with Big Data and Mobile Apps Singapore Sports Institute Uses Analytics for SEA Games Britain's National Health Service Jettisons Choose and Book System GE Bets on the Internet of Things and Big Data Analytics

Chapter 13: Building Information Systems Angostura Builds a Mobile Sales System Fujitsu Selects a SaaS Solution to Simplify the Sales Process Developing Mobile Apps: What’s Different ConAgra’s Recipe for a Better Human Resources System

Chapter 14: Managing Projects Intuit Counts on Project Management Can the National Health Service Go Paperless? Hilti AG: Putting Things Together with New Project Management Tools A Shaky Start for Healthcare.gov

Chapter 15: Managing Global Systems The Bel Group: Laughing All the Way to Success Indian E-commerce: Obstacles to Opportunity Steelcase Designs Goes for Global Talent Management Crocs Clambers to Global Efficiency

Business Cases and Interactive Sessions 17

Preface

The Global Edition is written for business school students in Europe, the Middle East, South Africa, Australia, and the Pacific Asian region. Case studies and examples focus on how firms in these regions use information systems. We wrote this book for business school students who wanted an in-depth look at how today's business firms use information technologies and systems to achieve corporate objectives. Information systems are one of the major tools available to business managers for achieving operational excellence, developing new products and services, improving decision making, and achieving competi- tive advantage. Students will find here the most up-to-date and comprehensive 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, man- agement discussions of information systems for their firms.

When interviewing potential employees, business firms often look for new hires who know how to use information systems and technologies for achiev- ing bottom-line business results. Regardless of whether you are an accounting, finance, management, operations management, marketing, or information sys- tems major, the knowledge and information you find in this book will be valu- able throughout your business career.

What’s New in This Edition

Currency The 15th edition features all new opening, closing, and Interactive Session cases. The text, figures, tables, and cases have been updated through September 2016 with the latest sources from industry and MIS research.

New Features • 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 anima- tion 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. Video Cases are listed at the beginning of each chapter.

• Learning Tracks: 47 Learning Tracks in MyLab MIS for additional cover- age of selected topics.

New Topics • 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,

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Preface 19

Hadoop, in-memory computing, non-relational databases, and analytic platforms.

• Cloud Computing: Updated and expanded coverage of cloud computing in Chapter 5 (IT infrastructure) with more detail on types of cloud ser- vices, 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 secu- rity), 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 in throughout the text. Detailed discussions of enterprise (internal corporate) social networking as well as social net- working in e-commerce.

• BYOD and mobile device management

• Smart products

• DevOps

• Zero-day vulnerabilities

• Machine learning

• Chatbots

• Near field communication (NFC)

• Native advertising

• Windows 10

• Microsoft Office 365

• Zero-day vulnerabilities

• Platforms

• Software-defined storage (SDS)

The 15th Edition: The Comprehensive Solution for the MIS Curriculum

Since its inception, this text has helped to define the MIS course around the globe. This edition continues to be authoritative but is also more customizable, flexible, and geared to meeting the needs of different colleges, universities, and individual instructors. Many of its learning tools are now available in digital form. This book is now part of a complete learning package that includes the core text, Video Case Package, and Learning Tracks.

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 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.

In addition, for students and instructors who want to go deeper into selected topics, there are 47 Learning Tracks in MyLab MIS that cover a variety of MIS topics in greater depth.

20 Preface

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.

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, orga- nization, and technology model used throughout the text

• Two Interactive Sessions with Case Study Questions

• 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 presen- tation 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

Organization

Technology

Management

• Improve customer service • Increase revenue

• Monitor service level and costs • Plan new IT infrastructure • Make IT infrastructure investments

• Create new services and business processes

• On-premises reservation system • Microsoft Azure cloud computing services

• Costly, unwieldy IT infrastructure • Low-cost provider • Highly competitive industry

Seat Allocation System • Provide online seat selection service

Business Challenges

Business Solutions

Information System

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

Preface 21

Key Features We have enhanced the text to make it more interactive, leading edge, and appealing 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 only current (2016) examples from business and public organiza- tions throughout the text to illustrate the important concepts in each chap- ter. All the case studies describe companies or organizations that are familiar to students, such as Nike, Rugby Football Union, Facebook, Walmart, Fiat, Unilever, and GE.

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

• Online Video Case Package. Students can watch short videos online, either in-class or at home or work, 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.

• Online Conceptual Videos [the digital edition only]. 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 rede- signed 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 pro- vide topics for class discussion, Internet discussion, or written assign- ments.

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

22 Preface

Businesses of all sizes are finding Facebook, Twit- ter, and other social media to be powerful tools for engaging customers, amplifying product messages, discovering trends and influencers, building brand awareness, and taking action on customer requests and recommendations. Half of all Twitter users rec- ommend products in their tweets.

About 1.6 billion people use Facebook, and more than 30 million businesses have active brand pages, enabling users to interact with the brand through blogs, comment pages, contests, and offerings on the brand page. The “like” button gives users a chance to share with their social network their feelings about content and other objects they are viewing and web- sites they are visiting. With like buttons on millions of websites, Facebook can track user behavior on other sites and then sell this information to market- ers. Facebook also sells display ads to firms that show up in the right column of users’ home pages and most other pages in the Facebook interface such as photos and apps.

Twitter has developed many new offerings to interest advertisers, like “promoted tweets” and “pro- moted trends.” These features give advertisers the ability to have their tweets displayed more promi- nently when Twitter users search for certain key- words. Many big advertisers are using Twitter’s Vine service, which allows users to share short, repeating videos with a mobile-phone app or post them on other platforms such as Facebook.

Lowe’s is using Facebook mobile video and Snap- chat image messaging to help first-time millennial home buyers learn home improvement skills. The home improvement retailer launched a new series of social videos in April 2016 to showcase spring clean- ing and do-it-yourself projects. Lowe’s believes this is a more immediate and interactive way to reach

INTERACTIVE SESSION: TECHNOLOGY

Getting Social with Customers

Lowe’s “In-a-Snap” Snapchat series tries to inspire young homeowners and renters to undertake sim- ple home improvement projects such as installing shelves to build a study nook. During the Lowe’s Snapchat story, users can tap on the screen to put a nail in a wall or chisel off an old tile. Lowe’s is working on another series of video tutorials on Face- book and Instagram called “Home School” that uses drawings from chalk artists to animate maintenance projects.

Lowe’s social media activities have helped increase brand engagement. Although the company’s social campaigns are designed to teach first-time homeowners or young renters about home improve- ment, the company is also hoping they will encour- age consumers to think differently about the brand beyond its products and services. Management believes millennials who are becoming first-time homeowners want to know the deeper meaning of what a company is trying to stand for, not just the products and services it offers.

An estimated 90 percent of customers are influ- enced by online reviews, and nearly half of U.S. social media users actively seek customer service through social media. As a result, marketing is now placing much more emphasis on customer satisfac- tion and customer service. Social media monitoring helps marketers and business owners understand more about likes, dislikes, and complaints concern- ing products, additional products or product modifi- cations customers want, and how people are talking about a brand (positive or negative sentiment).

General Motors (GM) has 26 full-time social media customer care advisers for North America alone, covering more than 150 company social channels from GM, Chevrolet, Buick, GMC, and Cadillac, and approximately 85 sites such as automotive enthusiast

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

Case Study Questions encour- age students to apply chapter concepts to real-world compa- nies in class discussions, stu- dent presentations, or writing assignments.

CASE STUDY QUESTIONS

, ,

1. Assess the management, organization, and tech- nology issues for using social media technology to engage with customers.

2. What are the advantages and disadvantages of using social media for advertising, brand building, market research, and customer service?

3. Give an example of a business decision in this case study that was facilitated by using social media to interact with customers.

4. Should all companies use social media technology for customer service and marketing? Why or why not? What kinds of companies are best suited to use these platforms?

• 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.

Assessment and AACSB Assessment Guidelines The Association to Advance Collegiate Schools of Business (AACSB) is a not- for-profit corporation of educational institutions, corporations, and other orga- nizations that seeks to improve business education primarily by accrediting uni- versity business programs. As a part of its accreditation activities, the AACSB has

Preface 23

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 objec- tives, and then prove that students do in fact achieve the objectives.

We have attempted in this book to support AACSB efforts to encourage assess- ment-based education. The back 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.

Management Decision Problems

11-8 U.S. Pharma Corporation is headquartered in New Jersey but has research sites in Germany, France, the United Kingdom, Switzerland, and Australia. Research and development of new pharmaceuticals is key to ongoing profits, and U.S. Pharma researches and tests thousands of possible drugs. The company’s researchers need to share information with others within and outside the company, including the U.S. Food and Drug Administration, the World Health Organization, and the International Federation of Phar- maceutical Manufacturers & Associations. Also critical is access to health information sites, such as the U.S. National Library of Medicine, and to industry conferences and professional journals. Design a knowl- edge portal for U.S. Pharma’s researchers. Include in your design specifications relevant internal systems and databases, external sources of information, and internal and external communication and collabora- tion tools. Design a home page for your portal.

11-9 Canadian Tire is one of Canada’s largest companies, with 50,000 employees and 1,100 stores and gas bars (gas stations) across Canada selling sports, leisure, home products, apparel, and financial services as well as automotive and petroleum products. The retail outlets are independently owned and operated. Cana- dian Tire has been using daily mailings and thick product catalogs to inform its dealers about new prod- ucts, merchandise setups, best practices, product ordering, and problem resolution, and it is looking for a better way to provide employees with human resources and administrative documents. Describe the prob- lems created by this way of doing business and how knowledge management systems might help.

Two real-world business sce- narios per chapter provide opportunities for students to apply chapter concepts and practice management decision making.

Students practice using soft- ware in real-world settings for achieving operational excel- lence and enhancing decision making.

Each chapter features a project to develop Internet skills for accessing information, con- ducting research, and perform- ing online calculations and analysis.

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 various 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). Com- pare the information 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.

24 Preface

For more information on the AACSB Assurance of Learning Program and how this text supports assessment-based learning, please visit the website for this book.

Customization and Flexibility: Learning Track Modules Our Learning Tracks feature gives instructors the flexibility to provide in-depth coverage of the topics they choose. There are 47 Learning Tracks in MyLab MIS available to instructors and students. This supplementary content takes students deeper into MIS topics, concepts, and debates; reviews basic technology concepts in hardware, software, database design, telecommunications, and other areas.

Author-Certified Test Bank and Supplements • Author-Certified Test Bank. 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.

• Annotated Slides. The authors have prepared a comprehensive collec- tion 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 presentations. Each of the slides is anno- tated 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.

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.

Career Resources The Instructor Resources for this text include extensive 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 acquired from using the text. The portfolio can be included in a resume or job application or used as a learning assessment tool for instructors.

Instructor Resources At the Instructor Resource Center, www.pearsonglobaleditions.com/laudon , instructors can easily register to gain access to a variety of instructor resources available with this text in downloadable format. If assistance is needed, our dedicated technical support team is ready to help with the media supplements that accompany this text. Visit http://support.pearson.com for answers to fre- quently asked questions and toll-free user support phone numbers.

The following supplements are available with this text:

• Instructor’s Resource Manual

• Test Bank

Preface 25

• TestGen ® Computerized Test Bank

• PowerPoint Presentation

• Image Library

• Lecture Notes

Video Cases and Instructional Videos Instructors can download step-by-step instructions for accessing the video cases from the Instructor Resources Center. Video Cases and Instructional Videos are listed at the beginning of each chapter as well as in the Preface.

Learning Tracks Modules There are 47 Learning Tracks in MyLab MIS providing additional coverage topics for students and instructors. See page 26 for a list of the Learning Tracks available for this edition.

Video Cases and Instructional Videos

Chapter Video Chapter 1 : Information Systems in Global Business Today

Business in the Cloud: Facebook and eBay Data Centers UPS Global Operations with the DIAD 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 v. 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 Broadcasting in the Cloud Netflix: Building a Business in the Cloud

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 IBMSametime

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 Evolution Homecare Manages Patients with Microsoft 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 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

26 Preface

Chapter Video 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: BPM: Business Process Management Customer Story Instructional Video: Workflow Management Visualized

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

Learning Tracks

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

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 Operational 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 Challenges of Knowledge Management Systems

Chapter 12 : Enhancing Decision Making Building and Using Pivot Tables

Video Cases and Instructional Videos (Continued)

Preface 27

Chapter Learning Tracks 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

MyLab MIS Available in MyLab MIS

• MIS Video Exercises - Videos illustrating MIS concepts, paired with brief quizzes

• MIS Decision Simulations - interactive exercises allowing students to play the role of a manager and make business decisions

• Assisted-Graded writing exercises - taken from the end of chapter, with a rubric provided

• Chapter Warm Ups, Chapter Quizzes - objective-based quizzing to test knowledge

• Discussion Questions - taken from the end of chapter • Dynamic Study Modules - on the go adaptive quizzing, also available on a

mobile phone • Learning Catalytics - bring-your-own-device classroom response tools • Enhanced eText - an accessible, mobile-friendly eText with Conceptual

Animations, which walk students through key concepts in the chapter by making figures come to life

• Excel & Access Grader Projects - live in the application auto-graded Grader projects provided inside MyLab MIS to support classes covering Office tools

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 project manager Katrina Ostler for their role in managing the project.

Our special thanks go to our supplement authors for their work, including the following MyLab content contributors: John Hupp, Columbus State University; Robert J. Mills, Utah State University; John P. Russo, Wentworth Institute of Technology; and Michael L. Smith, SUNY Oswego. We are indebted to Robin Pickering for her assistance with writing and to William Anderson and Megan Miller for their help during production. We thank Diana R. Craig for her assis- tance with database and software topics.

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 Lawrence Andrew of Western Illinois University; to Professor Detlef Schoder of the University of Cologne; to Professor

28 Preface

Walter Brenner of the University of St. Gallen; to Professor Lutz Kolbe of the University of Gottingen; to Professor Donald Marchand of the International Institute for Management Development; and to Professor Daniel Botha of Stellenbosch University who provided additional 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 dis- cussion 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 Managing the Digital Firm include:

Charles Wankel, St. John's University Ahmed Kamel, Concordia College Deborah E Swain, North Carolina Central University Jigish Zaveri, Morgan State University Robert Gatewood, Mississippi College James Drogan, SUNY Maritime College Amiya Samantray, Marygrove College John Miles, Keuka College Werner Schenk, University of Rochester Shuyuan Mary Ho, Florida State University Brian Jones, Tennessee Technological University Robert Fulkerth, Golden Gate University Osman Guzide, Shepherd University

Pearson gratefully acknowledges and thanks the following people for their contribution to the Global Edition:

Daniel Ortiz Arroyo, Aalborg University June Clarke, Sheffield Hallam University Andy Jones, Staffordshire University Sahil Raj, Punjabi University Neerja Sethi, Nanyang Technological University Vijay Sethi, Nanyang Technological University

K.C.L. J.P.L.

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?

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

Organizations, Management, and the Networked Enterprise

PART ONE

30

MyLab MIS™ Visit mymislab.com for simulations, tutorials, and end-of-chapter problems.

Information Systems in Global Business Today

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 CHAPTE R

VIDEO CASES

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

CHAPTER CASES

Rugby Football Union Tries Big Data The Mobile Pocket Office Digital Transformation of Healthcare at Singapore’s JurongHealth Services Are Farms Becoming Digital Firms?

31

In 1871, twenty-one English clubs decided that their sport, officially called rugby union but commonly referred to simply as rugby, needed an admin-istrative body. The clubs formed The Rugby Football Union (RFU), which today manages the English national team (England Rugby) in partnership with Premier Rugby Limited. Responsible for the promotion of rugby at all levels, the RFU organizes the Six Nations Championship, the unofficial north- ern hemisphere championship featuring teams from England, Scotland, Wales, Italy, Ireland, and France, and the Heineken Cup, its club-level counterpart. Owned by its member clubs, the RFU’s mission is to maximize profits from international ticket sales and vending so that it can support the more than 60,000 volunteers who organize matches and seminars, help secure loans and insurance policies, fund- raise, write grant proposals, provide medical advice and support, and per- form the clerical duties that keep the lower-level clubs operating.

To succeed in this complicated mission, the RFU entered into a five- year deal with IBM to capture and analyze Big Data that will be useful to both fans, and later—it is hoped— the players themselves. The system is called TryTracker. In rugby, a try, worth five points, is the highest scor- ing opportunity. Teams get posses- sion of the ball through a scrum, a contest for the ball where eight players bind together and push against eight players from the other team. The outcome determines who can control the ball. To score a try, a team must break through the opposition’s defenses, move into their in-goal area, and “ground” the ball. This is done in one of two ways. A player can either hold the ball in one or both hands or arms and then touch it to the ground in the in-goal area, or exert downward pressure on a ball already on the ground using one or both hands or arms or the upper front of the body (from the neck to the waistline).

The IBM TryTracker does not just track tries, however. It uses predictive analytics to track three categories of data: keys to the game, momentum, and key players. TryTracker uses over 8,000 measures of performance. Tradi- tional rugby statistics on team and individual performance as well as live

Rugby Football Union Tries Big Data

©Michal Sanca/Shutterstock

text commentary complement the TryTracker data. The keys to the game are determined ahead of a specific contest by analyzing a historical database of past matchups between a pair. For example, in 2015 England’s key was to average at least 3.2 meters per carry in the forwards; attempt an off load from 10 percent of opposition tackles; and make more than 66 percent of total line-breaks in the match. Fans can use their mobile devices to keep track of how their favorite team is faring, concentrating on game elements that will increase its winning chances. Key players for each team are selected after the game by comparing a single score compiled using different criteria for each position. Goal scoring is currently excluded so as not to overvalue kickers and undervalue players who contribute to creating scoring opportunities.

Like the IBM SlamTracker used at the Grand Slam tennis tournaments, the goal of TryTracker is to provide data visualization and real-time statis- tics to draw in fans. To compete with more popular sports such as Premier League football, the RFU hopes that enhanced communication will increase fan engagement. In 2015, IBM TryTracker was an ever-present fixture of Eng- landRugby.com’s extensive match coverage. As their understanding of game mechanics and emotional investment in what their team needs to do in order to prevail grows, casual fans will become dedicated fans who return again and again. Beyond marketing strategy, the long-term potential of predictive analysis is that it may provide tactical insights to players and coaches that will improve match play and thus the overall product offered to fans.

In 2016 IBM has deployed the same predictive analytics technology to the Australian New South Wales Waratahs Rugby team with an emphasis on pre- dicting player injuries based on their general health, and performance data on the field generated from GPS sensors that players wear.

Sources: IBM, “Building a Solid Foundation for Big Data Analytics,” IBM Systems Thought Leadership Paper, 2016; IBM, “IBM Predictive Analytics Reduces Player Injury and Opti- mises Team Performance for NSW Waratahs Rugby Team,” IBM.com, accessed November 14, 2016; IBM, “3 Ways Big Data and Analytics Will Change Sports,” by Preetam Kumar, IBM Analytics, ibmbigdatahub.com, December 17, 2015; Simon Creasey, “Rugby Football Union Uses IBM Predictive Analytics For Six Nations,” ComputerWeekly.com, 2016; “About Us,” rfu.com, accessed December, 14, 2015; “TryTracker: Rugby Data Analysis,” Telegraph, November 19, 2015; Oliver Pickup, “How Does TryTracker Work,” Telegraph, November 19, 2015; Simon Creasey, “Rugby Football Union Uses IBM Predictive Analytics for Six Nations,” ComputerWeek, September 2015; “IBM Rugby Insight Summer 2015,” MSN.com/sports, Sep- tember 3, 2015; “Live England vs. Scotland with IBM TryTracker,” www.englandrugby. com, March 15, 2015; “IBM TryTracker Confirms Performance,” www.englandrugby.com/ ibmtrytracker/, November 29, 2014; IBM UK, “IBM TryTracker Rugby Insight: QBE Interna- tionals 2014 England vs. Australia,” IBM Rugby Insight, November 27, 2014; Oliver Pickup, “IBM TryTracker: How Does It Work?” Telegraph, October 31, 2013.

The challenges facing the RFU demonstrate why information systems are so essential today. The RFU is classified as a “Friendly Society,” somewhere between a true company and a charity. It receives both government support and corporate sponsorship money. But it must maximize revenues from ticket sales, hospitality and catering, television rights, and its travel company in order to support both grassroots and elite rugby in England.

32 Part One Organizations, Management, and the Networked Enterprise

The chapter-opening diagram calls attention to important points raised by this case and this chapter. The RFU entered into a strategic partnership with IBM to educate and engage fans. Using the data collected by sports data com- pany Opta and the analytics developed by IBM, it may also be able to improve coaching and game performance as an additional way of cultivating custom- ers. IBM is also helping the RFU to develop a customer relationship manage- ment (CRM) system integrated with its Web site.

Here are some questions to think about: What role does technology play in the RFU’s success as the administrative head of rugby union in England? Assess the contributions which these systems make to the future of RFU.

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

It’s not business as usual in the global economy anymore. Information sys- tems and technologies are transforming the global business environment. In 2015, global firms and governments spent about €3.4 trillion on information systems hardware, software, and telecommunications equipment. In addition, they spent another €544 billion on business and management consulting and services—much of which involves redesigning firms’ business operations to take advantage of these new technologies (Gartner, 2016; IDC 2016; Shumsky, 2016). In fact, most of the business value of IT investment derives from these organizational, management, and cultural changes inside firms ( Saunders and Brynjolfsson, 2016 ). It is not simply the technology that is changing. Figure 1. 1 shows that between 2005 and 2015, global investment in information technology

Chapter 1 Information Systems in Global Business Today 33

consisting of hardware, software, and communications equipment grew from €2.43 trillion to €3.18 trillion and is expected to expand to €3.55 trillion by 2020. While America and Europe account for an estimated 70 percent of this invest- ment, 30 percent is occurring in Asia Pacific, Latin America, the Middle East and North Africa, and Eastern Europe. (Accelerance, 2016; IDC, 2016).

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, innovative business models have transformed social life and busi- ness practices. Some 2.8 billion people worldwide have smartphones (50 percent of the world’s population), and an estimated 1.26 billion use their smartphones for Internet access. More than 1 billion people use tablet computers, about 15 percent of the global population. In developing and emerging countries, phones and tablets are the primary means of access to the Internet (Pew Research, 2016; eMarketer, 2015). An estimated 2.34 bil- lion people now use social networks, with Facebook accounting for 1.7 bil- lion people alone. Messaging services like WhatsApp, Facebook Messenger, and Twitter collectively have over 2 billion monthly users. Smartphones,

€2.50

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FIGURE 1. 1 INFORMATION TECHNOLOGY CAPITAL INVESTMENT

Global investment in information technology has expanded by 30 percent in the period 2005 to 2015. IT investment now accounts for an estimated 20 percent of all capital investment. Source: World Economic Outlook, International Monetary Fund, October 2016; industry sources; author estimates.

34 Part One Organizations, Management, and the Networked Enterprise

social networking, texting, e-mailing, and webinars have all become essen- tial tools of business because that’s where your customers, suppliers, and colleagues can be found (eMarketer, 2016a).

By June 2015, more than 150 million businesses worldwide had dot-com Internet sites registered ( Curtis, 2015 ). In 2016 1.62 billion Internet users will purchase online, generating $1.9 billion in sales. Half of these sales will be from mobile devices. While still only 8 percent of total retail global sales, online commerce is growing at 6 percent annually, three times the growth of traditional offline retail (eMarketer, 2016a). In 2015, FedEx moved about 11.5 million packages daily in 220 countries and territories around the world, mostly overnight, and the United Parcel Service (UPS) moved more than 18 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 levels of operational effi- ciency. 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.

In comparison with the 2.7 billion people who read a print newspaper, online newspapers are read by one billion people, growing at 10 percent annu- ally, far faster than print newspapers (WPT, 2016; Conaghan, 2015). An esti- mated 1.7 billion people watch videos and feature films online, 100 million post to a blog everyday, and 250 million read a blog, creating an explosion of new writers and new forms of customer feedback that did not exist five years ago. Social networking site Facebook attracted more than 1.7 billion monthly visitors worldwide. Nearly all of the Fortune 2000 global firms now have Face- book pages, Twitter accounts, and Tumblr sites.

Global e-commerce and Internet advertising continue to expand. Google’s online ad revenues surpassed €80 billion in 2016, and Internet advertising con- tinues to grow at more than 20 percent a year, reaching more than €194 billion in revenues in 2016 ( eMarketer, 2016c ). That’s about one-third of all advertising in the world.

These changes in information technology and systems, consumer behavior, and commerce have spurred the annual growth of digital information to over 5 exabytes every few days, roughly equivalent to all the libraries in existence (Pappas, 2016). A recent study concluded that the value of information flow- ing between countries has grown 45 times since 2005, and the value of this information now exceeds the value of goods and finance exchanged (McKen- zie, 2016).

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, business analytics, and the use of social networks by managers to achieve business objectives. Most of these

Chapter 1 Information Systems in Global Business Today 35

changes have occurred in the past few years. These innovations are ena bling entrepreneurs and innovative traditional fi rms 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 like Netfl ix for streaming, Apple iTunes, Amazon, and many others for downloading video has forever changed how premium video is distributed and even created. Netfl ix in 2016 attracted more than 75 million subscribers worldwide to what it calls the “Internet TV” revolution. Netfl ix has moved into premium TV show production with 30 original shows such as House of Cards and Orange Is the New Black, challenging cable and broadcast produc- ers 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 Expanding. E-commerce generated about $600 billion in revenues in 2016 and is estimated to grow to nearly $900 billion by 2020. E-commerce is changing how fi rms 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 fi rms in jeopardy. Facebook and other social networking sites such as YouTube, Twitter, and Tumblr along with Netfl ix, Apple Beats music ser- vice, and many other media fi rms exemplify the new face of e-commerce in the twenty-fi rst 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: 80 percent of Facebook’s users access the service from mobile phones and tablets. Information systems and technologies are the foundation of this new services-based e-commerce. Mobile e-commerce hit $130 billion in 2016 and is growing at more than 30 percent a year.

Management Changes. The management of business fi rms 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. Business is going mobile, along with consumers. Man- agers 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 information they need for accurate and timely decisions. In addition to their public uses on the web, wikis and blogs are becoming important corporate tools for communication, collabo- ration, and information sharing.

Changes in Firms and Organizations. Compared to industrial organizations of the previous century, new fast-growing twenty-fi rst-century business fi rms put less emphasis on hierarchy and structure and more emphasis on employees

36 Part One Organizations, Management, and the Networked Enterprise

Can you run your company out of your pocket? Perhaps not entirely, but there are many business functions today that can be performed using an iPhone, iPad, or Android mobile handheld device. The smartphone has been called the “Swiss Army knife of the digital age.” A flick of the finger turns it into a web browser, a telephone, a camera, a music or video player, an e-mail and messaging machine, and, increasingly, a gateway into corporate systems. New software applications for document sharing, col- laboration, sales, order processing, inventory man- agement, and production monitoring make these devices even more versatile business tools. Mobile pocket offices that fit into a purse or coat pocket are helping to run companies large and small.

Sonic Automotive is one of the largest automo- tive retailers in the United States with more than 100 dealerships in 14 states. Every year Sonic sells 250,000 new and used cars from approximately 25 different automotive brands, and it also sells auto parts and maintenance, warranty, collision, and vehi- cle financing services. Sonic Automotive managers and employees do much of their work on the iPhone and iPad.

Sonic developed several custom iPhone and iPad applications to speed up sales and service. Virtual Lot, a dealer inventory app, lets sales associates quickly search for vehicles held in inventory by all Sonic dealerships. They have immediate access to vehicle information, pricing, trade-in values, interest rates, special promotions, financing, and what com- petitors are charging for identical vehicles. The asso- ciates can quickly find the best selection for each customer and often offer far more choices than the competition. Dealers are not limited to selling only their own inventory.

A mobile app called the Sonic Inventory Manage- ment System (SIMS) has speeded up and simplified trade-in appraisals and pricing. Sonic staff use their iPhones or iPads to take photos of a car, input the vehicle identification number (VIN) and mileage, and note any issues. The data are transmitted to cor- porate headquarters, which can quickly appraise the car. A Service Pad app simplifies the steps in repair and warranty work. In the past, customers with cars requiring repairs had to go inside the dealership and sit at a desk with a Sonic staff member who wrote up the repair order by hand. Now the Sonic staff

members go outside to the customer's vehicle and enter the repair order on an iPad on the spot.

SKF is a global engineering company headquar- tered in Gothenburg, Sweden, with 140 manufac- turing sites in 32 countries and 48,500 employees worldwide. SKF produces bearings, seals, lubrication systems, and services used in more than 40 indus- tries, including mining, transportation, and manu- facturing. SKF has developed more than 30 custom iPhone and iPad applications for streamlining work- flows and accessing critical corporate data from any- where in the world.

For example, a virtual reality app uses the iPhone or iPad camera to identify a factory machine and produce a 3-D overlay of the SKF parts it contains. A sensor-driven app called Shaft Align is used by SKF service teams and customers in the field. Shaft Align connects via wireless Bluetooth sensors to a piece of machinery such as a motor-driven fan to ensure that the drive shaft is running in proper alignment. If not, the app generates step-by-step instructions and a 3-D rendering to show how to manually align the motor. Then it checks the work and produces a report.

A mobile app called MOST enables factory opera- tors to monitor some SKF factory production lines. MOST links to the back-end systems running the machinery and provides operators with key pieces of data. Operators using this mobile app are able to use secure instant messaging to communicate with man- agers and each other, update maintenance logs, and track products in real time as they move through the factory line.

SKF's Shelf mobile app allows sales engineers and customers to access on demand more than 5,000 pieces of product literature, catalogs, product speci- fications, and interactive marketing materials. Sales teams can use Shelf to create custom “shelves” to organize, annotate, and share materials with custom- ers right from their iPhones or iPads. The iPhone, iPad, and Shelf app save company sales engineers as much as 25 minutes per day on processes and paperwork, freeing them up to spend more time in the field supporting customers. This increase in productivity is equivalent to putting 200 more sales engineers in the field.

SKF auditors perform about 60 audits per year, and each audit used to take more than a month to complete. With the SKF Data Collect app, auditors

INTERACTIVE SESSION: MANAGEMENT

The Mobile Pocket Office

Chapter 1 Information Systems in Global Business Today 37

taking on multiple roles and tasks and collaborating with others on a team. They put greater emphasis on competency and skills rather than position in the hierarchy. They emphasize higher speed and more accurate decision making based on data and analysis. They are more aware of changes in technology, con- sumer 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 fi rms and other organizations. To the extent organizations and business fi rms demon- strate these characteristics, they are twenty-fi rst-century digital fi rms.

are able to use their iPads to collect data and present customers with detailed reports instantly.

SKF Seals offers specifications and information about SKF's machined and injection-molded seals and plastic parts, while the Seal Select app helps users select seals and accessories using several dif- ferent input parameters to find the right solution for their needs.

4. One company deploying iPhones has said, “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.

Sources: “Sonic Automotive: Driving Growth with iPhone and iPad” and “Driving Innovation in the Factory and in the Field with iOS,” iPhone in Business, www.apple.com, accessed March 31, 2016; www.skf.com, accessed March 31, 2016; www.sonicautomotive.com, accessed March 31, 2016; and “Why the Mobile Pocket Office Is Good For Business,” ITBusinesEdge.com, accessed March 6, 2015.

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 businesses in this case study solved by using mobile digital devices.

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

iPhone and iPad Applications for Business

1. Salesforce1 2. Cisco WebEx Meetings 3. SAP Business One 4. iWork 5. Evernote 6. Adobe Acrobat Reader 7. Oracle Business Intelli-

gence Mobile 8. Dropbox

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

© STANCA SANDA/Alamy Stock Photo

38 Part One Organizations, Management, and the Networked Enterprise

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.

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 popu- lated 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 expan- sion 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 global economy depends on imports and exports. In 2015, about 57 percent of the worlds €74 trillion GDP resulted from imports and exports (World Bank, 2016). Many Fortune 1000 global firms derive more than half their revenues from foreign operations. Tech companies are par- ticularly dependent on offshore revenue: 85 percent of Intel’s revenues in 2015 came from overseas sales of its microprocessors, while Apple earned 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 all iPhones and about 90 percent of the PCs assembled in China use American-made Qualcomm, Intel or AMD chips.

It’s not just goods that move across borders; jobs do too, some of them high- level jobs that pay well and require a college degree. In the past decade, the United States lost 5 million manufacturing jobs to offshore, low-wage producers. But manufacturing is now a very small part of U.S. employment (less than 12 percent of the labor force and declining). Manufacturing jobs in the last decade have been replaced by service and retail jobs even as the value of manufactured goods made in the U.S. has soared by 20 percent in the same period, largely due to highly automated factories and enterprise information systems (Cassel- man, 2016). In a normal year in the United States, about 300,000 service jobs move offshore to lower-wage countries. On the plus side, the global labor force expanded from 3.2 billion to 3.4 billion during the 2010−2015 period, an expan- sion of 200 million new 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 due to slow recovery in 2011, by 2015 the U.S. econ- omy 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, and wages in the tech sector are rising at 5 percent annually. Outsourcing may have accelerated the development of new systems worldwide as new systems could be developed and maintained in low-wage countries. In

Chapter 1 Information Systems in Global Business Today 39

part this explains why the job market for MIS and computer science graduates is growing rapidly in the United States as well as Europe, the Middle East, and Asia Pacific.

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. 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 international communications system has drastically reduced the costs of oper- ating and transacting on a global scale. Communication between a factory floor in Shanghai and a distribution center in Rapid City, South Dakota, or Antwerp, Belgium, is now instant and virtually free. Customers can now shop in a world- wide marketplace, obtaining price and quality information reliably 24 hours a day. Firms producing goods and services on a global scale achieve extraordinary cost reductions by finding low-cost suppliers and managing production facili- ties in other countries. Internet service firms, such as Google, Netflix, Alibaba, and eBay, are able to replicate their business models and services in multiple countries without having to redesign their expensive fixed-cost information sys- tems 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. Developing a new product, generating and fulfilling an order, creating a mar- keting 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.

40 Part One Organizations, Management, and the Networked Enterprise

Many firms, such as Cisco Systems, 3M, and GE (see the Chapter 12 end- ing 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.

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 57 million managers and 120 million workers in the information and knowledge sectors in the labor force rely on information systems to conduct business. Information systems are essential for conducting day-to-day business in most 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. Sim- ilarly, retail firms such as Walmart and Sears and manufacturing firms such as General Motors, Volkswagen, Siemens, 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 century, 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

Hardware

Information System

Business Firm

Software

Business Strategic Objectives

Business Processes Data Management

Telecommunications

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.

Chapter 1 Information Systems in Global Business Today 41

quality 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, 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 2016, Walmart achieved $499 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 a square foot and other large general merchandise retail firms producing less than $200 a 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 hotel group which operates hotels in Asia, Europe, and the Americas, exemplifies the use of information systems and technolo- gies to achieve customer intimacy. These hotels use computers to keep track of guests’ preferences.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 cus- tomers’ preferences.

42 Part One Organizations, Management, and the Networked Enterprise

Large national retailers in Europe, the U.S., and Asia exemplify the use of information systems to enable supplier and customer intimacy. Every time a dress shirt is bought at a store the record of the sale appears immediately on computers of suppliers like TAL Apparel Ltd. in Hong Kong, a contract manu- facturer that produces one in eight dress shirts sold in the United States and Europe. TAL runs the numbers through a computer model it developed and then decides how many replacement shirts to make and in what styles, colors, and sizes. TAL then sends the shirts directly to retail stores, completely bypass- ing retailers’ warehouses (European Commission, 2014).

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. 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, Privi Organics Ltd., a leading Indian company that manufac- tures, supplies, and exports aroma chemical products worldwide, uses the Ora- cle Human Capital Management system for real-time insight into individual employee information—including performance rating and compensation his- tory. The system helps managers make faster human resource decisions, such as promotions or transfers, by integrating all employee records across the orga- nization. Managers are able to quickly review employee performance ratings for the previous three years and drill down into more details.

Competitive Advantage When firms achieve one or more of these business objectives—operational excel- lence; new products, services, and business models; customer/supplier inti- macy; 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 can- not match. Apple Inc., Walmart, and the Mandarin Group 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. Today, most national banks in the world have ATMs and link to national and international ATM networks, such as CIRRUS. Provid- ing ATM services to retail banking customers is simply a requirement of being in and surviving in the retail banking business.

Most nations have statutes and regulations that create a legal duty for com- panies and their employees to retain records, including digital records. For instance, the European Council REACH law and the U.S. Toxic Substances Con- trol Act (1976) regulate the exposure of workers to more than 75,000 toxic chem- icals and require firms to retain records on employee exposure for 30 years (European Commission, 2007). Financial regulatory agencies such as the U.S. Securities and Exchange Commission (SEC), Financial Conduct Authority (FAC UK), Financial Services Agency (FSA Japan), and the China Securities Regula- tory Commission (CSRC People’s Republic of China) require certified public accounting firms that audit public companies to retain audit working papers and records, including all e-mails, for five years or longer. Many other pieces

Chapter 1 Information Systems in Global Business Today 43

of national and regional legislation in health care, financial services, education, and privacy protection impose significant information retention and report- ing requirements on global businesses. Firms turn to information systems and technologies to provide the capability to respond to these record management requirements.

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 infor- mation we mean data that have been shaped into a form that is meaningful and useful to human beings. Data , in contrast, are streams of raw facts representing 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 pro- vide meaningful information, such as the total number of bottles of dish deter- gent 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 organizations need to make decisions, control operations, analyze problems, and create new products or services. These activities are input, process- ing, and output (see Figure 1. 4 ). Input captures or collects raw data from within the organization or from its external environment. Processing con- verts this raw input into a meaningful form. Output transfers the processed

44 Part One Organizations, Management, and the Networked Enterprise

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.

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

FIGURE 1. 3 DATA AND INFORMATION

Raw data from a supermarket checkout counter can be processed and organized to produce meaningful informa- tion, such as the total unit sales of dish detergent or the total sales revenue from dish detergent for a specific store or sales territory.

ENVIRONMENT

Feedback

INFORMATION SYSTEM

Suppliers Customers

Stockholders CompetitorsRegulatory Agencies

ORGANIZATION

Input Output

Processing Classify Arrange

Calculate

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.

Chapter 1 Information Systems in Global Business Today 45

In a professional sports team’s system for selling tickets, the raw input con- sists of order data for tickets, such as the purchaser’s name, address, credit card number, number of tickets ordered, and the date of the game for which the ticket is being purchased. Another input would be the ticket price, which would fluctuate based on computer analysis of how much could optimally be charged for a ticket for a particular game. Computers store these data and process them to calculate order totals, to track ticket purchases, and to send requests for payment to credit card companies. The output consists of tickets to print out, receipts for orders, and reports on online ticket orders. The sys- tem provides meaningful information, such as the number of tickets sold for a particular game or at a particular price, the total number of tickets sold each year, and frequent customers.

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. Computer programs, or software, are sets of operating instructions that direct and control computer processing. Knowing how computers and computer pro- grams work is important in designing solutions to organizational problems, but computers 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, landscaping, 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 lum- ber of computer-based information systems, but alone they cannot produce the information a particular organization needs. To understand information sys- tems, you must understand the problems they are designed to solve, their archi- tectural 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 organization, management, and information technology dimensions of sys- tems (see Figure 1. 5 ) and their power to provide solutions to challenges and problems in the business environment. We refer to this broader under- standing of information 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 . Com- puter 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 informa- tion systems used by managers and employees in the firm.

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

46 Part One Organizations, Management, and the Networked Enterprise

Organizations Information systems are an integral part of organizations. Indeed, for some companies, such as credit reporting firms, there would be no business without an information system. The key elements of an organization are its people, structure, business processes, politics, and culture. We introduce these compo- nents 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, professional, and technical employees, whereas the lower levels consist of operational 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 organi- zations, 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 information 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

Management

Organizations Technology

Information Systems

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.

Chapter 1 Information Systems in Global Business Today 47

rules guide employees in a variety of procedures, from writing an invoice to responding to customer complaints. Some of these business processes have been written down, but others are informal work practices, such as a require- ment to return telephone calls from coworkers or customers, that are not for- mally documented. Information systems automate many business processes. For instance, how a 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 mem- bers. You can see organizational culture at work by looking around your univer- sity 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

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

Senior Management

Middle Management Scientists and knowledge workers

Operational Management Production and service workers

Data workers

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.

48 Part One Organizations, Management, and the Networked Enterprise

an aspect of its organizational culture that can be found in the company’s pack- age tracking systems, which we describe later 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 natu- ral part of all organizations. In Chapter 3 , we examine these features of organiza- tions 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 powerful role in helping managers design and deliver new products and ser- vices 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 physical devices and software, links the various pieces of hardware and trans- fers data from one physical location to another. Computers and communica- tions equipment 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

Chapter 1 Information Systems in Global Business Today 49

technology platform has internal uses, providing the connectivity to link dif- ferent systems and networks within the firm. Internal corporate networks based on Internet technology are called intranets . Private intranets extended to authorized users outside the organization are called extranets , and firms use such networks to coordinate their activities with other firms for making pur- chases, collaborating on design, and other interorganizational work. For most business firms today, using Internet technology is both a business necessity and a competitive advantage.

The World Wide Web is a service provided by the Internet that uses uni- versally accepted standards for storing, retrieving, formatting, and displaying information in a page format on the Internet. Web pages contain text, graphics, animations, sound, and video and are linked to other web pages. 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.

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.

For instance, UPS operates the largest global package delivery system in the world. UPS invests heavily 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, handheld computers, the Internet, and many different pieces of software for tracking 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 ele- ment anchors the package tracking system in UPS’s sales and production func- tions (the main product of UPS is a service—package delivery). It specifies 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 deliv- ery 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 net- works, 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.

50 Part One Organizations, Management, and the Networked Enterprise

Jurong Health Services, or JurongHealth, is one of Singapore’s six public healthcare clusters. Health- care clusters provide holistic and integrated care when patients move from one care setting, like a clinic, to another, like a hospital. Overall, Singapore’s healthcare system comprises 8 public hospitals, 10 private hospitals, 8 national specialty centers, and an island-wide network of general medical practitio- ners. JurongHealth primarily manages the 700-bed Ng Teng Fong General Hospital, the 400-bed Jurong Community Hospital, and the Jurong Medical Cen- ter, all of which are located in western Singapore.

JurongHealth’s goal is to provide transformative medical care for its patients through the use of inno- vative information technologies. Underscoring this commitment, in September 2016 JurongHealth’s Ng Teng Fong General Hospital was awarded the Health- care Information and Management Systems Society (HIMSS) Electronic Medical Record Adoption Model (EMRAM) Stage 7 Award—there are 8 stages, from 0 to 7, that measure a hospital’s implementation of IT systems, and Stage 7 represents the highest level. Ng Teng Fong General thus became the first hospital in Singapore and the ASEAN region, and fifth in the Asia Pacific, to receive the award.

JurongHealth has integrated more than 50 health- care IT systems as part of the Project OneCare initiative. The systems’ implementation and integra- tion took four years and has enabled the hospital to become paperless, scriptless, chartless, and filmless. Among the many systems implemented by the hos- pital are self-service kiosks to enable patients to reg- ister themselves by merely scanning their national identification cards and obtaining a queue number generated by the Enterprise Queue Management System. This unique number is used throughout the patient’s visit that day for all service itineraries in the hospital. Patients refer to live screens located in the waiting areas that display a real-time queue sta- tus that shows their turn. This system has not only enabled JurongHealth to cut down on expenses but also to improve efficiency, as patients do not need different numbers for different services. It reduces waiting time and increases patient satisfaction.

Similarly, the Visitor Management System self- service kiosks enable visitors to scan their identifi- cation cards and register themselves to gain access to the hospital wards. Visitors can also register

INTERACTIVE SESSION: TECHNOLOGY

Digital Transformation of Healthcare at Singapore’s JurongHealth Services

themselves and obtain an e-pass from the Visitor Registration counters that grants them access to the wards that they want to visit. The identification card or e-pass must then be scanned at the 2-in-1 Gantry when entering and leaving the ward. The 2-in-1 Gan- try logs not only visitor information but also tracks staff, as they are also required to use the same gan- tries to visit a particular ward. Through the imple- mentation of the Visitor Management system, the hospital can control access to the wards, and visitors or staff can be easily tracked and contacted in case of an epidemic.

Another IT system implemented is the Warehouse Management System, which eliminates the tedious process of manually counting inventory. The system uses passive radio frequency identification (RFID) technology and a two-bin shelving system to auto- mate inventory top-up requests and improve inven- tory management. Once the primary compartment of the storage bin is empty, the clinical staff transfers the relevant RFID tag into a drop-box, where the reader automatically sends a request for drug replen- ishment, thus avoiding stock-outs.

JurongHealth has also implemented a Real-Time Location Tracking System to automatically track patients and medical equipment using Wi-Fi triangu- lation, low frequency exciters, and about 6,000 active RFID tags attached to patients or medical equipment. These tags continuously communicate with the low- frequency exciters to transmit data to the backend system for processing, allowing hospital staff to pre- cisely locate patients and equipment, thus eliminat- ing the need for tedious manual searching.

In another major move, JurongHealth made a conscious effort to ensure that the different IT sys- tems would not be stand-alone. The hospital thus implemented an integrated Electronic Medical Record (EMR) system that combines all the func- tional modules of the hospital in addition to being interfaced with 140 medical devices and equipment. Using the vendor-neutral Medical Devices Middle- ware Integration System, data from these medical devices is directly uploaded into the EMR system, and thus no time or effort is wasted by clinical staff having to manually enter such readings, and the hos- pital no longer has to worry about charting errors. Being vendor-neutral also means the freedom to

Chapter 1 Information Systems in Global Business Today 51

The result is an information system solution to the business challenge of provid- ing 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 invest- ment 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 mar- kets (which 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

CASE STUDY QUESTIONS

adopt best-of-breed individual modules as well as a lack of reliance on a single vendor.

The EMR system has spurred other innovations such as the Electronic Patient Information Board, which enables clinic staff and nurses to view essen- tial patient information on digital tablets, unlike most hospitals, which manually compile the informa- tion and display it at the bedside. Another example is the Inpatient Pharmacy Automation System, which receives prescriptions entered by the doctors via the EMR system and then sends machine-packed medi- cines to the wards using Automated Guided Vehicles that travel on pre-programmed routes and help in moving not only medication but also linen, meals, etc. At the ward, the patient’s wrist tag is scanned and matched against the doctor’s prescription before the medicines can be retrieved from the medical carts. Thus, only the required medication is supplied and administered to the right patient.

Another innovative use of technology is the Daily Operations Dashboard, which integrates data from different systems to show key metrics for various departments, such as emergency, outpatient clinics, inpatient wards, and surgery areas. It also analyzes,

compares, and displays daily, weekly, and monthly statistics, which act as vital input for management decision making.

IT has played a key role in enabling JurongHealth to achieve its mission of providing world-class medi- cal care at an affordable cost. As a result, Jurong- Health has developed a reputation as a leading technology-driven healthcare provider as well as a role model not only in Singapore but also the entire region. This is also evident from its many accolades, which include awards for IT-driven transformation— the Project of the Year 2015–16 award by SPMI, the Singapore branch of the global professional accredita- tion body Project Management International—and for overall organizational transformation—“Best Com- panies to Work for in Asia 2014” by HR Asia.

Sources: P. Bhunia, “The JurongHealth IT Journey—Integrating IT from the Ground-Up into a New Digital Hospital,” opengovasia.com, November 13, 2016, accessed December 21, 2016; JurongHealth, “Integrated Healthcare IT Systems at Ng Teng Fong General Hospital and Jurong Community Hospital win the Project of the Year Award at the SPMI Symposium 2016,” www.jmc.com.sg, accessed Decem- ber 21, 2016; JurongHealth, “Our Milestones,” www.juronghealth. com.sg, October 2016, accessed December 21, 2016 .

1. What technologies are used by JurongHealth? What purpose do they serve?

2. Search the web for RFID. Suggest an example of using RFID for locating and tracking people.

3. What information systems are implemented by JurongHealth? Describe the input, processing, and output of any one such system.

4. Why are information systems important for JurongHealth?

Case contributed by Neerja Sethi and Vijay Sethi, Nanyang Technological University

52 Part One Organizations, Management, and the Networked Enterprise

information that helps managers make better decisions or that improves the execution of business processes. For example, the information system for ana- lyzing supermarket 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 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 chal- lenge 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 the Rugby Football Union’s systems solved the business problem presented by the need to generate revenue in a highly competitive industry. These systems created a solution that takes advantage of opportunities that new digital tech- nology and the Internet provided. They opened up new channels for selling tickets and interacting with customers, optimized ticket pricing, and used new tools to analyze player performance. These systems were essential in improv- ing the rugby teams’ overall business performance. The diagram also illustrates

Using a handheld com- puter called a Delivery Information Acquisition Device (DIAD), UPS drivers automatically capture cus- tomers’ signatures along with pickup, delivery, and time card information. UPS information systems use these data to track pack- ages while they are being transported.

© Bill Aron/PhotoEdit.Inc

Chapter 1 Information Systems in Global Business Today 53

how people, technology, and organizational elements work together to create the systems.

Complementary Assets: Organizational Capital and the Right Business Model Awareness of the organizational and managerial dimensions of information sys- tems can help us understand why some firms achieve better results from their information systems than others. Studies of returns from information technol- ogy investments 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 infor- mation 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 tech- nology investments alone cannot make organizations and managers more effective unless they are accompanied by supportive values, structures, and behavior patterns in the organization and other complementary assets. Busi- ness 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

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

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, trans- forming, and distributing information that managers can use to improve decision making, enhance organizational performance, and, ultimately, increase firm profitability.

54 Part One Organizations, Management, and the Networked Enterprise

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 complemen- tary 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 organi- zational and management capital .

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 computing stan- dards, regulations and laws, and the presence of technology and service firms.

Throughout the book we emphasize a framework of analysis that considers technology, management, and organizational assets and their interactions. Per- haps the single most important theme in the book, reflected in case studies and

IT Capital Stock (relative to industry average)

Productivity (relati ve to industry average)

1 .0 4 .0 8 .0.25.12

1 .0

.5

.25

2 .0

4 .0 1 2

3 4

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: Based on Brynjolfsson and Hitt (2000) .

Chapter 1 Information Systems in Global Business Today 55

exercises, is that managers need to consider the broader organization and man- agement dimensions of information systems to understand current problems as well as to derive substantial above-average returns from their information tech- nology investments. As you will see throughout the text, firms that 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 formal capabilities of these systems. The disciplines that contribute to the technical approach are computer science, management science, and operations research.

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

56 Part One Organizations, Management, and the Networked Enterprise

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.

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 sys- tems 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 mar- kets, 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.

Technical Approaches

Behavioral Approaches

MIS

Operations Research

Sociology

Psychology Economics

Management Science

Computer Science

FIGURE 1. 9 CONTEMPORARY APPROACHES TO INFORMATION SYSTEMS

The study of information systems deals with issues and insights contributed from technical and behav- ioral disciplines.

Chapter 1 Information Systems in Global Business Today 57

Approach of This Text: Sociotechnical Systems Throughout this book you will find a rich story with four main actors: suppliers of hardware and software (the technologists); business firms making invest- ments and seeking to obtain value from the technology; managers and employ- ees seeking to achieve business value (and other goals); and the contemporary legal, social, and cultural context (the firm’s environment). 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 sys- tem solutions to real-world problems and managing information technology resources. It is also concerned with behavioral issues surrounding the develop- ment, 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 tech- nological approach to information systems. For instance, the fact that infor- mation technology is rapidly declining in cost and growing in power does not 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 manufactur- ers quickly seek to adjust the technology to conform with user expectations. Organizations and individuals must also be changed through training, learn- ing, 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.

58 Part One Organizations, Management, and the Networked Enterprise

TECHNOLOGY ORGANIZATION

Final Design of

Technology

Final Design of

Organization

Alternative 3

Alternative 3

Alternative 2

Alternative 2

Alternative 1

Alternative 1

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.

Review Summary

1-1 How are information systems transforming business, and why are they 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 Inter- net allows many businesses to buy, sell, advertise, and solicit customer feedback online. Organiza- tions 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 excellence; 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 genu- ine value for organizations?

From a technical perspective, an information system collects, stores, and disseminates informa- tion from an organization’s environment and internal operations to support organizational functions and decision making, communication, coordination, control, analysis, and visualization. Information systems 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 management technology, and networking/telecommunications technology (including the Internet). The organization dimension of information systems involves issues such as the organization’s hierar- chy, functional specialties, business processes, culture, and political interest groups.

Chapter 1 Information Systems in Global Business Today 59

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 models and capabilities of systems are computer science, management science, and operations research. The disciplines contributing to the behavioral approach focusing on the design, implemen- tation, management, 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.

Key Terms Business functions , 47 Business model , 42 Business processes , 40 Complementary assets , 54 Computer hardware , 49 Computer literacy , 46 Computer software , 49 Culture , 48 Data , 44 Data management technology , 49 Data workers , 47 Digital firm , 40 Extranets , 50 Feedback , 46 Information , 44 Information system , 44 Information systems literacy , 46 Information technology (IT) , 44

Information technology (IT) infrastructure , 50 Input , 45 Internet , 49 Intranets , 50 Knowledge workers , 47 Management information systems (MIS) , 46 Middle management , 47 Network , 49 Networking and telecommunications

technology , 49 Operational management , 47 Organizational and management capital , 55 Output , 46 Processing , 45 Production or service workers , 47 Senior management , 47 Sociotechnical view , 58 World Wide Web , 50

MyLab MIS To complete the problems marked with the 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 run- ning 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 sys- tem trends.

• Describe the characteristics of a digital firm.

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

• List and briefly describe the six strategic business objectives of information systems.

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

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

60 Part One Organizations, Management, and the Networked Enterprise

• List and describe the organizational, man- agement, and technology dimensions of information 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 technol- ogy components of information systems.

• Describe the flow of information through the business information value chain..

• 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 con- tribute to an understanding of information systems?

• List and describe each discipline that con- tributes to a technical approach to informa- tion systems.

• List and describe each discipline that con- tributes to a behavioral approach to informa- tion systems.

• Describe the sociotechnical perspective on information systems.

Discussion Questions 1- 4 What does it mean to describe the world as

“flat”?

1- 5 If you were setting up the website for a com- petitive rugby team, what management, orga- nization, and technology issues might you encounter?

MyLabMIS

MyLabMIS

1- 6 What do you think were some of the key managerial and organizational decisions that helped make JurongHealth Services’ IT efforts so successful?

MyLabMIS

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

Management Decision Problems

1- 7 Warbenton Snack Foods is a manufacturer of potato crisps and savoury snacks in the U.K. Warbenton’s financial department uses spreadsheets and manual processes for much of its data gathering and reporting. Warbenton’s financial analyst would spend the entire final week of every month collecting spreadsheets from the heads of various departments. She would then consolidate and re-enter all the data into another spreadsheet, which would serve as the company’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 and 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 Rabatt operates deep-discount stores offering housewares, cleaning supplies, clothing, health and beauty aids, and packaged food throughout Germany, with most items selling for 1 euro. 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 over 3 percent of total sales. What decisions have to be made before investing in an information system solution?

Chapter 1 Information Systems in Global Business Today 61

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 soft- ware 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 computer equip- ment 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.

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 account- ing, 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.

Are Farms Becoming Digital Firms?

CASE STUDY

Ohio farmer Mark Bryant raises corn, soybeans, and soft red winter wheat on 12,000 acres. But you’ll hardly ever see him on a tractor because that isn’t how farms work anymore. Bryant spends most of his time monitoring dashboards full of data gathered

from the 20 or so iPhones and five iPads he has sup- plied to employees who report on his acreage in real time. Using software from a Google-funded startup called Granular, Bryant analyzes the data along with data gathered from aircraft, self-driving tractors, and

62 Part One Organizations, Management, and the Networked Enterprise

other forms of automated and remote sensors for yield, moisture, and soil quality.

Tractors themselves have been morphed into pieces of intelligent equipment, and are now much smarter. Many tractors and combines today are guided by Global Positioning System (GPS) satellite- based navigation systems. The GPS computer receives signals from earth-orbiting satellites to track each piece of equipment’s location and where it has gone. The system helps steer the equipment so farm- ers are able to monitor progress on iPads and other tablet computers in their tractor cabs.

The world’s largest producer of autonomous four- wheeled vehicles isn’t Tesla or Google, it’s John Deere. The cab of one of Deere’s self-driving trac- tors is now so full of screens and tablets that it looks like the cockpit of a jet airplane. John Deere and its competitors aren’t just turning out tractors, com- bines, and trucks that can drive themselves, they are also turning out wirelessly connected sensors that map every field as well as planting and spraying machines that can use computerized instructions to apply seed and nutrients to a field.

Deere & Co. has embedded information technol- ogy in all of its farming equipment, creating an eco- system for controlling sprayers, balers, and planters. Deere products include AutoTrac GPS-controlled assisted-steering systems, which allow equipment operators to take their hands off the wheel; JDLink, which enables machinery to automatically upload data about fields to a remote computer center and farmers to download planting or fertilizing instruc- tions; and John Deere Machine Sync, which uses GPS data to create maps based on aerial or satellite photos to improve planting, seeding, spraying, and nutrient application.

Deere now ranks among the leading companies offering tools for farmers to practice what is known as precision agriculture. Managing fields with this level of computerized precision means farmers need to use fewer loads of fertilizer, potentially saving an individual farmer tens of thousands of dollars. Some also see precision agriculture as the solution to feeding the world’s exploding popula- tion. By 2050, the world’s population is predicted to be 9.2 billion people, 34 percent higher than today. More people will have the means to purchase food that requires more land, water, and other resources to produce. To keep up with rising populations and income growth, global food production must increase by 70 percent and precision agriculture could make this possible. Farmers using fertilizer, water, and energy to run equipment more precisely

are less wasteful, and this also promotes the health of the planet.

Other large agricultural companies like Monsanto and Dupont are big precision agriculture players, providing data analysis and planting recommenda- tions to farmers who use their seeds, fertilizers, and herbicides. Because adjustments in planting depth or the distance between crop rows can make a big dif- ference in crop yields, these companies want their computers to analyze the data generated during computerized planting work to show farmers how to further increase their crop output.

The farmer provides data on his or her farm’s field boundaries, historic crop yields, and soil conditions to these companies or another agricultural data anal- ysis company, which analyzes the data along with other data it has collected about seed performance and soil types in different areas. The company doing the data analysis then sends a computer file with recommendations back to the farmer, who uploads the data into computerized planting equipment. The farmer’s planting equipment follows the recommen- dations as it plants fields. For example, the recom- mendations might tell an Iowa corn farmer to lower the number of seeds planted per acre or to plant more seeds per acre in specified portions of the field capable of growing more corn. The farmer might also receive advice on the exact type of seed to plant in different areas. The data analysis company monitors weather and other factors to advise farmers how to manage crops as they grow.

A software application developed by Monsanto called FieldScripts takes into account variables such as the amount of sunlight and shade and variations in soil nitrogen and phosphorous content down to an area as small as a 10-meter-by-10-meter grid. Monsanto analyzes the data in conjunction with the genetic properties of its seeds, combines all this information with climate predictions, and delivers precise planting instructions or “scripts” to iPads connected to planting equipment in the field. Tools such as FieldScripts would allow farmers to pinpoint areas that need more or less fertilizer, saving them the cost of spreading fertilizer everywhere while boosting their yields in areas that have performed more poorly and reducing the amount of excess fertilizer that enters the water table—good for the environment.

Prescriptive planting could help raise the aver- age corn harvest to more than 200 bushels an acre from the current 160 bushels, some experts say. On a larger scale, according to Monsanto, the world’s largest seed company, data-driven planting advice

Chapter 1 Information Systems in Global Business Today 63

to farmers could increase worldwide crop produc- tion by about $20 billion a year. So far, output from prescriptive planting systems has not achieved those spectacular levels.

Is there a downside to all of this? For small farm- ers, the answer may be yes. The costs of investing in the new technology and vendor service fees for some of these tools such as FieldScripts can amount to more than what many small farmers can earn in extra yield from their farms. According to Sara Olson of Lux Research Inc., the problem with preci- sion agriculture is the diminishing returns that come along with costly technologies on smaller farms. That means that only the really big farms are likely to benefit.

Monsanto estimates that FieldScripts will improve yields by five to 10 bushels per acre. With corn at about $4 per bushel, that’s an increase of $20 to $40 per acre. A small farm of about 500 acres could get anywhere from $10,000 to $20,000 in extra revenue. Monsanto charges around $10 per acre for the ser- vice, so the farm will wind up paying about $5,000— in addition to paying tens of thousands of dollars to either retrofit its existing planting equipment or buy more modern tractors that include the elec- tronics gear that syncs the “scripts” provided by the Monsanto online service with the planter’s onboard navigation systems. Monsanto also charges an extra $15 per acre for its local climate prediction service. A small farm will most likely lose money or break even for the first two years of using a service like Field- Scripts, according to Olson.

For a large farm of about 5,000 acres, FieldScripts could increase revenues by between $100,000 and $200,000. With Monsanto’s service costing about $50,000, that farm’s total profits will run between $50,000 to $150,000, more than sufficient to offset the cost of updating farm machinery. Whether a farm is big or small, the impact of FieldScripts would be minimal in good years because yields would be high regardless. The technology is likely to have a bigger impact in years when conditions aren’t so propitious. A spokesperson for Monsanto stated that the outcome of its prescriptive planting system is less about the size of the farm and more about the farmer’s technology know-how. According to Michael Cox, codirector of investment research at securities firm Piper Jaffray Cos., revenue from FieldScripts and other technology-driven products and services could account for 20 percent of Monsanto’s projected growth in per-share earnings by 2018.

Although some farmers have embraced prescrip- tive planting, others are critical. Many farmers are

suspicious about what Monsanto and DuPont might do with the data collected about them. Others worry about seed prices rising too much because the big companies that developed prescriptive planting tech- nology are the same ones that sell seeds. (There has been a surge in seed prices during the past 15 years as the biggest companies increased their market share. Monsanto and DuPont now sell about 70 per- cent of all corn seed in the United States.) Farmers also fear that rivals could use the data to their own advantage. For instance, if nearby farmers saw crop- yield information, they might rush to rent farmland, pushing land and other costs higher. Other farmers worry that Wall Street traders could use the data to make bets on futures contracts. If such bets push futures-contract prices lower early in the growing season, it might squeeze the profits farmers might lock in for their crops by selling futures.

There are not yet any publicly known examples where a farmer’s prescriptive-planting informa- tion has been misused. Monsanto and DuPont offi- cials say the companies have no plans to sell data gathered from farmers. Monsanto has stated that it supports industrywide standards for managing infor- mation collected from fields and that it wouldn’t access the data without permission from farmers. Deere & Co., which has been working with DuPont and Dow Chemical Co. to formulate specialized seed-planting recommendations based on data from its tractors, combines, and other machinery, says it obtains consent from customers before sharing any of their data.

Some farmers have discussed aggregating plant- ing data on their own so they could decide what information to sell and at what price. Others are working with smaller technology companies that are trying to keep agricultural giants from dominating the prescriptive-planting business. Startups such as Farmobile LLC, Granular Inc., and Grower Informa- tion Services Cooperative are developing informa- tion systems that will enable farmers to capture data streaming from their own tractors and combines, store the data in their own remote data centers, and market the data to seed, pesticide, and equipment companies or futures traders if they so choose. Such platforms could help farmers wring larger profits from precision farming and give them more control over the information generated on their fields.

Sources: “Precision Agriculture,” www.research.ibm.com , accessed April 4, 2016; Matthew J. Grassi, “Agrible Launches Nutrient Forecasting, Spray Smart Features,” PrecisionAg, March 9, 2016; www.monsanto.com , accessed April 4, 2016; Jacob Bunge, ”On the Farm: Startups Put Data in Farmers’ Hands,” Wall Street Journal,

64 Part One Organizations, Management, and the Networked Enterprise

August 31, 2015; Mary K. Pratt, “How Technology Is Nourishing the Food Chain,” Computerworld, August 18, 2015; and Michael Hickins, “For Small Farmers, Big Data Adds Modern Problems to Ancient Ones,” Wall Street Journal, February 25, 2014.

CASE STUDY QUESTIONS 1- 12 List and describe the technologies used in this

case study.

1- 13 In what sense are U.S. farms now digital firms? Explain your answer.

1- 14 How is information technology changing the way farmers run their business?

1- 15 How do the systems described in this case improve farming operations?

1- 16 How do precision agriculture systems support decision making? Identify three different deci- sions that can be supported.

1- 17 How helpful is precision agriculture to individ- ual farmers and the agricultural industry? Explain your answer.

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

1- 18 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 the objective.

1- 19 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.

Chapter 1 Information Systems in Global Business Today 65

Chapter 1 References

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McKinsey Global Institute. “Digital America: A Tale of the Haves and Have-Mores (December 2015).

Mithas, Sunil and Roland T. Rust, “How Information Technology Strategy and Investments Influence Firm Performance: Conjecture and Empirical Evidence.” MIS Quarterly (March 2016).

Nevo, Saggi and Michael R. Wade. “The Formation and Value of IT-Enabled Resources: Antecedents and Consequences of Synergistic Relationships.” MIS Quarterly 34, No. 1 (March 2010).

Otim, Samual, Kevin E. Dow, Varun Grover, and Jeffrey A. Wong. “The Impact of Information Technology Investments on Downside Risk of the Firm: Alternative Measurement of the Business Value of IT.” Journal of Management Information Systems 29, No. 1 (Summer 2012).

Ren, Fei and Sanjeev Dewan. “Industry-Level Analysis of Information Technology Return and Risk: What Explains the Variation?” Journal of Management Information Systems 21, No. 2 (2015).

Ross, Jeanne W. and Peter Weill. “Four Questions Every CEO Should Ask About IT.” Wall Street Journal (April 25, 2011).

Sabherwal, Rajiv and Anand Jeyaraj. “Information Technology Impacts on Firm Performance: An Extension of Kohli and Devaraj (2003).” MIS Quarterly (December 2015).

Sampler, Jeffrey L., and Michael J. Earl. “What’s Your Information Footprint?” MIT Sloan Management Review (Winter 2014).

Saunders, Adam and Erik Brynjolfsson. “Valuing Information Technology Related Intangible Assets.” MIS Quarterly (March 2016).

Shanks, Ryan, Sunit Sinha and Robert J. Thomas. “Managers and Machines, Unite!” Accenture (2015).

Stats-Wordpress. “Wordpress Global Statistics,” https://wordpress. com , accessed April 22, 2016.

Teece, David. Economic Performance and Theory of the Firm : The Selected Papers of David Teece. London: Edward Elgar Publishing (1998).

U.S. Bureau of Labor Statistics. Occupational Outlook Handbook . (December 17, 2015).

Weill, Peter and Jeanne Ross. IT Savvy: What Top Executives Must Know to Go from Pain to Gain . Boston: Harvard Business School Press (2009).

Brynjolfsson, Erik and Lorin M. Hitt. “Beyond Computation: Information Technology, Organizational Transformation, and Business Performance.” Journal of Economic Perspectives 14, No. 4 (2000).

Brynjolfsson, Erik. “VII Pillars of IT Productivity.” Optimize (May 2005).

Bureau of Economic Analysis. National Income and Product Accounts . www.bea.gov , accessed April 19, 2016.

Carr, Nicholas. “IT Doesn’t Matter.” Harvard Business Review (May 2003).

Chae, Ho-Chang, Chang E. Koh, and Victor Prybutok. “Information Technology Capability and Firm Performance: Contradictory Findings and Their Possible Causes.” MIS Quarterly 38, No. 1 (March 2014).

Conaghan, Jim. “Newspaper Digital Audience Grew Twice as Fast as the Internet in the Past 12 Months.” Newspaper Association of America (October 9, 2015).

Curtis, Sophie. “Dot-com at 30: Will the World’s Best-Known Web Domain Soon Be Obsolete?” Telegraph.co.uk (March 15, 2015).

Dedrick, Jason, Vijay Gurbaxani, and Kenneth L. Kraemer. “Information Technology and Economic Performance: A Critical Review of the Empirical Evidence.” Center for Research on Information Technology and Organizations, University of California, Irvine (December 2001).

eMarketer. “eMarketer Numbers for: Blogging, 2014–2018.” (2016). eMarketer. “Worldwide Retail E-commerce Sales.” (2016a). eMarketer. “Tablet Users to Surpass 1 Billion Worldwide in 2015.”

(January, 2015a). eMarketer. “US Adults Spend 5.5 Hours with Video Content Each

Day.” (April 16, 2015b). eMarketer. “US Digital Ad Spending, 2013–2019.” (March 2015c). FedEx Corporation. “SEC Form 10-K for the Fiscal Year Ended May

31, 2015.” Friedman, Thomas. The World Is Flat. New York: Picador (2007). Garretson, Rob. “IT Still Matters.” CIO Insight 81 (May 2007). Hughes, Alan and Michael S. Scott Morton. “The Transforming

Power of Complementary Assets.” MIT Sloan Management Review 47. No. 4 (Summer 2006).

Lamb, Roberta, Steve Sawyer, and Rob Kling. “A Social Informatics Perspective of Socio-Technical Networks.” http://lamb.cba. hawaii.edu/pubs (2004).

Laudon, Kenneth C. Computers and Bureaucratic Reform . New York: Wiley (1974).

66 Part One Organizations, Management, and the Networked Enterprise

68

MyLab MIS™ Visit mymislab.com for simulations, tutorials, and end-of-chapter problems.

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?

VIDEO CASES

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

CHAPTER CASES

Enterprise Social Networking Helps ABB Innovate and Grow New Systems Help Plan International Manage Its Human Resources Collaborating the Glasscubes Way Social Business: Full Speed Ahead or Proceed with Caution?

C H

A P

T E

R

2 Global E-business and Collaboration

69

ABB, headquartered in Zurich, Switzerland, is a global supplier of power grids, industrial motors and drives, and generators for industrial, com-mercial, and utility operations. The company has about 135,000 employees in 100 countries around the world and is noted for its innovations in ship propulsion and power transmission. Collaboration, sharing informa- tion, and ongoing innovation are essential for ABB’s growth and business success.

ABB had a corporate intranet, but man- agement believed it was too static and outmoded to meet its current needs for empowering and energizing employees. The intranet had poor capabilities for searching for information, and informa- tion was often added instead of changed. This often created two or more differ- ent versions of the same content. ABB employees were storing information in wikis, local file servers, and other knowl- edge platforms besides the intranet, add- ing to the confusion and inefficiency. There were nine different platforms employees might need to access to do their work. Additionally, the intranet lacked tools to help staff have dialogues, share ideas, and work with other mem- bers of the company, including people that they might not know.

What ABB needed was a central resource that would support dynamic knowledge sharing. The entire staff would be able to easily locate information about the company as well as updates on the latest developments of current initiatives and projects. Tools that would help employees work more closely together—including the ability to locate employees in other parts of the com- pany who were experts in specific subjects—would help streamline operations and speed up key business functions.

ABB replaced its outmoded intranet with one called Inside+ that is more dynamic and socially enabled. Inside+ provides ABB employees with a single entry point to all the information and tools they need for their jobs. These include Microsoft Yammer, Office 365, and Sharepoint.

Yammer is an enterprise social networking platform used by more than 200,000 organizations worldwide. Yammer enables employees to create

Enterprise Social Networking Helps ABB Innovate and Grow

© Andrey Popov/Shutterstock

groups to collaborate on projects and share and edit documents and includes a news feed to find out what’s happening within the company. Yammer can be accessed through the web and desktop and mobile devices and can be integrated with other systems such as Microsoft 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 Office productivity applications (word processing, spreadsheet, electronic presentations, data management). Its mail service works seamlessly with an online meeting and videoconferencing service, simplifying online meetings.

Inside+ integrates all the key internal platforms that employees use for their work. Individualized Yammer feeds occupy the left half of the landing page. An employee’s Yammer feed displays e-mail messages and updates to documents that person has been working on. Conversations on Yammer are archived and searchable. Employees can access Microsoft SharePoint from their Inside+ toolbar, and Office 365 applications are also seamlessly linked to Yammer. This enterprise social network is now used by 50,000 ABB employees-nearly one- third of the company’s global workforce.

How has ABB benefited from becoming more “social”? Employees are using Yammer and Inside+ to collaborate on projects, share ideas, and discover peo- ple in other departments with useful expertise that could help them in their work. Moving conversations from e-mail to Yammer has made discussions more productive with better employee engagement. Some ABB teams report that their e-mail messages have shrunk by 50 percent. Staff can be productive anytime and anywhere because they are able to access Inside+ from smart- phones and tablets. More than half the comments employees post come from mobile devices. The company is also saving on conference costs. For example, instead of flying 100 employees to Zurich for an annual communications con- ference in 2012 and 2013, the company ran the conference online with all dis- cussion housed and archived on Yammer. Many more employees feel closely involved with the business as a whole—something that could not have been achieved with the old system.

Sources: Adam Bonefeste, “ABB Reinvents Its Intranet with Social Networking Technology,” www.yammer.com , January 28, 2015; Rachel Miller, “ABB Employees Have 50,000 Reasons to Discover Yammer,” allthingsic.com , accessed March 8, 2016; and www.abb.com , accessed March 14, 2016.

ABB’s experience illustrates how much organizations today rely on informa-tion systems to improve their performance and remain competitive. It also shows how much systems supporting collaboration and teamwork make a dif- ference in an organization’s ability to innovate, execute, and grow profits.

The chapter- opening diagram calls attention to important points raised by this case and this chapter . ABB itself is a knowledge-intensive company that prizes innovation, but it was hampered by outdated processes and tools for managing information that prevented employees and managers from working efficiently and effectively. This affected the company’s ability to create and deliver new leading-edge products and services.

ABB management decided that the best solution was to deploy new technol- ogy to move from a static corporate knowledge and work environment to one

70 Part One Organizations, Management, and the Networked Enterprise

that actively engaged employees and enabled them to obtain more knowledge from colleagues. The company consolidated its multiple knowledge platforms so that all employees would use Inside+ as a single entry point into ABB’s systems for knowledge sharing and collaboration. ABB took advantage of Micro- soft Yammer’s social tools to increase employee collaboration and engagement. Inside+ integrates all of the ways employees share knowledge. There is more effective sharing of institutional knowledge, and the company has become more innovative and efficient.

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

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

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 information, make better decisions, and improve the execution of their busi- ness 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 material, information, and knowledge among the participants in business pro- cesses. Business processes also refer to the unique ways in which organizations

Deploy Yammer

Management

Organization

Business Challenges

Technology

Information System

Business Solutions

Outdated static technology Geographically dispersed

workforce

Change knowledge and collaboration processes

Change organizational culture Inside+

Provide new channels for knowledge acquisition, innovation, and collaboration

Improve productivity Reduce costs

Develop knowledge- sharing strategy and goals

Chapter 2 Global E-business and Collaboration 71

coordinate work, information, and knowledge and the ways in which manage- ment 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 ABB’s improvements in knowledge-sharing processes clearly illustrates these points , as do many of the other cases in this text .

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 established, the production department pulls the product from inventory or produces the product. Then the product is shipped (and this may require work- ing 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 prepares 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.

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

72 Part One Organizations, Management, and the Networked Enterprise

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 decision making. New information technology frequently changes the way a business works and supports entirely new business models. Downloading a Kindle e-book from Amazon, buying a computer online at Best Buy, and down- loading 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.

Generate order

Assemble product

Ship product

Manufacturing and

Production

Accounting

Sales

Approve credit

Generate invoice

Check credit

Submit order

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 73

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.

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 activities 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 processing 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 keep- ing, 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.

74 Part One Organizations, Management, and the Networked Enterprise

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 represents 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 orga- nization. The data in the system are combined in different ways to create reports of interest to management and government agencies and to send pay- checks 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 infor- mation 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 reports such as income statements and balance sheets. It also supplies employee payment his- tory data for insurance, pension, and other benefits calculations 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?

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.

Chapter 2 Global E-business and Collaboration 75

Systems for Business Intelligence Firms also have business intelligence systems that focus on delivering infor- mation to support management decision making. Business intelligence is a contemporary term for data and software tools for organizing, analyzing, and providing access to data to help managers and other enterprise users make more informed decisions. Business intelligence addresses the decision-mak- ing needs of all levels of management. This section provides a brief introduc- tion 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 mid- dle management. MIS provide middle managers with reports on the organiza- tion’s current performance. This information is used to monitor and control the business 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, production, and accounting into MIS files that are used to pro- vide managers with reports. Figure 2. 4 shows a sample report from this system.

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

Transaction Processing Systems Management Information Systems

Order file

Production master

file

Accounting files

Managers

Reports

MIS FILES

Sales data

Unit product cost data

Product change data

Expense data

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.

76 Part One Organizations, Management, and the Networked Enterprise

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 deci- sion 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 oth- ers, and bids for shipping contracts in the open market to carry general cargo. A voyage-estimating system calculates financial and technical voy- age details. Financial calculations include ship/time costs (fuel, labor, capi- tal), freight rates for various types of cargo, and port expenses. Technical details include a myriad of 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?

PRODUCT CODE

PRODUCT DESCRIPTION

SALES REGION

Carpet Cleaner

TOTAL

Northeast South Midwest West

4469

Consolidated Consumer Products Corporation Sales by Product and Sales Region: 2017

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 77

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 senior 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?

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

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.

78 Part One Organizations, Management, and the Networked Enterprise

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 reliability, inventory management, safety, and energy consumption. With the displayed informa- tion, the COO and his team can review the performance of each Valero refin- ery 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 to 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 single 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 real-world examples of several of these types of systems used by an organization with employees and staff members working all over the world. Note the types of systems illustrated by this case and the role they play in improving both operations and decision making.

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

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

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1000

1500

2000

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

Chapter 2 Global E-business and Collaboration 79

Founded in 1937, Plan International is one of the oldest and largest children’s development organiza- tions in the world, promoting rights and opportuni- ties for children in need. With global headquarters in Surrey, UK, the organization has operations in more than 70 countries (including 51 developing nations in Africa, Asia, and the Americas), and worked with 81.5 million children in more than 86,676 communi- ties in 2014. Plan International has grown steadily over the years and has more than 1,200 paid staff members and more than 9,000 volunteers.

Plan International is not affiliated with any reli- gious or political group or government. It obtains about half of its funding from donations from corpo- rations, governments, and trusts and the rest from individuals willing to sponsor a child.

Plan International works with children, families, communities, and local governments to bring about positive change for children in health, education, water and sanitation, protection, economic security, and coping with catastrophes such as wars, floods, earthquakes, and other natural disasters. For exam- ple, Plan has sent workers to help children affected by the 2013 Typhoon Haiyan in the Philippines and the Ebola virus outbreak in West Africa. In addition to coordinating emergency response efforts, Plan runs public health information campaigns and trains health and aid workers.

Plan’s objective is to reach as many disadvan- taged children as possible, and this requires a highly coordinated approach. When an emergency strikes, Plan must locate and deploy the most appropriate resources wherever they are required. To accomplish this a disaster relief team at Plan’s head office must sift through data on all of its 10,000 aid workers in 70 countries to see which people have the appropri- ate skills and experience in medical aid, child protec- tion, education, and shelter management to provide the necessary services. Typically the people chosen to respond to a specific emergency will have a vari- ety of skills, including frontline workers with knowl- edge of the language and the local area. Plan now has the ability see data about all of its workers’ skills the moment an emergency occurs, so it can respond immediately with the right team of people.

Plan is now able to instantly assemble perti- nent information about its workers because of its new human resources (HR) systems. The human

resources systems allow Plan to track not only the skills people bring when they are hired but also any additional training or experience they have acquired for disaster response emergencies while working for Plan.

The human resources systems also help Plan manage the grants and donations it receives. When a donation first comes in, it is sent to Plan’s London headquarters and allocated from there. If, for exam- ple, Plan receives a $40 million grant to use in Sierra Leone, Plan will need different people to manage that grant for Plan. Plan needs to be able to scan the organization globally to find the right people.

Before the new human resources systems were implemented, Plan was working with very outdated decentralized systems that were partially manual. The organization had to keep track of employees using a patchwork of 30 different human resources systems, spreadsheets, and documents.

It could take weeks to locate people with the right language skills, disaster experience, and medical training. When a massive earthquake struck Haiti in 2010, Plan had to email everyone asking if staff knew any people who could speak French, had the appro- priate disaster management skills, and were avail- able to help.

In 2012 Plan began looking for a human resources system that could handle its growing global work- force, support common processes across all regions, and deliver information on a secure mobile platform in regions where technology infrastructure was not well developed. The organization selected a cloud- based HR system from SAP’s SuccessFactors as well as on-premises software from SAP, which satisfied these requirements and are integrated with one another. Implementation of the new system began in May 2013. It took only 16 weeks to implement a fully working system at Plan’s international headquarters, and all of Plan’s international regions were brought onto the system by 2014.

The cloud-based SuccessFactors system runs in remote computer centers managed by SuccessFac- tors and is accessible to users via the Internet. The system provides a centralized employee profile with a comprehensive view of employee skill sets, expertise, experience, and career interests. Through an intuitive interface, employees can update their own information, creating an easily searchable

INTERACTIVE SESSION: ORGANIZATIONS

New Systems Help Plan International Manage Its Human Resources

80 Part One Organizations, Management, and the Networked Enterprise

directory that every employee can access. Plan uses SuccessFactors software modules for recruiting, per- formance and goals, succession and development, compensation, and learning. Plan also implemented SuccessFactors Workforce Planning and on-premises SAP Personnel Administration and Organization Management software. Workforce planning entails systematic identification and analysis of what an organization is going to need in terms of the size, type, experience, knowledge, skills, and quality of its workforce to achieve its business objectives. SAP’s Personnel Administration software manages employee recordkeeping and organizational data concerning the recruitment, selection, retention, development, and assessment of personnel. SAP’s Organization Management software enables organi- zations to depict and analyze their organizational and reporting structures.

The new human resources systems provide a bird’s-eye view of the entire Plan workforce, showing immediately how many people work for Plan, where they are located, what skills they possess, their job responsibilities, and their career paths. Plan’s central human resources staff spend much less time chasing information. For example, assembling and analyzing data from employee performance reviews, including

4. How did these systems improve operational efficiency?

5. How did these systems improve decision making? Give examples of two decisions improved by Plan’s new systems.

performance-based salary calculations, used to take up to six months. Now all it takes is the push of a button. Employees are able to access their human resources records online and update information such as address, family details, and emergency contacts. By enabling employees to perform these tasks them- selves, Plan saves valuable human resources staff time, which can be directed toward more value-adding work. Plan is also able to show its donors exactly how their contributions were spent and the results.

Using SuccessFactors and SAP human resources software, Plan staff are able to identify and dispatch relief workers to disaster areas within hours. When Typhoon Haiyan struck the Philippines in Novem- ber 2013, Plan specialists were on the scene within 72 hours. Being able to deploy staff to emergencies so rapidly has saved more lives. What’s more, Plan’s improved response time has helped it secure new sources of funding by giving it more credibility with governments, corporations, and other sources of grants and donations.

Sources: Lauren Bonneau, “Customer Snapshot: Changing Lives and Creating Self-Sufficient Communities—One Child at a Time,” www.sap.com , accessed March 10, 2016; “Better Planning for Plan International: The Life-Saving Power of Improved Data Visibility,” SAP Insider Profiles, January 1, 2015; and www.plan-international. org , accessed March 10, 2016.

CASE STUDY QUESTIONS

1. Describe the problem faced by Plan International. What management, organization, and technology factors contributed to this problem?

2. Describe the system solution to this problem. Describe the types of systems used for the solution.

3. Why is human resources so important at Plan International?

information 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 solu- tions to this problem.

Chapter 2 Global E-business and Collaboration 81

One solution is to implement enterprise applications , which are systems that span functional areas, focus on executing business processes across the business firm, and include all levels of management. Enterprise applications help businesses become more flexible and productive by coordinating their business processes more closely and integrating 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 inte- grates a related set of functions and business processes to enhance the perfor- mance of the organization as a whole. Figure 2. 6 shows that the architecture for these enterprise applications encompasses processes spanning the entire organization and, in some cases, extending beyond the organization to custom- ers, 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 manufacturing and production, fi nance and accounting, sales and market- ing, and human resources into a single software system. Information that was previously fragmented in many different systems is stored in a single

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.

82 Part One Organizations, Management, and the Networked Enterprise

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 sched- ule shipment. The warehouse informs the factory to replenish whatever has been depleted. The accounting department is notified to send the customer an invoice. Customer service representatives track the progress of the order through every step to inform customers about the status of their orders. Manag- ers are able to use firmwide information to make more precise and timely deci- sions 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 sys- tems help suppliers, purchasing fi rms, distributors, and logistics companies share information about orders, production, inventory levels, and delivery of products and services so they can source, produce, and deliver goods and ser- vices effi ciently. The ultimate objective is to get the right amount of their prod- ucts from their source to their point of consumption in the least amount of time and at the lowest cost. These systems increase fi rm profi tability 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 infor- mation 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 rela- tionship management (CRM) systems to help manage their relationships with their customers. CRM systems provide information to coordinate all of the business processes that deal with customers in sales, marketing, and service to optimize revenue, customer satisfaction, and customer retention. This infor- mation helps fi rms identify, attract, and retain the most profi table customers; provide better service to existing customers; and increase sales.

Knowledge Management Systems Some fi rms perform better than oth- ers because they have better knowledge about how to create, produce, and deliver products and services. This fi rm knowledge is unique, is diffi cult to imitate, and can be leveraged into long-term strategic benefi ts. Knowledge management systems (KMS) enable organizations to better manage pro- cesses for capturing and applying knowledge and expertise. These systems collect all relevant knowledge and experience in the fi rm and make it avail- able wherever and whenever it is needed to improve business processes and management decisions. They also link the fi rm to external sources of knowledge.

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

Chapter 2 Global E-business and Collaboration 83

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 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, including weather forecasts, performance schedules, and details about groups and celebrities visiting the parks. The company also uses an extranet to broad- cast information about schedule changes and park events to its 30,000 seasonal employees. 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 elec- tronic 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 similar changes in the public sector. Governments on all levels are using Internet tech- nology to deliver information and services to citizens, employees, and businesses with which they work. E-government refers to the application of the Internet and networking technologies to digitally enable government and public sector agencies’ relationships with citizens, businesses, and other arms of government.

In addition to improving delivery of government services, 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 fund-raising.

84 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 is it 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? Information sys- tems can’t make decisions, hire or fire people, sign contracts, agree on deals, or adjust the price of goods to the marketplace. In addition to the types of systems we have just described, businesses need special systems to support collabora- tion and teamwork.

What Is Collaboration? Collaboration is working with others to achieve shared and explicit goals. Col- laboration focuses on task or mission accomplishment and usually takes place in a business or other organization and between businesses. You collaborate with a colleague in Tokyo having 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, depending 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 assigned 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. 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. Profes- sional jobs require substantial education and the sharing of information 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.

Chapter 2 Global E-business and Collaboration 85

• 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 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 nation, or even around the globe. For instance, Henry Ford developed the first mass-production automobile plant at a single Dearborn, Michigan, fac- tory. In 2015, Ford employed 199,000 people at about 67 plants worldwide. With this kind of global presence, the need for close coordination of design, production, marketing, distribution, and service obviously takes on new importance 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 indi- viduals working on their own. Popular notions of the crowd (“crowdsourcing” 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 into 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

86 Part One Organizations, Management, and the Networked Enterprise

employees how well they are doing. Nearly everyone involved in the creation of value will know much more about everyone else.

If such an environment could be created, it is likely to drive operational effi- ciencies, 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 Although many articles and books have been written about collaboration, nearly all of the research on this topic is anecdotal. Nevertheless, there is a general 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. A global sur- vey of business and information systems 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 Sul- livan, 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 percent ( 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.

Building a Collaborative Culture and Business Processes Collaboration won’t take place spontaneously in a business firm, especially if there is no supportive culture or business processes. Business firms, espe- cially large firms, had a reputation in the past for being “command and control”

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 or purchase 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 87

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. 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 PerformanceCollaboration Quality

FIGURE 2. 7 REQUIREMENTS FOR COLLABORATION

Successful collaboration requires an appropriate organizational structure and culture along with appro- priate collaboration technology.

88 Part One Organizations, Management, and the Networked Enterprise

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 dif- ferent. Senior managers are responsible for achieving results but rely on teams of employees to achieve and implement the results. Policies, prod- ucts, 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 per- formance in a team. The function of middle managers is to build the teams, coordinate their work, and monitor their performance. The business culture and business processes are more “social.” In a collaborative culture, senior management establishes collaboration and teamwork as vital to the organi- zation, 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 com- munication and collaboration tools for interaction jobs. Their software operates on computers, mobile phones, and other wireless devices and includes features for sharing files as well as transmitting messages. Many instant messaging sys- tems allow users to engage in real-time conversations with multiple partici- pants simultaneously. In recent years, e-mail use has declined, with messaging and social media becoming preferred channels of communication.

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.

Chapter 2 Global E-business and Collaboration 89

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 together from many different locations. The most widely used are Internet- based audio conferencing and video conferencing systems, cloud collaboration services such as Google’s online services and tools, corporate collaboration sys- tems such as Microsoft SharePoint and IBM Notes, and enterprise social net- working tools such as Salesforce Chatter, Microsoft Yammer, Jive, Facebook at Work, 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 tech- nologies. Companies such as Heinz, GE, and PepsiCo are using virtual meet- ing systems for product briefi ngs, training courses, strategy sessions, and even inspirational chats.

A videoconference allows individuals at two or more locations to communi- cate 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 appearance of being present at a location other than his or her true physical location. Free or low-cost Internet-based systems such as Skype group videoconferencing, Google+ Hangouts, Zoom, and ooVoo are of lower quality, but still useful for smaller companies. Apple’s FaceTime is useful for one-to-one videoconferenc- ing. 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, 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 via webcam.

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

90 Part One Organizations, Management, and the Networked Enterprise

The current business environment poses a number of challenges to the workplace, and businesses must offer new ways of accommodating flexi-timings, employees who work from home, the use of per- sonal devices for work, and reduced numbers of personal meetings. Each of these challenges requires changes in the IT infrastructure to accommodate the employee. For example, if employees are working from remote locations, they still need to connect in real time to share their work progress and commu- nicate with others. In such cases, a virtual space is required for employee collaboration.

The National School of Healthcare Science (NSHCS) was established in 2011 by Health Edu- cation England (West Midlands) to provide new healthcare science education and training programs nationally. To implement this program NSHCS needed a way for people working in teams in differ- ent locations to co-create documents and collaborate on scientific topics. This document creation involved a number of external associates who are involved in assessments, policies, strategic planning, and so on. Using email alone for such communication proved imprudent as it led to fragmented and disorganized discussions spread across multiple email threads. They required a better and reliable collaboration solution, and looked for it at the Digital Marketplace, which is the government’s framework for finding and hiring such services. After shortlisting a number of cloud-collaboration vendors and using predeter- mined multi-criteria scoring and multiple trials, the NSHCS settled on Glasscubes, which rated best in both price and quality.

Based in Buckinghamshire, UK, Glasscubes has been offering collaboration services to firms since 2008. It has a large customer base of more than 50,000 customers spread globally in over 100 coun- tries. The name of the firm is inspired by their vision of collaboration: to create a tool that allows users to visualize information and activities outside their cube (desk, office cubicle, or floor). Glasscubes means providing collaboration for individuals and groups who are isolated, allowing them to see and be seen. What Glasscubes offers its clients is an online workspace.

Clients can invite anyone to join this workspace, be it their employees, customers, suppliers—anyone who needs to share information and communicate

INTERACTIVE SESSION: TECHNOLOGY

Collaborating the Glasscubes Way

with the firm. Using this online space, people can share files, assign tasks, discuss ideas and topics, and organize schedules. The collaboration software provides a centralized repository for file sharing, and as the storage is on the cloud, there is no restriction on file size or number of files that can be uploaded to this space. The software can also automatically version the same file when it is uploaded after modifications.

Glasscubes’s Team Collaboration feature allows team participants to have conversations by posting messages on the workspace to be viewed by all team members, who can also comment on the post. New attachments can also be posted here. A feature called Workspace Activity Feed summarizes the entire con- versation, displaying questions, comments, etc. as quick links, which helps in day-to-day team commu- nication. An instant messenger allows users to com- municate privately if they need to, and any number of people can be invited to join that conversation. Any new and important update can be highlighted in the workspace using the Workspace Announcement Feature. The announcement stays in a user’s work- space until they acknowledge it, thus ensuring that all team members receive important updates.

The users can also set up a free conference class for up to 50 participants without any prior booking or billing. When a team is working on a specific project that involves a number of tasks, Glasscubes allows tasks to be assigned to individuals or groups as well. Users can specify details like priority, what needs to be done to complete the task, by what deadline, and by whom. On completion, the task can be marked as completed and its duration recorded. Glasscubes also provides project management facilities such as Gantt charts, critical path analysis, cost and time track- ing of tasks, and comparison with estimates. Team members can share their individual calendars and overlay them to build a team calendar that shows everyone’s availability. All the contacts of the organi- zation, including suppliers, customers, and partners, can be stored in Connect, a central place specifically for contacts. The client firm’s CRM data can also be transferred here. Glasscubes also offers cloud- based intranet, which means that users can access it anywhere with a device that supports an Internet browser. Data security is not an issue as all data is remotely backed up using SSL encryption. This can

Chapter 2 Global E-business and Collaboration 91

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 devices 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 document creation and sharing. OneDrive provides online storage for Microsoft Office doc- uments 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, a suite of productivity applications that offer collaborative editing on documents, spreadsheets, and presentations. Google’s cloud-based productiv- ity suite for businesses (word processing, spreadsheets, presentations, calendars, and mail) called Google Apps for Business also works with Google Drive.

Google Sites allows users to quickly create online team-oriented sites where multiple people can collaborate and share files. Google+ is Google’s effort to make these tools and other products and services it offers more “social” for both consumer and business use. Google+ users can create a profile as well as “Circles” for organizing people into specific groups for sharing and collaborat- ing. “Hangouts” enable people to engage in group video chat, with a maximum of 10 people participating at any point in time.

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 Offi ce,

CASE STUDY QUESTIONS

also be used as an extranet by extending invitations to users outside the firm to connect to the workspace and share information.

According to Stuart Sutherland, who heads Infor- mation and Digital Systems at the NSHCS, Glass- cubes’s document control handling worked very well, and adoption of the software by the firm was very smooth owing to its ease of use. Glasscubes set up multiple online workspaces for the NSHCS and invited its team members to access the workspace

from anywhere, using any device. The team can now directly post their content onto the workspace, and thanks to the versioning of uploaded documents, they can now be sure that the content they get is the latest and most accurate.

Sources: www.glasscubes.com, accessed January 13, 2017; “Best UK Collaboration Software Reviews 2017,” www.serchen.co.uk, accessed January 13, 2017; Jill Duffy, “The Best Online Collabora- tion Software of 2017,” uk.pcmag.com, January 5, 2017, accessed January 13, 2017.

1. Discuss the features of Glasscubes as a collabora- tion software.

2. Why did the NSHCS require a tool for collabora- tion? Was Glasscubes a feasible option?

3. Name some other areas where such software can be useful. Discuss at least one such area.

Case contributed by Sahil Raj, Punjabi University

92 Part One Organizations, Management, and the Networked Enterprise

including Offi ce 365, Microsoft’s online web-based version of these tools offered as a subscription service. SharePoint software makes it possible for employees to share their documents and collaborate on projects using Offi ce documents as the foundation.

SharePoint can be used to host internal websites that organize and store information in one central workspace to enable teams to coordinate work activ- ities, 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 together closely on tasks, projects, and documents. Enterprise search tools help locate people, expertise, and content. SharePoint now features social tools.

Southern Valve & Fitting USA (SVF) provides wholesalers with plumbing, irrigation, and utility valves and fittings. The company had initially used EMC Documentum eRoom and Google Docs for document sharing but encountered integration problems. SVF ported its documents and team sites to Microsoft SharePoint Online, which is integrated with Office 365. This solution combines multiple programs for communication and collaboration into a single online service. Employees can access documents from anywhere in the world using a standard Internet connection and make light edits to documents using Micro- soft Office 365 productivity tools. Everything is accessed from a single platform. An order placed in China is handled as a SharePoint project, and all the sales order data and paperwork are shared throughout company ( Microsoft Corpora- tion, 2015 ).

IBM Notes (formerly Lotus Notes) is a collaborative software system with capabilities for sharing calendars, e-mail, messaging, collective writing and editing, 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, RSS aggregators, help desk systems, voice and video conferencing, and online meetings. 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 social tools for this purpose, such as Salesforce Chatter, Microsoft Yammer, Jive, and IBM Connections. Enterprise social networking tools create business value by connecting the members of an organization through profi les, updates, and notifi cations similar to Facebook features but tailored to internal corporate uses. Table 2. 4 provides more detail about these internal social capabilities.

Although companies have benefited from enterprise social networking, internal social networking has not caught on as quickly as consumer uses of Facebook, Twitter, and other public social networking products. 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

Chapter 2 Global E-business and Collaboration 93

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 developed 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 problem: time and space. For instance, you need to collaborate with people in

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.

Same time synchronous

S am

e p

la ce

co lo

ca te

d D

iff er

en t

p la

ce re

m ot

e

Time/Space Collaboration and Social Tool Matrix

Different time asynchronous

Face to face interactions decision rooms, single display groupware, shared table, wall

displays, roomware,...

Continuous task team rooms, large public display,

shift work groupware, project management,...

Remote interactions video conferencing, instant

messaging, charts/MUDs/virtual words, shared screens, multi-user

editors,...

Communication + coordination e-mail, bulletin boards, blogs,

asynchronous conferencing, group calenders, workflow, version control,

wikis,...

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 time or place and whether these interactions are remote or colocated.

94 Part One Organizations, Management, and the Networked Enterprise

different time zones, and you cannot all meet at the same time. Midnight in New York is noon in Bombay, so this makes it difficult to have a videoconfer- ence (the people in New York are too tired). Time is clearly an obstacle to col- laboration 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 framework 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 messag- ing, meeting tools) and asynchronous (e-mail, wikis, document editing) interactions.

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 prod- ucts. Is your firm willing to put proprietary information into the hands of exter- nal service providers over the Internet? Is your firm willing to expose its important operations to systems controlled by other firms? What are the finan- cial 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 prop- erly and are up-to-date? End users manage their systems from a business standpoint, but managing the technology requires a special information sys- tems function.

Chapter 2 Global E-business and Collaboration 95

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 pro- grammers, systems analysts, project leaders, and information systems man- agers. Programmers are highly trained technical specialists who write the software instructions for computers. Systems analysts constitute the prin- cipal 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. Informa- tion systems managers are leaders of teams of programmers and analysts, project managers, physical facility managers, telecommunications manag- ers, 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 consultants, frequently partici- pate 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 integrating technology into the firm’s business strategy. Large firms today also have positions 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 responsible 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 ) .

96 Part One Organizations, Management, and the Networked Enterprise

End users are representatives of departments outside of the information systems group for whom applications are developed. These users are play- ing 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 the next eight years to 2024, IS/MIS will add about 500,000 jobs and will grow 50 percent faster than the average job growth for the economy as a whole. Out of 114 occupations, MIS is ranked 15th in terms of salaries. In 2016 the median wage for IT/MIS jobs is about $80,000, twice the level for all occu- pations. While all IT/IS occupations show above-average growth, the fastest- growing occupations are computer support specialists (12 percent), database administrators (11 percent), systems analysts (21 percent), information security analysts (18 percent), software engineers (17 percent), and information sys- tems managers (15 percent) ( Bureau of Labor Statistics, 2015 ). Unexpectedly, computer programmers will lose 8 percent in this period, in part because the process of creating computer programs is becoming increasingly efficient with the growth of online software services and cloud computing. In general, the management of IT occupations IS showing faster expansion than the technical occupations in IT. With businesses and government agencies increasingly rely- ing on the Internet for computing and communication, 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 2012–2018” 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 responsible for keeping its networks and applications running, or it might use consultants for these services. Larger companies will have a separate infor- mation 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.

Chapter 2 Global E-business and Collaboration 97

Review Summary

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 pay- roll 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 analyti- cal models. All of these types of systems provide business intelligence that helps managers and enterprise employees 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. Enterprise systems integrate the key internal business processes of a firm into a single software sys- tem 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 deliv- ery of products and services. Customer relationship management (CRM) systems coordinate the business processes 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 making, 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 collaboration 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.

98 Part One Organizations, Management, and the Networked Enterprise

Key Terms Business intelligence , 76 Chief data officer (CDO) , 96 Chief information officer (CIO) , 96 Chief knowledge officer (CKO) , 96 Chief privacy officer (CPO) , 96 Chief security officer (CSO) , 96 Collaboration , 85 Customer relationship management (CRM) systems , 83 Decision-support systems (DSS) , 77 Digital dashboard , 79 Electronic business (e-business) , 84 Electronic commerce (e-commerce) , 84 E-government , 84 End users , 96 Enterprise applications , 82 Enterprise systems , 82

Executive support systems (ESS) , 78 Information systems department , 96 Information systems managers , 96 Interorganizational system , 83 IT governance , 97 Knowledge management systems (KMS) , 83 Management information systems (MIS) , 76 Portal , 78 Programmers , 96 Social business , 86 Supply chain management

(SCM) systems , 83 Systems analysts , 96 Teams , 85 Telepresence , 90 Transaction processing systems (TPS) , 74

MyLab MIS To complete the problems marked with the 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 manage- ment 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 benefit businesses.

• Describe the characteristics of executive support systems (ESS) and explain how these systems differ from DSS.

• Explain how enterprise applications improve organizational performance.

• Define enterprise systems, supply chain management systems, customer relationship management systems, and knowledge

management systems and describe their business benefits.

• What is the difference between e-business, e-commerce, and e-government?

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 some of the applications of social busi- ness and explain their business value.

• 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?

• Compare the roles played by programmers, systems analysts, information systems man- agers, the chief information officer (CIO), the chief security officer (CSO), the chief data officer (CDO), and the chief knowledge officer (CKO)

• What is IT governance and what type of questions does it resolve for a firm?

Chapter 2 Global E-business and Collaboration 99

Discussion Questions 2- 5 How could information systems be used to

support the order fulfillment process illus- trated in Figure 2. 1 ? What are the most impor- tant 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 the information

MyLabMIS

MyLabMIS

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 ABB.

MyLabMIS

Hands-On MIS Projects The projects in this section give you hands-on experience analyzing opportunities to improve business pro- cesses 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’s Multimedia Library to access this chapter’s Hands-On MIS Projects.

Management Decision Problems

2- 8 Fulbert Timber Merchants in Brixton, UK, features a large selection of building supplies, including tim- ber, fencing and decking, mouldings, hardwood flooring, sheet materials, windows, doors, ironmongery, and other materials. The prices of building materials are constantly changing. When a customer inquires about the price on fixtures, fittings, hangings, and other items, 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 Fulbert’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 Quincaillerie is a small family hardware store in Paris, France. The owners 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 regis- ter. The owners use their own judgment in identifying items that need to be reordered. What is the busi- ness impact of this situation? How could information systems help the owners 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 con- tains 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 identification 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

100 Part One Organizations, Management, and the Networked Enterprise

supplier’s track record for on-time deliveries, suppliers offering the best accounts payable terms, and suppli- ers offering lower pricing when the same item can be provided by multiple suppliers. Use your spreadsheet software 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 Trans-Europe Transport, a trucking and deliv- ery service based in Brussels, Belgium. Your first assignment is to plan a shipment of paintings from the Museum Aan de Stroom in Antwerp, Belgium, to the Royal Museums of Fine Arts of Belgium in Brussels. To guide your trucker, you need to know the most efficient route between the two cities. Use Google Maps to determine the route that is the shortest distance between the two cities, the route that takes the least time, and the estimated fuel cost for both routes. Compare the results. Which route should Trans-Europe Transport 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.

Social Business: Full Speed Ahead or Proceed with Caution?

CASE STUDY

Many of today’s employees are already well versed in the basics of public social networking using tools such as Facebook, Twitter, and Instagram. Larry Ellison, head of the giant software firm Oracle, even went so far as to declare that social networking should be the backbone of business applications and that Facebook is a good model for how business users should inter- act with software.

According to Gartner, Inc., 50 percent of large orga- nizations will soon have internal Facebook-like social networks, and 30 percent of these will be consid- ered as essential as e-mail and telephones are today. Enterprise social networks will become the primary

communications channels for noticing, deciding on, or acting on information relevant to carrying out work. However, Gartner also notes that through 2015, 80 percent of social business efforts will not achieve the intended benefits due to inadequate leadership and an overemphasis on technology.

Social initiatives in a business are different from other technology deployments. For example, implementations of enterprise resource planning or customer relationship management systems are top-down: Workers are trained in the application and expected to use it. In contrast, social business tools require more of a “pull” approach, one that engages

Chapter 2 Global E-business and Collaboration 101

workers and offers them a significantly better way to work. In most cases, they can’t be forced to use social apps.

When firms introduce new social media technol- ogy (as well as other technologies), employees often resist the new tools, clinging to old ways of work- ing, such as e-mail, because they are more famil- iar and comfortable. There are companies where employees have duplicated communication on both social media and e-mail, increasing the time and cost of performing their jobs. BASF, the world’s larg- est 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 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.

Social media’s key capabilities for managing social networks and sharing digital content can help or hurt an organization. Social networks can provide rich and diverse sources of information that enhance organizational productivity, efficiency, and inno- vation, or they can be used to support preexisting groups of like-minded people which are reluctant to communicate and exchange knowledge with outsid- ers. Productivity and morale will fall if employees use internal social networks to criticize others or pur- sue personal agendas.

Social business applications modeled on consumer-facing platforms such as Facebook and Twitter will not necessarily work well in an organiza- tion that has different objectives. Will the firm use social business for operations, human resources, or innovation? The social media platform that will work best depends on its specific business purpose.

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 traditional

ways need an incentive to use social software. Changing an organization to work in a different way requires enlisting those most engaged and interested in helping and designing and building the right work- place environment for using social technologies.

Management needs to ensure that the internal and external social networking efforts of the company 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 connect to people who have the information they need and who would otherwise be out of reach or difficult to reach. Social business tools should be appropriate for the tasks at hand and the organization’s business pro- cesses, and users need to understand how and why to use them. For example, in 2012 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 was designed to help small teams collaborate without e-mailing larger groups, but very few users adopted it.

Despite the challenges associated with launch- ing an internal social network, there are companies using these networks successfully. For example, Bayer Material Sciences, the $11.8 billion material sciences division of Bayer, made social collabora- tion a success by making the tools more accessible, demonstrating the value of these tools in pilot proj- ects, 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.

Bayer Material Sciences chose IBM Connections for its social business toolset. IBM Connections is a social platform for collaboration, cooperation, and consolidation typically used in a centralized enter- prise social network. Featured are tools for employee profiles; communities of people with common inter- ests and expertise; blogs; wikis; viewing, organizing, and managing tasks; forums for exchanging ideas with others; and polls and surveys of customers and fellow employees along with a home page for each user to see what is happening across that person’s social network and access important social data.

A year after the new collaboration tools were introduced, adoption had plateaued. Working with company information technology and business leaders, management established an ambitious set of goals for growing social business along with seven key performance indicators (KPIs) to mea- sure success. The goals included fostering global

102 Part One Organizations, Management, and the Networked Enterprise

collaboration, creating stronger networks across regions and departments, creating a less hierarchi- cal culture of sharing, and reducing the confusion of which tools are intended for which job.

These efforts are now paying off: 50 percent of employees are now routinely active in the com- pany’s enterprise social network. Although ROI on social business initiatives has been difficult to mea- sure, Bayer Material Sciences has benefited from faster knowledge flows, increased efficiency, and lower operating costs.

Another company that has made social business work is Carlo’s Bake Shop, an old family-owned busi- ness that is the star of the Cake Boss reality television series on the cable television network TL C. The com- pany has 10 locations in New Jersey, New York, and Las Vegas, and people can order custom cakes from its website. Thanks to the popularity of Cake Boss , which created a huge upsurge in demand for Carlo’s products, the firm is looking to create a national presence over the next few years.

However, store operations were holding the com- pany back. Carlo’s was heavily paper-based, and the mountain of paperwork wasted employee time and led to errors, which sometimes resulted in a need to fix or remake cakes or offer partial or total refunds to customers. Custom orders were on paper and carbon paper, order forms were misplaced or lost, and people couldn’t read the handwriting from the order taker.

In the latter half of 2012, Carlo’s implemented Salesforce CRM with the Salesforce social networking tool Chatter as a solution. Some employees and mem- bers of Carlo’s management team initially resisted the new system. They believed that because they already used e-mail, Facebook, and Twitter, they didn’t need another social tool. The company was able to demon- strate the benefits of social business, and bakers and Chatter changed the way they worked.

Carlo’s produces a very large volume of custom cakes from a 75,000-square-foot commissary in Jer- sey City operating around the clock. Chatter is now the de facto standard for internal communication

from order to delivery. If a key cake decorator is away, that person is still included in the communi- cation and discussion process. Upon returning, the decorator can view any changes in color, shape, or design.

Because Carlo’s employees now work more socially, errors are down by more than 30 percent, and crews are able to produce cakes and other cus- tom products more rapidly and efficiently. Managers have access to a data and analytics dashboard that allows them to instantly view store performance and which products are hot and which are not. They can see sales and transaction patterns in depth. As Carlo’s expands nationally and perhaps globally, the ability to connect people and view order streams is critical. Social business tools have transformed an organization that was gradually sinking under the weight of paper into a highly efficient digital business.

Sources: Samuel Greengard, “Changing Your Business into a Social Business,” Baseline, June 18, 2015; Cordelia Kroob, “The Growth of an Enterprise Social Network at BASF,” www.simply-communicate. com , accessed March 12, 2016; Gerald C. Kane, “Enterprise Social Media: Current Capabilities and Future Possibilities,” MIS Quar- terly Executive, March 2015; Dion Hinchcliffe, “In Europe’s Biggest Firms, Social Business Is All Grown Up,” Enterprise Web 2.0, Febru- ary 12, 2015; Margaret Jones, “Top Four Social Collaboration Soft- ware Fails,” http://searchmobilecoputing.techtarget.com , accessed March 17, 2016; Gartner Inc., “Gartner Says 80 Percent of Social Business Efforts Will Not Achieve Intended Benefits Through 2015,” January 29, 2013; and Michael Healey, “Why Enterprise Social Net- working Falls Short,” Information Week, March 4, 2013.

CASE STUDY QUESTIONS 2- 13 Identify the management, organization, and

technology factors responsible for impeding adoption of internal corporate social networks.

2- 14 Compare the experiences implementing internal social networks of the two organiza- tions described in this case. Why were they 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 103

Chapter 2 References

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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).

Bernoff, Josh and Charlene Li. “Harnessing the Power of Social Applications.” MIT Sloan Management Review (Spring 2008).

Boughzala, Imed and Gert-Jan De Vreede. “Evaluating Team Collaboration 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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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,

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the Contribution of the IT Function in Organizations.” MIS Quarterly 36, No. 2 (June 2012).

Johnson, Bradford, James Manyika, and Lareina Yee. “The Next Revolution in Interactions,” McKinsey Quarterly No. 4 (2005).

Kane, Gerald C. “Enterprise Social Media: Current Capabilities and Future Possibilities.” MIS Quarterly Executive 14, No. 1 (2015).

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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).

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Li, Charlene. “Making the Business Case for Enterprise Social Networks.” Altimeter Group (February 22, 2012).

Malone, Thomas M., Kevin Crowston, Jintae Lee, and Brian Pentland. “Tools for Inventing Organizations: Toward a Handbook of Organizational Processes.” Management Science 45, No. 3 (March 1999).

Maruping, Likoebe M. and Massimo Magni. “Motivating Employees to Explore Collaboration Technology in Team Contexts.” MIS Quarterly 39, No.1 (March 2015).

McKinsey & Company. “Transforming the Business Through Social Tools.” (2015).

McKinsey Global Institute. “The Social Economy: Unlocking Value and Productivity Through Social Technologies.” McKinsey & Company (July 2012).

Microsoft Corporation. “Customer Stories: Southern Valve.” (January 18, 2015).

Mortensen, Mark. “Technology Alone Won’t Solve Our Collaboration Problems.” Harvard Business Review (March 26, 2015).

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Siebdrat, Frank, Martin Hoegl, and Holger Ernst. “How to Manage Virtual Teams.” MIT Sloan Management Review 50, No. 4 (Summer 2009).

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).

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Weill, Peter and Jeanne W. Ross. IT Governance . Boston: Harvard Business School Press (2004).

104 Part One Organizations, Management, and the Networked Enterprise

106

MyLab MIS™ Visit mymislab.com for simulations, tutorials, and end-of-chapter problems.

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?

VIDEO CASES

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

Akamai OS Streaming

CHAPTER CASES

Tate & Lyle Devise a Global IT Strategy Can Technology Replace Managers? Smart Products, Smart Companies Deutsche Bank: The Cost of Legacy Systems

C H

A P

T E

R

3 Information Systems, Organizations, and Strategy

107

F ounded in 1859 in Liverpool as a sugar refiner, today Tate & Lyle is a global provider of specialty food and other ingredients to four markets: food and beverage manufacturers (sweeteners, texturants, and fiber), the paper manufacturers (starches), animal feed producers (corn meal), and cosmetic manufacturers (cosmetics and creams). It operates over 30 manu- facturing facilities in four regions: the Americas, Europe, the Middle East, and Africa. Throughout its history Tate & Lyle grew through acquisitions of many companies in its operating regions, and in the 1970s began to diversify from the sugar business to more specialized agricultural food products. In 2016 the company had €2.6 billion in sales and €189 million in profits. Tate & Lyle’s 2020 stra- tegic plan is to expand the specialty food seg- ment, broaden the geo- graphic mix of sales to include Asia Pacific and Latin America, and generate over €200 mil- lion in sales from new products. As a multina- tional agribusiness, the firm faces stiff competi- tion from giant global c o m p e t i t o r s l i k e ConAgra, Archer Dan- iels Midland, and BASF.

In the process of growing over many decades, Tate & Lyle had gathered a large collection of financial accounting systems across four regions and thirty operating facili- ties. The accounts produced by all these financial systems were reconciled through manual means, using spreadsheets produced by individual units, telephone calls, paper records, fax, and emails to clarify disparities. Each region had its own manual processes for reconciling accounts. Reconciliation refers to the business processes used by firms to ensure that recorded expen- ditures and revenues are accurately reflected in cash outflow and income statements. The existing manual system stored records in different locations around the globe, which led to errors and made it difficult to produce monthly and annual financial statements. Senior managers understood that the firm

Tate & Lyle Devise a Global IT Strategy

© Gajus/Fotolia

could not achieve its business strategic objectives without a major re-thinking of its basic financial accounting systems.

The solution management decided on was to centralize financial accounting at a single location in Lodz, Poland, and to develop an Account Reconciliation and Task Management system. This new system is based on SAP’s ERP (Enter- prise Resource Planning) system, which brings together thousands of general ledger accounts and transactions located the four regions into a single system. SAP’s ERP utilizes their HANA relational database software, which stores and retrieves data, and provides many other enterprise capabilities, including pre- dictive analytics, management dashboards, and text search.

The consulting firm Black Line was hired to implement the new system and coordinate with Tate & Lyle financial groups. Implementing the system required two years of intensive planning and the integration of legacy sys- tems into the new single system. The major requirements for the new system included standardized templates, electronic approval of workflows, an easy-to- use interface so managers could quickly obtain the information on firm perfor- mance that they needed, as well as the ability to handle multiple currencies, produce basic reports in a timely fashion, and integrate data in the SAP system with non-SAP accounting systems already in use at the regional level.

Implementing the new system also gave managers the opportunity to revise and simplify business processes based on industry best practices, and to enforce their use across all the four regions. The result is a reconciliation system that is accurate, timely, transparent, and able to produce end-of-day results, report on progress towards month-end closing targets, identify outstanding tasks, and communicate with the teams responsible for completing the tasks.

Sources: Ken Murphy, “How Tate & Lyle Makes Food Extraordinary with Improved Finance Functions,” SAP Insider Profiles, December 8, 2016; Anahad O’Connor, “Study Tied to Food Industry Tries to Discredit Sugar Guidelines,” New York Times, December 19, 2016; Tate & Lyle, “Annual Report 2016,” tateandlyle.com, March 15, 2016; Ryan Phillips, “Tate & Lyle Announces $25M Consolidation Plan at Splenda Plant in McIntosh,” Birmingham Business Journal, April 23, 2015; Sean Walters, “Dissolving Confidence in Tate & Lyle,” Wall Street Jour- nal, September 23, 2016; Ryan Knutson, “Verizon Swings to a Profit, but Pace of Growth Slows,” Wall Street Journal, January 21, 2016; Douglas MacMillan and Ryan Knutson, “Verizon Tops Pack of Suitors Chasing Yahoo,” New York Times, April 17, 2016.

The story of Tate & Lyle illustrates some of the ways that information sys-tems are integrally related to business strategies. The specialty food ingre- dients segment of agribusiness is highly competitive. To grow the business, firms need a global scale of operations and the ability to operate efficiently across many regions, languages, currencies, and time zones. In short, global IT systems are a requirement for global business success. Tate & Lyle needed a single global system to perform its basic financial reporting tasks.

In order to implement this strategic IT system, Tate & Lyle changed their organization by centralizing the financial system in Lodz. Management had to review, document, and then redesign the key financial business processes of the firm. Managers had to select a suitable enterprise platform vendor (SAP) and select a consulting firm (Black Line) from among many possible vendors.

Here some questions to think about: How will the Account Reconciliation and Task Management system help Tate & Lyle remain competitive? Why did managers choose a single, global system? What specific problems did this sys- tem solve?

108 Part One Organizations, Management, and the Networked Enterprise

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

Organization

Technology

Management

Business Challenges

Business Solutions

Information System

Increase revenue Increase service

Determine business strategy Design new products

and services

Implement strategy Partner with other

vendors Mine customer data

Satellite TV Cable Internet Wireless networks Smartphones Mobile video Cloud computing

Opportunities from new technology Intense competition

Digital Products and Services Bundled TV, Internet, wireless

services and content Mobile video Digital advertising

Organizations InformationTechnology

Mediating Factors Environment Culture Structure Business Processes Politics Management Decisions

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 deci- sions made—or not made—by managers. Other factors mediating the relationship include the organi- zational culture, structure, politics, business processes, and environment.

Chapter 3 Information Systems, Organizations, and Strategy 109

information systems can change social and work life in your firm. You will not be able to design new systems successfully or understand existing systems without 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 can- not 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 messaging 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 defi- nition focuses on three elements of an organization. Capital and labor are pri- mary production factors provided by the environment. The organization (the firm) transforms these inputs into products and services in a production func- tion. 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 a collection 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 descriptive or even predictive of real-world organizations. A more realistic behavioral definition of an organization is a collection of rights, privileges, obli- gations, 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 develop customary ways of working; they gain attachments to existing relationships;

Inputs from the environment

Organization

Outputs to the environment

Production process

FIGURE 3. 2 THE TECHNICAL MICROECONOMIC DEFINITION OF THE ORGANIZATION

In the microeconomic definition of organizations, capital and labor (the primary production factors provided by the environment) are transformed by the firm through the production process into prod- ucts and services (outputs to the environment). The products and services are consumed by the envi- ronment, which supplies additional capital and labor as inputs in the feedback loop.

110 Part One Organizations, Management, and the Networked Enterprise

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 conditions work will be done. Most of these arrangements and feelings are not discussed in any formal rulebook.

How do these definitions of organizations relate to information systems technology? A technical view of organizations encourages us to focus on how inputs 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 technical 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 workings. Section 3 -2 describes how each of these definitions of organiza- tions can help explain the relationships between information systems and organizations.

FORMAL ORGANIZATION

Structure Hierarchy Division of labor Rules, procedures Business processes Culture

Process Rights/obligations Privileges/responsibilities Values Norms People

Environmental resources

Environmental outputs

FIGURE 3. 3 THE BEHAVIORAL VIEW OF ORGANIZATIONS

The behavioral view of organizations emphasizes group relationships, values, and structures.

Chapter 3 Information Systems, Organizations, and Strategy 111

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 because individuals in the firm develop routines for producing goods and ser- vices. 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 productive 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 struggle 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 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 actual way business firms produce value—are usually ensconced in the organization’s culture.

112 Part One Organizations, Management, and the Networked Enterprise

You can see organizational culture at work by looking around your univer- sity or college. Some bedrock assumptions of university life are that professors know more than students, the reason students attend college is to learn, and classes follow a regular schedule. Organizational culture is a powerful unify- ing force that restrains political conflict and promotes common understand- ing, 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 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

Individual Routines

Business Process 1

Business Process 2

Business Process 3

Business Process N

Business Firm

Routines, Business Processes, and Firms

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 sys- tem applications require that individual routines and business processes change to achieve high levels of organizational performance.

Chapter 3 Information Systems, Organizations, and Strategy 113

dependent on the social and physical environment that surrounds them. With- out financial and human resources—people willing to work reliably and consis- tently 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 example, 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 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 “disruptive” ( Christensen, 2003 ; Christensen, Raynor, and McDonald, 2015 ). What makes a

The Organization and Its Environment

Environmental Resources and Constraints

Governments Competitors Customers Financial Institutions Culture

Knowledge Technology

The Firm

Information Systems

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 technology plays a critical role in helping organizations perceive environmental change and in helping organizations act on their environment.

114 Part One Organizations, Management, and the Networked Enterprise

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 for portable CD players, and digital photography for process fi lm photography. Table 3. 1 describes just a few disrup- tive technologies from the past.

In these cases, entire industries were put out of business. In other cases, dis- ruptive technologies simply extend the market, usually with less functionality 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 offering cheap digital storage for small files. Eventually, small PC hard disk drives became the largest segment of the disk drive marketplace.

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 cap- ture any profits). Moreover, not all change or technology is disruptive ( King and Baatartogtokh, 2015 ). Managers of older businesses often do make the right deci- sions and find ways to continue competing. Disruptive technologies are tricky. Firms that invent disruptive technologies as “first movers” do not always ben- efit if they lack the resources to exploit the technology or fail to see the oppor- tunity. 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

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, 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.

Chapter 3 Information Systems, Organizations, and Strategy 115

followers,” such as IBM and Microsoft, reaped the rewards. Citibank’s ATMs rev- olutionized 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 organizational struc- ture. For instance, in a professional bureaucracy such as a hospital, it is not unusual to find parallel patient record systems operated by the administra- tion, 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 often quickly outgrow their useful- ness. In huge multidivisional firms operating in hundreds of locations, you will often find there is not a single integrating information system, but instead each locale or each division has its set of information systems.

Other Organizational Features Organizations have goals and use different means to achieve them. Some organizations 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 constitu- encies, some primarily benefiting their members, others benefiting clients, stockholders, or the public. The nature of leadership differs greatly from one organization 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

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

116 Part One Organizations, Management, and the Networked Enterprise

routine tasks that can be reduced to formal rules that require little judgment (such as manufacturing 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 organizations. 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 relatively expensive. Hence, over time we should expect managers to increase their invest- ments in IT because of its declining cost relative to other capital investments.

IT also affects the cost and quality of information and changes the economics of information. Information technology helps firms contract in size because it can reduce transaction costs—the costs incurred when a firm buys on the mar- ketplace what it cannot make itself. According to transaction cost theory , firms and individuals seek to economize on transaction costs, much as they do on pro- duction costs. Using markets is expensive because of costs such as locating and communicating with distant suppliers, monitoring contract compliance, buying insurance, obtaining information on products, and so forth ( Coase, 1937 ; William- son, 1985 ). Traditionally, firms have tried to reduce transaction costs through ver- tical 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 result, firms can shrink in size (numbers of employees) because it is far less expensive 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 Cisco Systems and Dell Inc. to outsource their produc- tion to contract manufacturers such as Flextronics instead of making their prod- ucts 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

Chapter 3 Information Systems, Organizations, and Strategy 117

purchase 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 company 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 employees. In 2015, it generated more than $9.6 billion in revenue with only 15,000 employees.

Information technology also can reduce internal management costs. Accord- ing 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” (employees) to per- form work on his or her behalf. However, agents need constant supervision and management; otherwise, they will tend to pursue their own interests rather than those of the owners. As firms grow in size and scope, agency costs or coor- dination costs rise because owners must expend more and more effort supervis- ing 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 technol- ogy expanded the power and scope of small organizations by enabling them to perform coordinating activities such as processing orders or keeping track of inventory 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 increase 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 computer age, are often inefficient, slow to change, and less competitive than newly cre- ated organizations. Some of these large organizations have downsized, reducing 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 because lower-level employees receive the information they need to make decisions without supervision. (This empowerment is also possible because of higher educational levels among the workforce, which give employees the 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 decline 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

118 Part One Organizations, Management, and the Networked Enterprise

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 professional workers tend to be self-managing, and decision making should become more decentralized as knowledge and information become more wide- spread 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 automobile); once the task is accomplished, the individuals join other task forces. The global consulting firm Accenture is an example. Many of its 373,000 employees move from location to location to work on projects at client loca- tions 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, as described in the Interac- tive Session on Management.

An organization that has been "flattened" by removing layers of management

A traditional hierarchical organization with many levels of management

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.

Chapter 3 Information Systems, Organizations, and Strategy 119

Start-up companies are known for being innovative, and one of those innovations appears to be the way they are being managed. A number of these new firms are trying to minimize headcount and maxi- mize agility by eliminating management hierarchy. In place of managers, they’re turning to technol- ogy, including user-friendly software and low-cost web-based services such as Amazon.com ’s Redshift for storing corporate data, analyzing the data, and presenting the results in the form of dashboards that anyone in the firm can use. In the past such data were difficult to obtain, required more senior managers to organize and interpret, or could not be analyzed without expensive business intelligence systems costing millions of dollars. Today even small start-ups can afford to store and manipulate nearly limitless pools of data in near real time.

For example, Chubbies, a rapidly growing clothing start-up targeting college fraternities, doesn’t have a CEO. Instead, it has four co-CEOs, each in charge of his or her own business function. This structure is repeated all the way down the company’s hierarchy. All Chubbies employees have access to the same data as its top managers. According to Tom Montgomery, one of the Chubbies co-CEOs, when you don’t have a traditional CEO and final decision maker, you have to trust people to make the right decisions based on the information they see. Although it takes time to build up that trust, once you do, the company can move much more quickly.

Montgomery points out that in the past, an associ- ate specializing in events for clients might report to a manager in the marketing department in charge of thinking about why the company should be throw- ing events in the first place. Today, the event plan- ner working alone can use an array of dashboards to determine exactly how many Facebook likes, Insta- gram posts, and sales arose from a particular event, and she is able to decide on her own whether future events should be scheduled. With the right data and tools to back up her decision, she doesn’t need a manager to validate her choices.

Web retailer Zappos.com Inc. announced in 2013 that it was eliminating managers in order to keep the 1,500-person company from becoming too rigid, too unwieldy, and too bureaucratic as it grows. Zappos adopted a “holocracy” model in which work- ers manage themselves without the aid of middle managers. In contrast to a traditional corporate

chain of command, holocracy organizes the busi- ness as a series of overlapping, self-governing “ circles. ” Instead of having jobs, holocracies have “roles.” Each role belongs to a circle rather than a department. The circles overlap, and individu- als hold many different roles. Individuals assigned roles in these circles work together, and their meet- ing outcomes are recorded using web-based soft- ware called Glass Frog. This system allows anyone in the company to view who’s responsible for what role and what they’re working on. Glass Frog pro- vides a “to-do” list that teams use to define the work they’re supposed to be doing and to hold themselves accountable for those tasks.

Although Zappos CEO Tony Hsieh continues to trumpet self-management, it is unclear if employees widely share his enthusiasm. Some employees wel- comed the opportunity for more independence. With experience and expertise downplayed, less senior employees with fresh ideas receive more attention. Introverts have benefited from the expectation that everybody speak in meetings. Other employees were confused and frustrated by numerous mandates, endless meetings, and uncertainty about who did what. To whom would they report to if there were no bosses? What was expected of them if they did not have a job title, and how would they be compen- sated? Within weeks after Zappos embraced holoc- racy, about 14 percent of employees had left the company. The employee exodus has continued. Zap- pos’s turnover rate for 2015 was 30 percent, 10 per- centage points above its typical annual attrition rate.

Treehouse Island Inc., a Portland, Oregon, online coding school, also had a flat organization. Staff worked four-day weeks, worked only on projects they liked, rarely had to send e-mail, and had no direct bosses. However, the business grew, with about 100,000 students enrolled in its online courses and 100 employees. Some projects weren’t being com- pleted, and employees were unsure of their responsi- bilities. Treehouse wasn’t burdened by bureaucracy, but work still stalled nevertheless. Without managers to coordinate projects and supervise and encourage workers, Treehouse employees weren’t as produc- tive as they could have been. According to Treehouse founder Ryan Carson, there was no real reason to work hard because no one knew about it. Some of Treehouse’s best employees started believing that not as much was expected of them.

INTERACTIVE SESSION: MANAGEMENT

Can Technology Replace Managers?

120 Part One Organizations, Management, and the Networked Enterprise

Understanding Organizational Resistance to Change Information systems inevitably become bound up in organizational politics because they influence access to a key resource—namely, information. Infor- mation systems can affect who does what to whom, when, where, and how in an organization. Many new information systems require changes in personal, individual routines that can be painful for those involved and require retraining and additional effort that may or may not be compensated. Because informa- tion 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 organizational resistance to innovation suggests that four factors are para- mount: the nature of the IT innovation, the organization’s structure, the culture of people in the organization, and the tasks affected by the innovation (see Figure 3. 7 ). 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 “unfreeze” organizations before introducing an innovation, quickly implementing 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

Questions about which subjects to teach would spark much analysis and chatter but resulted in few answers or plans. Michael Watson, who headed Treehouse finance and operations, estimated that decisions about matters such as Treehouse’s website design took twice as long as they should have.

Treehouse partially reversed course in the spring of 2015. Employees still work four-day weeks, but they now have managers. Since that change was made, revenue has increased along with the number of minutes of video courses the company produces. The time required for customer support employ- ees to respond to students who have questions has dropped to three and a half hours from seven

from a traditional bureaucracy to a flatter organization?

4. Can technology replace managers? Explain your answer.

hours. With roles now clearly defined and managers tracking assignments, e-mail is actually enhancing productivity.

According to Quy Huy, professor of strategy at the Singapore campus of the prestigious graduate busi- ness school Insead, middle managers are often vili- fied as symptoms of corporate bloat, but things fall apart without them. Sources: David Gelles, “The Zappos Exodus Continues After a Radical Management Experiment,” New York Times , January 13, 2016; Bour- ree Lam, “Why Are So Many Zappos Employees Leaving?” The Atlan- tic , January 15, 2016; Christopher Mims, “Data Is the New Middle Manager,” Wall Street Journal , April 19, 2015; and Rachel Feintzeig, “Radical Idea at the Office: Middle Managers,” Wall Street Journal , April 18, 2015.

CASE STUDY QUESTIONS

1. How do flat organizations differ from traditional bureaucratic hierarchies?

2. How has information technology made it possible to eliminate middle manager positions?

3. What management, organization, and technology issues would you consider if you wanted to move

Chapter 3 Information Systems, Organizations, and Strategy 121

failure 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 rela- tionships between many firms and external entities and even on the organization of business processes inside a firm. The Internet increases the accessibility, stor- age, 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, brokerage firms and banks in New York can now deliver their internal operating procedures manuals to their employees at distant locations by posting them on the corporate website, saving millions of dollars in distribution costs. A global sales force can receive nearly instant prod- uct price information updates using the web or instructions 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 replenishment 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 busi- ness processes, fewer employees, and much 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 understanding of the organization in which they will be used. In our experience,

Information Technology

Organizational Structure

People Job Tasks Resistance

to Change

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.

122 Part One Organizations, Management, and the Networked Enterprise

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

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, and in the related industry of digital music players, the iPod is the leader. 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 competitive 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 answer 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.

Chapter 3 Information Systems, Organizations, and Strategy 123

Traditional Competitors All firms share market space with other competitors who are continuously devising 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 busi- ness, but it is much more expensive and difficult to enter the computer chip business, which has very high capital costs and requires significant expertise and knowledge that are hard to obtain. New companies have several possible advantages: 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 hun- gry” (more highly motivated) than traditional occupants of an industry. These advantages are also their weakness: 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 allows you to download music tracks to an iPod or smartphone has become a substitute for CD-based music stores. The more substitute products and ser- vices in your industry, the less you can control pricing and the lower your profit margins.

New market entrants

The Firm Competitors

Substitute products

Suppliers Customers

FIGURE 3. 8 PORTER’S COMPETITIVE FORCES MODEL

In Porter’s competitive forces model, the strategic position of the firm and its strategies are determined not only by competition with its traditional direct competitors but also by four other forces in the industry’s environment: new market entrants, substitute products, customers, and suppliers.

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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 competi- tor’s products and services or if they can force a business and its competitors to compete on price alone in a transparent marketplace where there is little product differentiation and all prices are known instantly (such as on the Internet). For instance, in the used college textbook market on the Internet, students (customers) can find multiple suppliers of just about any current college textbook. 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.

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.

Supermarkets and large retail stores such as Walmart use sales data captured at the checkout counter to deter- mine which items have sold and need to be reordered. Walmart’s continuous replen- ishment 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 125

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 effi- cient customer response system . An efficient customer response system directly links 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. For instance, Google continuously introduces new and unique search services on its website, such as Google Maps. By purchasing PayPal, an electronic payment system, in 2003, eBay made it much easier for customers to pay sellers and expanded use of its auction marketplace. Apple created the iPod, a unique por- table digital music player, plus iTunes, an online music store where songs can be purchased for $0.69 to $1.29 each. Apple has continued to innovate with its multimedia iPhone, iPad tablet computer, and iPod video player.

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 narrow target market better than competitors. Information systems support this strategy by producing and analyzing data for finely tuned sales and

126 Part One Organizations, Management, and the Networked Enterprise

marketing techniques. Information systems enable companies to analyze customer buying patterns, tastes, and preferences closely so that they effi- ciently pitch advertising 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 and retail stores, and data collected when people access and interact with web- sites. 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 inti- macy with customers. Fiat Chrysler Automobiles LLC uses information systems to facilitate direct access by suppliers to production schedules and even permits suppliers to decide how and when to ship supplies to Chrysler and Fiat facto- ries. This allows suppliers more lead time in producing goods. 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 lowering costs.

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 iPod and iTunes The iPod is an integrated handheld player backed up with an online library of more than 43 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.

Chapter 3 Information Systems, Organizations, and Strategy 127

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 pro- vider on the web. Profits have been dampened. Table 3. 5 summarizes some of the potentially 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 agency industry have been nearly decimated by the availability of substitutes over the Internet. Likewise, the Internet has had a significant impact on the

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

TABLE 3. 5 IMPACT OF THE INTERNET ON COMPETITIVE FORCES AND INDUSTRY STRUCTURE

COMPETITIVE FORCE IMPACT OF THE INTERNET

Substitute products or services Enables new 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 Internet reduces barriers to entry, such as the need for a sales force, access to channels, and physical assets; it 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

128 Part One Organizations, Management, and the Networked Enterprise

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, Alibaba, eBay, iTunes, YouTube, Facebook, Travelocity, and Google are examples. In this sense, the Internet is “transforming” entire indus- tries, 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 services. Nike, Under Armour, Gatorade, and many 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). Farm tractors from John Deere, Kubota, and Mahindra are loaded with field radar, GPS transceivers, and hundreds of sensors keeping track of the equip- ment , as described in the Chapter 1 ending case . GE is creating a new business out of helping its aircraft and wind turbine clients improve operations by exam- ining the data generated from the many thousands of sensors in the equipment (see the Chapter 12 ending case) . The result is what are referred to as “smart products”—products that are a part of a larger set of information-intensive ser- vices sold by firms ( Gandhi and Gervet, 2016 ; Davis, 2015 ; Porter and Heppel- mann, 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 intense use of products while providing detailed information that can be used to improve both the products and the customer experience. They expand opportunities for product and service differentiation. When you buy a wear- able digital health product, you not only get the product itself, you also get a host of services available from the manufacturer’s cloud servers. Smart prod- ucts 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 dom- inant 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

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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.

What difference does that make? Take Nike, the world’s biggest sports footwear and apparel company. Nike has created a series of information technology–based products and an ecosystem of gadgets and services built around measurable per- sonal improvement through exercise. The Nike+ ecosystem links Nike’s corporate computer system to smart devices such as the Nike+ SportWatch GPS, the Nike+ FuelBand, and the Nike+ Running App on Apple and Android mobile devices. This enables Nike to analyze individual performance and activity data collected by the devices to help users train and work out more effectively. It also adds value to Nike products and a reason to stay with the brand.

The Nike+ SportWatch GPS keeps track of your location, pace, distance, laps, calories burned, and (with the Polar Wearlink+) heart rate. The Nike+ Running App tracks your route, distance, pace, calo- ries burned, and time using your phone or another Nike-partnered device, giving you audio feedback as you run. The Nike+ FuelBand activity tracker is worn on the wrist and used with an Apple iPhone or iPad. The FuelBand enables wearers to track their physical activity, steps taken daily, and amount of calories burned. The information it collects is inte- grated into the Nike+ online community and phone application, allowing wearers to set their own fitness goals, monitor their progress on the device LED dis- play, and compare themselves to others within the Nike community.

Nike’s proprietary software turns all tracked move- ment from Nike’s smart devices into NikeFuel points, which can show achievements, can be shared with friends, or can be used to engage others in competi- tion. NikeFuel is Nike’s universal way for measur- ing movement for all kinds of activities using a metric that enables comparisons—no matter what height, weight, gender, or activity—to past perfor- mance, another person, or a daily average (which Nike defines as 2,000 Fuel points.) Users of multiple Nike+ devices can visit the nikeplus.com site to

INTERACTIVE SESSION: TECHNOLOGY

Smart Products, Smart Companies

access all their data—including lifetime NikeFuel points accumulated from all their Nike+ devices.

Nike is developing other fitness technology prod- ucts to integrate with Nike+. The more people mea- sure their activity with NikeFuel, the more they are locked in to the Nike ecosystem and the harder it will be to switch to other companies’ products. Nike’s integration of information and technology into its products keeps people coming back to Nike’s own website and apps.

Nike believes technology is revolutionizing its rela- tionship with consumers, turning it into a company that provides services as well as products. In the past, when you bought a product, that was the end of the relationship with the company. Now, the purchase of any Nike product has become the beginning of the company’s relationship with the consumer. The deeper the relationship, the more consumers will embrace and stay loyal to the Nike brand.

Under Armour, noted for performance clothing using technologically advanced material, is mak- ing its products smarter as well. The company has spent $710 million to scoop up mobile apps such as MyFitnessPal, MapMyFitness, and Endomondo, which enable it to tap into the world’s largest digi- tal health and fitness community. Under Armour can generate revenue from in-app ads, including ads from other companies, and purchases from app users referred to its products. The platform deliv- ers unprecedented depth of information and insight about fitness-and health-oriented consumers, creat- ing numerous opportunities for Under Armour and other brands to engage with potential and existing customers. For example, MapMyFitness collects data about a user’s name, e-mail address, birth date, loca- tion, 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 provide advertisers with aggre- gate 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.

Under Armour has teamed up with e-commerce retailer Zappos to send users a pop-up notification when their sneakers need replacement, based on workout data logged in MapMyFitness apps. Under

130 Part One Organizations, Management, and the Networked Enterprise

views the firm as a series or chain of basic activities that add a margin of value to a firm’s products or services. These activities can be categorized as either primary activities or support activities (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 stor- ing materials 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 prod- ucts. The service 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).

CASE STUDY QUESTIONS

Armour sees clothes themselves eventually becom- ing the means to track movement and biorhythms. Under Armour developed its own smart footwear called UA SpeedForm Gemini 2 Record Equipped, which tracks a runner’s time and date, duration, dis- tance, and splits without the need for other devices. The company also partnered with HTC to develop UA HealthBox, a $400 red box that includes a Wi-Fi scale (for measuring weight and body fat), a heart rate chest strap and removable sensor, and a shower-proof dimpled fitness band to track workouts and sleep. The data these devices collect are stored on an Under Armor Record app on an iPhone or Android phone.

Gatorade, with a 78 percent share of the $7.21 bil- lion sports-drinks market, is developing a microchip- fitted “smart cap” bottle that communicates digitally with a bandage-like sweat patch to provide athletes and fitness buffs constant updates on how much they should drink. According to Gatorade, individual hydration needs differ, with sweat loss ranging from half a liter to more than two liters per hour of exer- cise. The company is planning to launch as many as a dozen different formulas for electrolytes and carbo- hydrates in small pods that snap on to bottles.

Gatorade began testing the smart-cap bottle with Brazil’s national soccer team ahead of the 2014 World Cup and is testing a new version with the Boston Celtics basketball team and FC Barcelona soccer squad. In the field-tested prototypes, flashing lights tell players when they need to hydrate. Users can customize the smart caps with their name, team logo, and number.

According to Xavi Cortadellas, Gatorade senior director of global innovation and design, personal- ized nutrition and integrating technology in sports are the next frontier of performance. Gatorade’s parent company, PepsiCo, is actively attempting to expand into areas outside of sugary sodas, and such technology-enabled products provide opportunities.

Sources: Kate Taylor, “Gatorade Is Developing a ‘Smart Cap’ That Keeps Track of Hydration,” Business Insider , March 21, 2016; Mike Esterl, “Gatorade Sets Its Sights on Digital Fitness,” Wall Street Jour- nal , March 10, 2016; Edward C. Baig, “Under Armour and HTC Team Up on Connected Fitness,” USA Today , January 5, 2016; www.underarmour.com , accessed April 20, 2016; www.nike.com , accessed April 19, 2016; John Kell, “Why Under Armour Is Making a Costly Bet on Connected Fitness,” Fortune, April 21, 2016; and Jared Linzdon, “The Rise and Fall of Wearable Fitness Trackers,” The Globe and Mail , January 5, 2015.

1. What competitive strategies are the companies discussed in this case pursuing?

2. How are information technology and smart prod- ucts related to these strategies? Describe the role of information technology in these products.

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 131

Now you can ask at each stage of the value chain, “How can we use infor- mation systems to improve operational efficiency and improve customer and supplier intimacy?” 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 relationship 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 com- paring the efficiency and effectiveness of your business processes against strict standards and then measuring performance against those standards. Industry best practices are usually identified by consulting companies, research organi- zations, government agencies, and industry associations as the most successful

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

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.

132 Part One Organizations, Management, and the Networked Enterprise

solutions or problem-solving methods for consistently and effectively 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.

How can information systems be used to achieve strategic advantage at the industry level? By working with other firms, industry participants can use information technology to develop industrywide standards for exchang- ing information or business transactions electronically, which force all market participants to subscribe to similar standards. Such efforts increase efficiency, making product substitution less likely and perhaps raising entry costs—thus discouraging new entrants. Also, industry members can build industrywide, IT-supported consortia, symposia, and communications networks to coordinate activities concerning government agencies, foreign competition, and compet- ing 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 industry value chains called value webs. A value web is a collection of inde- pendent 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 response 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.

Chapter 3 Information Systems, Organizations, and Strategy 133

Synergies, Core Competencies, and Network-Based Strategies A large corporation is typically a collection of businesses. Often, the firm is organized 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 busi- ness 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 relationships 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 together the operations of disparate business units so that they can act as a whole. For example, when large national banks acquire mortgage originating firms they are able to tap into a large pool of new customers who might be interested in its credit card, consumer banking, and other financial products. Information systems would help the merged companies consolidate operations, lower retailing costs, and increase cross-marketing of financial products.

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

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.

134 Part One Organizations, Management, and the Networked Enterprise

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 existing 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 com- petencies. An intranet called InnovationNet helps people working on similar problems share ideas and expertise. InnovationNet connects those working in research and development (R&D), engineering, purchasing, marketing, legal affairs, and business information systems around the world, using a portal to provide browser-based access to documents, reports, charts, videos, and other data from various sources. It includes a directory of subject matter experts who can be tapped to give advice or collaborate on problem solving and product development and links to outside research scientists and entrepreneurs who are searching for new, innovative products worldwide.

Network-Based Strategies The availability of Internet and networking technology has inspired strategies that take advantage 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 which 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 applied 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 diminishing returns, and it is the foundation for most of modern economics.

In some situations, the law of diminishing returns does not work. For instance, 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

Chapter 3 Information Systems, Organizations, and Strategy 135

because each user can interact with more people. It is not much more expen- sive 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 installed 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 services without being limited by traditional organizational boundaries or physical locations. One company can use the capabilities of another company without being organizationally tied to that company. The virtual company model is useful when a company fi nds it cheaper to acquire products, services, or capabilities from an external vendor or when it needs to move quickly to exploit new market opportunities and lacks the time and resources to respond on its own.

Global fashion companies, such as LVMH, GUESS, Ann Taylor, Levi Strauss, and Reebok, enlist Hong Kong–based Li & Fung to manage production and ship- ment of their garments. Li & Fung handles product development, raw mate- rial sourcing, production 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. Cus- tomers place orders with Li & Fung over its private extranet. Li & Fung then sends instructions 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 cli- ents in short order to keep pace with rapidly changing fashion trends.

Business Ecosystems and Platforms The Internet and the emergence of digi- tal fi rms call for some modifi cation of the industry competitive forces model. The traditional Porter model assumes a relatively static industry environment; relatively clear-cut industry boundaries; and a relatively stable set of suppliers, substitutes, and customers, with the focus on industry players in a market envi- ronment. Instead of participating in a single industry, some of today’s fi rms are much more aware that they participate in industry sets—collections of indus- tries that provide related services and products (see Figure 3. 11 ). Business eco- system is another term for these loosely coupled but interdependent networks of suppliers, distributors, outsourcing fi rms, transportation service fi rms, and technology manufacturers ( Iansiti and Levien, 2004 ).

136 Part One Organizations, Management, and the Networked Enterprise

The concept of a business ecosystem builds on the idea of the value web described earlier, the main difference being that cooperation takes place across many industries rather than many firms. For instance, both Microsoft and Face- book provide platforms composed of information systems, technologies, and services that thousands of other firms in different industries use to enhance their own capabilities ( Van Alstyne et al., 2016 ).

Microsoft has estimated that more than 40,000 firms use its Windows plat- form to deliver their own products, support Microsoft products, and extend the value of Microsoft’s own firm. 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 services. Business ecosystems can be characterized as having one or a few keystone firms that dominate the ecosys- tem and create the platforms used by other niche firms. Keystone firms in the Microsoft ecosystem include Microsoft and technology producers such as Intel and IBM. Niche firms include thousands of software application firms, software developers, service firms, networking firms, and consulting firms that both sup- port and rely on the Microsoft products.

Information technology plays a powerful role in establishing business ecosys- tems. Obviously, many firms use information systems to develop into keystone firms by building IT-based platforms that other firms can use. In the digital firm era, we can expect greater emphasis on the use of IT to build industry ecosys- tems because the costs of participating in such ecosystems will fall and the benefits to all firms will increase rapidly as the platform grows.

Individual firms should consider how their information systems will enable them to become profitable niche players in larger ecosystems created by key- stone firms. For instance, in making decisions about which products to build or which services to offer, a firm should consider the existing business ecosystems related to these products and how it might use IT to enable participation in these larger ecosystems.

A powerful, current example of a rapidly expanding ecosystem is the mobile Internet platform. In this ecosystem there are four industries: device makers

Industry 1

Industry 3

Industry 2

Industry 4

Industry Ecosystem

Customers

Substitute Products

and Services

New Market

Entrants

Suppliers

FIGURE 3. 11 AN ECOSYSTEM STRATEGIC MODEL

The digital firm era requires a more dynamic view of the boundaries among industries, firms, custom- ers, and suppliers, with competition occurring among industry sets in a business ecosystem. In the eco- system 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.

Chapter 3 Information Systems, Organizations, and Strategy 137

(Apple iPhone, Samsung Galaxy, Motorola, LG, and others), wireless tele- communication firms (AT&T, Verizon, MTN [South Africa], STC Group [Saudi Arabia], Vodafone [UK], Orascom [Egypt], and others), independent software applications providers (generally small firms selling games, applications, and ring tones), and Internet service providers (who participate as providers of Internet service to the mobile platform).

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 industry we refer to as the mobile digital platform ecosys- tem. More than other firms, Apple has managed to combine these industries into a system. It is Apple’s mission to sell physical devices (iPhones) that are nearly as powerful as yesterday’s supercomputers. These devices work only with a high-speed broadband network supplied by the wireless phone carriers. In order to attract a large customer base, the iPhone had to be more than just a cell phone. Apple differentiated this product by making it a “smart phone,” one capable of running more than a million different, useful applica- tions. Apple could not develop all these applications itself. Instead, it relies on thousands of generally small, independent software developers to provide these applications, which can be purchased at the iTunes store. In the back- ground is the Internet service provider industry, which makes money when- ever iPhone users connect to the Internet. These four different industries together form an ecosystem, creating value for consumers that none of them could acting alone.

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 prod- ucts, services, and operating procedures, driving the organization into new behavioral patterns. Successfully using information systems to achieve a com- petitive advantage is challenging and requires precise coordination of technol- ogy, 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 retaliate and copy strategic systems, competitive advantage is not always sus- tainable. Markets, customer expectations, and technology change; globalization has made these changes even more rapid and unpredictable. The Internet can make competitive advantage disappear very quickly because virtually all com- panies can use this technology. Classic strategic systems, such as American Air- lines’s SABRE computerized reservation system, Citibank’s ATM system, and FedEx’s package tracking system, benefited by being the first in their indus- tries. Then rival systems emerged. Amazon was an e-commerce leader but now faces competition from eBay, Walmart, and Google. Information systems alone cannot provide an enduring business advantage. Systems originally intended to be strategic frequently become tools for survival, required by every firm to

138 Part One Organizations, Management, and the Networked Enterprise

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 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 nui- sance to work around. Such firms pay a hefty price in poor performance. Suc- cessful 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 revenues 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, cus- tomers, 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 addi- tional 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 manage- ment, 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 ben- efit 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?

Chapter 3 Information Systems, Organizations, and Strategy 139

• 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 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 exter- nal and internal. Suppliers and customers must become intimately linked and may share each other’s responsibilities. Managers will need to devise new busi- ness processes 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 atten- tion throughout this text. Chapter 14 examines organizational change issues in more detail.

Review Summary

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. Informa- tion 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 management. 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 market entrants, substitute products and services, suppliers, and customers. Information systems help companies 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 information systems will have the greatest impact. The model views the firm as a series of

140 Part One Organizations, Management, and the Networked Enterprise

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 pri- mary activities possible. A firm’s value chain can be linked to the value chains of its suppliers, distribu- tors, 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 busi- nesses to work more efficiently with their value partners.

Because firms consist of multiple business units, information systems achieve additional efficien- cies 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 partici- pating 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 painful 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 strate- gic advantage is not always sustainable.

Key Terms Agency theory , 118 Benchmarking , 132 Best practices , 132 Business ecosystem , 136 Competitive forces model , 123 Core competency , 135 Disruptive technologies , 115 Efficient customer response system , 126 Mass customization , 126 Network economics , 135 Organization , 110

Platform , 137 Primary activities , 131 Product differentiation , 125 Routines , 112 Strategic transitions , 140 Support activities , 131 Switching costs , 127 Transaction cost theory , 117 Value chain model , 129 Value web , 133 Virtual company , 136

Review Questions 3- 1 Which features of organizations do managers

need to know about to build and use informa- tion systems successfully?

• Define an organization and compare the technical definition of organizations with the behavioral definition.

• Identify and describe the features of organi- zations that help explain differences in orga- nizations’ use of information systems.

• Define disruptive technology and list three examples.

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

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.

Chapter 3 Information Systems, Organizations, and Strategy 141

• Explain why there is considerable organiza- tional resistance to the introduction of infor- mation 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 competen- cies, and network economics help companies develop competitive strategies using informa- tion 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 strategies 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 businesses identify opportunities for strategic informa- tion systems.

• Describe how the Internet has changed competitive 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.

• Define and describe business ecosystems and platforms.

3- 4 What are the challenges posed by strategic information systems, and how should they be addressed?

• List and describe the management chal- lenges 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 What is meant by the phrase “IT should flat- ten hierarchies?”

MyLabMIS

MyLabMIS

3- 7 What are some of the issues to consider in determining whether the Internet would pro- vide your business with a competitive advantage?

MyLabMIS

Hands-On MIS Projects The projects in this section give you hands-on experience identifying information systems to support a busi- ness strategy and to solve a customer retention problem, using a database to improve decision making about business strategy, and using web tools to configure and price an automobile. Visit MyLabMIS’s Multimedia Library to access this chapter’s Hands-On MIS Projects.

Management Decision Problems

3- 8 Marks & Spencer Group is a leading department store chain in the United Kingdom. Its retail stores sell a range of merchandise. Senior management has decided that Marks & Spencer should 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 store. How could information systems help management

142 Part One Organizations, Management, and the Networked Enterprise

implement this new strategy? What pieces of data should these systems collect to help management make merchandising decisions that support this strategy?

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 cover- age, or data plans? How can the company use information systems to help find the answer? What manage- ment 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 problems. 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 questions, 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 Vauxhall Corsa (or some other car of your choice). Go to the Web site of AutoTrader.co.uk (www.autotrader.co.uk) and begin your investigation. Locate the Vauxhall Corsa. Research the various models, choose one you prefer in terms of price, features, and safety ratings. Locate and read at least two reviews. Surf the Web site of the manufacturer, in this case Vauxhall (www. vauxhall.co.uk). Compare the information available on Vauxhall’s Web site with that of Autotrader.co.uk for the Vauxhall Corsa. Try to locate the lowest price for the car you want in a local dealer’s inventory. Suggest improvements for Autotrader.co.uk and Vauxhall.co.uk.

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 , For- tune , 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 impor- tant business business processes, culture, structure, and environment as well as its business strategy. Sug- gest 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 brain- storm, organize, and develop a presentation of your findings for the class.

Chapter 3 Information Systems, Organizations, and Strategy 143

Deutsche Bank: The Cost of Legacy Systems

CASE STUDY

Deutsche Bank AG, founded in 1870, is one of the world’s top financial companies, with 2,790 branches in 70 countries. It offers a range of financial products and services, including retail and commercial bank- ing, foreign exchange, and services for mergers and acquisitions. The bank provides products for mort- gages, consumer finance, credit cards, life insurance, and corporate pension plans; financing for interna- tional trade; and customized wealth management ser- vices for wealthy private clients. Deutsche Bank is also the largest bank in Germany, with 1,845 retail branch locations, and plays a central role in German economic life. In many ways, Deutsche Bank is the embodiment of the global financial system.

Deutsche has the world’s largest portfolio of deriva- tives, valued at around $46 trillion. A financial deriv- ative 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, com- modities, 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 bank- ing industry, including recent regulatory change and fears of a global economic downturn. 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 addi- tion, the Commodity Futures Trading Commission (CTFC) complained 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 busi- ness continuity and disaster recovery 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 corporation) defaults on a debt and which can be purchased or sold by either party on the financial market. Credit default swaps are very com- plex financial instruments.

Deutsche Bank is in trouble with U.S. regulators for its inability to fulfill swap reporting requirements under the Commodity Exchange Act and CFTC Regu- lations. 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 repeat- edly exacerbated existing reporting problems and led to the discovery and creation of new reporting problems,

For example, Deutsche Bank’s swap data reported before and after the system outage revealed persis- tent 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 identify 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 available to the public as well as data that is used by the CFTC to evaluate systemic risk throughout the swaps mar- kets. The CFTC complaint also alleged that Deutsche Bank’s system outage and subsequent reporting prob- lems occurred in part because Deutsche Bank failed to have an adequate business continuity and disaster recovery plan and other appropriate supervisory sys- tems 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. The U.S. regulators have pointed out Deutsche Bank’s antiquated technology as one rea- son why the bank was not always able to provide the correct information for running its business properly and responding to regulators. Poor information sys- tems may have even contributed to the 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 those of their acquisitions. The effort and costs required for this integration, including coordination

144 Part One Organizations, Management, and the Networked Enterprise

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 one hundred differ- ent booking systems for trades in London alone, and no common 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 cli- ent, so it would be extremely difficult or impossible 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 trad- ers 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 sys- tems that they need today or to comply with regula- tory 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 regula- tory pressures as well as changing consumer expecta- tions. 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 has been trying to reduce costs and improve efficiency, laying off thousands of employees. And he is focusing on overhauling Deutsche Bank’s frag- mented, 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 inef- fective business processes, inadequate technology, and too many tasks being handled manually. He has

called for standardizing the bank’s systems and pro- cedures, eliminating legacy software, standardizing and enhancing data, and improving reporting.

Cryan appointed technology specialist Kim Ham- monds as Chief Operating Officer to oversee the re- engineering of 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 announced a 10-year multi-billion 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 is migrating to a cloud computing infrastructure through which it will run its informa- tion systems in HP’s remote data centers. HP will provide computing services, hosting, and storage. Deutsche Bank will still be in charge of application development and information security technolo- gies, which it considers as proprietary and crucial for competitive differentiation. Deutsche Bank will most likely build mobile, Web, and other applications tai- lored to its customers’ banking preferences, as well as computer-based trading software.

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 will reduce the number of its individual operating systems that con- trol the way a computer works from 45 to 4, replace scores of outdated computers, and replace antiquated software applications. Thousands of its applications and functions will be shifted from Deutsche Bank’s mainframes to HP cloud computing services. Auto- mating 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 is not the only major bank to be hampered by system problems. IT shortcomings 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. According to Peter Roe, Research Director with TechMarketView LLP in the UK, banks now spend about 75 percent of their IT budgets on maintaining

Chapter 3 Information Systems, Organizations, and Strategy 145

existing systems and operations, and only 25 percent on innovation.

A 2015 Accenture consultants report found that only 6 percent of board of director members and 3 percent of CEOs at the world’s largest banks had professional technology experience. More than two- fifths (43 percent) of the banks have no board mem- bers with professional technology experience. Since many of the biggest challenges facing banking are technology-related, that means that many banks lack sufficient understanding of technology required for making informed technology decisions. Financial technology innovations, security, IT resilience, and technology implications of regulatory changes are now all critical issues for bank boards of directors, but many lack the expertise to assess these issues and make decisions about strategy, investment, and how best to allocate technology resources.

Sources: Geoffrey Smith, “Things You Should Know About the Deutsche Bank Train Wreck,” Fortune, September 28, 2016; Hay- ley 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 Multiple Sys- tems 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 Braithwaite, “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 Problem,” Busi- ness Insider, October 20, 2015; Edward Robinson and Nicholas Comfort, “Cryan’s Shakeup at Deutsche Bank Sees Tech Restart,” Bloomberg, December 20, 2015; Accenture, “Bank Boardrooms Lack Technology Experience, Accenture Global Research Finds,” October 28, 2015.

CASE STUDY QUESTIONS 3- 13 Identify the problem described in this case

study. What people, organization, and technol- ogy factors contributed to this problem?

3- 14 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?

3- 15 Was Deutsche Bank using technology effec- tively to pursue its business strategy? Explain your answer.

3- 16 What solution for Deutsche Bank was pro- posed? 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.

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 organizations 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.

146 Part One Organizations, Management, and the Networked Enterprise

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150

MyLab MIS™ Visit mymislab.com for simulations, tutorials, and end-of-chapter problems.

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?

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

CHAPTER CASES

The Dark Side of Big Data Monitoring in the Workplace Are We Relying Too Much on Computers to Think for Us? Facebook Privacy: What Privacy?

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Organizations today are furiously mining big data, looking for ways to benefit from this technology. There are many big data success stories. For example, the Berg biopharmaceutical company is mining big data on patient tissue samples, clinical history, and demographic characteristics to pinpoint potential biomarkers for pancreatic cancer so that it can be detected much earlier and treated more effectively. The city of Barcelona has reduced its annual water bill by 25 percent by analyzing data from sensors installed in local parks to monitor soil moisture.

But there’s a dark side to big data, and it has to do with privacy. We can now collect or analyze data on a much larger scale than ever before and use what we have learned about individuals in ways that may be harmful to them. The following are some examples.

Predictive policing In February 2014, the Chicago Police Department sent uniformed officers to make custom notification visits to individuals—especially gang members—whom a computer system had identified as likely to commit a crime in the future. The intent was to prevent crime by providing the targeted individuals with information about job training programs or informing them about increased penalties for people with certain backgrounds. Many commu- nity groups protested the practice as another form of racial profiling.

Insurance rates Auto insurance companies such as Progressive offer a small device to install in your car to analyze your driving habits, ostensibly to give you a better insurance rate. However, some of the criteria for lower auto insurance rates

The Dark Side of Big Data

© Sangoiri/123RF

are considered discriminatory. For example, insurance companies like people who don’t drive late at night and don’t spend much time in their cars. However, poorer people are more likely to work a late shift and to have longer commutes to work, which would increase their auto insurance rates.

Deloitte Consulting LLP developed a predictive modeling system for insur- ance applicants that predicts life expectancy by using data about individual consumers’ buying habits as well as their personal and family medical histories. The company claims it can accurately predict whether people have any 1 of 17 diseases, including diabetes, tobacco-related cancer, cardiovascular disease, and depression, by analyzing their buying habits. What you pick up at the drugstore might increase your health insurance rates.

Computerized hiring More and more companies are turning to computer- ized systems to filter and hire job applicants, especially for lower-wage, service- sector jobs. The algorithms these systems use to evaluate job candidates may be preventing qualified applicants from obtaining these jobs. For example, some of these algorithms have determined that, statistically, people with shorter com- mutes are more likely to stay in a job longer than those with longer commutes or less reliable transportation or those who haven’t been at their address for very long. If asked, “How long is your commute?” applicants with long com- muting times will be scored lower for the job. Although such considerations may be statistically accurate, is it fair to screen job applicants this way?

Targeting financially vulnerable individuals Data brokers have been around for decades, but their tools for collecting and finely analyzing huge quantities of personal data grow ever more powerful. These data brokers now sell reports that specifically highlight and target financially vulnerable individuals. For example, a data broker might provide a report on retirees with little or no savings to a com- pany offering reverse mortgages, high-cost loans, or other financially risky prod- ucts. Very few rules or regulations exist to prevent targeting of vulnerable groups. Privacy laws and regulations haven’t caught up with big data technology.

Sources: Brian Brinkmann, “Big Data Privacy: What Privacy?” Business2Community, March 2, 2016; Bernard Marr, “The 5 Scariest Ways Big Data Is Used Today,” DataInformed , May 20, 2015; Victoria Craig, “Berg Hopes Big Data Will Lead to Breakthrough for Pancreatic Cancer, Fox Business , June 11, 2015; and “Police Gang-warning Tactic of ‘Custom Notifica- tions’ Is Working,” Chicago Sun-Times , March 27, 2014.

The challenges of big data 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 ability to combat disease and crime and to achieve major cost savings and efficiencies for business. At the same time, digital tech- nology creates new opportunities for invading your privacy and using informa- tion that could cause you harm.

The chapter -opening diagram calls attention to important points this case and this chapter raise. Developments in data management technology and ana- lytics have created opportunities for organizations to use big data to improve operations and decision making. One popular use of big data analysis is for pre- dictive modeling—sifting through data to identify how specific individuals will behave and react in the future. The organizations described here are benefiting from using predictive modeling to fight crime, select the best employees, and

152 Part One Organizations, Management, and the Networked Enterprise

lower insurance and credit lending risks. However, their use of big data is also taking benefits away from individuals. Individuals might be subject to job dis- crimination, racial profiling, or higher insurance rates because organizations have new tools to assemble and analyze huge quantities of data about them. 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 medical breakthroughs and those who fervently 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 dilem- mas involving information systems.

Here are some questions to think about: Does analyzing big data about peo- ple create an ethical dilemma? Why or why not? Should there be new privacy laws to protect individuals from being targeted by companies analyzing big data? Why or why not?

4-1 What ethical, social, and political issues are raised by information systems?

In the past 10 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 global legal environment, managers who violate the law and are convicted may spend time in prison. U.S. federal sentencing guide- lines adopted in 1987 mandate that federal judges impose stiff sentences on

Business Solutions

Management

Organization

Predictive Modeling Systems

Technology

Information System

Business Challenges

• Opportunities from new technology • Undeveloped legal environment

• Develop privacy policies

• Develop big data predictive models

• Predictive policing • Predict insurance risks • Identify employment risks • Target financially vulnerable individuals

• Invade privacy? • Increase efficiency • Lower costs

• Big data mining technology

• Big data analytics tools

• Develop big data strategy

Chapter 4 Ethical and Social Issues in Information Systems 153

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). International treaties and Interpol, enabled by global information systems, have made it possible to extradite, prosecute, arrest, and imprison business managers suspected of criminal activity on a global basis.

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. These developments mean that, more than ever, as a manager or an employee, you will have to decide for your- self what constitutes proper legal and ethical conduct.

Although these major instances of failed ethical and legal judgment were not masterminded by information systems departments, 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 in the vain hope they would never be caught.

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 behaviors. Information systems raise new ethical questions for both individuals and societies because

TABLE 4.1 RECENT EXAMPLES OF FAILED ETHICAL JUDGMENT BY SENIOR MANAGERS

Volkswagen (2015) Volkswagen agrees to pay $14.7 billion to consumers and agencies in the U.S. and replace nearly 500,000 diesel cars with faulty emission software. Faces additional fines worldwide.

General Motors Inc. (2015) General Motors CEO admits 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 need to be replaced.

Takata Corporation (2015) Takata executives admit they covered up faulty airbags used in millions of cars over many years. To date, 100 million cars need airbags replaced.

Citigroup, JPMorgan Chase, Barclays, UBS (2012)

Four of the largest money center banks in the world plead guilty to criminal charges that they manipulated the LIBOR interest rate used to establish loan rates throughout the world.

SAC Capital (2013) SAC Capital, a hedge fund led by founder Steven Cohen, pleads guilty to insider trading charges and agrees to pay a record $1.2 billion penalty. The firm was also forced to leave the money management business. Individual traders for SAC were found guilty of criminal charges and were sentenced to prison.

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 and the largest payment ever by a drug company.

McKinsey & Company (2012) CEO Rajat Gupta heard on tapes leaking insider information. The former CEO of prestigious management consulting firm McKinsey & Company was found guilty in 2012 and sentenced to two years in prison.

154 Part One Organizations, Management, and the Networked Enterprise

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, the telephone, and the radio, 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 infor- mation technology 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 firm technologies make it easier than ever to assemble, integrate, and distribute information, unleashing new concerns about the appropriate use of customer information, the protection 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 shown in Figure 4.1 . Imagine society as a more or less calm pond on a summer day,

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

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 political levels. These issues have five moral dimensions: information rights and obligations, property rights and obligations, system quality, quality of life, and accountability and control.

Chapter 4 Ethical and Social Issues in Information Systems 155

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 developed well-honed rules of behavior, and these are supported by laws developed 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, individual 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 correct 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.

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 individu- als 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 knowl- edge-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.

156 Part One Organizations, Management, and the Networked Enterprise

Advances in data storage techniques and rapidly declining storage costs have been responsible for the multiplying databases on individuals—employees, customers, and potential customers—maintained by private and public orga- nizations. These advances in data storage have made the routine violation of individual privacy both inexpensive and effective. Enormous data storage sys- tems for terabytes and petabytes of data are now available on-site or as online services 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 the 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

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 it 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.

Credit card purchases can make personal information available to market researchers, telemarket- ers, and direct mail companies. Advances in information tech- nology facilitate the invasion of privacy.

© Andriy Popov/123RF

Chapter 4 Ethical and Social Issues in Information Systems 157

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 describe how companies can analyze large pools of data from multiple sources to identify buying patterns of customers rapidly and suggest individual responses. 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 Double- Click (owned by Google), an Internet advertising broker, to track the activities of their visitors in exchange for revenue from advertisements based on visitor information 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. DoubleClick creates a detailed dossier of a person’s spending and computing habits on the web that is sold to compa- nies to help them target their web ads more precisely.

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 assem- ble and maintain dossiers on almost every adult in the United States. The com- pany sells this personal information to businesses and government agencies. Demand for personal data is so enormous that data broker businesses such as Risk Solutions are flourishing.

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.

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 machines, 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?

158 Part One Organizations, Management, and the Networked Enterprise

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

Customer Transaction

Systems

Incident and Arrest Systems

Telephone Records

Human Resources Systems

"Watch" Lists

Name standardization Match Merge

NORA Alerts

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.

Chapter 4 Ethical and Social Issues in Information Systems 159

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 manner 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 errors 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.

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 dis- pute all claim to be pursuing higher values (e.g., freedom, privacy, protection of property, and 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 stakehold- ers: 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 ethically 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 ( Imman- uel Kant’s categorical imperative ). Ask yourself, “If everyone did this, could the organization, or society, survive?”

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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 slippery path, you may not be able to stop.”

4. Take the action that achieves the higher or greater value ( utilitarian princi- ple ). This rule assumes you can prioritize values in a rank order and under- stand 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 automobile accidents). Avoid actions which 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.

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 pro- fessionals such as the American Medical Association (AMA), the American Bar Association (ABA), the Association of Information Technology Profes- sionals (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, honoring 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 rec- ognition software to reduce the size of their customer support staff by enabling computers to recognize a customer’s responses to a series of computerized questions. Many companies monitor what their employees are doing on the Internet to prevent them from wasting company resources on nonbusiness activities. Facebook monitors its subscribers and then sells the information to advertisers and app developers (see the chapter -ending case study).

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

Chapter 4 Ethical and Social Issues in Information Systems 161

their welfare. Business owners might feel obligated to monitor employee e-mail 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.

Information Rights: Privacy and Freedom in the Internet Age Privacy is the claim of individuals to be left alone, free from surveillance or interference from other individuals or organizations, including the state. Claims to privacy are also involved at the workplace. Millions of employees are subject 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 report- ing, education, financial records, newspaper records, and electronic and digital communications. The Privacy Act of 1974 has been the most important 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 fed- eral government and regulate very few areas of the private sector. There were 20 major privacy bills before Congress in 2015, although few of them are likely to be passed in the near future (Kosseff, 2014).

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 most recently in 2010 to take into account new privacy-invading technology (Federal Trade Commission [FTC], 2010; U.S. Department of Health, Education, and Welfare, 1973). FIP is a set of principles governing the collection and use of information about individ- uals. FIP principles are based on the notion of a mutuality of interest between the record holder and the individual. The individual has an interest in engag- ing in a transaction, and the record keeper—usually a business or government

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agency—requires information about the individual to support the transac- tion. After information is gathered, the individual maintains 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 Commission (FTC) restated and extended the original FIP to provide guidelines for protecting online privacy. Table 4.4 describes the FTC’s Fair Information Practice 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

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 Childrens Online Privacy Protection Act (COPPA) of 1998 Financial Modernization Act (Gramm-Leach- Bliley Act) of 1999

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.

Chapter 4 Ethical and Social Issues in Information Systems 163

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 require consumer consent and provide clear options to opt out of data collec- tion schemes (FTC, 2012). Other proposed Internet privacy legislation focuses on protecting the online use of personal identification numbers, such as social security numbers; protecting personal information collected on the Internet that deals with individuals not covered by COPPA; and limiting the use of data mining for homeland security.

In 2012, the FTC extended its FIP doctrine to address the issue of behav- ioral targeting. The FTC held hearings to discuss its program for voluntary industry principles for regulating behavioral targeting. The online advertising trade group Network Advertising Initiative (discussed later in this section), published its own self-regulatory principles that largely agreed with the FTC. Nevertheless, the government, privacy groups, and the online ad industry are still at loggerheads over two issues. Privacy advocates want both an opt-in pol- icy at all sites and a national Do Not Track list. The 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 Cen- ter found 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 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 personally identifiable information without consumer’s prior consent. On Octo- ber 25, 1998, the European Commission’s Directive on Data Protection went into effect, broadening privacy protection in the European Union (EU) nations.

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The directive requires companies to inform people when they collect informa- tion 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 deci- sion. In 2009, the European Parliament passed new rules governing the use of third-party cookies for behavioral tracking purposes, and required website visitors to give explicit consent to be tracked by cookies. Websites are required to have highly visible warnings on their pages if third-party cookies are being used (European Parliament, 2009). The Directive developed a safe harbor trans- border data framework for non-European firms that allowed them to move data across borders for storage and processing. A safe harbor is a private, self-regu- lating policy and enforcement mechanism that meets the objectives of govern- ment regulators and legislation but does not involve government regulation or enforcement.

In 2015 Europe’s highest court struck down the safe harbor agreement, in large part because of revelations that U.S. intelligence agencies had gained access to EU personal data stored in the U.S. The European Council sub- sequently approved the EU General Data Protection Regulation (GDPR) to replace the existing Data Protection Directive. The concept of safe harbor was replaced by a policy now called Privacy Shield. When it takes effect, the GDPR will apply across all EU countries, rather than the current situation in which each member-state regulates privacy matters within its own borders. Facebook and Google, for instance, currently base their European operations in Ireland, where privacy protections are minimal. The GDPR will apply to any firm oper- ating in any EU country, require unambiguous consent to use personal data for purposes like tracking individuals across the Web, limit the ability to use data for purposes other than those for which it was collected (tertiary uses, such as constructing user profiles), and strengthen the right to be forgotten, specifically, by allowing individuals to remove personal data from social plat- forms like Facebook and prevent them from collecting any new information. Companies operating in the EU will have to delete personal information once it no longer serves the purpose for which it was collected. In addition, an inde- pendent ombudsman was created to investigate complaints and enforce the policy. The new regulation was finally signed in 2016 and does not interfere with transborder dataflows.

Internet Challenges to Privacy Internet technology has posed new challenges for the protection of individual privacy. Information sent over this vast network of networks may pass through many computer systems before it reaches its final destination. Each of these systems is capable of monitoring, capturing, and storing communications that pass through it.

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 it pays

Chapter 4 Ethical and Social Issues in Information Systems 165

for the cost of publishing websites. In this sense, it’s like broadcast television: advertiser-supported content that is free to the user. The commercial 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 com- puter, 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 combine the data they have gathered from cookies and other website monitor- ing 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. So-called super cookies or Flash cookies cannot be easily deleted and can be installed whenever a person clicks a Flash video. Flash uses these so-called local shared object files to play videos and puts them on the user’s com- puter without his or her consent. Marketers use web beacons as another tool to monitor online behavior. Web beacons , also called web bugs (or simply track- ing files), are tiny software programs that keep a record of users’ online click- streams. They report this data back to whomever owns the tracking file invisibly embedded in e-mail messages and web pages that are designed to monitor the

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.

FIGURE 4.3 HOW COOKIES IDENTIFY WEB VISITORS

Cookies are written by a website on a visitor’s hard drive. 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.

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behavior of the user visiting a website or sending e-mail. Web beacons are placed on popular websites by third-party firms who pay the websites a fee for access to their audience. 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 sur- veillance 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 iden- tifying 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 information 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 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, Google began using behavioral targeting to help it 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 Inter- net. 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 other web activities (such as blogging). Google’s AdSense program enables Google to help advertisers select keywords and design ads for various market segments based on search histo- ries such as helping a clothing website create and test ads targeted at teenage females. A recent study found that 88 percent of 400,000 websites had at least one Google tracking bug.

Google also scans the contents of messages users receive of its free web-based e-mail service called Gmail. Ads that users see when they read their e-mail are related to the subjects of these messages. Profiles are developed on individual users based on the content in their e-mail. 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

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collecting any personal information unless the consumer specifically takes action to approve information collection and use. Here, the default option is no collection of user information.

The online industry has preferred self-regulation to privacy legislation for protecting consumers. The online advertising industry formed the Online Pri- vacy Alliance to encourage self-regulation to develop a set of privacy guidelines for its members. The group promotes the use of online seals, such as that of TRUSTe, certifying websites adhering to certain privacy principles. Members of the advertising network industry, including Google’s DoubleClick, have created an additional industry association called the Network Advertising Initiative (NAI) to develop its own privacy policies to help consumers opt out of advertis- ing 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 by 2016 Microsoft removed this feature in large part because most websites ignore 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 themselves. For commercial websites that depend on advertising to support themselves, most revenue derives from selling 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 major- ity 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, 2015). In 2016, what firms such as Facebook and 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.

In one of the more insightful studies of consumer attitudes toward Inter- net privacy, a group of Berkeley students conducted surveys of online users and of complaints filed with the FTC involving privacy issues. Some of their results show that people feel they have no control over the information col- lected about them, and they don’t know who to complain to. Websites collect all this information but do not let users have access, the website policies 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 are not saying, “Take my privacy, I don’t care, send me the service for free.” They are saying, “We want access to the infor- mation, we want some controls on what can be collected, what is done with the information, the ability to opt out of the entire tracking enterprise, and some clarity on what the policies really are, and we don’t want those policies changed without our participation and permission.” (The full report is avail- able at knowprivacy.org .)

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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 encrypting e-mail, for making e-mail or surfing activities appear anonymous, for preventing client computers from accepting cookies, or for detecting and eliminating spyware. For the most part, technical solutions have failed to pro- tect users from being tracked as they move from one site to another.

Because of growing public criticism of behavioral tracking, targeting of ads, and the failure of industry to self-regulate, attention has shifted to browsers. 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 requesting the user’s behavior not be tracked, but websites are not obligated to honor their visitors’ requests not to be tracked. There is no online advertising industry agreement on how to respond to Do Not Track requests nor, currently, any legislation requiring websites to stop tracking. Private browser encryption software or apps on mobile devices provide consumers a powerful opportunity to at least keep their messages private.

Property Rights: Intellectual Property Contemporary information systems have severely challenged existing laws and social practices that protect intellectual property . Intellectual property is considered to be tangible and intangible products of the mind created by individuals or corporations. Information technology has made it difficult to protect intellectual property because computerized information can be so eas- ily copied or distributed on networks. Intellectual property is subject to a vari- ety of protections under three legal traditions: trade secrets, copyright, and patent law.

Trade Secrets Any intellectual work product—a formula, device, pattern, method of manufac- ture, 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 secrets 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 included as 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 nondis- closure 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.

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, dra- mas, musical compositions, maps, drawings, artwork of any kind, and motion

Chapter 4 Ethical and Social Issues in Information Systems 169

pictures. The intent behind copyright laws has been to encourage creativity and authorship by ensuring that creative people receive the financial and other benefits of their work. Most industrial nations have their own copyright 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 infringe- ment 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 protected by copyright law ( Brown Bag Software v. Symantec Corp., 1992).

Patents A patent grants the owner an exclusive monopoly on the ideas behind an inven- tion 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 pos- sible by providing detailed diagrams for those wishing to use the idea under license from the patent’s owner. The granting of a patent is determined 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 that 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 delivered a decisive victory to Apple and a stunning defeat to Samsung. The jury awarded Apple $1 billion

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in damages. The decision established criteria for determining just how close a competitor can come to an industry-leading and standard-setting product like Apple’s iPhone before it violates the design and utility patents of the leading firm. The same court ruled that Samsung could not sell its new tablet computer (Galaxy 10.1) in the United States. In a later patent dispute, Samsung won an infringement case against Apple. In June 2013, the United States International Trade Commission issued a ban for a handful of older iPhone and iPad devices because they violated Samsung patents from years ago. In 2014, Apple sued Samsung again, claiming infringement of five patents. The patents cover hard- ware and software techniques for handling photos, videos, and lists used on the popular Galaxy 5. Apple sought $2 billion in damages. In 2015, the U.S. Court of Appeals reaffirmed that Samsung had copied specific design patents, but dropped the damages Apple was granted to $930 million. In 2016 the case moved to the Supreme Court to determine whether Samsung will have to turn over all its profits from the offending phones or just those profits that derived from the infringing elements in the phones.

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.

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, periodi- cals, and other media in terms of ease of replication; ease of transmission; ease of alteration; compactness—making theft easy; and difficulties in establishing uniqueness.

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 repro- duced and distributed. The BSA Global Software Survey conducted by Inter- national Data Corporation and The Software Alliance (also known as BSA) reported that the rate of global software piracy was 39 percent in 2015 (The Software Alliance, 2016).

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 pro- tected by copyright. Illegal file sharing became so widespread that it threatened the viability of the music recording industry and, at one point, consumed 20 percent of Internet bandwidth. The recording industry won several legal battles 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

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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 the iTunes Store expanded, some forms of illegal file sharing have declined. Technology has radically altered the prospects for intellectual property protection from theft, at least for music, videos, and television shows (less so for software). The Apple iTunes Store legit- imated paying for music and entertainment and created a closed environment from which music and videos could not be easily copied and widely distrib- uted unless played on Apple devices. Amazon’s Kindle also protects the rights of publishers and writers because its books cannot be copied 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 inhibits piracy because the streams cannot be easily recorded on separate devices, and videos can be downloaded so easily. Despite these gains in legitimate online music platforms, Apple’s iTunes based on downloads of singles and streaming services’ unwillingness to pay labels and artists a reasonable fee for playing have resulted in a 50 percent decline in record industry revenues since 2000 and the loss of thousands of jobs.

The Digital Millennium Copyright Act (DMCA) of 1998 also provides some copyright protection. The DMCA implemented a World Intellectual Prop- erty 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 infor- mation content firms are represented by the Software and Information Industry Association (SIIA), which lobbies for new laws and enforcement of existing 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.

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 accountable for the posting of pornographic material or racial insults, or should they be held harmless against any liability for what users post (as is true of common carriers, such as the telephone system)? What about the Internet? If you out- source 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.

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Computer-Related Liability Problems In late 2013 hackers obtained credit card, debit card, and additional personal information about 70 to 110 million customers of Target, one of the largest U.S. retailers. Target’s sales took an immediate hit from which it has still not com- pletely 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. A survey of U.K. retailers found that 70 percent had their customer files hacked, most notably the hack of Carphone Warehouse involving 2.4 million customers (Rigby, 2015).

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 busi- nesses 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. Inso- far as the software acts like a book, storing and displaying information, courts have been reluctant to hold authors, publishers, and booksellers liable for con- tents (the exception being instances of fraud or defamation); hence, courts have been wary of holding software authors liable for software.

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 causes is rarely fatal and typi- cally 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 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 because they are regulated common carriers. In return for their right to pro- vide telephone 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 air waves are subject to a wide variety of federal and local constraints on content and

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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 all kinds of websites and services, including Netflix. The loss of service lasted for a day. Amazon’s cloud computing services have had several subsequent outages, although not as long-lasting as the Christmas Eve outage. Outages at cloud computing services are rare but recurring. In 2016 cloud and data center outages occured across the globe, disrupting service at iTunes, Microsoft Azure, Twitter, Salesforce, and Nest (V3, 2016). These outages have called into question the reliability and quality 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 acceptable, technologically feasible level of system quality? At what point should system managers say, “Stop testing, we’ve done all we can to perfect this software. Let’s go live!” Individuals and organizations may be held responsible for avoidable and foreseeable consequences, which they have a duty to per- ceive and correct. The gray area is that some system errors are foreseeable and correctable only at very great expense, expense so great that pursuing this level of perfection is not feasible economically—no one could afford the product.

For example, although software companies try to debug their products before releasing them to the marketplace, they knowingly ship buggy prod- ucts because the time and cost of fixing all minor errors would prevent these products from ever being released. What if the product was not offered on the marketplace? 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. A 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 techno- logical barrier to perfect software, and users must be aware of the potential for catastrophic failure. The software industry has not yet arrived at testing stan- dards for producing software of acceptable but imperfect performance.

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 quality. 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

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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, who 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, up until recently reduced the fears of power centralization in government institutions. Yet much of the empower- ment described in popular business magazines is trivial. Lower-level employees may be empowered to make minor decisions, but the key policy decisions may 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 U.S. federal government has greatly expanded its use of this private sector informa- tion under the authority of the Patriot Act of 2001 and subsequent and secret executive orders. Most European countries, including France, Germany, the UK, Hungary, and Poland, have passed legislation authorizing both mass and targeted surveillance programs (Council of Europe, 2016). In this sense, power has become more centralized 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 more efficient 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 Parts of this book were produced on trains and planes as well as on vacations and during what otherwise might have been family time. The danger to ubiq- uitous computing, telecommuting, nomad computing, mobile 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.

Although authors have traditionally worked just about anywhere, the advent of information systems, coupled with the growth of knowledge-work occupa- tions, means that more and more people are working when traditionally they would have been playing or communicating with family and friends. The work umbrella now extends far beyond the eight-hour day into commuting time,

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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.

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. Most critical systems involving national infrastructure, from electricity and water to hospitals and schools, are dependent on the Internet. Secondary schools, for instance, increasingly use and rely on educational software. Test results are often stored off campus. If these systems were to shut down, there is no backup educational structure or content that can 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.

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 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, 2015). 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 Inter- net and e-mail has turned one form of computer abuse—spamming—into a

Although some people enjoy the convenience of working at home, the do-anything-anywhere computing environment can blur the traditional boundaries between work and family time.

© Hongqi Zhang/123RF

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serious problem for both individuals and businesses. Originally, spam was junk e-mail an organization or individual sent to a mass audience of Internet users who had expressed no interest in the product or service being mar- keted. However, as cell phone use has mushroomed, spam was certain to fol- low. Identity and financial-theft cybercriminals are turning their attention to smartphones as users check e-mail, 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 Newsfeed and messaging service as well. Spammers tend to market pornog- raphy, fraudulent deals and services, outright 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 subject of the e-mail 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 e-mail that is spam was estimated at around 65 percent in 2015 (Kaspersky, 2015). Most spam originates from bot networks, which consist of thousands of captured PCs that can initiate and relay spam messages. Spam volume has declined somewhat since authorities took down the Rustock botnet in 2011. Spam costs for businesses are very high (estimated at more than $50 billion per year) because of the computing and network resources billions of unwanted e-mail messages and the time required to deal with them consume.

Spamming is more tightly regulated in Europe than in the United States. In 2002, the European Parliament passed a ban on unsolicited commercial mes- saging. 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 out- law spamming but does ban deceptive e-mail practices by requiring commer- cial e-mail messages to display accurate subject lines, identify the true senders, and offer recipients an easy way to remove their names from e-mail lists. It also prohibits the use of fake return addresses. A few people have been prosecuted under the 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. The largest spam network 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, which stretches from Rus- sia to Indian pharmaceutical firms selling counterfeit Viagra. Australia, South Africa, the European Union, Sweden, and Malaysia are among the countries that have anti-spam laws (ITU, 2016).

For a many years automobile manufacturers around the globe have tried to find ways of manipulating mileage and emissions tests to produce more favorable results on paper than what actually takes place on the road. The use of software for this purpose recently came to light with revelations that Volkswagen Group installed deceptive software in some of its diesel car mod- els to violate the U.S. Clean Air Act, as described in the Interactive Session on Management.

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INTERACTIVE SESSION: MANAGEMENT

Monitoring in the Workplace

There may be only 11 players on the pitch during a match, but the Blackburn Rovers Football Club in the United Kingdom employs more than 800 people. As with any modern organization, computers are at the heart of running an efficient business. Most of the club’s computers are housed with the administra- tion department at the Ewood Park office, but others can be found at the club’s training center and soccer academy.

The club decided to install a software product called Spector 360, which it obtained from the Manchester- based company Snapguard. According to Snapguard’s sales literature, the product enables company-wide monitoring of employee PC and Internet usage. Previously, the club had tried to introduce an accept- able use policy (AUP), but initial discussions with employees stalled, and the policy was never imple- mented. Early trials of Spector 360 showed that some employees were abusing the easygoing nature of the workplace to spend most of their day surfing the Web, using social networking sites, and taking up a huge amount of bandwidth for downloads.

Before officially implementing the monitoring soft- ware, the AUP was resurrected. The policy was also made part of the terms and conditions of employment. Understandably, some employees were annoyed at the concept of being watched, but the software was installed anyway. According to Ben Hayler, Senior Systems Administrator at Blackburn Rovers, Spector 360 has definitely restored order, increasing productiv- ity and reducing activity on non-business apps.

Reports provided by Spector 360 can show manag- ers the following: excessive use of Facebook, Twitter, and other social networking sites; visits to adult sites or shopping sites; use of chat services; the printing or saving of confidential information; and staff login and logout times. Managers can also use the software to drill down to look at patterns of usage, generate screen snapshots, or even log individual keystrokes.

The software can also be used to benefit employ- ees. For example, because it can log exactly what an employee is doing, the system can help in staff train- ing and troubleshooting, because it is easy to track exactly what caused a particular problem to occur.

In the United States there is also very little limita- tion on employee monitoring as long as the monitor- ing is related to job performance. Employee knowledge

is desirable, but not necessary, especially if criminal behavior is involved. With portable cameras and an explosion of sensors that employees may be asked to wear, so-called “sociometric” badges are being intro- duced in some locations. These badges are equipped with microphones, GPS location sensors, and acceler- ometers to measure the detailed behavior of employ- ees and their conversations. Among the more recent findings are that employees are more productive and far less likely to quit when they have more time to interact with other employees. More coffee breaks were recommended! A recent research paper found that workplace monitoring with video cameras in res- taurants had very strong positive impacts on revenues, not by reducing suspected theft, but by increasing the motivation of wait staff to sell more drinks and spe- cial foods. On average, restaurant revenues expanded by nearly $3,000 per month. Employee tips also grew with the greater sales effort.

However, what is the wider view of the monitor- ing of employees in the workplace? According to the Citizens Advice Bureau (a free information and advice service for UK residents), the following are some of the ways that employers monitor their employees in the workplace: recording the workplace on CCTV cameras, opening mail or e-mail, using automated software to check e-mail, checking telephone logs or recording telephone calls, checking logs of Web sites visited, vid- eoing outside the workplace, getting information from credit reference agencies, and collecting information from point-of-sale terminals.

Although this list may look formidable, there is no argument that the employer has a right to ensure that his or her employees are behaving in a manner that is not illegal or harmful to the company. However, under UK data protection law, the employer must ensure that the monitoring is justified and take into account any negative effects the monitoring may have on staff. Monitoring for the sake of it is not allowed. Secret monitoring without employees’ knowledge is usually illegal.

In a case that went before the European Court of Human Rights in 2007 (Copeland v. the United Kingdom), Ms. Copeland, who was an employee of Carmarthenshire College, claimed that her privacy had been violated. She was a personal assistant to the principal and also worked closely with the deputy prin-

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cipal, who instigated monitoring and analysis of her telephone bills, Web sites visited, and e-mail commu- nication. The deputy principal wanted to determine whether Copeland was making excessive use of the col- lege’s services. The European Court ruled in her favor, stating that her personal Internet usage was deemed to be under the definitions of the Convention for the Protection of Rights, covered as “private life.”

The major fault of Carmarthenshire College was in not having a usage policy in place. Employers and employees should have an agreed-upon policy as part of the contract of employment that clarifies what is and is not acceptable computer usage in the workplace. The employer can then follow normal disciplinary pro- cedures if an employee is using workplace equipment in a manner that is not permitted in the contract of employment.

Whatever the legal situation, it is clear where potential problems can occur in the workplace regard- ing information technology use. An e-mail, once sent, becomes a legally published document that can be produced as evidence in court cases involving issues

of libel, breach of contract, and so on. Most businesses rely on their company data to keep ahead of the com- petition. Therefore, the loss, theft, or sabotage of data is potentially more dangerous than similar problems with hardware. If a USB memory stick is lost in a bar parking lot, replacing the hardware will cost a few dol- lars, but if it contains the company’s confidential data, then its loss could put the company out of business .

Sources: Gov.UK, “Data Protection and Your Business,” gov. uk, February 23, 2015; Ethan Bernstein, “How Being Filmed Changes Employee Behavior,” Harvard Business Review, Septem- ber 12, 2014; Steve Lohr, “Unblinking Eyes Track Employees,” New York Times, June 21, 2014; Lamar Pierce, et al., “Cleaning House: The Impact of Information Technology Monitoring on Employee Theft and Productivity, Olin School of Business, Washington University, 2014. Spencer E. Ante and Lauren Weber, “Memo to Workers: The Boss Is Watching,” Wall Street Journal, Octo- ber 22, 2014; Steve Lohr, “Unblinking Eyes Track Employees,” New York Times, June 21, 2014; Information Commissioners Office, “Employment Practices Data Protection Code-Supplementary Guid- ance,” www.ico.gov.uk, accessed October 25, 2010; “Spector 360 Helps Blackburn Rovers Show Red Card to PC and Internet Abuse,” Snapguard, www.snapguard.co.uk/blackburn_fc.html, accessed October 25, 2010; “Citizens Advice Bureau Advice Guide, Basic Rights at Work,” Adviceguide, accessed October 25, 2010.

CASE STUDY QUESTIONS

1. Do you consider the approach taken by Blackburn Rovers to be too strict on employees, too lenient, or just right?

2. Consider the five moral dimensions described in the text. Which are involved in the case of Cope- land v. the United Kingdom?

3. Consider the following scenario. Your 14-year-old son attends a soccer academy. While there, he downloads unsuitable images, which he later sells to his friends. He would not have been able to download the images at home, because you have installed parental control software. Who is to blame for his indiscretion?

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 man- agers and clerical workers to lose their jobs, along with millions of blue collar factory jobs. Several 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 because 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

Case contributed by Andy Jones, Staffordshire University.

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with earlier assessments by economists that both labor and capital would receive stable shares of income and that new technologies created as many or more new jobs as they destroyed old ones. However, there is no guarantee this will happen in the future, and the income wealth share of labor may con- tinue to fall relative to capital, resulting in a loss of high-paying jobs and further declines in wages.

Other economists are much more sanguine about the potential job losses. In some cases, employment has grown or remained unchanged in industries where investment in IT capital is highest. 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.

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 resources. 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 access 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 chil- dren 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, computer literate and skilled, versus a large group of information have-nots, computer illiterate and unskilled.

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 be 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 percent to 6 percent of the workforce (LeBlanc and Cestia, 2011).

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INTERACTIVE SESSION: ORGANIZATIONS

Are We Relying Too Much on Computers to Think for Us? Does our ever–burgeoning dependence on computers foster complacency, suppressing our ability to mar- shal our mental faculties when required? Although computerization has undoubtedly mitigated mal- functions, work stoppages, and breakdowns, are we concurrently losing our ability to assess alternatives independently and make optimal choices?

At least one technology writer is sure this is exactly what is happening. Nicholas Carr’s book, The Glass Cage: Automation and Us , lays out the case that our overreliance on computers has dulled our reflexes and eroded expertise. Two cognitive failures undermine performance. Complacency—overconfi- dence in the computer’s ability—causes our attention to wander. Bias—overconfidence in the accuracy of the data we are receiving from the computer—causes us to disregard outside data sources, including con- flicting sensory stimuli.

When pilots, soldiers, doctors, or even factory managers lose focus and lack situational aware- ness, they ignore both suspect data coming from the computer and the external cues that would refute it. The results can be catastrophic. In two instances in 2009, commercial airplane pilots misinterpreted the signals when their autopilot controls disconnected after receiving warnings that the aircraft would stall. Rather than pushing the yoke forward to gain veloc- ity, both pilots heeded faulty control panel data while ignoring environmental cues and pulled back on the yoke, lifting the plane’s nose and decreasing airspeed—the exact opposite of what was required. Loss of automation triggered confusion and panic. Sharply curtailed hands-on flight experience (on a typical passenger flight today, a human pilot mans the controls for just three minutes) resulted in stalled aircraft plunging to earth. Fifty died in Buffalo, New York; 228 perished in the Atlantic Ocean en route to Paris from Rio de Janeiro. The Federal Aviation Administration (FAA) is now pressing airlines to adopt stricter requirements for manual flying hours to offset the risks posed by complacency and bias.

Carr’s critics point out that air travel is now safer than ever, with accidents and deaths steadily declin- ing over decades and fatal airline crashes exceed- ingly rare. Carr concedes this point but still worries that pilots have come to rely so much on computers that they are forgetting how to fly. Andrew McAfee, a researcher at the MIT Sloan School of Management, points out that people have lamented the loss of

skills due to technology for many centuries, but on balance, automation has made the world better off. There may be a high-profile crash, but he believes greater automation, not less, is the solution.

Although humans have historically believed that allocating tasks to machines liberates us from the mundane and enables us to pursue the extraordi- nary, computers have ushered in an altogether dif- ferent era. Massive data compilation and complex analytical capabilities now mean that decision mak- ing, heretofore the sole province of the human brain, is increasingly being accomplished by computers. Offloading tasks to computers liberates us from com- plex thinking while requiring us to pursue mundane tasks such as inputting data, observing output, and absentmindedly awaiting equipment failure.

Complacency and bias-induced errors are piling up. For example, computer programs now highlight suspect spots on mammograms. With the compul- sion to examine images scrupulously relieved, radi- ologists are now missing some early-stage tumors not flagged by the program. Australian researchers found that accountants at two international firms using advanced auditing software had a significantly weaker understanding of the different types of risk than did those at a firm using simpler software that required them to make risk assessment decisions themselves. Even the most rudimentary tasks, such as editing and spell checking, are now performed dif- ferently. Rather than actively participating, we are observers, waiting to be told to correct an error. Are such short-term efficiencies worth the long-term loss of knowledge and expertise?

What’s more, software programs are shoulder- ing ever more capabilities heretofore thought to be the exclusive domain of the human brain. Sensory assessment, environmental awareness, coordinated movement, and conceptual knowledge are included in programming that has enabled Google to begin testing its driverless cars on public roads. Some argue that this is precisely the direction in which we should be going: autonomous computers with no human oversight or intervention at all. The solution to pilot error during automation failures? A wholly autonomous autopilot. The solution to doctors’ declining diagnostic skills due to complacency and bias? Cut doctors out of the equation altogether.

Carr sees two problems with this thinking. First, complex computer systems require complex

Chapter 4 Ethical and Social Issues in Information Systems 181

interdependencies among databases, algorithms, sensors, software, and hardware. The more mutu- ally dependent elements there are in a system, the greater the potential points of failure and the more difficult they are to find. Second, we have known for more than three decades that humans are spec- tacularly bad at precisely the job that increased computerization has relegated to them: passive observation. When not actively engaged, our minds tend to drift off to any topic other than the one we are supposed to be monitoring. What’s more, because we now know that “use it or lose it” applies to flying airplanes, diagnosing illnesses, spell-checking, and everything in between, restricting humans to obser- vation reduces experts to rookies, escalating the risk of improper responses to malfunctions.

One solution is to design programs that promote engagement and learning, for example, by return- ing control to the operator at frequent, but irregular, intervals or by ensuring that challenging tasks are

included. If operators must perform and repeat com- plex manual and mental tasks, the generation effect will be reinforced. Unfortunately, introducing these changes necessarily includes software slowdown and productivity decline. Businesses are unlikely to value long-term expertise preservation and development over short-term profits. Who does this technology benefit in the long run?

Sources: Patrick Smith, “Why Pilots Still Matter,” New York Times , April 10, 2015; Nicholas Carr, “All Can Be Lost: The Risk of Putting Our Knowledge in the Hands of Machines,” Atlantic , October 23, 2013; John Preston, “Review of Nicholas Carr’s The Glass Cage: Where Automation Is Taking Us,” Telegraph , January 11, 2015; Daniel Mena- ker, “ Review of Nicholas Carr’s The Glass Cage ,” New York Times Book Review , November 7, 2014; John Jones, “The Technophobe’s Dilemma: Nicholas Carr’s The Glass Cage ,” DML Central , November 10, 2014; Maria Bustillos, “Nicholas Carr’s Latest Anti-technology Rant, The Glass Cage ,” LA Times , September 19, 2014; Carol Call- waladr, “ The Glass Cage: Where Automation Is Taking Us Review: On Course for Disaster,” Guardian , January 19, 2015; Daniel J. Levitin, “Book Review: The Glass Cage by Nicholas Carr,” Wall Street Journal , October 10, 2014.

3. Can the problem of automation reducing cognitive skills be solved? Explain your answer.

CASE STUDY QUESTIONS

1. Identify the problem described in this case study. In what sense is it an ethical dilemma?

2. Should more tasks be automated? Why or why not? Explain your answer.

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 cog- nitive functions or at least changing how we think and solve problems. Although the Internet has made it much easier for people to access, create, and use infor- mation, some experts believe that it is also preventing people from focusing and thinking clearly. They argue that exposure to computers reduces intelligence and actually makes people dumb. One MIT scholar believes exposure to computers discourages drawing and encourages looking up answers rather than engaging in real problem solving. Students, in this view, don’t learn much surfing the web or answering e-mail when compared to listening, drawing, arguing, looking, playing

182 Part One Organizations, Management, and the Networked Enterprise

outdoors, and exploring (Henry, 2011). The Interactive Session on Organizations describes a related concern: that automation is de-skilling people by removing opportunities to learn important tasks and impairing their ability to think on their own.

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 become easier as information technology continues to transform our world. The growth of the Internet and the information economy suggests that all the ethical and social issues we have described will be intensified 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.

© Donna Cuic/Shuttertock

Review Summary

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 obliga- tions, 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 ethi- cal 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

Chapter 4 Ethical and Social Issues in Information Systems 183

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 loca- tions simultaneously over the Internet.

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 hold- ing 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 disrup- tions 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 socioeconomic disparities among different racial 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 , 159 Carpal tunnel syndrome (CTS) , 180 Computer abuse , 177 Computer crime , 177 Computer vision syndrome (CVS) , 182 Cookies , 166 Copyright , 170 Digital divide , 181 Digital Millennium Copyright Act (DMCA) , 173 Due process , 159 Ethical no-free-lunch rule , 161 Ethics , 154 Fair Information Practices (FIP) , 162 Golden Rule , 160 Immanuel Kant’s categorical imperative , 160 Information rights , 156 Informed consent , 165 Intellectual property , 169

Liability , 159 Nonobvious relationship awareness

(NORA) , 158 Opt-in , 168 Opt-out , 168 Patent , 170 Privacy , 162 Profiling , 158 Repetitive stress injury (RSI) , 180 Responsibility , 159 Risk aversion principle , 161 Safe harbor , 165 Slippery slope rule , 161 Spam , 177 Spyware , 167 Trade secret , 169 Utilitarian principle , 161 Web beacons , 167

Review Questions 4-1 What ethical, social, and political issues are

raised by information systems?

• Explain how ethical, social, and political issues are connected and give some examples.

• List and describe the key technological trends that heighten ethical concerns.

• Define profiling and nonobvious relation- ship awareness and explain the ethical con- cerns they raise.

4-2 What specific principles for conduct can be used to guide ethical decisions?

• Differentiate between responsibility, accountability, and liability.

• List and describe the five steps in an ethical analysis.

• Identify and describe six ethical principles.

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

184 Part One Organizations, Management, and the Networked Enterprise

4-3 Why do contemporary information systems technology and the Internet pose challenges to the protection of individual privacy and intel- lectual 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 legal traditions that protect intellectual property rights.

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 software services liable for failure or injury.

• List and describe the principal causes of sys- tem quality problems.

• Define computer crime and computer abuse and describe their impacts on computer users.

• Define and describe computer vision syn- drome and repetitive stress injury (RSI) and explain their relationship to information technology.

Discussion Questions 4-5 What is the digital divide and how do you

think it should be dealt with?

4-6 Should companies be responsible for unem- ployment their information systems cause? Why or why not?

MyLabMIS

MyLabMIS

4-7 Discuss the pros and cons of allowing compa- nies to amass personal data for behavioral tar- geting.

MyLabMIS

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 cre- ate a simple blog, and analyzing web browser privacy. Visit MyLab MIS’s Multimedia Library to access this chapter’s Hands-On MIS Projects.

Management Decision Problems

4-8 The Malaysian government is a major healthcare provider. The government plans to have 33 paperless public hospitals in Malaysia in the next few years. These paperless hospitals will be backed by information systems that will collect, process, and retrieve data. This will not only help to increase the operating effi- ciency of these hospitals but will also be environment-friendly. So far, the government has been successful in making two public hospitals paperless, and work to make 31 other hospitals paperless is in progress. Although the government has formulated a code of conduct for doctors to be good practitioners, there is no code in place for information ethics. There is an urgent need to regulate the collection, storage, and com- munication of medical data and patient information to prevent misuse. What concerns might patients have? What can hospitals do to prevent misuse? Given the scenario outlined above, what do you think should be part of an ethical code of conduct for securing the sensitive information gathered by healthcare service providers?

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.

Chapter 4 Ethical and Social Issues in Information Systems 185

• 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 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 hard drive 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 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 employee privacy and the privacy of customers and users of the corporate website. Be sure to consider e-mail 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 pos- sible, use Google Docs and Google Drive or Google Sites to brainstorm, organize, and develop a presenta- tion of your findings for the class.

Business Problem-Solving Case

FACEBOOK PRIVACY: WHAT PRIVACY?

In less than a decade, Facebook has morphed from a small, niche networking site for mostly Ivy League college students into a publicly traded company with

a market worth of $338 billion in 2016. Facebook boasts that it is free to join and always will be, so where’s the money coming from to service 1.65 billion

186 Part One Organizations, Management, and the Networked Enterprise

worldwide subscribers? Just like its fellow tech titan and rival Google, Facebook’s revenue comes almost entirely from advertising. Facebook does not have a diverse array of hot new gadgets like Apple does, a global network of brick-and-mortar retail outlets like Walmart does, or a full inventory of software for sale. All Facebook has to sell is your personal information and the information of hundreds of millions of others with Facebook accounts.

Advertisers have long understood the value of Facebook’s unprecedented trove of personal informa- tion. They can serve ads using highly specific details such as relationship status, location, employment status, favorite books, movies, or TV shows and a host of other categories. For example, an Atlanta woman who posts that she has become engaged might be offered an ad for a wedding photogra- pher on her Facebook page. When advertisements are served to finely targeted subsets of users, the response is much more successful than traditional types of advertising.

A growing number of companies both big and small have taken notice. In 2015, Facebook generated $17.9 billion in revenue, 94 percent of which ($16.8 billion) was from selling ads and the remainder from selling games and virtual goods. Facebook’s revenues in 2015 grew by 43 percent over the previous year, driven mostly by adding new users and showing 40 percent more ads than a year earlier. A major con- tributor to revenue growth in 2015 is ads sold in the mobile News Feed.

That was good news for Facebook, which is expected to continue to increase its revenue in com- ing years, but is it good news for you, the Facebook user? More than ever, companies such as Facebook and Google, which made approximately $67 billion in advertising revenue in 2015, are using your online activity to develop a frighteningly accurate picture of your life. Facebook’s goal is to serve advertisements that are more relevant to you than anywhere else on the web, but the personal information 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. Facebook’s partnership with the Department of Labor helps connect job seekers and employers; Facebook has helped families find lost pets; Facebook 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 companies a chance to solidify their brands; and, per- haps most obviously, Facebook allows you to keep in touch with your friends, relatives, local restaurants,

and in short, just about all things you are interested in more easily. These are the reasons so many people use Facebook—it provides value to users.

However, Facebook’s goal is to get its users to share as much data as possible because the more Facebook knows about you, the more accurately it can serve relevant advertisements to you. Face- book CEO Mark Zuckerberg often says that people want the world to be more open and connected. It’s unclear whether that is truly the case, but it is cer- tainly true that Facebook wants the world to be more open and connected because it stands to make more money in that world. Critics of Facebook are con- cerned that the existence of a repository of personal data of the size that Facebook has amassed requires protections and privacy controls that extend far beyond those that Facebook currently offers.

Facebook wanting to make more money is under- standable, but the company has a checkered past of privacy violations and missteps that raise doubts about whether it should be responsible for the personal data of hundreds of millions of people. There are no laws in the United States that give consumers the right to know what data companies like Facebook have com- piled. You can challenge information in credit reports, but you can’t even see what data Facebook has gath- ered about you, let alone try to change it. It’s different in Europe: you can request Facebook to turn over a report of all the information it has about you.

More than ever, your every move, every click, on social networks is being used by outside entities to assess your interests and behavior and then pitch you an ad based on this knowledge. Law enforce- ment agencies use social networks to gather evi- dence on tax evaders and other criminals; employers use social networks to make decisions about prospec- tive candidates for jobs; and data aggregators are gathering as much information about you as they can sell to the highest bidder. Facebook has admitted that it uses a software bug or code to track users across the Internet even if they are not using Facebook.

Think you own your face? Febook’s newest pri- vacy issue involves its facial recognition software used for photo tagging of users. This “tag sugges- tions” 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 recent Consumer Reports study found that of 150 million Americans on Facebook, ever day, at least 4.8 million are willingly sharing information

Chapter 4 Ethical and Social Issues in Information Systems 187

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 insurers could use to deny coverage. Thirteen million users have never adjusted Facebook’s privacy controls, which allow friends using Facebook appli- cations to transfer your data unwittingly to a third party without your knowledge.

Credit card companies and similar organizations have begun engaging in weblining, taken from the phrase redlining, by altering their treatment of you based on the actions of other people with profiles similar to yours. Employers can assess your personal- ity and behavior by using your Facebook likes. In one survey, 93 percent of people polled believe that Inter- net companies should be forced to ask for permission before using your personal information, and 72 per- cent want the ability to opt out of online tracking.

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 Face- book’s features and services are enabled by default 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.

Facebook’s value and growth potential are deter- mined by how effectively it can leverage the personal data it aggregated about its users to attract advertisers. Facebook also stands to gain from managing and avoid- ing the privacy concerns its users and government regulators raise. For Facebook users who value the pri- vacy of their personal data, this situation appears grim, but there are some signs that Facebook might become more responsible with its data collection 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 investors and regulators because, unlike in the past, its balance sheets, assets, and financial reporting documents are readily available.

In August 2012, Facebook settled a lawsuit with the Federal Trade Commission (FTC) in which it was barred from misrepresenting the privacy or security

of users’ personal information. Facebook was charged with deceiving its users by telling them they could keep their information on Facebook private but then repeatedly allowing it to be shared and made public. Facebook agreed to obtain user consent before mak- ing any change to that user’s privacy preferences and to submit to biannual privacy audits by an indepen- dent firm for the next 20 years.

Privacy advocate groups such as the Electronic Privacy Information Center (EPIC) want Facebook to restore its more robust privacy settings from 2009 as well as to offer complete access to all data it keeps about its users. Facebook has also come under fire from EPIC for collecting information about users who are not even logged on to Facebook or may not even have accounts on Facebook. Facebook keeps track of activity on other sites that have Like buttons or rec- ommendations widgets and records the time of your visit and your IP address when you visit a site with those features, regardless of whether you click them.

Although U.S. Facebook users have little recourse to access data that Facebook has collected on them, users from other countries have made inroads in this regard. 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 Face- book’s privacy controls as the European Union pur- sues more stringent privacy protection legislation, In June 2015, Belgium’s data-protection watchdog sued Facebook over privacy practices such as how Face- book tracks users across the web through Like and Share buttons on external websites. In 2016 an Aus- trian student’s class-action suit against Facebook’s privacy rules has been referred to the European Court of Justice. The suit alleges Facebook’s privacy policies violate European data protection laws.

In January 2014, Facebook shut down its Spon- sored Stories feature, which served advertisements in the user’s news feed highlighting products and busi- nesses that Facebook friends were using. Sponsored Stories had been one of the most effective forms of advertising on Facebook because they don’t seem like advertisements at all to most users. However, this fea- ture triggered many lawsuits, attempted settlements, and criticism from privacy groups, the FTC, and annoyed parents whose children’s photos were being used throughout Facebook to sell products.

Although Facebook has shut down one of its more egregious privacy-invading features, the com- pany’s Data Use policies make it very clear that,

188 Part One Organizations, Management, and the Networked Enterprise

as a condition of using the service, users grant the company wide latitude in using their information in advertising. This includes a person’s name, photo, comments, and other information. Facebook’s exist- ing policies make clear that users are required to grant the company wide permission to use their personal information in advertising as a condition of using the service. This includes social advertising, by which your personal information is broadcast to your friends and, indeed, the entire Facebook service if the company sees fit. Although users can limit some uses, an advanced degree in Facebook data features is required.

Ad-based firms like Facebook, and hundreds of others, including Google, justify their collection of personal information by arguing that consumers, by virtue of using the service, implicitly know about the data collection efforts and the role of advertisers in paying for the service and must, therefore, believe they are receiving real economic value from ads. This line of reasoning received a blow when in June 2015, researchers at the Annenberg School of Com- munication at the University of Pennsylvania found that 65 percent of Americans feel they have lost con- trol over their information to advertisers, 84 percent want to control their information, and 91 percent do not believe it is fair for companies to offer discounts or coupons in exchange for their personal informa- tion without their knowledge.

In June 2015, Facebook held its first ever privacy conference as part of a growing effort to convince users it really is concerned about privacy and aware of public criticism of the firm. It has hired more than 50 privacy experts focused on Facebook’s privacy practices. Critics asked Facebook why it doesn’t offer an ad-free service—like music streaming sites—for a monthly fee. Others wanted to know why Face- book 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 unfettered use of its users’ personal private information, just like it declares in its data

use policy. That policy declares very openly that if you use Facebook, you don’t have any privacy with respect to any data you provide to it.

Sources: Samuel Gibbs, “WhatsApp, Facebook and Google Face Tough New Privacy Rules Under EC Proposal,” The Guardian, Jan- uary 10, 2017; Stephanie Bodoni, “Google, Facebook Face Tighter EU Grip With New Privacy Law,” Bloomberg News, January 10, 2017; Hannah Kuchler and Duncan Robinson, “Facebook Privacy Case Referred to Europe’s Top Court,” Financial Times, September 16, 2016; “‘Privacy Shield,’ the New Deal Governing How Europe’s User Data Is Sent to the US,” Reuters, February 29, 2016; Katie Collins, “Facebook’s Newest Privacy Problem: ‘Faceprint’ Data,” CNET, May 16, 2016; United States District Court Northern Dis- trict of California in Re Facebook Biometric Information Privacy Litigation. Case No. 15-cv-03747-JD Order Re Motion to Dismiss and Summary Judgment, May 6, 2016; Jessica Guynn, “Facebook to Face Privacy Lawsuit over Photo Tagging,” USA Today , May 6, 2016; Natasha Singer, “Sharing Data, but Not Happily,” New York Times , June 4, 2015; Sam Schechner and Natalia Drozdiak, “Bel- gium Takes Facebook to Court over Privacy, User Tracking,” Wall Street Journal , June 16, 2015; Deepa Seethharaman, “At Facebook Summit, Little Consensus on Privacy,” New York Times , June 4, 2015; Zeynep Tufecki, “Let Me Pay for Facebook,” New York Times , June, 4, 2015; IBM, “IBM and Facebook Team Up to Deliver Per- sonalized Brand Experiences through People-Based Marketing,” press release, May 6, 2015; Lisa Fleisher, “Admitting Tracking Bug, Facebook Defends European Privacy Practices,” Wall Street Journal , April 9, 2015; Facebook, Inc., SEC Form 10K filed with the Securi- ties and Exchange Commission for the fiscal year ending Decem- ber 31, 2014, January 29, 2015; Anna North, “How Your Facebook Likes Could Cost You a Job,” New York Times , January 20, 2015; Natasha Singer, “Didn’t Read Those Terms of Service? Here’s What You Agreed to Give Up,” New York Times , April 28, 2014.

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 Face- book’s business model?

4-15 Describe the weaknesses of Facebook’s privacy policies and features. What people, organiza- tion, and technology factors have contributed 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?

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 situation in which the principle comes into play and how you think managers should react.

4-18 What are five digital technology trends in American 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.

Chapter 4 Ethical and Social Issues in Information Systems 189

Aeppel, Timothy. “What Clever Robots Mean for Jobs.” Wall Street Journal (February 24, 2015).

Belanger, France and Robert E. Crossler. “Privacy in the Digital Age: A Review of Information Privacy Research in Information 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).

Bertolucci, Jeff. “Big Data Firm Chronicles Your Online, Offline Lives.” Information Week (May 7, 2013).

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 Access.” 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).

Council of Europe, “European Court of Human Rights Case Law.” Thematic Fact Sheet, rm.coe.int (February 2016).

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 Parliament. “Directive 2009/136/EC of the European Parliament and of the Council of November 25, 2009.” European Parliament (2009).

Federal Trade Commission. “Protecting Consumer Privacy in an Era of Rapid Change.” Washington, DC. (2012).

Goldfarb, Avi and Catherine Tucker. “Why Managing Consumer Privacy Can Be an Opportunity.” MIT Sloan Management Review 54, No. 3 (Spring 2013).

Henry, Patrick. “Why Computers Make Us Stupid.” Slice of MIT (March 6, 2011).

Hsieh, J. J. Po-An, Arun Rai, and Mark Keil. “Understanding Digital 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).

ITU. “ITU Survey on Anti-Spam Legislation Worldwide.” International Telecommunication Union, www.itu.int (2016).

Chapter 4 References

Kaspersky Lab. “Spam and Phishing Statistics Report Q1-2015.” (2015).

Kosseff, Joseph. “Twenty Privacy Bills to Watch in 2014.” (January 15, 2014).

Laudon, Kenneth C. and Carol Guercio Traver. E-Commerce 2016: Business, Technology, Society (12th ed .). Upper Saddle River, NJ: Prentice-Hall (2017).

Laudon, Kenneth C. Dossier Society: Value Choices in the Design of National Information Systems . New York: Columbia University Press (1986).

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 Consumer Privacy Concerns in Personalization: A Strategic Analysis of Privacy Protection.” MIS Quarterly 35, No. 2 (June 2011).

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).

PwC. “US State of Cybercrime Survey 2015.” (June 2015), Pew Research Center. “The State of Privacy in America.” (January

20, 2016). Rigby, Chloe. “How Can Ecommerce and Multichannel Retailers

Respond to the Carphone Warehouse Data Breach?” Internetretailing.com (August 11, 2015).

Robinson, Francis. “EU Unveils Web-Privacy Rules.” Wall Street Journal (January 26, 2012).

Smith, H. Jeff. “The Shareholders vs. Stakeholders Debate.” MIS Sloan Management Review 44, No. 4 (Summer 2003).

Sojer, Manuel, Oliver Alexy, Sven Kleinknecht, and Joachim Henkel. “Understanding the Drivers of Unethical Programming Behavior: The Inappropriate Reuse of Internet- Accessible Code.” Journal of Management Information Systems 31, No. 3 (Winter 2014 ).

Tarafdar. Monideepa, John D’Arcy, Ofir Turel, and Ashish Gupta. “The Dark Side of Information Technology.” MIT Sloan Management Review 56, No. 2 (Winter 2015).

The Software Alliance. “BSA Global Software Survey 2016.” (May 2016).

United States Department of Health, Education, and Welfare. Records, Computers, and the Rights of Citizens. Cambridge: MIT Press (1973).

U.S. Senate. “Do-Not-Track Online Act of 2011.” Senate 913 (May 9, 2011).

U.S. Sentencing Commission. “Sentencing Commission Toughens Requirements for Corporate Compliance Programs.” (April 13, 2004).

V3. “Top 10 Cloud Outages from Twitter and iTunes to Azure and AWS,” http://www.v3.co.uk (accessed November 2016).

190 Part One Organizations, Management, and the Networked Enterprise

Information Technology Infrastructure

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

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

192

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?

VIDEO CASES

Rockwell Automation Fuels the Oil and Gas Industry with the Internet of Things (IoT)

ESPN.com : The Future of Sports Broadcasting in the Cloud Netflix: Building a Business in the Cloud

CHAPTER CASES

EasyJet Flies High with Cloud Computing Wearable Computers Change How We Work Glory Finds Solutions in the Cloud BYOD: Business Opportunity or Big Headache?

C H

A P

T E

R

5 IT Infrastructure and Emerging Technologies

MyLab MIS™ Visit mymislab.com for simulations, tutorials, and end-of-chapter problems.

193

EasyJet is the largest airline in the United Kingdom and the second-largest short-haul airline carrier in the world (behind Ryanair) with more than 800 domestic and international routes in 32 countries. Based in Luton, England, EasyJet has expanded rapidly since its founding in 1995, propelled by a series of acquisitions as well as fulfilling an important market need for low-cost airline services. EasyJet carries more than 70 million passengers per year. Obviously, having a reliable and robust system for booking and manag- ing reservations while keeping costs low is a key business requirement.

EasyJet’s customers, like those of other airlines, like the idea of being able to select their seats on a given flight when they made their reservations online. However, EasyJet’s existing reservation system did not have the capability to add this new feature, which required investing in an additional computer cen- ter and modifying its IT infrastructure.

EasyJet’s IT department found a better solution. It retained the core reser- vation system as is and hosted the seat allocation service in the cloud using Microsoft’s Azure cloud service. EasyJet had tried other public cloud comput- ing platforms, but Microsoft’s offered a better integration of on-premises and cloud services. EasyJet had used the Microsoft Azure cloud service to build services that communicate wirelessly at airports without running up major airport charges for new services desks.

Microsoft’s Azure cloud enabled EasyJet’s information system developers to write their own software program code for seat allocation and use as much or as little processing power as needed to test the service. It then turned out to be much faster and cost-effective to have the public cloud actually host the new seat allocation service rather than use EasyJet’s internal IT infrastructure.

EasyJet is adopting a hybrid cloud strategy. It is not moving its entire IT infrastructure to the cloud, only specific functions that its internal IT infrastruc- ture can’t easily handle. The new capabilities are integrated with the company’s existing IT Infra- structure. By enhancing its sys- tems by adding new features in the cloud, the company is able to get more value out of its earlier IT investments, which amounted to many millions of dollars.

EasyJet Flies High with Cloud Computing

© CPC Collection/Alamy Stock Photo

When an EasyJet customer books a reservation, EasyJet’s information sys- tems integrate three different technologies. EasyJet’s web servers handle the process of customers entering their desired travel dates and destinations for flight bookings. The company’s reservation system residing in a different com- puter center presents data on alternative times and prices of flights for custom- ers to choose from. Finally, the aircraft diagram where users can select their seats is fully hosted on Microsoft’s Azure cloud service. The entire experience appears seamless to users.

By enhancing its systems to offer allocated seating, EasyJet was able to increase customer satisfaction by 5 percent and add 7 percent to its revenue growth according to the company’s 2013 annual earnings report. In the fol- lowing two years, the company increased customer conversion to its website by 13 percent. Selecting seats and boarding flights have become much more pleasant.

EasyJet’s management believes that good customer experience combined with low prices clearly differentiates the company from competitors. The busi- ness benefits of offering online seat selection using cloud computing services have made it possible for EasyJet to continue this strategy because it can keep operating costs low while offering customers top-notch services in searching for and booking flights. Airlines on average spend 2 percent of their revenue on IT infrastructure; EasyJet spends only half a percent of its revenue on IT.

What if the new seat allocation system enhancement had failed to improve cus- tomer service and revenue? EasyJet could have easily turned off the cloud service for online seat selection if it so chose. It is much easier to eliminate a cloud ser- vice than to remove the functionality from the company’s core internal system.

Sources: “Leading European Airline Improves Service and Scalability with Hybrid Cloud Solution,” www.microsoft.com , accessed February 9, 2016; www.easyjet.com , accessed May 1, 2016; Clare McDonald, “How EasyJet Uses Digital to Drive Competitive Advantage,” Com- puter Weekly, October 13, 2015; and “EasyJet Raises Customer Satisfaction with Hybrid IT,” Computer Weekly , September 23–29, 2014.

The experience of EasyJet illustrates the importance of information technol-ogy infrastructure in running a business today. The right technology at the right price will improve organizational performance. EasyJet was saddled with an outdated IT infrastructure that was far too costly and unwieldy for adding new services, such as online passenger seat selection, that were being offered by competitors. This caused EasyJet to lose customers and prevented the com- pany 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 . As a low-cost carrier, EasyJet is under pressure to keep costs down, but it still must offer services such as online seat selec- tion that are provided by competing airlines. Management had to find a low- cost solution that enabled the company to remain competitive. It decided to develop and run the new seat selection service on Microsoft’s Azure cloud com- puting platform, where the hardware is located in remote computing centers accessed via the Internet. The seat selection capability is integrated with Easy- Jet’s internal reservation system, which is maintained on premises. This is an example of a hybrid cloud strategy, where an organization maintains part of its

194 Part Two Information Technology Infrastructure

IT infrastructure itself and part using cloud computing services. Using cloud computing for part of its IT infrastructure enables EasyJet to expand and offer new services at very affordable prices. The company pays for only the comput- ing capacity it actually uses on an as-needed basis and did not have to make extensive and costly new infrastructure investments.

Here are some questions to think about: How did EasyJet’s hardware and software technology affect the company’s ability to operate? What were the business benefits of using cloud computing?

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 and software) in 2016 is estimated to be a $3.5 trillion industry when telecommunications, networking equipment, and telecommunications services (Internet, telephone, and data transmission) are included. Investments in infrastructure account for between 25 and 50 percent of information technology expenditures in large firms, led by financial 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:

Organization

Technology

Management

• Improve customer service • Increase revenue

• Monitor service level and costs • Plan new IT infrastructure • Make IT infrastructure investments

• Create new services and business processes

• On-premises reservation system • Microsoft Azure cloud computing services

• Costly, unwieldy IT infrastructure • Low-cost provider • Highly competitive industry

Seat Allocation System • Provide online seat selection service

Business Challenges

Business Solutions

Information System

Chapter 5 IT Infrastructure and Emerging Technologies 195

• 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

• 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 pro- vide enterprise-wide capabilities such as enterprise resource planning, cus- tomer relationship management, supply chain management, 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 employees and offer managers training in how to plan for and manage IT investments

IT Services and

Infrastructure

Customer Services Supplier Services

Enterprise Services

IT Strategy

Information Technology

Business Strategy

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.

196 Part Two Information Technology Infrastructure

• 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 under- stand 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 making $100,000 a year to connect to all the company’s major systems, including col- laboration 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 computing power and infrastructure elements (see Figure 5. 2 ). The five eras are general-purpose mainframe and minicomputer computing, personal computers, 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 intro- duction of the IBM 360 series. The 360 was the first commercial computer that could provide time sharing, multitasking, and virtual memory in more advanced 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 propri- etary 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.

Chapter 5 IT Infrastructure and Emerging Technologies 197

Stages in IT Infrastructure Evolution

Mainframe/ Minicomputer (1959–present)

Personal Computer (1981–present)

Client/Server (1983–present)

Enterprise Computing 1992–present)

Cloud Computing (2000–present)

Enterprise Server

Internet

THE INTERNET

• Hardware • Software • Services

FIGURE 5. 2 ERAS IN IT INFRASTRUCTURE EVOLUTION

Illustrated here are the typical computing configurations characterizing each of the five eras of IT infra- structure evolution.

198 Part Two Information Technology Infrastructure

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 American busi- nesses. At first using the DOS operating system, a text-based command lan- guage, and later the Microsoft Windows operating system, the Wintel PC computer (Windows operating system software on a computer with an Intel microprocessor) became the standard desktop personal computer. Worldwide PC shipments have declined more than 10 percent because of the popularity of tablets and smartphones, but the PC is still a popular tool for business. About 289 million new PCs were sold worldwide in 2015 ( Gartner, Inc., 2016 ). Approx- imately 87 percent are thought to run a version of Windows, and about 4 per- cent run a version of Mac OS. The Wintel dominance as a computing platform is receding as iPhone and Android device sales increase. About 2 billion people worldwide own smartphones, and most of these users access the Internet with their mobile devices.

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 sys- tems 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 typically are more powerful versions of personal computers, based on inexpensive 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 (often called N-tier) client/server architectures in which the work of the entire network is balanced over several different levels of serv- ers, depending on the kind of service being requested (see Figure 5. 3 ).

For instance, at the first level, a web server will serve a webpage to a cli- ent in response to a request for service. Web server software is responsible for locating and managing stored webpages. 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 busi- ness 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 architectures for e-commerce and e-business.

Chapter 5 IT Infrastructure and Emerging Technologies 199

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 com- munications environment after 1995, business firms began seriously using the Transmission Control Protocol/Internet Protocol (TCP/IP) networking 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 hardware and smaller networks into an enterprise-wide network so that information can flow freely across the organization and between the firm and other organiza- tions. It can link different types of computer hardware, including mainframes, servers, PCs, and mobile devices, and it includes public infrastructures 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 business, 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 services) over the network, often the Internet. These “clouds” of computing

Web Server Application ServerClient

Data

Sales Production Accounting

HR

Internet

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.

200 Part Two Information Technology Infrastructure

resources can be accessed on an as-needed basis from any connected device and location.

Cloud computing is now the fastest growing form of computing. According to the International Data Corporation ( IDC ), worldwide spending on public cloud services is growing at a 19.4 percent compound annual growth rate, nearly six times the rate of overall IT spending growth—from nearly $70 billion in 2015 to more than $141 billion in 2019 ( International Data Corporation, 2016 ).

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, and high-speed Internet connections to firms that want to maintain their IT infra- structures remotely. Firms such as Google, Microsoft, SAP, Oracle, and Sales- force.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 Infrastruc- ture 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, tele- communications and networking hardware and software, and software design that have exponentially increased computing power while exponentially reduc- ing 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 microprocessor chip was introduced in 1959, the number of components on a chip with the smallest manufacturing costs per component (generally transis- tors) 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 microprocessor and millions of instructions per second (MIPS), a common measure of processor power. Figure 5. 5 shows the exponential decline in the cost of transistors and rise in computing power. For instance, in 2016, you could buy an Intel i7 quad-core 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 processors coupled with an exponential decline in computing costs may not be able to con- tinue much longer. Chip manufacturers continue to miniaturize components. Today’s transistors should no longer be compared to the size of a human hair but rather to the size of a virus. Within the next five years or so, chip makers may reach the physical limits of semiconductor size. At that point they may need to use alternatives to fashioning chips from silicon or finding other ways to make computers more powerful ( Markoff, 2016 ).

Chapter 5 IT Infrastructure and Emerging Technologies 201

2010

2016 2014

2006 2002 1998 1994 1990 1986 1982 1978 1974 1970

Processing power (MIPS) N um

be r o

f tr an

sis tor

s

250,000

5 bill

ion

Moore’s Law Means More Performance

FIGURE 5. 4 MOORE’S LAW AND MICROPROCESSOR PERFORMANCE

Packing more than 5 billion transistors into a tiny microprocessor has exponentially increased process- ing power. Processing power has increased to more than 250,000 MIPS (about 2.6 billion instructions per second). Source: Authors’ estimate.

1965 1968

1973 1978

1983

1988

1993

1998

2003

2008

2016

Packing more transistors into less space has driven dramatic reductions in their cost and in the cost of the products they populate.

Ten

Transistor Price in U.S. Dollars

One

One Tenth

One Hundredth

One Thousandth

One Ten-Thousandth

One Hundred-Thousandth

One Millionth

One Ten-Millionth

Moore’s Law Begins 1965

Moore’s Law Means Decreasing Costs

FIGURE 5. 5 FALLING COST OF CHIPS

Source: Authors’ estimate.

202 Part Two Information Technology Infrastructure

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 thou- sands of times smaller than current technologies permit. Chip manufacturers 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 Digi- tal Storage. The amount of digital information is roughly doubling every year Lyman and Varian, 2003 ). Fortunately, the cost of storing digital information 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 2016, a 500 gigabyte 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 lin- early, 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.

Nanotubes are tiny tubes about 10,000 times thinner than a human hair. They consist of rolled-up sheets of carbon hexa- gons and have potential use as minuscule wires or in ultrasmall electronic devices and are very powerful conductors of electrical current.

© Owen Thomas/123RF

Chapter 5 IT Infrastructure and Emerging Technologies 203

19 50

19 55

19 58

19 59

19 60

19 70

19 75

19 80

19 90

20 00

20 05

20 10

20 15

Data Storage Per Dollar

S to

ra g

e (

G ig

a b

yt e

s)

0

2

4

6

8

10

100

FIGURE 5. 6 THE AMOUNT OF STORAGE PER DOLLAR RISES EXPONENTIALLY, 1950–2016

Cloud storage services like Google Drive provide 100 gigabytes of storage for $1.99 per month. Source: Authors’ estimates.

Declining Communications Costs and the Internet A fourth technology driver transforming IT infrastructure is the rapid decline in the costs of communication and the exponential growth in the size of the Internet. Today there are more than 3.5 billion Internet users worldwide ( Inter- netlivestats.com, 2016 ). Figure 5. 7 illustrates the exponentially declining 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 communication and com- puting facilities explode.

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 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 expensive than is currently the case. Table 5. 1 describes important standards that have shaped IT infrastructure.

204 Part Two Information Technology Infrastructure

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.

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.

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.

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 webpages.

C os

t p

er k

ilo b

it ($

)

Year

2.00

1.50

1.00

.50

0 1995 1997 1999 2001 2003 2005 2006 2016

FIGURE 5. 7 EXPONENTIAL DECLINES IN INTERNET COMMUNICATIONS COSTS

Verizon FiOS (fiber to the home) delivers 1 kilobit of data for a retail price less than 2 thousandths of a penny. Source: Authors.

Chapter 5 IT Infrastructure and Emerging Technologies 205

Beginning in the 1990s, corporations started moving toward standard com- puting and communications platforms. The Wintel PC with the Windows oper- ating 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 sys- tems and the Android operating system.) Widespread adoption of Unix-Linux as the enterprise server operating system of choice made possible the replace- ment of proprietary and expensive mainframe infrastructures. In telecommu- nications, 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.

Computer Hardware Platforms

Dell IBM

Oracle Sun HP

Apple

Data Management and Storage

IBM DB2 Oracle

SQL Server Sybase MySQL

EMC Apache Hadoop

Consultants and System Integrators

IBM HP

Accenture Networking/ Telecommunications

Microsoft Windows Server Linux Cisco

AT&T, Verizon

IT Infrastructure Ecosystem

Operating Systems Platforms

Microsoft Windows Unix Linux

Mac OS X Chrome

Android iOS

Internet Platforms Apache

Microsoft IIS, .NET Unix

Cisco Java

Enterprise Software Applications

(including middleware) SAP

Oracle Microsoft

IBM

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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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. According to International Data Corporation , by 2020, busi- ness spending on cloud infrastructure will account for roughly half of the total computing resources budget. Firms’ IT infrastructures 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 $626 billion on computer hardware devices in 2016, including mainframes, servers, PCs, tablets, and smartphones. All these devices constitute the computer hardware platform for corporate (and personal) computing worldwide.

Most business computing takes place using microprocessor “chips” manufac- tured or designed by Intel Corporation and, to a lesser extent, AMD Corpora- tion. 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 mobile 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.

The computers with Intel microprocessors in the first computer hardware platform use complex instruction set computing (CISC) with several thousand instructions built into the chip. This requires a considerable number of tran- sistors per processor, consumes power, and generates heat. Mobile devices in the second computer hardware platform are not required to perform as many tasks as computers in the first computer hardware platform. They are able to use reduced instruction set computing (RISC), which contains a smaller set of instructions, consumes less power, and generates less heat. RISC proces- sors for mobile devices are manufactured by a wide range of firms, includ- ing Apple, Samsung, and Qualcomm, using an architecture designed 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 quantities of data, and for handling large workloads in cloud computing cen- ters. The mainframe is still the digital workhorse for banking and telecommu- nications networks that are often running software programs that are older and require a specific hardware platform. Currently, mainframes process 30

Chapter 5 IT Infrastructure and Emerging Technologies 207

billion business transactions per day, and 80 percent of the world’s corporate data also originates on the mainframe ( ITBusinessEdge.com, 2015 ).

However, the number of providers has dwindled to one: IBM. IBM has also repurposed its mainframe 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 replacing 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 oper- ating system and network services and appeals to organizations seeking Win- dows-based IT infrastructures. Unix and Linux are scalable, reliable, and much less expensive than mainframe operating systems. They can also run on many different types of processors. The major providers of Unix operating systems are IBM, HP, and Oracle-Sun, each with slightly different and partially incom- patible versions.

At the client level, 81 percent of PCs use some form of the Microsoft Windows operating system (such as Windows 10, Windows 8, or Windows 7) to manage 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 com- puting 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 tab- let computers developed by the Open Handset Alliance led by Google. It has become the most popular smartphone platform worldwide, competing with iOS, Apple’s mobile operating system for the iPhone, iPad, and iPod Touch. Android is installed on more than half the tablets, smartphones, and portable computers in use globally.

Conventional client operating system software is designed 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, iPhone, and iPod Touch, 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 $321 billion in 2016 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.

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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 linking the firm’s exist- ing 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 pro- viders are IBM (DB2), Oracle, Microsoft (SQL Server), and Sybase (Adaptive Server Enterprise). MySQL is a Linux open source relational database product now owned by Oracle Corporation, and Apache Hadoop is an open source software framework for managing very large data sets (see Chapter 6 ) . The physical data storage market for large-scale systems is dominated by EMC Corporation.

Networking/Telecommunications Platforms Companies worldwide are expected to spend $1.44 trillion for telecommunica- tions services in 2016 ( Gartner, Inc., 2016 ). 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 series 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. 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 sup- plied by Microsoft (Microsoft Visual Studio and the Microsoft .NET family of development tools), Oracle-Sun (Sun’s Java is the most widely used tool for developing interactive web applications on both the server and client sides),

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and a host of independent software developers, including Adobe (Creative Suite). Chapter 7 describes the components of the firm’s Internet platform in greater detail.

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 Global Business Services, HP, Infosys, and Wipro Technologies.

Software integration means ensuring the new infrastructure works with the firm’s older, so-called legacy systems and ensuring the new elements of the infrastructure work with one another. Legacy systems are generally older transaction 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 sys- tems 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. We look at seven hardware trends: the mobile digital platform, consumerization of IT and BYOD, quantum computing, virtualization, cloud 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 wire- less communication 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 tablet computers are increasingly used for business com- puting as well as for consumer applications. For example, senior executives at General Motors are using smartphone applications that drill down into vehicle sales information, financial performance, manufacturing metrics, and project management status.

Wearable computing devices are a recent addition to the mobile digital plat- form. These include smartwatches, smart glasses, smart ID badges, and activity trackers. Wearable computing technology has business uses, and it is changing the way firms work, as described in the Interactive Session on Technology.

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It looks like wearable computing is taking off. Smart- watches, smart glasses, smart ID badges, and activ- ity trackers promise to change how we go about each day and the way we do our jobs. According to an April 2015 report surveying 2,400 U.S. CIOs by IT staffing firm Robert Half Technology, 81 percent expect wearable computing devices such as watches and glasses to become common workplace tools.

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 distribution and ful- fillment operations. Wearable computing devices improve productivity by delivering information to workers without requiring them to interrupt their tasks, which in turn empowers employees to make more informed decisions more quickly.

Although primarily consumer devices, smart- watches are being used for business. The Apple Watch, for example, has a number of features to make employees more productive. It can take phone calls and accept voice commands. It will display an important message, e-mail, or calendar appointment on your wrist. Instead of buzzing loudly and with every e-mail, text message, and calendar alert you receive, the watch uses subtle, discreet vibrations that won’t be a distraction in the middle of a meet- ing. There are Apple Watch versions of Evernote (note taking), PowerPoint (electronic presentations), and Invoice2go, which will automatically prompt you to start logging your work time as soon as you arrive at a job site, send basic invoices, and receive alerts when they’re paid.

Salesforce.com has developed several enterprise applications for the Apple Watch. Salesforce1 for Apple Watch delivers instant notifications to sales- people, service agents, and other business users to help speed up their work. For example, sales manag- ers can receive a discount approval request and take action right from the watch. Customer service man- agers can receive alerts if a critical case requires immediate attention or call wait times are about to exceed thresholds. Digital marketers can be alerted when a marketing campaign surpasses a goal. Sales- force Analytics for Apple Watch enables Salesforce

INTERACTIVE SESSION: TECHNOLOGY

Wearable Computers Change How We Work

customers to use analytics data delivered to their smartwatches to view performance metrics, uncover new insights, and take action with dashboards. Users will also be able to query via Voice Search to access a report, view a dashboard, or find other information.

Global logistics company DHL worked with Ricoh , the imaging and electronics company, and Ubimax , a wearable computing services and solutions com- pany, 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 finding items and reduce errors. The company says the technology delivered a 25 percent increase in efficiency.

Right now, vision picking gives workers locational information 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, pro- vide pictures 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.

Southern Co. , an Atlanta-based energy company, is experimenting with several different wearables in its power plants and its power distribution and trans- mission pipeline. Southern recently deployed both head-mounted and wrist-mounted computers and performed several “proofs of concept” with Google Glass, Apple Watch, and the Moto 360 Android Wear device. The proofs of concept focused on enhanc- ing plant workers’ ability to follow documented procedures more accurately and to document adher- ence to those procedures. The company also piloted Bluetooth video cameras worn on the head for docu- menting work processes and for videoconferencing between field personnel and central office personnel. Southern Co. now uses head-worn cameras in some plants and field locations.

At Walt Disney World Resort in Orlando, Florida, guests are issued a MagicBand, a radio frequency identification (RFID) wristband, which serves as their hotel room key and park entrance ticket and can be assigned a PIN and linked to a credit card to make purchases. The wristband is also used to link photos to guest accounts and will soon connect to a vacation-planning system. Staff are equipped with

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Consumerization of IT and BYOD The popularity, ease of use, and rich array of useful applications for smart- phones and tablet computers have created a groundswell of interest in allowing employees to use their personal mobile devices in the workplace, a phenom- enon 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. Consum- erization of IT includes not only mobile personal devices but also business uses of software services that originated in the consumer marketplace as well, such as Google and Yahoo search, Gmail, Google Apps, 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 man- aging 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 pro- tected 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 demanding that employees be able to use their own personal computers, smartphones, and tablets to access the corporate network. It is more difficult for the firm to manage and control

CASE STUDY QUESTIONS

long-range RFID readers so they can personally greet guests. Aggregated RFID data will be used to mini- mize attraction wait times. Messages entice guests to relocate to less busy areas of the park. FastPass+, Disney’s ride reservation system, allocates guests to the most popular attractions by assigning one-hour return windows for express entrance.

The value of wearable computing devices isn’t from transferring the same information from a lap- top or smartphone to a smartwatch or eyeglass dis- play. Rather, it’s about finding ways to use wearables to augment and enhance business processes. Suc- cessful adoption of wearable computing depends not

only on cost effectiveness but on the development of new and better apps and integration with existing IT infrastructure and the organization’s tools for man- aging and securing mobile devices (see the chapter- ending case study.)

Sources: Mary K. Pratt, “Wearables in the Enterprise? Yes, Really!” Computerworld , February 24, 2016; www.salesforce.com , accessed May 5, 2016; Bob Violino, “Wearables in the Workplace: Potential and Pitfalls,” Baseline , September 9, 2015; Brett Nuckles, “Apple Watch: Is It Good for Business?” Business News Daily , May 12, 2015; Dennis McCafferty, “Why Wearable Tech Needs Killer Business Apps,” CIO Insight, May 1, 2015; and Daisuke Wakabayashi, “What Exactly Is an Apple Watch For?” Wall Street Journal, February 16, 2015.

1. Wearables have the potential to change the way organizations and workers conduct business. Dis- cuss the implications of this statement.

2. How would a business process such as ordering a product for a customer in the field be changed if the salesperson was wearing a smartwatch equipped with Salesforce software?

3. What management, organization, and technology issues would have to be addressed if a company

was thinking of equipping its workers with a wear- able computing device?

4. 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.

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these consumer technologies and make sure they serve the needs of the busi- ness. The chapter- ending case study explores some of these management chal- lenges created by BYOD and IT consumerization.

Quantum Computing Quantum computing is an emerging technology with the potential to dramati- cally boost computer processing power to find answers to problems that would take conventional computers many years to solve. Quantum computing uses the principles of quantum physics to represent data and perform operations on these data. While conventional computers handle bits of data either as 0 or 1 but not both, quantum computing can process bits as 0, 1, or both simultane- ously. 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 and Lockheed Martin currently use quantum platforms ( Follow, 2016 ).

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. Virtual- ization 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 machine. 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. Vir- tualization also facilitates centralization and consolidation of hardware administration.

Virtualization also enables multiple physical resources (such as storage devices or servers) to appear as a single logical resource, as in software- defined storage (SDS) , which separates the software for managing data stor- age from storage hardware. Using software, firms can pool and arrange multiple storage infrastructure resources and efficiently allocate them to meet specific application 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

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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.

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.

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

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.

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• Rapid elasticity: Computing resources can be rapidly provisioned, increased, or decreased to meet changing user demand.

• Measured service: Charges for cloud resources are based on amount of resources actually used.

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 capacity of its IT infrastructure to provide a broadly based cloud environment sell- ing 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 computing and storage capacity they actually use. (See the Interactive Session on Organiza- tions). Figure 5. 10 shows the range of services Amazon Web Services offers.

• Software as a service (SaaS): Customers use software hosted by the vendor on the vendor’s cloud infrastructure and delivered as a service over a network. Leading software as a service (SaaS) examples are Google Apps, 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 Apps has a pared-down free version. Users access these applications 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 applications. For example, IBM offers a Bluemix service for software devel- opment and testing on the IBM cloud. Another example is Salesforce.com’s Force.com , which allows developers to build applications that are hosted on its servers as a service.

Amazon Web

Services

Analytics

Application services

Computing

Management

Deployment Database

Data storage

Content Delivery

Networking

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.

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INTERACTIVE SESSION: ORGANIZATIONS

Glory Finds Solutions in the Cloud Ever wonder who keeps track of all your ATM trans- actions? If you use ATMs anywhere in the globe — and who doesn’t—chances are good that specialist firms like Glory Global Solutions Ltd. are manag- ing the process of dispensing and depositing cash ATM transactions. It’s called the cash management business, and it’s at the heart of banking activity in thousands of bank branches and global banking systems, and an important part of the retail vending, automated self-service venues, and gaming indus- tries (such as the gambling industry, which runs on cash). There are over 3.2 million ATMs worldwide, and consumers made 10 billion withdrawals in 2016, amounting to just under €1 trillion in value. Given the ubiquity of ATMs, cash transactions require global scale systems to manage the flow of value. One impact of the financial meltdown beginning in 2008 is that banks shut down thousands of bank branches, resulting in a spurt in ATM cash transac- tions and an industry-wide move towards automated teller systems.

Glory Global was founded in 1918 as Kokuei Machinery in Himeji, Japan. Originally a light bulb manufacturing firm, it expanded on its manufac- turing strengths by building the first coin and cash counters in Japan. By the 1970s it moved into the manufacture of ATMs worldwide and changed its name to the Glory Group. Through a series of acquisitions, Glory expanded rapidly. In 2013 Global acquired Talaris (a UK-based cash management firm) to become Glory Global Solutions with headquarters in Basingstoke, England. Today Glory is one of the world’s largest cash management solutions providers. Glory Global Solutions has 2,500 employees, operates in 100 countries, and generates more than €1.7 bil- lion annually according to company sources. Glory remains a Japanese-owned firm that trades on the Tokyo stock exchange.

Growing through more than 25 acquisitions, the company quickly became a collection of legacy sys- tems developed in different countries, by multiple firms and developers, for different lines of business. The company also inherited a collection of data centers from the firms it acquired. The various sys- tems could not communicate with one another, and management was unable to “see” all of its businesses or to understand the business processes of their vari- ous business segments and operating companies.

In 2015 management decided the firm could not achieve its strategic goals of growing the business without being able to streamline and standardize its business processes worldwide. The inefficiency of operating so many disparate data centers and the absence of a single global system operating on a modern technology platform suggested the need for a global enterprise database approach and for operat- ing on a cloud platform provided by a single vendor. Moving to a cloud solution would greatly reduce its data management and IT infrastructure costs.

Glory had already begun the move toward a cloud- based business by deploying Office 365 and other cloud solutions a few years before. For the first time, the firm was able to share documents, data, and presentations across all its business segments. The firm’s managers believed they could obtain a positive return on their investment within four years by mov- ing other processes to a single database and a single cloud service.

The next challenge was determining which vendor would be the best choice. There are multiple vendors of cloud-based computing, from very large firms like Oracle, SAP, IBM, and HP to smaller, regional provid- ers. Ultimately, Glory narrowed the choice down to two global vendors and then decided that Oracle best fit their needs. The firm had already adopted in its European operations several elements of Oracle’s traditional enterprise suite installed on Glory’s own servers. In the last five years, along with most global cloud providers, Oracle has moved rapidly towards offering “computing on demand” as a business model, where customers do not purchase software but instead rent the computing power they need and pay for only as much as they use the service. Having a single vendor for licensing software and processing power rather than dealing with multiple vendors was also seen as a positive factor.

Few firms have the expertise to move rapidly from a legacy system to a contemporary cloud platform. Glory reviewed ten vendors of systems integrationor services and chose a firm called TCS to help them with the transition and fill in gaps in the firm’s own knowledge. TCS had considerable experience with Oracle enterprise systems and had a number of pre- built modules that could used by Glory. System inte- grators are consulting firms that have expertise in the hardware and software of business systems and

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bring with them a knowledge and background in best business practices learned over many years in differ- ent industries. They help firms redesign their busi- ness processes and merge them into the enterprise software and IT infrastructure. After twelve months of work, the new platform was ready to deploy.

A key challenge facing management was how to implement these platform changes in 24 countries with multiple languages and multiple regulations in each country. This turned out to be a massive cultural change. Each of the firm’s business units required training in the new business processes and the software used to implement the processes. Over 2,000 of the firm’s employees would be using the new systems, some daily, to perform their jobs. A direct cutover to the new system was considered too risky. A parallel system cutover where both the old and new platforms operate in parallel was con- sidered too expensive, and too difficult technically.

Management decided instead for a regional roll out strategy starting with the U.K. headquarters location. Completed in 2016, the company plans to implement the new system in the remaining countries over an eighteen month period, with a target date of 2018 for complete implementation. Overall, the transition required four years to completion. Management believes they will have reduced their annual IT costs by 50 percent compared to the older legacy systems, but the real benefit will come from being able to operate and grow as a single global firm .

Sources: “The Federal Reserve Payments Study 2016,” Federal Reserve Board (www.federalreserve.gov), 2016; “ATM Benchmarking Study 2016 and Industry Report,” Accenture Report, www.accenture. com, 2016; Ariella Brown, “Public Cloud Helps Global Firm Grow Its Business,” CIO Insight, December 13, 2016; Ron Delnevo, “2016 in the ATM Industry: For Europe, a Year of Heavy Lifting,” January 7, 2016; “Annual Report 2016,” The Glory Global Group 2016, http:// www.glory-global.com.

CASE STUDY QUESTIONS

1. Why did Glory choose a cloud solution as opposed to modernizing the systems it had?

2. Why was it necessary to hire a systems integrator firm?

3. What were the main organizational change requirements for implementing the new cloud platform?

4. Why did management choose a regional rollout strategy? Why in the UK?

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Chapter 2 discussed Google Docs, Google Apps, and related software ser- vices for desktop productivity and collaboration. These are among the most popular software services for consumers, although they are increasingly used in business. Salesforce.com is a leading software service for business. Sales- force 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 improving sales and customer service. A marketing cloud enables companies to engage in digital marketing interactions with customers through e-mail, mobile, social, web, and connected products. Salesforce.com also provides a community cloud platform for online collabora- tion and engagement and an analytics cloud platform to deploy sales, service, marketing, and custom analytics apps.

Salesforce.com is also a leading example of platform as a service (PaaS). Its Force.com is an application development platform where customers can develop their own applications for use within the broader Salesforce network. Force.com provides a set of development tools and IT services that enable users to customize their Salesforce.com customer relationship management appli- cations or to build entirely new applications and run them in the cloud on Salesforce.com’s data center infrastructure. Salesforce opened up Force.com to other independent software developers and listed their programs on its AppEx- change, an online marketplace for third-party applications that run on the Force.com 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 ser- vices 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 externally. Like public clouds, private clouds are able to allocate storage, com- puting power, or other resources seamlessly to provide computing resources on an as-needed basis. Companies that want flexible IT resources and a cloud ser- vice model while retaining control over their own IT infrastructure are gravitat- ing toward these private clouds. (Review the chapter- opening case on EasyJet and the Interactive Session on Organizations).

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 related 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 infrastructures 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.

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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 .

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 design- ing, manufacturing, using, and disposing of computers, servers, and associated devices such as monitors, printers, storage devices, and networking and com- munications systems to minimize impact on the environment.

According to Green House Data, the world’s data centers use as much energy as the output of 30 nuclear power plants, which amounts to 1.5 percent of all energy use in the world. Reducing computer power consumption has been a very high “green” priority. 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 operat- ing costs. Data centers are now being designed with energy efficiency in mind, using state-of-the art air-cooling techniques, energy-efficient equipment, virtu- alization, and other energy-saving practices. Large companies like Microsoft, Google, Facebook, and Apple are starting to reduce their carbon footprint with clean energy–powered data centers with power-conserving equipment 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

Chapter 5 IT Infrastructure and Emerging Technologies 219

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 fea- ture multiple processor cores (which perform the reading and execution of com- puter 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 simultaneous processing of multiple tasks. This technology enables two or more process- ing 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 processors and servers with 16-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 and A10 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. The Apple processors have about one-fiftieth of the power consumption of a laptop dual-core processor. Intel introduced a line of ultrasmall, low-power microprocessors called Quark that can be used in wear- able devices and skin patches or even swallowed to gather medical data.

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, and the software can be redistributed by the user without additional licensing. Open source software is by definition not restricted to any specific operating system or hardware technology, although most open source software is currently based on a Linux or Unix operating system.

The open source movement has demonstrated that it can produce commer- cially acceptable, high-quality software. 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 operating system and Chrome web browser are based on open source tools. You can find out more out more about the Open Source Definition from the Open Source Initiative and the history of open source soft- ware in the Learning Tracks for this chapter .

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Linux Perhaps the most well-known open source software is Linux, an operating sys- tem related to Unix. Linux was created by the Finnish programmer Linus Tor- valds and first posted on the Internet in August 1991. Linux applications are embedded in cell phones, smartphones, tablet computers and consumer elec- tronics. 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, and integration—because Linux works on all the major hardware platforms from mainframes to servers to clients.

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 become the leading interactive programming environment for the web. The Java plat- form has migrated into mobile phones, smartphones, 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 operating 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 webpages 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 webpages and for accessing the web and other Internet resources. Microsoft’s Internet Explorer, Mozilla Firefox, Google Chrome, and Apple Safari browsers are exam- ples. 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 webpage and for creating dynamic links to other webpages and objects. Using these links, a user need only point at a highlighted keyword or graphic, click on it, and imme- diately be transported to another document.

HTML was originally designed to create and link static documents com- posed largely of text. Today, however, the web is much more social and inter- active, and many webpages have multimedia elements—images, audio, and video. Third-party plug-in applications like Flash, Silverlight, and Java have been required to integrate these rich media with webpages. However, these add-ons require additional programming and put strains on computer process- ing. The next evolution of HTML, called HTML5 , solves this problem by mak- ing it possible to embed images, audio, video, and other elements directly into a document without processor-intensive add-ons. HTML5 makes it easier for webpages to function across different display devices, including mobile devices

Chapter 5 IT Infrastructure and Emerging Technologies 221

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 and ease of use in building web applications, and Python (praised for its clarity) is being used for building cloud computing applications. Major websites such as Google, Facebook, Amazon, and Twitter use Python and Ruby as well as Java.

Web Services and Service-Oriented Architecture Web services refer to a set of loosely coupled software components that exchange 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 single 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 development of the web) as a more powerful and flexible markup language than hypertext markup language (HTML) for webpages. Whereas HTML is limited to describing how data should be presented in the form of webpages, 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 meanings, XML makes it possible for computers to manipulate and interpret their data automatically and perform operations on the data without human intervention. 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 exchange, 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

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>

222 Part Two Information Technology Infrastructure

communicate with each other to create a working software application. Busi- ness tasks are accomplished by executing a series of these services. Software developers reuse these services in other combinations to assemble other appli- cations as needed.

Virtually all major software vendors provide tools and entire platforms for building and integrating software applications using web services. IBM includes web service tools in its WebSphere e-business software platform, and Microsoft has incorporated web services tools in its Microsoft .NET platform.

Dollar Rent A Car’s systems use web services for its online booking system with Southwest Airlines’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 information 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 ).

Tour Operator’s Systems

Wireless Web Site

Dollar Rent A Car Systems

Web Services

Travel Reservation

System

Southwest Airlines

Systems

Fututre Business Partners’ Systems

Server Legacy

Reservation System

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.

Chapter 5 IT Infrastructure and Emerging Technologies 223

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.

There are three external sources for software: software packages from a com- mercial software vendor, outsourcing custom application development to an external vendor, (which may or may not be offshore), and cloud-based software services and tools.

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-PeopleSoft have developed powerful software packages that can support the primary business processes of a firm worldwide from warehousing, customer rela- tionship management, 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.

Sources of Software

E xp

en d

it u

re s

(b ill

io n

s $)

19 99

20 00

20 01

20 02

20 03

20 04

20 05

20 06

20 07

20 08

20 09

20 10

20 11

20 12

20 15

20 13

20 14

Outsourced Software

Software as a Service (SaaS )

Total Software Spending

100

50

0

150

200

300

250

350

400

FIGURE 5. 12 CHANGING SOURCES OF FIRM SOFTWARE

In 2015, U.S. firms spent and estimated $334 billion on software. About 44% of that originated outside the firm, provided by a variety of vendors. About 10% ($33 billion) was provided by SaaS vendors as an online cloud-based service. Sources: BEA National Income and Product Accounts, 2016; authors’ estimates.

224 Part Two Information Technology Infrastructure

Software Outsourcing Software outsourcing enables a firm to contract custom software development or maintenance of existing legacy programs to outside firms, which often oper- ate offshore in low-wage areas of the world. For example, UK communications regulator Ofcom recently signed a £23 million, six-year contract to outsource application and infrastructure management to NIIT Technologies. NIIT Tech- nologies is an Indian firm specializing in application development and main- tenance, infrastructure management, and business process management. NIIT provides Ofcom with a service desk, data center services, and application man- agement and project management services ( Flinders, 2016 ).

Offshore software outsourcing firms have primarily provided lower-level maintenance, data entry, and call center operations, although more sophisti- cated 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.

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 software vendors. Instead of buying and installing software programs, subscribing com- panies rent the same functions from these services, with users paying either on a subscription or per-transaction basis. A leading example is 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 composed of interchangeable components that integrate freely with other applications on the Internet. Individual users and entire companies mix and match these software components to create their own customized applications and to share information 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

Chapter 5 IT Infrastructure and Emerging Technologies 225

sources alone. For instance, ZipRealty uses Google Maps and data provided by online real estate database Zillow.com to display a complete list of multiple listing service (MLS) real estate listings for any ZIP code specified by the user.

Apps are small specialized software programs (application software) that are designed for mobile devices like smartphones and tablets. They are downloaded from app stores like Apple’s App Store and Google Play. Google refers to its online services as apps, including the Google Apps suite of desktop productivity tools. Windows 10 refers to all of its desktop software programs as apps. But when we talk about apps today, most of the attention goes to the apps that have been devel- oped for mobile devices like smartphones and tablets. It is these apps that turn smartphones and tablets into general-purpose computing tools. First appearing in 2008, in 2016 there are hundreds of millions of apps for the iOS and Android mobile operating systems. The use of apps now exceeds the use of mobile brows- ers, which are much slower and cumbersome for accessing mobile software.

Apps provide a streamlined non-browser pathway for users to perform a number of tasks, ranging from reading the newspaper to shopping, searching, personal health monitoring, 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 con- ventional software, which further adds to their appeal. There are already more than 2 million apps for the Apple iPhone and iPad platform and a similar num- ber that run on devices using Google’s Android operating system. Apple reports that more than 100 billion apps have been downloaded by users. 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 comput- ing), 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

226 Part Two Information Technology Infrastructure

purchases 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 number of users without breaking down. New applications, mergers and acqui- sitions, 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 and procedures for managing these platforms. They will need to inventory all of their mobile devices in business use and develop policies and tools for tracking, updating, and securing them and for controlling the data and applications that run on them. Firms using cloud computing and SaaS will need to fashion new contractual arrangements with remote vendors to make sure that the hardware and software for critical applications are always available when needed and that they meet corporate standards for information security. It is up to business management to determine acceptable levels of computer response time and availability for the firm’s mission-critical systems to main- tain the level of business performance 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 depart- ments and divisions have the responsibility of making their own information technology decisions, or should IT infrastructure be centrally controlled and managed? What is the relationship between central information systems man- agement and business unit information systems management? How will infra- structure 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 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 appli- cation in-house. Yet there are many benefits to using cloud services including significant reductions in hardware, software, human resources, and mainte- nance costs. Moving to cloud computing allows firms to focus on their core businesses rather than technology issues. As the reliability of cloud computing has improved greatly in the last decade, in 2016 some Fortune 500 firms are planning to move the majority of their computing platforms to cloud services.

Chapter 5 IT Infrastructure and Emerging Technologies 227

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 admin- istration costs for hardware and software upgrades, maintenance, technical support, training, and even utility and real estate costs for running and hous- ing 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 TCO 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 productivity and efficiency from equipping employees with mobile computing devices 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 allowed to use. In a centralized infrastructure, systems can be administered from a cen- tral location and troubleshooting can be performed from that location.

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

228 Part Two Information Technology Infrastructure

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.

Market demand for your firm’s services. Make an inventory of the services 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 complaining 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 strategy 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 infor- mation 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 technolo- gies that are still experimental, often expensive, and sometimes unreliable. You want to spend on technologies for which standards have been established and

1 Market Demand for Your Firm’s

Customer Services, Supplier Services,

and Enterprise Services

3 Your Firm’s IT Strategy,

Infrastructure, and Cost

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

5 Competitor

Firms’ IT Services

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?”

Chapter 5 IT Infrastructure and Emerging Technologies 229

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.

Competitor firm services. Try to assess what technology services competitors offer to customers, suppliers, and employees. Establish quantitative and quali- tative 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 expendi- tures 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 information 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.

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 tech- nology, 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 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 emerg-

ing 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 origi- nated 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 individuals obtain computing power and software as services over a network, including the Internet, rather than pur- chasing and installing the hardware and software on their own computers. A multicore processor is a microprocessor to which two or more processing cores have been attached for enhanced performance. Green computing includes practices and technologies for producing, using, and disposing of information technology hardware to minimize negative impact on the environment.

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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 com- bine 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 management

and governance, and making wise infrastructure investments. Solution guidelines include using a com- petitive 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 hard- ware 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.

Key Terms Android , 208 Application server , 199 Apps , 226 BYOD , 212 Chrome OS , 208 Clients , 199 Client/server computing , 199 Cloud computing , 200 Consumerization of IT , 212 Extensible Markup Language (XML) , 222 Green computing (green IT) , 219 HTML (Hypertext Markup Language), 221 HTML5 221 Hybrid cloud , 219 Hypertext Markup Language (HTML) , 221 iOS , 208 Java , 221 Legacy systems , 210 Linux , 208 Mainframe , 197 Mashup , 225 Minicomputers , 197 Moore’s Law , 201 Multicore processor , 220 Multitiered (N-tier) client/server architecture , 199 Multitouch , 208 Nanotechnology , 203

On-demand computing , 208 Open source software , 220 Operating system , 208 Outsourcing , 225 Private cloud , 218 Public cloud , 218 Quantum computing , 213 Scalability , 227 Service level agreement (SLA) , 225 Server , 199 Service-oriented architecture (SOA) , 225 Software as a service (SaaS) , 215 Software package , 224 Software-defined storage (SDS) , 213 Tablet computers , 210 Technology standards , 204 Total cost of ownership (TCO) , 228 Unix , 208 Virtualization , 213 Web browser , 221 Web hosting service , 209 Web server , 199 Web services , 222 Windows , 200 Windows 10 208 Wintel PC , 198

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

Chapter 5 IT Infrastructure and Emerging Technologies 231

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 evo- lution 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 economics, declining communications costs, and technology stan- dards affect IT infrastructure.

5- 2 What are the components of IT infrastructure? • List and describe the components of IT

infrastructure that firms need to manage.

5- 3 What are the current trends in computer hard- ware platforms?

• Describe the evolving mobile platform, con- sumerization of IT, and cloud computing.

• Explain how businesses can benefit from virtualization, green computing, and multi- core processors.

• List the essential characteristics of cloud computing.

• Describe the three types of services that make up cloud computing.

5- 4 What are the current computer software plat- forms 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 infra- structure 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.

Discussion Questions 5- 6 Why is selecting computer hardware and soft-

ware for the organization an important man- agement decision? What management, organization, and technology issues should be considered when selecting computer hard- ware and software?

MyLabMIS 5- 7 Why would some organizations choose a pri-

vate cloud or hybrid cloud over a public cloud?

5- 8 What are the advantages and disadvantages of cloud computing?

MyLabMIS

MyLabMIS

Hands-On MIS Projects The projects in this section give you hands-on experience in developing solutions for managing IT infra- structures and IT outsourcing, using spreadsheet software to evaluate alternative desktop systems, and using web research to budget for a sales conference. Visit MyLab MIS’s Multimedia Library to access this chapter’s Hands-On MIS Projects.

Management Decision Problems

5- 9 Hischornklinik Group is a leading private medical clinic group in Germany. It relies on information sys- tems to operate 14 hospitals, as well as hundreds of specialist institutes. Demand for additional servers and storage technology is growing by 20 percent each year. Hischornklinik was setting up a separate server for every application, and its servers and other computers were running a number of different operating sys- tems, including several versions of UNIX and Windows. Hischornklinik 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?

232 Part Two Information Technology Infrastructure

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 peo- ple. 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 Dell. Each desktop system must satisfy the minimum specifications shown in tables that you can find in MyLab MIS.

Also obtain pricing on 30 copies of the most recent versions of Microsoft Office and Apache OpenOf- fice (formerly Oracle Open Office) and on 30 copies of Microsoft Windows 10. Each desktop productivity package should contain programs for word processing, spreadsheets, database, and presentations. Prepare a spreadsheet showing your research results for the software and the desktop system, printer, and software combination offering the best performance and pricing per worker. Because every two workers share one printer (15 printers/30 systems), your calculations should assume only half a printer cost per worker.

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 rep- resentative 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. Man- agement has set a budget of $175,000 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 that would enable the company 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 airline 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.

Chapter 5 IT Infrastructure and Emerging Technologies 233

BYOD: Business Opportunity or Big Headache?

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 why not? Employees using their own smart- phones would allow companies to enjoy all the same benefits of a mobile workforce without spending their own money to purchase these devices. Smaller companies are able to go mobile without making large investments in devices and mobile services. According to Gartner, Inc., by 2017, 50 percent of employers will require employees to supply their own mobile devices for the workplace. BYOD is becoming the “new normal.”

But … wait a minute. Half of all enterprises believe that BYOD represents a growing problem for their organizations, according to a number of studies. Although BYOD can improve employee job satisfac- tion and productivity, it also can cause a number of problems if not managed properly. Support for personally owned devices is more difficult than it is for company-supplied devices, the cost of man- aging mobile devices can increase, and protecting corporate data and networks becomes more difficult. Research conducted by the Aberdeen Group found that on average, an enterprise with 1,000 mobile devices spends an extra $170,000 per year when it allows BYOD. So it’s not that simple.

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 software upgrades or fixes because all employees were using the same devices or, at the very least, the same operating system. Today, the mobile digital landscape 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 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 attracts many hackers. Android is also vulnerable because 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, com- panies need an effective way to keep track of all the devices employees are using. To access company infor- mation, the company’s networks must be configured to receive connections from that device. When employees make changes to their personal phone, such as switch- ing cellular carriers, changing their phone number, or buying a new mobile device altogether, companies will need to quickly and flexibly ensure that their employ- ees 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 phones and operating systems available, providing adequate technical sup- port for every employee could be difficult. When employees are not able to access critical data or encounter other problems with their mobile devices, 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 company information accessed with mobile devices. If a device is stolen or compromised, companies need ways to ensure that sensitive or confidential information 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 machines. 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 tech- nologies that allow them to wipe data from devices remotely or encrypt data so that if the device is sto- len, it cannot be used. You’ll find a detailed discus- sion of mobile security issues in Chapter 8 .

234 Part Two Information Technology Infrastructure

Management at Michelin North America believes BYOD will make the business more flexible and pro- ductive. Initially, all 4,000 mobile devices used by the company were company-owned and obsolete, with a large number of traditional cell phones that could only be used for voice transmission and mes- saging. Only 90 employees were allowed access to e-mail on mobile devices, and fewer than 400 were allowed access to calendars on these devices. Service costs were high, and the business received little value from its mobility program. Management had identified significant business benefits from increasing mobility in sales, customer support, and operations.

In mid-2011, the company created a team com- posed of executives and representatives from the IT, human resources, finance, and legal depart- ments as well as the business units to share in the development, rollout, and management of a new mobile strategy for corporate-owned and personal mobile devices. The team decided to transition the mobility business model from corporate-owned to personal-liable.

According to Gartner, Inc. consultants, about half of organizations with a formal BYOD program com- pensate their employees for the amount of time they use their personal devices on their jobs using stipends, reimbursements, or allowances. Handling employee reimbursement for using personal devices for corporate purposes has proved to be one of the most problematic aspects of BYOD mobile programs. Although most companies use expense reports or payroll stipends to reimburse employees for BYOD, these methods have drawbacks. Expense reports are an administrative burden for both the employee and the employer, and payroll stipends can have tax con- sequences for both as well.

For some companies, the best option is to make direct payments to wireless carriers to reimburse employees for the expense they incur when they use their own wireless devices for company busi- ness. The employer provides funds to the wireless carrier, which then applies a credit to the employee’s account. When the employee’s bill arrives, the employee pays the amount owed less the credit amount that was funded by the employer.

Michelin opted for a managed service from Cass Information Systems that enables the company to make payments directly to wireless carriers. Cass Information Systems is a leading provider of trans- portation , utility , waste , and telecom expense man- agement and related business intelligence services. A single employee portal handles enrollment of

corporate and BYOD devices and provides track- ing and reporting of all ongoing mobile and related inventory and expenses. The portal can automati- cally register employees, verify user eligibility, ensure policy acknowledgment, and distribute cred- its directly to employees’ wireless accounts for the amount of service they used for their jobs.

Since implementing its version of BYOD, Michelin North America increased the number of mobile- enabled employees to 7,000. Employee efficiency, productivity, and satisfaction have improved from updating the mobile technology and functional- ity available to employees and giving them choices in mobile devices and wireless carrier plans, The program is cost-neutral. Michelin has obtained new vendor discounts across all wireless vendors in the United States and Canada and has reduced the cost of deploying each mobile device by more than 30 percent.

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 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.

Management at Rosendin Electric, a Silicon Val- ley electrical contractor, worried that BYOD would become a big headache. Rosendin has thousands of employees and deploys hundreds of smartphones, more than 400 iPads, and a few Microsoft Surface tablets. These mobile devices have greatly enhanced the company’s productivity by enabling employees to order equipment and supplies on the spot at a job site or check on-site to see whether ordered items have arrived. However, CIO Sam Lamonica does not believe BYOD would work for this company. He wor- ries employees would be too careless using apps, cloud, and technology devices. (An Aruba Networks study of 11,500 workers in 23 countries found that 60 percent share their work and personal devices with others regularly, nearly 20 percent don’t have passwords on devices, and 31 percent have lost data due to misuse of a mobile device.)

Lamonica feels more confident about equipping employees with company-owned devices because they can be more easily managed and secured. Rosendin uses MobileIron mobile device manage- ment (MDM) software for its smartphones and

Chapter 5 IT Infrastructure and Emerging Technologies 235

tablets. If a device is lost or stolen, the MDM soft- ware is able to wipe the devices remotely. Because MobileIron allows Rosendin to separate and isolate business apps and data from personal apps and data, the company allows employees to use certain con- sumer apps and store personal photos on company- owned tablets. Rosendin has found that employees of companies that are able to personalize company- owned iPads are more likely to treat them as prized possessions, and this has helped lower the number of devices that become broken or lost. The company has the right to wipe the devices if they are lost.

Rosendin’s mobile security is not iron-clad. An employee might be able to put company data in his or her personal Dropbox account instead of the company-authorized Box account. However, MobileIron is able to encrypt data before it gets into a Dropbox account, and this lowers the risk. With company-owned and managed devices, Rosendin still benefits from volume discounts from wireless carri- ers and does not have to do the extra work involved in reimbursing employees when they use their own devices for work.

Sources: Ryan Patrick, “Is a BYOD Strategy Best for Business?” IT World Canada, March 22, 2016; “5 BYOD Management Case Studies,” Sunviewsoftware.com , accessed May 5, 2016; Aruba Net- works, “Enterprise Security Threat Level Directly Linked to User Demographics, Industry and Geography,” Business Wire, April 14, 2015; Alan F., “Open Signal: 24,093 Unique and Different Android- Powered Devices Are Available,” Phonearena.com , August 5, 2015; Tom Kaneshige, “Why One CIO Is Saying ‘No’ to BYOD,” CIO, June 24, 2014; “CIO Meets Mobile Challenges Head-On,” CIO, July 7, 2014; and “Cass BYOD: How Michelin Became a Mobile-First Enterprise,” Cass Information Systems Inc., 2014.

CASE STUDY QUESTIONS 5- 14 What are the advantages and disadvantages of

allowing employees to use their personal smartphones for work?

5- 15 What management, organization, and technol- ogy factors should be addressed when deciding whether to allow employees to use their personal smartphones for work?

5- 16 Compare the BYOD experiences of Michelin North America and Rosendin Electric. Why did BYOD at Michelin work so well?

5- 17 Allowing employees to use their own smart- phones for work will save the company money. Do you agree? Why or why 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?

236 Part Two Information Technology Infrastructure

Chapter 5 References

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Babcock, Charles. “Cloud’s Thorniest Question: Does It Pay Off?” Information Week (June 4, 2012).

Benlian, Alexander, Marios Koufaris, and Thomas Hess. “Service Quality in Software-as-a-Service: Developing the SaaS-Qual Measure and Examining Its Role in Usage Continuance.” Journal of Management Information Systems 28, No. 3 (Winter 2012).

Carr, Nicholas. The Big Switch. New York: Norton (2008). Clark, Don. “Moore’s Law Shows Its Age..” Wall Street Journal (April

17, 2015). 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).

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).

Fitzgerald, Brian. “The Transformation of Open Source Software.” MIS Quarterly 30, No. 3 (September 2006).

Flinders, Karl. “Ofcom Outsources IT Management to Indian Xervices 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).

Gantz, John and David Reinsal. ”Extracting Value from Chaos.” IDC (June 2011).

Gartner, Inc. “Gartner Says Worldwide IT Spending Is Forecast to Decline 0.5 Percent in 2016.” Business Wire (April 7, 2016).

“How to Tap the Power of the Mainframe.” ITBusinessEdge.com , accessed September 11, 2015.

International Data Corporation. “Worldwide Public Cloud Services Spending Forecast to Double by 2019, According to IDC.” (January 21, 2016).

“Internet Users.” Internetlivestats.com , accessed May 2, 2016. Kauffman, Robert J. and Julianna Tsai. “The Unified Procurement

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).

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).

McCafferty, Dennis. “Eight Interesting Facts About Java.” CIO Insight (June 16, 2014).

Mell, Peter and Tim Grance. “The NIST Definition of Cloud Computing” Version 15. NIST (October 17, 2009).

Moore, Gordon. “Cramming More Components Onto Integrated Circuits,” Electronics 38, No. 8 (April 19, 1965).

Mueller, Benjamin, Goetz Viering, Christine Legner, and Gerold Riempp. “Understanding the Economic Potential of Service- Oriented Architecture.” Journal of Management Information Systems 26, No. 4 (Spring 2010).

Netmarketshare. “Desktop Operating System Market Share April 2016.” www.netmarketshare.com , accessed May 1, 2016.

Ray, Tierman. “Watch Out Intel, Here Comes Facebook.” Barrons (October 31, 2015).

Schuff, David and Robert St. Louis. “Centralization vs. Decentralization of Application Software.” Communications of the ACM 44, No. 6 (June 2001).

Stango, Victor. “The Economics of Standards Wars.” Review of Network 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 Debunked: 10 Reasons Why It’s Still Hot.” eWeek (February 22, 2012).

Torode, Christine, Linda Tucci, and Karen Goulart. “Managing the Next-Generation Data Center.” Modern Infrastructure CIO Edition (January 2013).

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Weitzel, Tim. Economics of Standards in Information Networks. Heidelberg, New York: Physica-Verlag (2004).

Chapter 5 IT Infrastructure and Emerging Technologies 237

238

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?

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

CHAPTER CASES

BAE Systems Data-Driven Crime Fighting Goes Global Societe Generale Builds an Intelligent System to Manage Information Flow Lego’s Enterprise Software Spurs Growth

C H

A P

T E

R

6 Foundations of Business Intelligence: Databases and Information Management

MyLab MIS™ Visit mymislab.com for simulations, tutorials, and end-of-chapter problems.

239

BAE Systems (BAE) is the United Kingdom’s largest manufacturing com-pany and one of the largest commercial aerospace and defence organiza-tions in Europe. Its high-technology, information-driven products and services range from one of the world’s most capable multi-role combat fighters, the Eurofighter Typhoon, to the Jetstream family of commercial aircraft, to the provision of information technology (IT) and information systems (IS) for e-business to develop and implement logistics, IT, and e-capability services. With sales, manufacturing, and support sites throughout the world, including the United Kingdom, Europe, the United States, and Australia, BAE employs 83,000 people in 40 countries and generated more than €23.8 billion in annual revenue in 2015.

Although BAE has consoli- dated its competitive position in established markets, and continues to expand into new markets in the Middle East and Asia, its performance in the aircraft part of the busi- ness was being impeded by legacy information systems that support the computer- aided design (CAD) and com- puter-aided manufacturing (CAM) of its aircraft. The dis- tributed nature of BAE’s design and manufacturing sites meant that storing and analyzing accurate sets of operational data describing the complex components of the various aircraft types to produce aircraft assembly reports for the production lines became increasingly challenging and resource- consuming.

Accessing the data from the many systems was a complex task involving many technical challenges. As the aircraft business of BAE grew, so did the like- lihood of delays in producing the aircraft assembly reports and other operations data sets necessary for aircraft production management decision-making. In the worst case, the production of aircraft on the assembly line would stop until accu- rate information was available, with consequent schedule and cost implications. BAE’s CAD/CAM staff were storing and analyzing data sets sourced from five major aircraft design and manufacturing sites spread throughout the United Kingdom, each host to thousands of staff involved in the design and manufac- turing process, so that assembly reports and other operations data could be pro- duced. There were numerous occasions when paper drawings with annotations

BAE Systems

© Graham Taylor/Shutterstock

containing component design and manufacturing information were used to rec- oncile ambiguities and inconsistencies in the assembly reports. These data ambi- guities and inconsistencies gave rise to a sense of uncertainty in the assembly reports produced.

What BAE needed was a single repository for CAD/CAM data that would also facilitate the integration of data held in its legacy systems. The company decided to replace its legacy systems with an enterprise-wide knowledge management system that would bring the design and manufacturing data into a single database that could be concurrently accessed by the design and manufacturing engineers. BAE implemented Siemens’ Teamcenter product lifecycle management software and Dassault Systemes’ CATIA CAD/CAM software. Teamcenter can also be con- figured to take advantage of recent developments in cloud computing using Microsoft’s Azure, IBM’s SmartCloud Enterprise+, and Amazon Web Services.

Bringing together Siemens’ Teamcenter and Dassault Systemes’ CATIA has given BAE Systems powerful integrated data management tools. The Teamcenter database includes tools for component markup and rollup capabilities, allowing users to visualize the effect of component design changes and configuration selections in real-time.

The new solution has produced significant cost savings at BAE in terms of its design and manufacturing data management and storage while boosting perfor- mance. With fewer legacy systems and data files to manage, BAE has been able to meet quality, time, and cost requirements by being able to produce complete and accurate aircraft component definitions and configurations. BAE has used Team- center to enlarge its business model to include “through-life” maintenance and repair for aircraft.

Sources: “BAE Systems Annual Report 2015,” baesystems.com, March 25, 2016; “BAE Sys- tems Military Air Solutions: Case Study: Teamcenter Supports Aircraft Through 50-year Life- cycle,” 2015 Siemens Product Lifecycle Management Software Inc., 2015; “CMI-CATIA Teamcenter Integration,” T-Systems, April 13, 2015, https://servicenet.t-systems.de/t-sys- tems-plm-de; “BAE Systems Half-Yearly Report and Presentation 2015,” www.baesystems. com, accessed December 21, 2015; “Teamcenter Supports Aircraft Through 50-year Cycle: BAE Systems Military Air Solutions,” www.plm.automation.siemens.com, accessed Novem- ber 8, 2012.

The experience of BAE Systems illustrates the importance of data man-agement. Business performance depends on the accuracy and reliability of its data. The company has grown its business, but both operational CAD/ CAM efficiency and production management decision making were impeded by data stored in legacy systems that were difficult to access. How businesses store, organize, and manage their data has a huge impact on organizational effectiveness.

The chapter-opening diagram calls attention to important points raised by this case and this chapter. BAE Systems management decided that the firm needed to improve the management of its data. Pieces of data about design components, manufactured components, and their final assembly had been stored in many large legacy systems that made it extremely difficult for the data to be retrieved and correctly unified so that it could be used in the produc- tion line assembly of aircraft components. The data were often redundant and inconsistent, limiting their usefulness. Management was unable to obtain an enterprise-view of the company.

240 Part Two Information Technology Infrastructure

In the past, BAE Systems had used manual paper processes to reconcile its inconsistent and redundant data and to assemble data for management report- ing. This solution was extremely time-consuming and costly, and prevented the company’s information technology department from performing higher-value work. A more appropriate solution was to install new hardware and software to create an enterprise-wide repository for business information that would sup- port a more streamlined set of business applications. The new software included enterprise software that was integrated with an up-to-date database manage- ment system that could supply data for enterprise-wide reporting. The com- pany had to reorganize its data into a standard company-wide format, eliminate redundancies, and establish rules, responsibilities, and procedures for updating and using the data.

A state-of-the-art database management system suite of software helps BAE Systems boost efficiency by making it easier to locate and assemble data for management reporting and for processing day-to-day CAD/CAM transactions for final aircraft component assembly. The data are more accurate and reliable, and costs for managing and storing the data have been considerably reduced.

Here are some questions to think about: What kinds of data management problems did BAE Systems experience in its legacy database environment? What work had to be done before the company could effectively take advantage of the new data management technology?

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.

• Data fragmented in isolated databases and files

• Time-consuming reporting processes • Outdated data management technology• Standardize data

definitions

• Organize and reconcile data

• Educate users

• Monitor enterprise-wide performance

• Accelerate decision making • Improve customer analysis

• Reduce costs • Increase customer service

• Increase market share

• Deploy mainframe computer • Implement SAP enterprise software and data warehouse • Reduce use of local databases • Run SAP HANA on Amazon cloud

• Centralize data management

Technology

Management

Organization

Business Challenges

Information System

Business Solutions

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 241

You might be surprised to learn that many businesses don’t have timely, accurate, 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 represents 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 .

0100 1001 (Letter I in ASCII)

0

IS 101 (Course field)

Student_ID Course Date Grade

39044 IS 101 F16 B+

Bit

Byte

Field

Record

File

Database

Student_ID Course Date Grade

39044 IS 101 F16 B+

59432 IS 101 F16 A

64029 IS 101 F16 C

COURSE

Student_ID Course Date Grade

39044 IS 101 F16 B+

59432 IS 101 F16 A

64029 IS 101 F16 C

COURSE

COURSE File

FINANCIAL File

PERSONAL File

Student Database

FIGURE 6. 1 THE DATA HIERARCHY

A computer system organizes data in a hierarchy that starts with the bit, which represents 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.

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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 companywide plan. Accounting, finance, manufacturing, human resources, and sales and marketing all developed their own systems and data files. Figure 6. 2 illustrates the traditional approach to information processing.

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

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

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.

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 243

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, may also have different names in different systems throughout the organization. Some systems might use Student_ID and others might use ID, for example.

Additional confusion might result from using different coding systems to represent values for an attribute. For instance, the sales, inventory, and man- ufacturing systems of a clothing retailer might use different codes to repre- sent clothing size. 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 may 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 orga- nization cannot be related to one another, it is virtually impossible for infor- mation to be shared or accessed in a timely manner. Information cannot flow

244 Part Two Information Technology Infrastructure

freely across different functional areas or different parts of the organization. If users find different values of 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.

Database Management Systems A database management system (DBMS) is software that permits 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 per- ceived 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 avail- able for different logical views required by users. For example, for the human resources 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 orga- nization to eliminate data redundancy entirely, but it can help control redun- dancy. Even if the organization maintains some redundant data, using a DBMS eliminates data inconsistency because the DBMS can help the organization ensure that every occurrence of redundant data has the same values. The DBMS

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 245

uncouples programs and data, enabling data to stand on their own. The descrip- tion 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 without having to write complicated programs. The DBMS enables the organization to centrally manage data, their use, and secu- rity. 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 rela- tions). 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 SUP- PLIER 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.

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

FIGURE 6. 3 HUMAN RESOURCES DATABASE WITH MULTIPLE VIEWS

A single human resources database provides many different views of data, depending on the infor- mation 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.

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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

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

Primary Key Foreign Key

8259

8259

8261

8259

Supplier_Number

22.00

31.00

54.00

10.00

Unit_Price

Door latch

844412.00Side mirror

82636.00Door molding

Door lock

Compressor

Door handle

Part_Name

137

145

152

150

155

178

Part_Number

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.

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 247

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 opera- tion creates a subset consisting of all records in the file that meet stated crite- ria. Select creates, in other words, a subset of rows that meet certain criteria. 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 relational 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.

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 information about the name, description, size, type, format, and other proper- ties 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 organization is responsible for maintaining the data), authorization, secu- rity, 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 lan- guage that is used to add, change, delete, and retrieve the data in the database. This language contains commands that permit end users and programming specialists to extract data from the database to satisfy information requests and develop applications. The most prominent data manipulation language today is Structured Query Language , or SQL. Figure 6. 7 illustrates the SQL query 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.

248 Part Two Information Technology Infrastructure

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Chapter 6 Foundations of Business Intelligence: Databases and Information Management 249

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

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.

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;

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 .

250 Part Two Information Technology Infrastructure

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 physi- cal design shows how the database is actually arranged on direct-access stor- age devices.

Normalization and Entity-Relationship Diagrams The conceptual database design describes how the data elements in the data- base 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 redun- dant data elements and the groupings of data elements required for specific application programs. Groups of data are organized, refined, and streamlined until an overall logical view of the relationships among all the data in the data- base 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.

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.

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. 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.

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 251

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 repeating 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 diagramming, and database design in the Learning Tracks for this chapter .

Relational database systems try to enforce referential integrity rules to ensure 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 chap- ter, 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 Sup- plier_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 nonex- istent suppliers!

Database designers document their data model with an entity-relationship diagram , illustrated in Figure 6. 11 . This diagram illustrates the relationship between the entities SUPPLIER, PART, LINE_ITEM, and ORDER. The boxes represent 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

PART LINE ITEM

SUPPLIER ORDER

Part_ Number

Part_ Name

Unit_ Price

Supplier_ Number

Key

Part_ Number

Part_ Quantity

Order_ Number

Key

Supplier_ Number

Supplier_ Name

Supplier_ Street

Supplier_ City

Supplier_ State

Supplier_ Zip

Key

Order_ Number

Order_ Date

Key

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.

252 Part Two Information Technology Infrastructure

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 systems 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 perhaps the most important lesson you can learn from this course.

For example, Famous Footwear, a shoe store chain with more than 800 locations 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 data- base was designed 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 com- pany 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 and Databases in the Cloud For more than 30 years, relational database technology has been the gold stan- dard. Cloud computing, unprecedented data volumes, massive workloads for web services, and the need to store new types of data require database alter- natives 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 database manage- ment systems use a more flexible data model and are designed 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, social 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.

provides

is supplied by

is ordered

contains

belongs to

includes

ORDERLINE_ITEMSUPPLIER PART

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 .

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 253

For example, MetLife used the MongoDB open source NoSQL database to quickly integrate disparate data on more than 100 million customers and deliver a consolidated view of each. MetLife’s 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 is able to use structured, semi-structured, and unstructured information without requiring tedious, expensive, and time-consuming database mapping.

Cloud Databases Amazon and other cloud computing vendors provide relational database services as well. Amazon Relational Database Service (Amazon RDS) offers MySQL, SQL Server, Oracle Database, PostgreSQL, MariaDB, or Amazon Aurora DB (compat- ible with MySQL) as database engines. Pricing is based on usage. Oracle has its own Database Cloud Services using its relational Oracle Database, and Micro- soft Windows SQL Azure Database is a cloud-based relational database service based on Microsoft’s SQL Server DBMS. Cloud-based data management services have special appeal for web-focused start-ups or small to medium-sized busi- nesses seeking database capabilities at a lower price than in-house database products.

In addition to public cloud-based data management services, companies now have the option of using databases in private clouds. For example, Sabre Holdings, the world’s largest software as a service (SaaS) provider for the aviation industry, has a private database cloud that supports more than 100 projects and 700 users. A consolidated database spanning a pool of standard- ized servers running Oracle Database provides database services for multiple applications.

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 paying suppliers, processing orders, keeping track of customers, and pay- ing employees. 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 easily fit into rows and columns of relational database management systems. We are now witnessing an explosion of data from web traffic, e-mail mes- sages, 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

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products that organize 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 doesn’t refer to any specific quantity but usually refers to data in the petabyte and exabyte range—in other words, billions to trillions of records, all 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. Even though “tweets” are limited to 140 characters each, 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. Major cities in Europe and Europol are using Big Data to identify criminals and terrorists (Aline, 2016). The Interactive Session on Organizations describes how New York City is using big data to lower its crime rate.

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 ques- tions 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.

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

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Nowhere have declining crime rates been as dra- matic as in New York City. As reflected in the reported rates of the most serious types of crime, the city in 2015 was as safe as it had been since statistics have been kept. Crimes during the preceding few years have also been historically low.

Why is this happening? Experts point to a num- ber of factors, including demographic trends, the proliferation of surveillance cameras, and increased incarceration rates. But New York City would also argue it is because of its proactive crime preven- tion program along with district attorney and police force willingness to aggressively deploy information technology.

There has been a revolution in the use of big data for retailing and sports (think baseball and Money- Ball ) as well as for police work. New York City has been at the forefront in intensively using data for crime fighting, and its CompStat crime-mapping program has been replicated by other cities.

CompStat features a comprehensive, citywide database that records all reported crimes or com- plaints, arrests, and summonses in each of the city’s 76 precincts, including their time and location. The CompStat system analyzes the data and produces a weekly report 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 and NYPD’s senior leadership quickly identify pat- terns and trends and develop a targeted strategy for fighting crime, such as dispatching more foot patrols to high-crime neighborhoods.

Dealing with more than 105,000 cases per year in Manhattan, New York’s district attorneys did not have enough information to make fine-grained deci- sions about charges, bail, pleas, or sentences. They couldn’t quickly separate minor delinquents from serious offenders.

In 2010 New York created a Crime Strategies Unit (CSU) to identify and address crime issues and target priority offenders for aggressive prosecution. Rather than information being left on thousands of legal pads in the offices of hundreds of assistant district attorneys, CSU gathers and maps crime data for Manhattan’s 22 precincts to visually depict criminal activity based on multiple identifiers such as gang

affiliation and type of crime. Police commanders supply a list of each precinct’s 25 worst offenders, which is added to a searchable database that now includes more than 9,000 chronic offenders. A large percentage are recidivists who have been repeatedly convicted of grand larceny, active gang members, and other priority targets. These are the people law enforcement wants to know about if they are arrested.

This database is used for an arrest alert system. When someone considered a priority defendant is picked up (even on a minor charge or parole viola- tion) or arrested in another borough of the city, any interested prosecutor, parole officer, or police intel- ligence officer is automatically sent a detailed e-mail. The system can use the database to send arrest alerts for a particular defendant, a particular gang, or a particular neighborhood or housing project, and the database can be sorted to highlight patterns of crime ranging from bicycle theft to homicide.

The alert system helps assistant district attor- neys ensure that charging decisions, bail applica- tions, and sentencing recommendations address that defendant’s impact on criminal activity in the community. The information gathered by CSU and disseminated through the arrest alert system differ- entiates among those for whom incarceration is an imperative from a community-safety standpoint and those defendants for whom alternatives to incarcera- tion are appropriate and will not negatively affect overall community safety. If someone leaves a gang, goes to prison for a long time, moves out of the city or New York state, or dies, the data in the arrest alert system are edited accordingly.

Information developed by CSU helped the city’s Violent Criminal Enterprises Unit break up the most violent of Manhattan’s 30 gangs. Since 2011, 17 gangs have been dismantled.

Using Big Data and analytics to predict not only where crime will occur, but who will likely commit a crime, has spread to cities across the globe in the UK, Germany, France, Singapore and elsewhere. In the UK, Kent Police have been using “pre-crime” software beginning in 2015. The proprietary soft- ware, called PredPol, analyzes a historical database of crimes using date, place, time, and category of offense. PredPol then generates daily schedules for the deployment of police to the most crime-prone

INTERACTIVE SESSION: ORGANIZATIONS

Data-Driven Crime Fighting Goes Global

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areas of the city. PredPol does not predict who will likely commit a crime, but instead where the crimes are likely to happen based on past data. Using decades worth of crime reports, the PredPol system identified areas with high probabilities of various types of crime, and creates maps of the city with color coded boxes indicating the areas to focus on.

It’s just a short step to predicting who is most likely to commit a crime, or a terrorist act. Predict- ing who will commit a crime requires even bigger Big Data than criminal records and crime locations. Law enforcement systems being developed now parallel those used by large hotel chains who collect detailed data on their customers personal prefer- ences, and even their facial images. Using surveil- lance cameras throughout a city, along with real time analytics, will allow police to identify where former, or suspected, criminals are located and traveling. These tracking data will be combined with surveil- lance of social media interactions of the persons involved. The idea is to allocate police to those areas where “crime prone” people are located. In 2016 the UK adopted the Investigatory Powers Bill which

legalizes a global web and telecommunications sur- veillance system, and a government database that stores the web history of every citizen. This data and analysis could be used to identify people who are most likely to commit a crime or plot a terrorist attack. Civil liberties groups around the globe are concerned that these systems operate without judi- cial or public oversight, and can easily be abused by authorities.

Sources: “The UK Now Wields Unprecedented Surveillance Powers- Here’s What it Means,” by James Vincent, The Verge.com, Novem- ber 29, 2016; “Predictive Policing and the Automated Suppression of Dissent,” by Lena Dencik, LSE Media Projects Blog, April 2016; “Prosecution Gets Smart” and “Intelligence-Driven Prosecution/ Crime Strategies Unit,” www.manhattanda.org , accessed March 4, 2016; Pervaiz Shallwani and Mark Morales, “ NYC Officials Tout New Low in Crime, but Homicide, Rape, Robbery Rose,” Wall Street Jour- nal, January 4, 2016; “The New Surveillance Discretion: Automated Suspicion, Big Data, and Policing,” by Elizabeth Joh, Harvard Law & Policy Review, December 14, 2015; “British Police Roll Out New ‘Pre- crime’ Software to Catch Would-Be Criminals,” 21st Century Wire, March 13, 2015; and Chip Brown, “The Data D.A.”, New York Times Magazine , December 7, 2014.

3. What management, organization, and technology issues should be considered when setting up infor- mation systems for intelligence-driven prosecution?

CASE STUDY QUESTIONS

1. What are the benefits of intelligence-driven prose- cution for crime fighters and the general public?

2. What problems does this approach to crime fight- ing pose?

company. 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 historical data from multiple operational systems inside the organiza- tion. These data are combined with data from external sources and trans- formed by correcting 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, decentral- ized warehouses called data marts. A data mart is a subset of a data warehouse in which a summarized or highly focused portion of the organization’s data is

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placed in a separate database for a specific population of users. For example, a company might develop marketing and sales data marts to deal with customer information.

Hadoop Relational DBMS and data warehouse products are not well suited for organizing 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 Founda- tion 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 ana- lyze. 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.

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 Twit- ter feeds, complex data such as web server log files, and unstructured audio and video data. Hadoop runs on a cluster of inexpensive servers, and proces- sors 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 inter- ests. 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 accomplished 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

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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 commercial products for in-memory computing include SAP HANA and Oracle Exalytics. Each provides a set of integrated software components, including in-memory database software and specialized analytics software, that run on hardware optimized for in-memory computing work.

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 such as IBM PureData System for Analytics, feature preconfigured hardware-software systems that are specifically designed for query processing and analytics. For example, IBM PureData System for Analytics features tightly integrated database, server, and storage components that handle complex analytic queries 10 to 100 times faster than traditional systems. Analytic platforms also include in-memory systems and NoSQL non-relational database management systems. Analytic platforms are now available as cloud services.

Figure 6. 12 illustrates a contemporary business intelligence infrastructure using the technologies we have just described. Current and historical data are extracted from multiple operational systems along with web data, machine- generated data, unstructured audio/visual data, and data from external sources that have been restructured and reorganized for reporting and analysis. Hadoop clusters pre-process big data for use in the data warehouse, data marts, or an

Hadoop Cluster

Data Warehouse

Data Mart

Casual users • Queries • Reports • Dashboards

Power users • Queries • Reports • OLAP • Data mining

Historical Data

Machine Data

Audio/ Video Data

External Data

Analytic Platform

Extract, transform, load

Operational Data

Web Data

FIGURE 6. 12 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.

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analytic platform or for direct querying by power users. Outputs include reports 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 .

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 sold during the past quar- ter, you could easily find the answer by querying your sales database. But what if you wanted to know how many washers 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 different 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 compares 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.

Projected

Actual

Nuts

BoltsPRODUCT

Washers

Screws

East

West Central

REGION

FIGURE 6. 13 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.

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Figure 6. 13 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. 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 2016?” 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 pro- vide 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 val- ues will be. For example, forecasting might find patterns in data to help man- agers 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 mining

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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. E-mail, 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 big data sets, 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 mea- sure customer sentiment about their company. Sentiment analysis software is able to mine text comments in an e-mail message, blog, social media conversa- tion, or survey form to detect favorable and unfavorable opinions about specific subjects.

For example, discount brokers use analytic software to analyze hundreds of thousands of its customer interactions each month. The software analyzes customer service notes, e-mails, survey responses, and online discussions to discover signs of dissatisfaction that might cause a customer to stop using the company’s services. The software is able to automatically identify the various “voices” customers use to express their feedback (such as a positive, negative, or conditional voice) to pinpoint a person’s intent to buy, intent to leave, or reaction to a specific product or marketing message. Brokers use this information to take corrective actions such as stepping up direct broker communication with the customer and trying to quickly resolve the prob- lems that are making the customer unhappy.

The web is another rich source of unstructured big data for revealing pat- terns, 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 cus- tomer behavior, evaluate the effectiveness of a particular website, or quantify the success of a marketing campaign. For instance, marketers use the Google Trends service, which tracks the popularity of various words and phrases used

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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 webpages, which may include text, image, audio, and video data. Web structure mining examines data related to the structure of a particular website. For example, links pointing to a document indicate the popularity of the document, while links coming out of a docu- ment 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 whenever requests for a website’s resources are received. The usage data records the user’s behavior when the user browses or makes trans- actions 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 online retailer’s database for pricing information. Figure 6. 14 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 corpo- rate 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 working with the database. In a client/server environment, the DBMS resides on a dedicated computer called a database server . The DBMS receives the

Internet

Client with Web browser

Web server

Application server

Database server Database

FIGURE 6. 14 LINKING INTERNAL DATABASES TO THE WEB

Users access an organization’s internal database through the web using their desktop PC browsers or mobile apps.

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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. 14 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 appli- cation 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 700,000 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. Face- book features “profiles” with information on 1.6 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.

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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 pro- cesses for managing the availability, usability, integrity, and security of the data employed in an enterprise with special emphasis on promoting 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 defin- ing 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 ensuring that the business has the information it needs. However, additional steps must be taken to ensure that the data in organizational databases are accu- rate 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 Global 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 multi- ple systems feeding a data warehouse. For example, the sales ordering system and the inventory management system might both maintain data on the orga- nization’s products. However, the sales ordering system might use the term

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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, product, 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 information 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, Lav- don, Lauden, or Landon.

If a database is properly designed and enterprise-wide data standards estab- lished, duplicate or inconsistent data elements should be minimal. Most data quality problems, however, such as misspelled names, transposed numbers, or incorrect or missing codes, stem from errors during data input. The incidence 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 detect- ing 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 seri- ous problems for individuals, affecting their financial condition and even their jobs. For example, inaccurate or outdated data about consumers’ credit histo- ries maintained by credit bureaus can prevent creditworthy individuals from obtaining loans or lower their chances of finding or keeping a job.

A small minority of companies allow individual departments to be in charge of maintaining the quality of their own data. However, best data administration practices call for centralizing data governance, standardization of organizational data, data quality maintenance, and accessibility to data assets.

The Interactive Session on Management illustrates Societe Generale’s expe- rience with managing data as a resource. As you read this case, try to identify the policies, procedures, and technologies that were required to improve data management at this company.

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Societe Generale is France’s largest bank and the third largest bank in the European Union. In 2016 the bank reported revenues of €25 billion, and a net income of €4 billion. Societe Generale has offices in 76 countries and more than 33 million custom- ers across the globe. Like many banks in Europe, Societe Generale is still struggling from the near collapse of the global financial system in 2008, and is burdened by a large volume of underperforming and non-performing loans and financial instruments. Extremely low interest rates in the past four years have also reduced the bank’s traditional source of revenues, which is lending money to consumers and firms alike.

Like many large money-center banks in Europe and the U.S., Societe Generale has adopted a univer- sal banking model, a one-stop shop for whatever its clients want. It operates in three banking segments: retail banking for consumers, international banking to service corporate clients, and investment banking for wealthy clients and other sources of capital like pension funds, insurance firms, and sovereign off- shore funds.

As a global universal bank, Societe Generale sells hundreds of financial products to its customers, and this in turn generates tens of millions of daily trans- actions including account deposits, checks, credit card charges, ATM cash dispensing, financial instru- ment trades, and local payments. These transac- tions are stored in over 1,500 files (generally along product lines). These 1,500 files are sent each day to its “back office” operations group for storage and processing. Ultimately, the information in the files is used to update the bank’s operational database applications that maintain the general ledger and sub-ledgers. In this sense, banks such as Societe Generale are industrial-scale information processing factories that are required to deliver bank services and products to customers with minimal errors.

But before the main databases are updated, the information streaming into the back office needs to be verified. Why does this basic information need to be verified? As it turns out, the data is often “dirty”: record count and the amounts recorded can change as information flows between and across systems. Duplicate files are sometimes created, and sometimes the files needed for a business process are not present. A third problem is ensur- ing the correct information is being produced for

downstream applications and the general ledger system in particular. Sometimes, files and records are out of sequence or incomplete, and that causes a downstream application to close down. There are hundreds of downstream applications relying on the transaction data.

In the past, the process of verification was han- dled manually by hundreds of employees checking files and records, dealing with errors, omissions, and system error messages on the fly, as they occurred. Given the critical nature of the verifica- tion process and the size and complexity of the task, Societe Generale senior management decided to find an automated solution that would capture the knowledge of its employees and then apply that knowledge to the verification process, which would operate in real time. What Societe Generale needed was an “intelligent system” to take over the work of many employees, or at least reduce the burden and the inherent chance for errors.

After evaluating several vendors, the chose Infogix, a French-based database firm that specializes in running data-intensive business environments. The Infogix Enterprise Data Platform monitors incoming transactions, provides balancing and rec- onciliation and identifies and predicts fraud and cus- tomer behavior. The Infogix Platform is a rule-based system allowing development of complex business rules for validating integrity. To implement this sys- tem, Infogix had to identify the rules and procedures that humans follow can when verifying the data, and then implement those rules in computer code. The firm identified over 220 business rules that employ- ees had invented over many years of experience.

With the Infogix platform in operation, transac- tions are verified several times a day, enabling the bank to validate the accuracy of millions of transac- tions and about 1,500 files daily. The cost of verifi- cation and data management has been drastically reduced along with error rates and system shut downs. Humans are still needed to handle new situ- ations or critical errors the system cannot decide. In the event of critical errors that disrupt the opera- tion of important bank systems, the bank’s produc- tion support team swings into action and, using the tools available on the Infogix platform, are able to solve the problem in much less time than with the manual system. Since automating the transaction

INTERACTIVE SESSION: MANAGEMENT

Societe Generale Builds an Intelligent System to Manage Information Flow

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 267

process, the bank has reassigned employees to other tasks or to backing up the automated system .

Sources: David Jolly, “Société Générale Profit Rises Despite Weak- ness in Investment Banking,” New York Times, May 4, 2016; “Societe

3. What is the role of human decision makers in the new system?

4. Why did managers select the Infogix platform?

Generale Group Results Full Year 2016,” Annual Report, societe- generale.com, March 15, 2017; “Enhancing the Accuracy of Front-to- Back Office Information Flow,” Infogix.com, 2016; Noemie Bisserbe, “Société Générale Shares Plunge After Profit Warning,” Agence France-Presse, February 11, 2016.

CASE STUDY QUESTIONS

1. Why did Societe Generale’s managers decide to develop an automated transaction processing system?

2. Why did managers decide they needed an “intelli- gent system?” In what way was the new system “intelligent?”

Review Summary

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 accessed. Different functional areas and groups were allowed to develop their own files indepen- dently. Over time, this traditional file management environment creates problems such as data redun- dancy 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 DBMS, and why is a relational DBMS so powerful? The principal capabilities of a DBMS include a data definition capability, a data dictionary capabil-

ity, and a data manipulation language. The data definition capability specifies the structure and con- tent of the 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 infor- mation 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.

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 business 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.

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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 consisting of text. Web mining tools focus on analysis of useful patterns and information from the Web, examining the structure of websites and activities of website users as well as the contents of webpages. 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 , 259 Attribute , 243 Big data , 255 Bit , 242 Byte , 242 Data administration , 265 Data cleansing , 266 Data definition , 248 Data dictionary , 248 Data governance , 265 Data inconsistency , 244 Data manipulation language , 248 Data mart , 257 Data mining , 261 Data quality audit , 266 Data redundancy , 244 Data warehouse , 255 Database , 245 Database administration , 265 Database management system (DBMS) , 245 Database server , 263 Entity , 243

Entity-relationship diagram , 252 Field , 242 File , 242 Foreign key , 247 Hadoop , 258 In-memory computing , 258 Information policy , 265 Key field , 247 Non-relational database management

systems , 253 Normalization , 251 Online analytical processing (OLAP) , 260 Primary key , 247 Program-data dependence , 244 Record , 242 Referential integrity , 252 Relational DBMS , 246 Sentiment analysis , 262 Structured Query Language (SQL) , 248 Text mining , 262 Tuple , 247 Web mining , 262

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

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 269

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 and attributes.

• 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.

• Explain the importance of data manipula- tion languages.

• Explain why non-relational databases are useful.

• Define and describe normalization and refer- ential integrity and explain how they contrib- ute to a well-designed relational database.

• Define and describe an entity-relationship dia- gram 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 contem- porary business intelligence infrastructure.

• Describe the capabilities of online analytical processing (OLAP).

• Describe Hadoop and explain how it differs from relational DBMS.

• Explain how text mining and web mining differ from conventional data mining.

• Describe how users can access information from a company’s internal databases through the web.

6- 4 Why are information policy, data administra- tion, 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.

Discussion Questions 6- 5 Imagine that you are the owner of a small

business. How might you use sentiment anal- ysis to improve your performance?

6- 6 To what extent should end users be involved in the selection of a database management system and database design?

MyLabMIS

MyLabMIS

6- 7 What are the consequences of an organiza- tion not having an information policy? MyLabMIS

Hands-On MIS Projects The projects in this section give you hands-on experience in analyzing data quality problems, establishing companywide data standards, creating a database for inventory management, and using the web to search online databases for overseas business resources. Visit MyLab MIS’s Multimedia Library to access this chap- ter’s Hands-On MIS Projects.

Management Decision Problems

6- 8 Iko Instruments Group, a global supplier of measurement, analytical, and monitoring instruments and ser- vices based in the Netherlands, had a new data warehouse designed to analyze 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 the United States, 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, telephone numbers, and addresses the same way. In fact, compa- nies in different countries were using multiple ways of entering quote, billing, shipping, contact information

270 Part Two Information Technology Infrastructure

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 rela- tional 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.

• 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 ser- vices in faraway locations.

Your company, Caledonian Furniture, is located in Cumbernauld, Scotland, and manufactures office fur- niture 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 manufacturing 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 Register, AustraliaTrade Now (australiatradenow.com), and the Nationwide Business Directory of Australia (www.nationwide.com.au). 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.

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 271

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 pro- vides. Then list the entities and attributes that the company running the website must keep track of in its databases. Diagram 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.

Lego’s Enterprise Software Spurs Growth

CASE STUDY

The Lego Group, headquartered in Billund, Denmark, is one of the largest toy manufacturers in the world. Lego’s main products have been the bricks and figures that children have played with for generations. The Danish company has experienced sustained growth since its founding in 1932, and for most of its history its major manufacturing facilities were located in Denmark.

In 2003, Lego was facing tough competition from imitators and manufacturers of electronic toys. In an effort to reduce costs, the group decided to initiate a gradual restructuring process that continues today. In 2006, the company announced that a large part of its production would be outsourced to the elec- tronics manufacturing service company Flextronics, which has plants in Mexico, Hungary, and the Czech Republic. The decision to outsource production came as a direct consequence of an analysis of Lego’s total supply chain. To reduce labor costs, manually inten- sive processes were outsourced, keeping only the highly skilled workers in Billund. Lego’s workforce was gradually reduced from 8,300 employees in 2003 to approximately 4,200 in 2010. Additionally, produc- tion had to be relocated to places closer to its natural markets. As a consequence of all these changes, Lego transformed itself from a manufacturing firm to a market-oriented company that is capable of reacting fast to changing global demand.

Lego’s restructuring process, coupled with double- digit sales growth in the past few years, has led to the company’s expansion abroad and made its work- force more international. These changes presented supply chain and human resources (HR) challenges

to the company. The supply chain had to be reen- gineered to simplify production without reducing quality. Improved logistics planning allowed Lego to work more closely with retailers, suppliers, and the new outsourcing companies. At the same time, the HR department needed to play a more strategic role inside the company. HR was now responsible for implementing effective policies aimed at retaining and recruiting the most qualified employees from a diversity of cultural backgrounds.

Adapting company operations to these changes required a flexible and robust IT infrastructure with business intelligence capabilities that could help management perform better forecasting and plan- ning. As part of the solution, Lego chose to move to SAP business suite software. SAP AG, a German company that specializes in enterprise software solutions, is one of the leading software companies in the world. SAP’s software products include a vari- ety of applications designed to efficiently support all of a company’s essential functions and opera- tions. Lego chose to implement SAP’s Supply Chain Management (SCM), Product Lifecycle Management (PLM), and Enterprise Resources Planning (ERP) modules.

The SCM module includes essential features such as supply chain monitoring and analysis as well as forecasting, planning, and inventory optimization. The PLM module enables managers to optimize development processes and systems. The ERP mod- ule includes, among other applications, the Human Capital Management (HCM) application for person- nel administration and development.

272 Part Two Information Technology Infrastructure

SAP’s business suite is based on a flexible three- tier client–server architecture that can easily be adapted to the new service-oriented architecture (SOA) available in the latest versions of the software. In the first tier, a client interface—a browser-type graphical user interface (GUI) running on a laptop, desktop, or mobile device—submits users’ requests to the application servers. The applications servers (the second tier in the system) receive and process clients’ requests. In turn, these application servers send the processed requests to the database sys- tem (the third tier), which consists of one or more relational databases. SAP’s business suite supports databases from different vendors, including those offered by Oracle, Microsoft, MySQL, and others. The relational databases contain tables that store data on Lego’s products, daily operations, the supply chain, and thousands of employees. Managers can easily use the SAP query tool to obtain reports from the databases because it does not require any techni- cal skill. Additionally, the distributed architecture enables authorized personnel to have direct access to the database system from the company’s various locations, including those in Europe, North America, and Asia.

SAP’s ERP-HCM module includes advanced fea- tures such as “Talent Manager” as well as those for handling employee administration, reporting, and travel and time management. These features allow Lego’s HR personnel to select the best candidates, schedule their training, and create a stimulus plan to retain them. It is also possible to include perfor- mance measurements and get real-time insight into HR trends. Using these advanced features, together with tools from other software vendors, Lego’s man- agers are able to track employees’ leadership poten- tial, develop their careers, and forecast the recruiting of new employees with certain skills.

The investments that The Lego Group has made in information systems and business re-design have paid off handsomely. In 2014 the Group increased sales by 13 percent to €3.8 billion against €3.3 billion the year before. Operating profit increased 15 per- cent to €1.26 billion. Full-time employees increased to 11,755 as the company expanded production in Asia. In 2015, sales surged by 25 percent.

Reflecting its growing emphasis on developing a global company and its substantial investment in global information systems both in the supply chain and the distribution chain, The Lego Group in 2014 showed strong, long-term growth in all regions. In Europe, America, and Asia, sales growth has been in the double digits for over five years despite the fact

that the Global Great Recession (2008 to 2013) led to flat sales of toys worldwide. In the Asian region, growth in Lego sales varied from market to market. China’s growth in consumer sales of more than 50 percent was the most significant in the region. This supports The Lego Group’s ambitions to further glo- balize the company and make Asia a significant con- tributor to future growth.

In May 2014 The Lego Group opened its first fac- tory in China, located in Jiaxing, and a new office in Shanghai, which is one of five main offices globally for The Lego Group. The executives at Lego believe there is huge potential in Asia, and have decided to learn more about the Asian market and build capa- bilities in the region. The new factory and office rep- resent a significant expansion of the Lego physical presence in the region. According to executives, in combination with their existing office in Singapore, the Shanghai office and the new factory enable stra- tegically important functions to be located close to their customers as well as children and parents in China and Asia.

The decision to place a Lego factory in China is a direct consequence of The Lego Group’s ambition to have production placed close to core markets. This same philosophy has led to expansions of the Lego factory in the Czech Republic, and an entirely new factory was opened in Nyiregyhaza, Hungary, in March 2014. These factories, along with the parent factory in Denmark, serve the European markets. To serve the Americas faster and with customized products, the company expanded its Lego factory in Monterrey, Mexico.

Executives believe the global approach to informa- tion systems and production facilities enables the company to deliver Lego products to retailers and ultimately to children all over the world very fast, offering world-class service to consumers. In 2014, in addition to its growth across a variety of markets, The LEGO Movie was also released to overwhelmingly positive reviews, bolstering the company’s brand and allowing it to develop a new array of products based on the movie’s themes. The movie led to shortages of Lego bricks for Christmas 2015.

The Lego Group is primed to continue its growth throughout 2016 and beyond using its organizational flexibility and the concepts it has honed for years. The company is responding to its customers and releasing new versions of some of its most popular sets of toys, including its Bionicle series of block sets. So far, Lego has built an impressive worldwide pres- ence, block by block .

Chapter 6 Foundations of Business Intelligence: Databases and Information Management 273

Sources: Bob Ferrari, “A New CEO for LEGO with an Operations and Supply Chain Management Background,” Theferrarigroup. com, December15, 2016; John Kell, “Lego Says 2015 Was Its ‘Best Year Ever,’ With Huge Sales Jump,” Fortune.com, March 1, 2016; “The LEGO Group Annual Report 2015,” Lego.com, 2016; Mary O’Connor, “LEGO Puts the RFID Pieces Together,” RFID Jour- nal, http://www.rfidjournal.com/articles/view?2145/2 accessed December 21, 2015; Henrik Amsinck, “LEGO: Building Strong Cus- tomer Loyalty Through Personalized Engagements,” http://events. sap.com/ accessed December 20, 2015; Gregory Schmidt, “Lego’s Success Leads to Competitors and Spinoffs,” New York Times, November 20, 2015; Niclas Rolander, “China Shock Can’t Halt Lego Executive Chasing ‘Fantastic’ Growth,” Bloombergbusiness. com, September 2, 2015; Rebecca Kanthor, “New Lego Facility in China to Start Production This Year,” Plastics News, May 15, 2015; “Now Lego’s Business Rules Are on the Table,” Economic Engineer- ing, 2015; “The Lego Group Annual Report 2014,” The Lego Group, April 2015; Roar Trangbaek, “New London Office Supports Lego Group Strategy to Reach Children Globally, Newsroom, www. lego.com, November 2014; “How Lego Became World’s Hottest

Toy Company,” Economist, March 9, 2013; “Lego, the Toy of the Century Had to Reinvent the Supply-Chain to Save the Company,” Supply Chain Digest, September 25, 2007, www.scdigest.com/ assets/on_target/07-09-25- 7.php?cid=1237, accessed November 16, 2010.

CASE STUDY QUESTIONS 6- 13 Explain the role of the database in SAP’s three-

tier system.

6- 14 Explain why distributed architectures are flexible.

6- 15 Identify some of the business intelligence fea- tures included in SAP’s business software suite.

6- 16 What are the main advantages and disadvan- tages of having multiple databases in a distrib- uted architecture? Explain.

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, analytic platforms.

Case contributed by Daniel Ortiz Arroyo, Aalborg University.

274 Part Two Information Technology Infrastructure

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TechTarget Inc. “Identifying and Meeting the Challenges of Big Data.” (2016).

Wallace, David J. “How Caesar’s Entertainment Sustains a Data- Driven Culture.” DataInformed (December 14, 2012).

Zoumpoulis, Spyros, Duncan Simester, and Theos Evgeniou, “Run Field Experiments to Make Sense of Your Big Data.” Harvard Business Review (November 12, 2015).

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MyLab MIS™ Visit mymislab.com for simulations, tutorials, and end-of-chapter problems.

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?

VIDEO CASES

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

CHAPTER CASES

Wireless Technology Makes Dundee Precious Metals Good as Gold The Global Battle over Net Neutrality Monitoring Employees on Networks: Unethical or Good Business? RFID Propels the Angkasa Library Management System

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Dundee Precious Metals (DPM) is a Canadian-based, international min-ing company engaged in the acquisition, exploration, development and mining, and processing of precious metal properties. One of the com- pany’s principal assets is the Chelopech copper and gold mine east of Sofia, Bulgaria; the company also has a gold mine in southern Armenia and a smelter in Namibia.

The price of gold and other metals has fluctuated wildly, and Dundee was looking for a way to offset lower gold prices by making its mining operations more efficient. However, mines are very complex operations, and there are special challenges with communicating and coordinating work underground.

Management decided to implement an underground wireless Wi-Fi net- work that allows electronic devices to exchange data wirelessly at the Chelopech mine to monitor the location of equipment, people, and ore throughout the mine’s tunnels and facilities. The company deployed several hundred Cisco Systems Inc. high-speed wireless access points (in waterproof, dust- proof, and crush-resistant enclo- sures), extended-range antennas, communications boxes with indus- trial switches connected to 90 kilo- meters of fiber optic lines that snake through the mine, emergency boxes on walls for Linksys Voice over Internet Protocol (VoIP) phones, protected vehicle antennas that can withstand being knocked against a mine ceiling, and custom walkie- talkie software. Dundee was able to get access points that normally have a range of 200 meters to work at a range of 600 to 800 meters in a straight line or 400 to 600 meters around a curve.

Another part of the solution was to use AeroScout Wi-Fi radio frequency identification (RFID) technology to track workers, equipment, and vehicles. About 1,000 AeroScout Wi-Fi RFID tags are worn by miners or mounted on vehicles and equipment, transmitting data about vehicle rock loads and mechanical status, miner locations, and the status of doors and ventilation fans over the mine’s Wi-Fi network. AeroScout’s Mobile View software can

Wireless Technology Makes Dundee Precious Metals Good as Gold

© Caro/Alamy

display a real-time visual representation of the location of people and items. The software can determine where loads came from, where rock should be sent, and where empty vehicles should go next. Data about any mishap or slow- down, such as a truck that made an unscheduled stop or a miner who is behind schedule, are transmitted to Dundee’s surface crew so that appropriate action can be taken.

The Mobile View interface is easy to use and provides a variety of reports and rules-based alerts. By using this wireless technology to track the location of equipment and workers underground, Dundee has been able to decrease equip- ment downtime and use resources more efficiently. Dundee also uses the data from the underground wireless network for its Dassault Systemes’ Geovia mine management software and IBM mobile planning software.

Before implementing AeroScout, Dundee kept track of workers by noting who had turned in their cap lamps at the end of their shift. AeroScout has auto- mated this process, enabling staff in the control room to determine the location of miners quickly.

It is also essential for workers driving equipment underground to be able to communicate closely with the mine’s control room. In the past, workers used a radio checkpoint system to relay their location. The new wireless system enables control room staff workers actually to see the location of machinery so they can direct traffic more effectively, quickly identify problems, and respond more rapidly to emergencies.

Thanks to wireless technology, Dundee has been able to reduce costs and increase productivity while improving the safety of its workers. Communica- tion costs have dropped 20 percent. According to Dundee CEO Rick Howes, the $10 million project, along with new crushing and conveyor systems, helped lower production costs to $40 a ton from $60. In 2013, Chelopech ore produc- tion topped two million tons, a 12 percent increase over the previous year.

Sources: Clint Boulton, “Mining Sensor Data to Run a Better Gold Mine,” Wall Street Journal , February 17, 2015, and “Tags to Riches: Mining Company Tracks Production with Sensors,” Wall Street Journal , February 18, 2015, www.dundeeprecious.com , accessed April 29, 2015; Eric Reguly, “Dundee’s Real-Time Data Innovations Are as Good as Gold,” The Globe and Mail , December 1, 2013; and Howard Solomon, “How a Canadian Mining Company Put a Wi-Fi Network Underground,” IT World Canada , December 3, 2013.

The experience of Dundee Precious Metals illustrates some of the power-ful capabilities and opportunities contemporary networking technology provides. The company uses wireless networking, RFID technology, and Aero- Scout MobileView software to automate tracking of workers, equipment, and ore as they move through its Chelopech underground mine.

The chapter-opening diagram calls attention to important points this case and this chapter raise. The Dundee Precious Metals production environment in its Chelopech mine is difficult to monitor because it is underground yet requires intensive oversight and coordination to make sure that people, materials, and equipment are available when and where they are needed underground and that work is flowing smoothly. Tracking components manually or using older radio identification methods was slow, cumbersome, and error-prone. Dundee was also under pressure to cut costs because the price of gold had dropped and precious metals typically have wild price fluctuations.

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Management decided that wireless Wi-Fi technology and RFID tagging pro- vided a solution and arranged for the deployment of a wireless Wi-Fi network throughout the entire underground Chelopech production facility. The net- work made it much easier to track and supervise mining activities from above ground.

Here are some questions to think about: Why did wireless technology play such a key role in this solution? Describe how the new system changed the pro- duction process at the Chelopech mine.

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, e-mail, 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.

Management

Organization

Technology

Business Challenges

Information System

Business Solutions

• Select wireless technology • Monitor underground work flow

• Increase efficiency • Lower costs

• Revise job functions and production processes • Train employees

• Cisco wireless access points • Aeroscout RFID tags and software • Wireless communication

• Inefficient manual processes • Large, inaccessible production environment

Wi-Fi Wireless Network • Track people, equipment, ore underground • Optimize work flow • Expedite communication

Chapter 7 Telecommunications, the Internet, and Wireless Technology 279

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. 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 Com- cast, offer voice service and Internet access. Computer networks have expanded 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 sec- ond, but today more than 80 percent of EU households have high-speed broad- band connections provided by telephone and cable TV companies running at 1 to 15 million bits per second. The cost for this service has fallen exponentially, from 25 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, mobile handheld devices, and PCs in wireless networks. More than half the Internet users in the United States use smartphones and tablets to access the Internet.

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 client

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 dedi- cated server computer, cable (wiring) connecting the devices, switches, and a router.

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computer and a dedicated server computer, network interfaces, a connection medium, network operating system software, and either a hub or a switch.

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 performs important network functions for client computers, such as display- ing web pages, storing data, and storing the network operating system (hence controlling the network). Microsoft Windows Server, Linux, and Novell Open Enterprise Server 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 Inter- net? 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 new networking approach in which many of these control functions are man- aged by one central program, which can run on inexpensive commodity servers that are separate from the network devices themselves. This is especially help- ful 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 cor- porate-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).

Chapter 7 Telecommunications, the Internet, and Wireless Technology 281

As you can see from this figure, a large corporate network infrastructure uses a wide variety of technologies—everything from ordinary telephone service 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 develop- ment of widely used communications standards (the most important of which is Transmission Control Protocol/Internet Protocol, or TCP/IP) for linking 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

FIGURE 7. 2 CORPORATE NETWORK INFRASTRUCTURE

Today’s corporate network infrastructure is a collection of many networks from the public switched telephone network, to the Internet, to corporate local area networks linking workgroups, departments, or office floors.

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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 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 become 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 makes much more efficient use of the communications capacity of a network. In packet-switched networks, messages are first broken down into small fixed bundles of data called packets. The packets include infor- mation for directing the packet to the right address and for checking trans- mission errors along with the data. The packets are transmitted over various communications channels by using routers, each packet traveling indepen- dently. Packets of data originating at one source will be routed through many paths and networks before being reassembled into the original message when they reach their destinations.

FIGURE 7. 3 PACKET-SWITCHED NETWORKS AND PACKET COMMUNICATIONS

Data are grouped into small packets, which are transmitted independently over various communica- tions channels and reassembled at their final destination.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 283

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 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 busi- ness firms to purchase computing and communications equipment from a sin- gle vendor. However, today, corporate networks are increasingly using a single, common, worldwide standard called Transmission Control Protocol/Inter- net Protocol (TCP/IP) . TCP/IP was developed during the early 1970s to sup- port U.S. Department of Defense Advanced Research Projects Agency (DARPA) efforts to help scientists transmit data among different types of computers over long distances.

TCP/IP uses a suite of protocols, the main ones being TCP and IP. TCP refers to the Transmission Control Protocol, which handles the movement of data between computers. TCP establishes a connection between the computers, sequences 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 transmis- sion. 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 Pro- tocol (HTTP), which is used to transfer web page files.

2. Transport layer. The Transport layer is responsible for providing the Application 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.

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.

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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 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 voice communication. The most common analog devices are the telephone handset, the speaker on your computer, or your iPod earphone, all of which create ana- log 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: one bits and zero bits, which are represented as on-off electrical pulses. Com- puters use digital signals and require a modem to convert these digital signals into analog 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 ).

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.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 285

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 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, providing users with access to shared computing resources in the network, including software 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 another corporate network, so that the LAN can exchange information with networks external to it. The most common LAN operating systems are Win- dows, Linux, and Novell.

Ethernet is the dominant LAN standard at the physical network level, specify- ing 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 gigabit per second (Gbps).

The LAN illustrated in Figure 7. 1 uses a client/server architecture by 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 network treats all proces- sors equally and is used primarily in small networks with 10 or fewer users. The various computers on the network can exchange data by direct access and can share peripheral devices without going through a separate server.

Larger LANs have many clients and multiple servers, with separate servers for specific services such as storing and managing files and databases (file serv- ers or database servers), managing printers (print servers), storing and manag- ing e-mail (mail servers), or storing and managing web pages (web servers).

Metropolitan and Wide Area Networks Wide area networks (WANs) span broad geographical distances—entire regions, states, continents, or the entire globe. The most universal and power- ful 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

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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 tech- nology have to offer for business? Let’s look at the most important Internet features.

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 and harder to install; often used for network 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

Chapter 7 Telecommunications, the Internet, and Wireless Technology 287

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 Inter- networking, linking millions of individual networks all over the world. This global network of networks began in the early 1970s as a U.S. Department of Defense network 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, AT&T, and Time Warner are ISPs. Individuals also connect to the Internet through their business firms, universities, 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 second (Kbps), used to be the most common form of connection worldwide, but broad- band connections have largely replaced it. Digital subscriber line, cable, satel- lite 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 40 Mbps, depending on usage patterns and distance. 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 ranging from 1 Mbps to 6 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 earlier in this chapter . Every computer on the Internet is assigned a unique Internet Protocol (IP) address , which currently is a 32-bit number represented by four strings of numbers ranging from 0 to 255 separated by periods. For instance, the IP address of www.microsoft.com is 207.46.250.119.

When a user sends a message to another user on the Internet, the message is first decomposed into packets using the TCP protocol. 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 pack- ets are reassembled into the original message.

The Domain Name System Because it would be incredibly difficult for Internet users to remember strings of 12 numbers, the Domain Name System (DNS) converts domain names to IP addresses. The domain name is the English-like name that corresponds to

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the unique 32-bit numeric IP address for each computer connected to the Inter- net. 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.

DNS has a hierarchical structure (see Figure 7. 6 ). At the top of the DNS hier- archy is the root domain. The child domain of the root is called a top-level 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 familiar with from surfing the web, for example, .com, .edu, .gov, and the various coun- try 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 hierarchy 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.

.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 fi rms .info Information providers

FIGURE 7. 6 THE DOMAIN NAME SYSTEM

Domain Name System is a hierarchical system with a root domain, top-level domains, second-level domains, and host computers at the third level.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 289

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 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 Inter- net. 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 Orga- nizations 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 orga- nizations 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.

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What kind of Internet user are you? Do you primar- ily use the Net to do a little e-mail 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. Could hundreds of millions of people like you start to slow the Internet down?

Video streaming on Netflix has accounted for 32 percent of all bandwidth use in the United States and Google’s YouTube for 19 percent of web traffic at peak hours. If user demand overwhelms network capacity, the Internet might not come to a screech- ing halt, but users could face sluggish download speeds and video transmission. Heavy use of iPhones in urban areas such as New York and San Francisco has degraded service on the AT&T wireless network. AT&T had reported that 3 percent of its subscriber base accounted for 40 percent of its data traffic.

Internet service providers (ISPs) assert that network congestion is a serious problem and 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 widely accepted because 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. Presently, the Internet is neutral; all Internet traffic is treated equally on a first-come, first-served basis by Internet backbone owners. How- ever, this arrangement prevents telecommunications and cable companies from charging differentiated prices based on the amount of bandwidth consumed by the content being delivered over the Internet.

The strange alliance of net neutrality advocates includes MoveOn.org ; the Electronic Frontier Foun- dation; the Christian Coalition; the American Library Association; data-intensive web businesses such as Netflix, Amazon, and Google; major consumer groups; and a host of bloggers and small businesses. Net neutrality advocates argue that differentiated

pricing would impose heavy costs on heavy band- width users such as YouTube, Skype, and other inno- vative services, preventing high-bandwidth start-up 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 customers to use the cable company’s on-demand movie rental services.

Network owners believe regulation to enforce net neutrality will impede competitiveness by discourag- ing capital expenditure for new networks and curb- ing their networks’ ability to cope with the exploding demand for Internet and wireless traffic. U.S. Inter- net service lags behind many other nations in overall speed, cost, and quality of service, adding credibility to this argument. Moreover, with enough options for Internet access, dissatisfied consumers could simply switch to providers who enforce net neutrality and allow unlimited Internet use.

In the United States the Internet has recently been declared a public utility, and therefore subject to regulation of the Federal Communications Com- mission (FCC), which regulates the land telephone system. Public utilities are required to provide ser- vice on an equal footing to all users.

The new rules are intended to ensure that no content is blocked and that the Internet cannot be divided into pay-to-play fast lanes for Internet and media companies that can afford them and slow lanes for everyone else. Outright blocking of con- tent, slowing of transmissions, and the creation of so-called fast lanes were prohibited. The FCC stated that it favors a light touch rather than the heavy- handed regulations to which the old regulated tele- phone companies were subjected. One provision requiring “just and reasonable” conduct allows the FCC to decide what is acceptable on a case-by-case basis. The new rules apply to mobile data service for smartphones and tablets in addition to wired lines. The order also includes provisions to protect consumer privacy and ensure that Internet service is available to people with disabilities and in remote areas.

In Europe, telecommunications carriers are sub- ject to the European Parliament, which in 2015 ad- opted net neutrality legislation that required Internet service providers to treat all web traffi c equally. In

INTERACTIVE SESSION: ORGANIZATIONS

The Global Battle over Net Neutrality

Chapter 7 Telecommunications, the Internet, and Wireless Technology 291

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 the transmission of mas- sive quantities of data and billions of users. 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 addressing system is being replaced by a new version of the IP addressing schema called IPv6 (Internet Protocol ver- sion 6), which contains 128-bit addresses (2 to the power of 128), or more than

2016 the Body of European Regulators for Electronic Communications (BEREC) issued regulations that prohibited ISPs from blocking or slowing down of Internet traffi c, except where necessary for mainte- nance and security.

In 2015, United States Telecom Association, an industry trade group, filed a lawsuit to overturn the government’s net neutrality rules. AT&T, the National Cable & Telecommunications Association, and CTIA, which represents wireless carriers, filed similar legal challenges. Pro-net neutrality forces have asked the FCC to look at “zero-rating” practices, in which certain services, like Spotify and Netflix, are exempt from data caps in a customer’s data plan. The battle over net neutrality is not yet over

In Europe, telecommunications carriers are subject to the European Parliament, which in 2015 adopted net neutrality legislation that required inter- net service providers to treat all web traffic equally. In 2016, the Body of European Regulators for Elec- tronic Communications (BEREC) issued regulations that prohibited ISPs from blocking or slowing down

4. It has been said that net neutrality is the most important issue facing the Internet since the advent of the Internet. Discuss the implications of this statement.

5. Are you in favor of legislation enforcing network neutrality? Why or why not?

of Internet traffic except where necessary for mainte- nance and security.

In Europe, major ISPs including Deutsche Tele- kom, Nokia, Vodafone, and BT promise to launch 5G networks in every country in the European Union by 2020 if authorities hold off on implementing the new rules. Otherwise, 5G networks will take a much lon- ger time, they argue.

Sources: Amar Toor, “Europe’s Net Neutrality Guidelines Seen as a Victory for the Open Web,” The Verge, August 30, 2016; BEREC, “All You Need to Know About Net Neutrality Rules in the EU,” berec. europa.eu, 2016; David Meyer, “Here’s Why Europe’s Net Neutral- ity Advocates Are Celebrating,” Fortune, August 30, 2016; John D. McKinnon and Brett Kendall, “FCC’s Net-Neutrality Rules Upheld by Appeals Court,” Wall Street Journal, June 14, 2016; Darren Orf, “The Next Battle for Net Neutrality Is Getting Bloody,” Gizmodo , May 25, 2016; Stephanie Milot, “GOP Moves to Gut Net Neutrality, FCC Budget,” PC Magazine , February 26, 2016; Rebecca Ruiz, “FCC Sets Net Neutrality Rules,” New York Times , March 12, 2015; Rebecca Ruiz and Steve Lohr, “F.C.C. Approves Net Neutrality Rules, Classifying Broadband Internet Service as a Utility,” New York Times , February. 26, 2015; Robert M. McDowell, “The Turning Point for Internet Free- dom,” Wall Street Journal , January 19, 2015; Ryan Knutson, “AT&T Sues to Overturn FCC’s Net Neutrality Rules,” Wall Street Journal , April 14, 2015.

CASE STUDY QUESTIONS

1. What is net neutrality? Why has the Internet oper- ated under net neutrality up to this point?

2. Who’s in favor of net neutrality? Who’s opposed? Why?

3. 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 as well as wireless?

292 Part Two Information Technology Infrastructure

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 66,000 institutions across the United States and international networking partners from more than 100 countries. To connect these communities, Inter- net2 developed a high-capacity, 100 Gbps network that serves as a test bed for leading-edge technologies that may eventually migrate to the public Internet, including large-scale network performance measurement and management 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 Inter- net control what they do through client applications on their computers, such as web browser software. The data, including e-mail 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 requested 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 e-mail, 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.

E-mail 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 e-mail today is sent through the Internet. The cost of e-mail is far lower than equiva- lent voice, postal, or overnight delivery costs, and e-mail messages arrive any- where in the world in a matter of seconds.

TABLE 7. 3 MAJOR INTERNET SERVICES

CAPABILITY FUNCTIONS SUPPORTED

E-mail 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

Chapter 7 Telecommunications, the Internet, and Wireless Technology 293

Chatting enables two or more people who are simultaneously connected to the Internet to hold live, interactive conversations. Chat systems now sup- port voice and video chat as well as written conversations. Many online retail businesses offer chat services on their websites to attract visitors, to encourage repeat 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 consumers include Yahoo! Messenger, Google Hangouts, AOL Instant Messen- ger, and Facebook Chat. 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 e-mail, 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 rea- sons companies may need to monitor their employees’ e-mail and web activi- ties, 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

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.

294 Part Two Information Technology Infrastructure

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 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 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 infra- structure for both telecommunications and computing services. Companies no longer have to maintain separate networks or provide support services and per- sonnel 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, e-mail, 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 company, used unified communications technology to create collaborative websites for each of its real estate deals. Each website provides a single point for accessing

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 destination, 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.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 295

The Internet has become an extremely valuable busi- ness 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 receiving per- sonal e-mail, talking to friends via online chat, and downloading videos and music. A series of studies have found that employees spend between one and three hours per day at work surfing the web on per- sonal business. A company with 1,000 workers using the Internet could lose up to $35 million in produc- tivity annually from just an hour of daily web surfing by workers.

Many companies have begun monitoring employee use of e-mail and the Internet, some- times without their knowledge. Many tools are now available for this purpose, including Spector CNE Investigator, OsMonitor, IMonitor, Work Examiner, Mobistealth, and Spytech. These products enable companies to record online searches, monitor file downloads and uploads, record keystrokes, keep tabs on e-mails, create transcripts of chats, or take certain screenshots of images displayed on com- puter screens. Instant messaging, text messaging, and social media monitoring are also increasing. Although U.S. companies have the legal right to monitor employee Internet and e-mail activity while they are at work, is such monitoring unethical, or is it simply good business?

Managers worry about the loss of time and employee productivity when employees are focus- ing on personal rather than company business. Too much time on personal business translates into lost revenue. Some employees may even be billing time they spend pursuing personal interests online to cli- ents, 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. transpor- tation industry, found that employees were down- loading a great deal of music and streaming video and storing them on company servers. GMI’s server backup space was being eaten up.

When employees use e-mail 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 liable. Management in many firms fear that racist, sexually explicit, or other potentially offensive mate- rial accessed or traded by their employees could result in adverse publicity and even lawsuits for the firm. An estimated 27 percent of Fortune 500 organi- zations have had to defend themselves against claims of sexual harassment stemming from inappropriate e-mail. 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 informa- tion and trade secrets through e-mail or social net- works. Another survey conducted by the American Management Association and the ePolicy Institute found that 14 percent of the employees polled admit- ted they had sent confidential or potentially embar- rassing company e-mails to outsiders.

U.S. companies have the legal right to monitor what employees 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 specific websites or social sites, closely monitor e-mail messages, or limit personal time on the web.

GMI Insurance implemented Veriato Investiga- tor and Veriato 360 software to record and analyze the Internet and computer activities of each GMI employee. The Veriato software is able to identify which websites employees visit frequently, how much time employees spend at these sites, whether employees are printing out or copying confidential documents to take home on a portable USB storage device, and whether there are any inappropriate communication conversations taking place. GMI and its sister company, CCS, had an acceptable use policy (AUP) in place prior to monitoring, provid- ing rules about what employees are allowed and not allowed to do with the organization’s computing resources. However, GMI’s AUP was nearly impos- sible to enforce until implementation of the Veriato employee monitoring software. To deal with music and video downloads, GMI additionally developed a “software download policy,” which must be reviewed and signed by employees. Management at both GMI and CCS believe employee productivity increased by

INTERACTIVE SESSION: MANAGEMENT

Monitoring Employees on Networks: Unethical or Good Business?

296 Part Two Information Technology Infrastructure

structured and unstructured data. Integrated presence technology lets team members e-mail, 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 e-mail each other and communicate with the home office without any chance that outsiders could intercept the communica- tions. In the past, one answer to this problem was to work with large private networking firms that offered secure, private, dedicated networks to customers, but this was an expensive solution. A much less expensive solution is to create a virtual private network within the public Internet.

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.

15 to 20 percent as a result of using the Veriato moni- toring software.

A number of firms have fired employees who have stepped out of bounds. A Proofpoint survey found that one in five large U.S. companies had fired an employee for violating e-mail policies. Among managers who fired employees for Internet misuse, the majority did so because the employees’ e-mail contained sensitive, confidential, or embarrassing information.

No solution is problem-free, but many consultants believe companies should write corporate policies on employee e-mail, social media, and web use. The policies should include explicit ground rules that state, by position or level, under what circumstances employees can use company facilities for e-mail, blogging, or web surfing. The policies should also inform employees whether these activities are moni- tored and explain why.

IBM now has “social computing guidelines” that cover employee activity on sites such as Facebook

3. Should managers inform employees that their web behavior is being monitored? Or should managers monitor secretly? Why or why not?

and Twitter. The guidelines urge employees not to conceal their identities, to remember that they are personally responsible for what they publish, and to refrain from discussing controversial topics that are not related to their IBM role.

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 sharing, innovation, and independence could very well find that monitoring creates more problems than it solves.

Sources: Susan M. Heathfield, “Surfing the Web at Work,” About.com , May 27, 2016; Veriato, “Veriato ‘Golden’ for GMI Insurance Services,” 2016; “Office Slacker Stats,” www.staffmonitoring.com , accessed May 28, 2016; “How Do Employers Monitor Internet Usage at Work?” wisegeek.org , accessed April 15, 2016; ” Could HR Be Snooping on Your Emails and Web Browsing? What Every Worker Should Know,” Philly.com , March 30, 2015; “How Do Employers Monitor Inter- net Usage at Work?” wisegeek.org , accessed April 15, 2015; Dune Lawrence, “Companies Are Tracking Employees to Nab Traitors,” Bloomberg , March 23, 2015; and “Should Companies Monitor Their Employees’ Social Media?” Wall Street Journal , May 11, 2014.

CASE STUDY QUESTIONS

1. Should managers monitor employee e-mail and Internet usage? Why or why not?

2. Describe an effective e-mail and web use policy for a company.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 297

Several competing protocols are used to protect data transmitted over the public Internet, including Point-to-Point Tunneling Protocol (PPTP). In a pro- cess called tunneling , packets of data are encrypted and wrapped inside IP packets. By adding this wrapper around a network message to hide its con- tent, 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 hyper- text with 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 pictures stored in the same or remote computers ( see Chapter 5 ). Web 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 document. Most companies have a domain name that is the same as or closely related to their official corporate name. The directory path and document name are two more pieces of information within the web address

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, organiza- tions can create a private connection that travels through the public Internet.

298 Part Two Information Technology Infrastructure

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 document 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 most common web server in use today is Apache HTTP Server, followed by Microsoft Internet Information Services (IIS). 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 60 trillion pages in 2016, and this reflects a large portion of the publicly accessible web page popula- tion. 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. Searching for information on Facebook is another matter. With more than 1.6 billion members, each with pages of text, photos, and media, the population of web pages is larger than many estimates. However, Facebook is a closed web, and its pages are not completely searchable by Google or other search engines.

Search Engines Obviously, with so many web pages, fi nding specifi c ones that can help you or your business, nearly instantly, is an important problem. The question is, how can you fi nd the one or two pages you really want and need out of billions of indexed web pages? Search engines attempt to solve the problem of fi nding 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 fi les; fi les of Microsoft Offi ce applications; PDF fi les; and audio, video, and image fi les. There are hundreds of search engines in the world, but the vast majority of search results come from Google, 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 infor- mation 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

Chapter 7 Telecommunications, the Internet, and Wireless Technology 299

the editors 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 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 With the growth of mobile smartphones and tablet comput- ers, and with about 210 million Americans accessing the Internet via mobile devices, the nature of e-commerce and search is changing. Mobile search from smartphones and tablets made up more than 50 percent of all searches in 2016 and will expand rapidly in the next few years. Google, Amazon, and Yahoo have developed new search interfaces to make searching and shopping from smart- phones 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 could really understand human language and behavior. Google and other search engine fi rms are attempting to refi ne search engine algorithms to capture more of what the user intended and the meaning of a search. In September 2013, Google introduced its Hummingbird search algorithm. Rather than evaluate each word separately in a search, Google’s semantically informed

Yahoo 12.4%

Microsoft 21.3%

Ask 1.7%

Others .6%

Google 64.0%

FIGURE 7. 11 TOP WEB SEARCH ENGINES IN THE UNITED STATES

Google is the most popular search engine, handling about 64 percent of web searches in the United States and about 90 percent in Europe. Sources: Based on data from comScore Inc., February 2016.

300 Part Two Information Technology Infrastructure

Hummingbird 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 fi nancial data 2015,” Hummingbird should be able to fi g- ure out that you really want Google’s SEC Form 10K report fi led with the Securi- ties and Exchange Commission on March 31, 2016.

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 and contain more information about the topic or person you are search- ing 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! Search engines are not very dis- criminating. 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 fi nd pages that satisfy your query, a social search website would review your friends’

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 millions variables and 2 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.

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.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 301

recommendations (and their friends’), their past web visits, and their use of Like buttons.

In January 2013, Facebook launched Graph Search (now called Facebook Search ), 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, alumni from the University of South Carolina who like Lady Gaga, or pictures of your friends before 2012.

Google has developed Google +1 as a social layer on top of its existing search engine. Users can place a +1 next to the websites they found helpful, and their friends will be notified automatically. Subsequent searches by their friends would list the +1 sites recommended by friends higher up on the page. One problem with social search is that your close friends may not have intimate knowledge of topics you are exploring, or they may have tastes you don’t appre- ciate. It’s also possible your close friends don’t have any knowledge about what you are searching for.

Visual Search and the Visual Web Although search engines were originally designed to search text documents, the explosion of photos and videos on the Internet created a demand for searching and classifying these visual objects. Facial recognition software can create a digital version of a human face. In 2012, Facebook introduced facial recognition software combined with tagging to cre- ate a new feature called Tag Suggest . The software creates a digital facial print, similar to a fi ngerprint. Users can put their own tagged photo on their timeline and their friends’ timelines. Once a person’s photo is tagged, Facebook can pick that person out of a group photo and identify for others who is in the photo. You can also search for people on Facebook by using their digital image to fi nd and identify them. Facebook is now using artifi cial 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 Pin- terest, where pictures replace text documents, where users search pictures, and where pictures of products replace display ads for products. Pinterest is a social networking site that provides users (as well as brands) with an online board to which they can pin interesting pictures. One of the fastest-growing websites in history, Pinterest had 270 million monthly visitors worldwide in 2016. Insta- gram is another example of the visual web. Instagram is a photo and video shar- ing site that allows users to take pictures, enhance them, and share them with friends on other social sites such as Facebook, Twitter, and Google+. In 2016, Instagram had 400 million monthly active users.

Intelligent Agent Shopping Bots Chapter 11 describes the capabilities of software agents with built-in intelligence that can gather or fi lter informa- tion and perform 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 can help people interested in making a purchase fi lter and retrieve information about products of interest, evalu- ate competing products according to criteria the users have established, and negotiate with vendors for price and delivery terms. Many of these shopping agents search the web for pricing and availability of products specifi ed by the user and return a list of sites that sell the item along with pricing information and a purchase link.

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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 activ- ities; 70 percent of American adult Internet users will use a search engine at least once a day in 2016, generating about 20 billion queries a month. In addi- tion, 180 million smartphone users will generate another 12 billion monthly searches. Worldwide, there are over 6 billion search engine requests daily. In Europe 90 percent of the searches are done with Google, and in the United States about 67 percent are Google searches. 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 adver- tisers 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 advertisements 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 mon- etizes the value of the search process. In 2016, search engine marketing is expected to generate $28 billion in revenue, nearly half of all online advertis- ing ($67 billion). About 90 percent of Google’s revenue of $74 billion in 2015 came from online advertising, and 90 percent of that ad revenue came from search engine marketing (Google, 2016).

Because search engine marketing is so effective (it has the highest click- through rate and the highest return on ad investment), companies seek to opti- mize 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 web- site achieve a higher ranking with the major search engines when certain key- words and phrases are put into the search field. One technique is to make sure that the keywords used in the website description match the keywords 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 light- ing . It is also advantageous to link your website to as many other websites as possible because search engines evaluate such links to determine 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 or 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 prob- lem. Code named Penguin , the revised algorithm examines the quality of links more carefully with the intent of down-ranking sites that have a suspicious pat- tern of sites linking to them. Penguin is updated annually.

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 product. Thus, search engine marketing saves consumers cognitive energy and reduces 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 bene- fit going to consumers in the form of lower search costs and lower prices (McK- insey & Company, 2011).

Web 2.0 Today’s websites don’t just contain static content—they enable people to col- laborate, share information, and create new services and content online. These second-generation interactive Internet-based services are referred to as Web 2.0 . If you have pinned a photo on Pinterest, posted a video to YouTube, created a blog, or added an app to your Facebook page, you’ve used some of these Web 2.0 services.

Web 2.0 has four defining features: interactivity, real-time user control, social participation (sharing), and user-generated content. The technologies and ser- vices behind these features include cloud computing, software mashups and apps, blogs, RSS, wikis, and social networks. We have already describd cloud computing, mashups, 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 , TypePad.com , and Xanga.com , and blogging 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. Micro- blogging , used in Twitter, is a type of blogging that features short posts of 140 characters or fewer.

Blog pages are usually variations on templates provided by the blogging ser- vice 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 e-mail 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.

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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. 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 (with more than 1.6 billion and 310 million monthly active users, respectively, in 2016), and LinkedIn (for professional contacts).

For many, social networking sites are the defining Web 2.0 application and one that has radically changed how people spend their time online; how people communicate and with whom; how business people stay in touch with cus- tomers, 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 1 million external developers who created more than 9 million applications for gaming, video sharing, and com- municating with friends and family. In 2016 Facebook supported 3.5 billion app installations. 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. You can also find a more detailed discussion of Web 2.0 in our Learning Tracks.

Web 3.0 and the Future Web The future of the Internet, so-called Web 3.0, is already visible. The key fea- tures of Web 3.0 are more tools for individuals to make sense out of the trillions of pages on the Internet, or the millions 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 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 net- work without requiring human-to-human or human-to-computer interaction. Firms such as General electric, IBM, HP, and Oracle, and hundreds of smaller start-ups, are exploring how to build smart machines, factories, and cities through extensive use of remote sensors and fast cloud computing. A related Web 3.0 development is the emerging Internet of People (IoP) based on sensors attached

Chapter 7 Telecommunications, the Internet, and Wireless Technology 305

to clothing and personal effects that monitor physical states and locations of individuals. 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, only 20 percent using 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 3.0 include more widespread use of cloud computing and software as a service (SaaS) business mod- els, 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. These more modest visions of the future Web 3.0 are more likely to be realized in the near term.

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 . Smart- phones such as the iPhone, Android phones, and BlackBerry combine the functionality 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 In 2015, more than 1.5 billion cell phones were sold worldwide. In the United States, there are 351 million cell phone subscriptions, and 190 million people have smartphones. About 193 million people access the web by using their phone (eMarketer, 2015). Smartphones, not the desktop PC, are now respon- sible for more than half of all Internet searches.

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 car- riers 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

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users, offer fair transmission speeds for e-mail, browsing the web, and online shopping but are too slow for videos. 4G networks have much higher speeds: 100 megabits/second download and 50 megabits upload speed, 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.

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 access to numerous locations that could not be covered by traditional wired Inter- net 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 delivery

Tablet

Wireless keyboard

Printer

User computer

Smartphones

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.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 307

data captured by their handheld computers to cellular transmitters, which for- ward 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.

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 netbooks 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 num- ber of mobile devices to a larger wired LAN and to the Internet. Most wireless devices 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

FIGURE 7. 14 AN 802.11 WIRELESS LAN

Mobile laptop computers equipped with network interface cards link to the wired LAN by communi- cating 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 under- stand. The client adapter then transmits the data from the mobile device back to the access point, which forwards the data to the wired network.

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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 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, microwave 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 new family of standards known as WiMax to deal with these problems. WiMax , which stands for Worldwide Interoperability for Microwave Access, is the popu- lar term for IEEE Standard 802.16. It has a wireless access range of up to 31 miles and transmission speed of up to 75 Mbps.

WiMax antennas are powerful enough to beam high-speed Internet connections to rooftop antennas of homes and businesses that are miles away. Cellular hand- sets 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 location, where

Chapter 7 Telecommunications, the Internet, and Wireless Technology 309

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. 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 produc- tion than bar coding systems. If a large number of items are shipped together, RFID systems track each pallet, lot, or even unit item in the shipment. This technology may help companies such as Walmart improve receiving and stor- age operations by improving their ability to see exactly what stock is stored in warehouses or on retail store shelves. Macy’s, described in the chapter- opening case, 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 depleted 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

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.

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those data with other applications. Major enterprise software vendors now offer RFID-ready versions of their supply chain management applications.

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 security 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, stor- age, and radio frequency sensors and antennas. They are linked into an intercon- nected network that routes the data they capture to a computer for analysis.

These networks range from hundreds to thousands of nodes. Because wire- less sensor devices are placed in the field for years at a time without any main- tenance or human intervention, they must have very low power requirements and batteries capable of lasting for years.

Figure 7. 16 illustrates one type of wireless sensor network, with data from individual nodes flowing across the network to a server with greater processing power. The server acts as a gateway to a network based on Internet technology.

Wireless sensor networks are valuable for uses such as monitoring environ- mental changes; monitoring traffic or military activity; protecting property; efficiently operating and managing machinery and vehicles; establishing secu- rity perimeters; monitoring supply chain management; or detecting chemical, biological, 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 prod- uct 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 con- nected to the Internet and will be able to identify themselves to other devices, creating networks that can sense and respond as data changes. Macy’s Pick to the Last Unit system, described in the chapter opening case, is an example of an IoT application. According to the McKinsey Global Institute, up to 50 billion devices connected to the Internet could add $3.9 trillion to $11.1 trillion a year of new economic value to business and society by 2025 (Manyika et al., 2015). You’ll find more examples of the Internet of Things in Chapters 2 and 12 .

Chapter 7 Telecommunications, the Internet, and Wireless Technology 311

FIGURE 7. 16 A WIRELESS SENSOR NETWORK

The small circles represent lower-level nodes, and the larger circles represent high-end nodes. Lower- level nodes forward data to each other or to higher-level nodes, which transmit data more rapidly and speed up network performance.

Review Summary

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 tradi- tional telephone system, mobile cellular communication, wireless local area networks, videoconfer- encing systems, a corporate 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 universal communications standard for linking disparate networks and computers, including the Internet. Protocols provide a common set of rules that enable communication among diverse compo- nents 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 geo- graphical distances, ranging from several miles to continents and are often private networks that are independently 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 computing and the TCP/IP network reference model. Every computer on the Internet is assigned a unique

312 Part Two Information Technology Infrastructure

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 e-mail, 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 features of Web 2.0. The future Web 3.0 will feature more semantic search, visual search, prevalence of apps, and intercon- nectedness 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 capable of transmission speeds of 100 Mbps 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 movement of goods by using tiny tags with embedded data about an item and its location. RFID read- ers read the radio signals transmitted by these tags and pass the data over a network to a computer for processing. Wireless 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 , 306 4G networks , 306 Bandwidth , 287 Blog , 304 Blogosphere , 304 Bluetooth , 307 Broadband , 280 Cable Internet connections , 288 Chat , 294 Digital subscriber line (DSL) , 288 Domain name , 288 Domain Name System (DNS) , 288 E-mail , 293 File Transfer Protocol (FTP) , 293 Hertz , 287 Hotspots , 309 Hubs , 281 Hypertext Transfer Protocol (HTTP) , 298 Instant messaging , 294 Internet of Things , 305 Internet Protocol (IP) address , 288 Internet service provider (ISP) , 288 Internet2, 293 IPv6, 292 Local area network (LAN) , 286

Metropolitan area network (MAN) , 286 Microblogging , 304 Modem , 285 Near field communication (NFC) , 311 Network operating system (NOS) , 281 Packet switching , 283 Peer-to-peer , 286 Personal area networks (PANs) , 307 Predictive search , 300 Protocol , 284 Radio frequency identification

(RFID) , 309 Router , 281 RSS , 304 Search engine marketing , 303 Search engine optimization (SEO) , 303 Search engines , 299 Semantic search , 300 Shopping bots , 302 Smartphones , 306 Social networking , 305 Social search , 300 Software-defined networking (SDN) , 281 Switch , 281 T1 lines , 288

Chapter 7 Telecommunications, the Internet, and Wireless Technology 313

Telnet , 293 Transmission Control Protocol/Internet

Protocol (TCP/IP) , 284 Unified communications , 295 Uniform resource locator (URL) , 299 Virtual private network (VPN) , 297 Visual web , 302 Voice over IP (VoIP) , 294

Web 2.0 304 Web 3.0 305 Website , 298 Wide area networks (WANs) , 286 Wi-Fi , 308 Wiki , 304 WiMax , 309 Wireless sensor networks (WSNs) , 311

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

Review Questions 7-1 What are the principal components of telecom-

munications 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.

• Define hertz and bandwidth.

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 HTTP and explain its importance to the web.

• 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 stan- dards for wireless networking, communica- tions, and Internet access?

• Define Bluetooth, Wi-Fi, WiMax, and 3G and 4G networks.

• Describe the capabilities of each and for which types of applications each is best suited.

• Define RFID, explain how it works, and describe how it provides value to businesses.

• Define WSNs, explain how they work, and describe 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?

MyLabMIS

MyLabMIS

7-7 What are some of the issues to consider in determining whether search engine optimiza- tion would provide your business with a com- petitive advantage?

MyLabMIS

Hands-On MIS Projects The projects in this section give you hands-on experience evaluating and selecting communications tech- nology, using spreadsheet software to improve selection of telecommunications services, and using web search engines for business research. Visit MyLab MIS’s Multimedia Library to access this chapter’s Hands- On MIS Projects.

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Management Decision Problems

7-8 Your company supplies ceramic floor tiles to Leroy Merlin, Bricorama, and other home improvement stores in France. 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 BD sells medical devices and instrument systems to hospitals, health clinics, medical offices, and laborato- ries in over 50 countries. The company employs over 30,000 people around the world, including account managers, customer service and support representatives, and warehouse staff. Management is considering adopting a system for unified communications. What factors should be considered? What are the key deci- sions that have to 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 Dublin, Ireland, 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 ser- vice 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 applications. 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.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 315

RFID Propels the Angkasa Library Management System

CASE STUDY

Radio-frequency identification (RFID) can play a key role in library management. The major advantage of using RFID is that it ensures traceability and secu- rity. In addition, RFID simplifies transactional pro- cesses at the library and can help to cut costs and save time. Across the globe, libraries are setting up the infrastructure for RFID as a replacement for manual management or barcodes. RFID tags can be embed- ded within a book, and unlike other forms of label- ing, these tags can store additional information, like author and title. Using this system also speeds up the process of checking books in and out, prevents theft, and helps in inventory management. The Allianze University College of Medical Sciences (AUCMS) has successfully set up RFID tagging as part of its library management system.

AUCMS is a premier institute offering courses in medicine and applied health sciences in Penang, Malaysia. The institution has a vast array of resources, including books, journals, newspapers, and e-books, and the library caters to a large popula- tion of students and staff. AUCMS partnered with the Sains Group, which is a globally renowned soft- ware solutions and IT services provider, to install and implement the the company’s Angkasa Library Management system. This system manages many of the core functions of the library, including acquisi- tion, cataloguing, circulation, subscriptions to jour- nals, and the management of an open-access catalog available to members on the Web.

The system is primarily useful as a repository of all library records. It enables the automatization of library processes that would earlier have been man- ual and paper-based. The Acquisition Module man- ages the process of acquiring the books, magazines, journals, and other materials for the library. This automates the entire process of acquisition, from the approval of orders to placing them, the recording of receipts and invoices to management of expenditure and maintenance of budgets. In a typical instance, lists of required reading material are sent over to the library heads, a final list is determined, and all of the important information is recorded on the sys- tem (invoice numbers, supplier names, and so on). The system provides a printable order form, which is then signed off on by the library head and sent to suppliers.

Information on newly acquired books is entered into the system through the Cataloguing Module, which assigns classification numbers to each book. Data is entered in the standard machine-readable format AACR2, which stands for Anglo-American Cataloguing Rules. Based on this standard format, the technical department enters details into the sys- tem, which then generates an index card in the same format. This card serves as an index for searching, and makes import/export of bibliographic data in standard exchange formats possible. The Circulation Module performs all the functions related to circula- tion, providing suitable checks at every stage. Since books may be circulated for multiple reasons such as book binding and display, in addition to being issued to members, this module records the current status of a circulated library item. The Serials Management Module controls the library’s subscriptions to periodi- cals and monitors the scheduled arrival of individual issues in addition to recording budget information.

An important part of the library management system is the Online Public Access Catalog (OPAC), which provides online access to library resources. The OPAC module supports keyword searches in many languages, and page navigation is user- friendly. Since the catalog is Web-enabled, this makes it very easy to keep information on the availability of materials in the library up-to-date. Another member- centric module is the Member Management module, which stores profiles for all library members and includes a photograph and a registration number. This module sends reminders to members to return their books on time, and also records fines if items are not returned.

The first step toward setting this comprehensive system up at the AUCMS library was the tagging of the books. The RFID tag is the most important aspect of the system because the tag establishes a unique identity for each library asset, from books to maga- zines, and functions as the item’s identity in the system. The tag contains electronically stored infor- mation that may be read from up to several meters. Unlike a bar code, the RFID tag does not need to be in the line of sight of a bar code reader. All library issuing and returns counters have a touch screen with an RFID glass sensor. A handheld reader is also required to scan membership cards.

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Borrowers simply place books and other material they want to borrow on the touch screen and hand over their cards to library staff. The screen reads RFID tags, while the card reader opens up a mem- ber’s profile on the system. The staff member assigns material to the borrower in question, and an issuing receipt is generated, with the date of return clearly marked. This system eliminates the need for physi- cal records, stamping, and other time-consuming activities involved in the process of checking a book out of a library. In addition, the system also mini- mizes human error.

Returning books is also much easier now, with members simply dropping their books at any time into a specially designed “drop box” machine in the library. Members drop the books to be returned in the box one at a time. A scanner within the drop box scans the RFID tag of the dropped book and marks it as returned in the system. Member accounts are updated accordingly and a proof-of-return slip is issued automatically. The whole process is accom- plished through a link between the RFID system and the library’s host computer. This eliminates the need for staff who would earlier have had to process all book returns, and is also convenient for mem- bers, since they can return their books even when the library is closed. The status of returned items is updated instantly, which means other members who are waiting for a particular item can acquire it at once.

Another major task that has always occupied library staff is shelf management. Since a large number of users access the library and do not put books back on shelves in the right order, shelves can become difficult to manage. Books that have been returned also have to be placed in specific shelves. The shelf management system in place at the AUCMS library consists of a portable scanner and a base station. The solution is designed to cover three main operations: searching for individual books, inventory checks of library stock, and locating and replacing books that have been shelved incorrectly. Each book has a shelf ID, which is the location iden- tification code (this code enables section-wise and rack-wise identification of books). This information is saved in a central database against the book’s infor- mation and RFID tag, and also linked to OPAC. The portable scanner fetches the information stored in a book’s RFID tag, and using the shelving information also stored in the database, library staff can move books back into their places. Similarly, missing books can also be identified, with the portable scanner pull- ing up the records of all the books meant to be on a

specific shelf. The collected information is compared against the library database to generate a report of missing books. This system has improved accuracy and enabled faster shelving (20 books per minute). It also directs OPAC users to the exact physical loca- tions of the books they are looking for. In total, the automatization of all of these library processes has resulted in a significant decrease in the amount of manpower required to staff the library.

Finally, one of the most pervasive problems in any library is theft. RFID tagging in concert with the installation of Electronic Article Surveillance (EAS) gates in libraries is extremely useful in preventing theft. Just like alarm systems in stores, a library member attempting to leave with an unissued item triggers an alarm because the gates can sense the book’s RFID tag within a range of 1 meter without interference from magnetic items. The EAS gates are linked to the library’s surveillance station. When someone passes through with an unissued item, the gates are raised, an alarm is sounded, and the cam- era at the gates takes a photograph of the person and sends it to the surveillance station.

RFID systems are not without issues. RFID and associated databases develop a comprehensive record of what books people have read, and potentially, these systems can be used to invade the privacy of library users. RFID tags can fail, or be torn out of books. But for the most part RFID tags and data sys- tems are the current best practices technology for library management .

Sources: Sally Eggloff, “Advantages and Disadvantages of Using RFID Technology in Libraries,” University of Maryland, http://ter- pconnect.umd.edu, accessed December 28, 2015; Osborn James, “Bringing Libraries to Every Home: The Malaysia Scenario,” Sar- awak Information Systems Sdn. Bhd., December 18, 2015; Phil Morehart, “RFID to the Rescue,” American Libraries Magazine, May 21, 2015; “Integrated Library Management Solution,” SAINs Corporation, Sarawak, Malaysia, http://www.sains.com.my/solu- tions.php?id=47, February 11, 2015; http://www.allianzeunicol- lege.edu.my/; “Library Management Solution for Penang Allianze University College of Medical Sciences,” Sarawak Information Sys- tems Newsletter, 2012.

Chapter 7 Telecommunications, the Internet, and Wireless Technology 317

CASE STUDY QUESTIONS 7-13 How can RFID technology simplify basic

library processes like the lending and returns of books?

7-14 What kind of technology does your school or university library use? Does IT play a crucial role in managing operations?

7-15 How is RFID technology helping the Allianze University College of Medical Sciences library to detect and prevent the theft of books?

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

7-16 Compare Web 2.0 and Web 3.0.

7-17 How do social search, semantic search, and mobile search differ from searching for information on the web by using conventional search engines?

Case contributed by Sahil Raj, Punjabi University.

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Chapter 7 References

Barr, Alistair. “Mobile Devices Upend Google Search.” Wall Street Journal (February 25, 2016).

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).

Deichmann, Johannes, Matthias Roggendorf, and Dominik Wee. “Preparing IT Systems and Organizations for the Internet of Things.” McKinsey & Company (2015).

eMarketer, “It’s 2015. What Does Mobile Mean Now?” (February 18, 2015).

Google, Inc. “SEC Form 10k for the Fiscal Year Ending December 31, 2015” (February 11, 2016).

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).

Manjoo, Farhad. “Google Mighty Now, but Not Forever.” New York Times (February 11, 2015).

Manyika, James, Michael Chui, Peter Bisson, Jonathan Woetzel, Richard Dobbs, Jacques Bughin, and Dan Aharon. “Unlocking the Potential of the Internet of Things.” McKinsey Global Institute (2015).

McKinsey & Company. “The Impact of Internet Technologies: Search.” (July 2011).

National Telecommunications and Information Agency. “NTIA Announces Intent to Transition Key Internet Domain Name Functions.” (March 14, 2014).

Panko, Raymond R. and Julia Panko. Business Data Networks and Security 10e. Upper Saddle River, NJ: Prentice-Hall (2015).

Reisinger, Don. “How Mark Zuckerberg Is Shaping the Future of Facebook, Social Media.” eWeek (May 16, 2016).

Winkler, Rolfe. “Getting More Than Just Words in a Google Search Result.” Wall Street Journal (Aug. 18, 2014).

Wittman, Art. “Here Comes the Internet of Things” Information Week (July 22, 2013).

Wyatt, Edward. “U.S. to Cede Its Oversight of Addresses on Internet.” New York Times (March 14, 2014).

Chapter 7 Telecommunications, the Internet, and Wireless Technology 319

320

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?

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

CHAPTER CASES

Hackers Attack Singapore’s Telecom Infrastructure Stuxnet and the Changing Face of Cyberwarfare BYOD: A Security Nightmare? Information Security Threats and Policies in Europe

C H

A P

T E

R

8 Securing Information Systems

MyLab MIS™ Visit mymislab.com for simulations, tutorials, and end-of-chapter problems.

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In October 2016, Singapore experienced an unprecedented attack on its Internet infrastructure when Starhub, one of the nation’s three telecom companies, faced a massive distributed denial of service (DDoS) attack, forcing users offline. A DDoS attack forces an online service to become unavail- able by overwhelming it with traffic from compromised computers called bot- nets by infecting them with malicious software. Owners of these computers, a small cluster or in the millions, do not even know that their computers are compromised and being used for such attacks.

According to Starhub, the scale and complexity of the attacks were unprec- edented. That is because instead of computers it was malware-infected broad- band routers and webcams that were involved in the attacks that overwhelmed the company’s broadband service. Ironically, these devices were all bought by the customers themselves.

The attack on Singa- pore’s telecommunica- tions company raises the specter of more and bigger DDoS attacks in the future, especially in financial hubs such as Singapore and Hong Kong. In fact, the Singapore attack was likely related to the biggest global cyberattack in Internet history, carried out with the malware Mirai, which searches the Internet for vulnerable devices and hijacks them. To make matters worse, Mirai’s source code is published online, making the software available to practically anyone today.

Starhub addressed the problem in the short term by sending technicians to the affected customers to “clean up” their devices by upgrading the software. At the same time, the Cyber Security Agency of Singapore (CSA) and Info- comm Media Development Authority (IMDA) advised members of the public to adopt sound cyber-hygiene practices to secure their devices. For the long run, Singapore is launching a new national cyber-security strategy outlining a multi-tiered cyber-security response plan. A new Cybersecurity Act is also in

Hackers Attack Singapore’s Telecom Infrastructure

© Brian Jackson/123RF

the pipeline. Singapore’s Communications and Information Minister Dr. Yaacob Ibrahim urged businesses to also take responsibility, adding that governments alone cannot address the problem and that everyone should make cybersecu- rity a priority. In the same way, Malaysia has expressed its concerns about rising cyberattacks using smart devices. It has urged consumers to regularly change the default passwords of their devices and companies to prepare them- selves using penetration testing.

Mirai isn’t the first malware of its kind, and neither are DDoS attacks a new phenomenon, but together they demonstrate the growing insecurity of the Internet of Things (IoT). The IoT is a platform to connect smart devices to the Internet, including everything from toasters to home appliances. The problem is that these IoT devices, unlike computers, have little security built in, and most ship with well-known default passwords, no passwords, or easily hackable passwords. Further, most IoT companies do not have the resources to push out mass security updates, and so vulnerable devices are never fixed.

The Starhub attack was a watershed moment because it was considered the beginning of a new era of cyberattacks orchestrated through everyday devices. This completely changes the security landscape because of the enormous tech- nical challenge of securing already-compromised devices. The only solution is to disconnect and “brick” the vulnerable devices, rendering unusable millions of webcams, thermostats, and other everyday devices which consumers use!

It is clear that the new era of connected and smart devices will fuel more security attacks and the only way to address this challenge is through a multi- pronged approach involving government regulations, new industry standards, and user education. Singapore is working to strengthen its infrastructure and processes .

Case contributed by Neerja Sethi and Vijay Sethi, Nanyang Technological University

Sources: “DDoS Attack on Starhub First of Its Kind on Singapore’s Telco Infrastructure: CSA, IMDA,” channelnewsasia.com, October 26, 2016, accessed December 26, 2016; “DDoS Attacks: What You Need to Know,” Today Online, October 28, 2016, www.todayonline.com, accessed December 26, 2016; “DDOS Via Smart Devices Is Next Global Cyber Threat, Warns Malaysian Hacker: Exclusive,” cio-asia.com, November 15, 2016, accessed January 6, 2017; “Cyber Risks to Intensify in 2017 with Increased Cyber Espionage, Data Integrity Attacks, According to Stroz Friedberg’s 2017 Cybersecurity Predictions Report,” prnewswire.com, Jan- uary 5, 2017, accessed January 6, 2017.

The problems created by the DDoS cyberattack resulting from break-ins into everyday “smart” devices illustrate some of the reasons businesses and consumers need to pay attention to all aspects of information system secu- rity. These attacks made the Internet—a critical tool for global business—even more vulnerable. From a security standpoint, as networks expand, hackers gain greater reach and access to increasingly vicious malware.

The chapter-opening diagram calls attention to important points raised by this case and this chapter. Smart devices are simple, easy to use, and do not have the same high level of security built in. Even though most institutions have installed state-of-the-art firewalls and updated software to protect their organizational systems, such as PCs and servers, they fail to pay attention to increasingly connected devices such as webcams and routers, which have very

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weak security. Thus, despite many strong security safeguards to protect the telecom and Internet infrastructure, criminals were able to compromise the weakest link in the system to launch DDoS attacks.

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?

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 with- out a firewall or antivirus software? Your computer would be disabled in a few seconds, and it might take you many days to recover. If you used the com- puter 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 destroyed valuable data, including confidential payment data from your customers. If too much data were 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 con- trol a top priority. Security refers to the policies, procedures, and technical mea- sures used to prevent unauthorized access, alteration, theft, or physical damage to information systems. Controls are methods, policies, and organizational pro- cedures that ensure the safety of the organization’s assets, the accuracy and reli- ability of its records, and operational adherence to management standards.

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

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Technology

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Organization

Business Challenges

Information System

Business Solutions

Chapter 8 Securing Information Systems 323

access, abuse, or fraud is not limited to a single location but can occur at any access point 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 flow- ing 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, destroyed, or fall into the wrong hands, revealing important trade secrets or information that violates personal privacy.

The popularity of handheld mobile devices for business computing adds to these woes. Portability makes cell phones, smartphones, and tablet comput- ers easy to lose or steal. Smartphones share the same security weaknesses as other Internet devices and are vulnerable to malicious software and penetra- tion from outsiders. Smartphones that corporate employees use often contain sensitive data such as sales figures, customer names, phone numbers, and e-mail addresses. Intruders may also be able to access internal corporate sys- tems through these devices.

FIGURE 8. 1 CONTEMPORARY SECURITY CHALLENGES AND VULNERABILITIES

The architecture of a web-based application typically includes a web client, a server, and corporate infor- mation systems linked to databases. Each of these components presents security challenges and vulner- abilities. Floods, fires, power failures, and other electrical problems can cause disruptions at any point in the network.

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Internet Vulnerabilities Large public networks, such as the Internet, are more vulnerable than inter- nal 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 becomes part of the corporate network, the orga- nization’s information systems are even more vulnerable to actions from outsiders.

Telephone service based on Internet technology ( see Chapter 7 ) is more vul- nerable than the switched voice network if it does not run over a secure private network. Most Voice over IP (VoIP) traffic over the Internet is not encrypted. Hackers can intercept conversations or shut down voice service by flooding servers supporting VoIP with bogus traffic.

Vulnerability has also increased from widespread use of e-mail, instant mes- saging (IM), and peer-to-peer (P2P) file-sharing programs. E-mail may contain attachments that serve as springboards for malicious software or unauthorized access to internal corporate systems. Employees may use e-mail messages to transmit valuable trade secrets, financial data, or confidential customer infor- mation to unauthorized recipients. Popular IM applications for consumers do not use a secure layer for text messages, so they can be intercepted and read by outsiders during transmission over the Internet. Instant messaging activ- ity 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, may also transmit malicious software or expose information on either individual or corporate computers to outsiders.

Wireless Security Challenges Is it safe to log on to a wireless network at an airport, library, or other public location? It depends on how vigilant you are. Even the wireless network in your home is vulnerable because radio frequency bands are easy to scan. Both Blue- tooth 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 hacking software. Hackers use these tools to detect unprotected networks, monitor net- work 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 access point. Once this association occurs, hackers using the rogue access point can capture the names and passwords of unsuspecting users.

Chapter 8 Securing Information Systems 325

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 soft- ware programs or data files to be executed, usually without user knowledge or permission. Most computer viruses deliver a payload. The payload may be rela- tively benign, such as instructions to display a message or image, or it may be highly destructive—destroying programs or data, clogging computer memory, reformatting a computer’s hard drive, or causing programs to run improperly. Viruses typically spread from computer to computer when humans take an action, such as sending an e-mail attachment or copying an infected file.

Most recent attacks have come from worms , which are independent com- puter programs that copy themselves from one computer to other computers over a network. Unlike viruses, worms can operate on their own without attach- ing to other computer program files and rely less on human behavior to spread from computer to computer. This explains why computer worms spread much more rapidly than computer viruses. Worms destroy data and programs as well as disrupt or even halt the operation of computer networks.

Worms and viruses are often spread over the Internet from files of down- loaded software; from files attached to e-mail transmissions; or from compro- mised e-mail messages, online ads, or instant messaging. Viruses have also invaded computerized information systems from infected disks or infected

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.

326 Part Two Information Technology Infrastructure

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 Inter- net device: request malicious files without user intervention, delete files, trans- mit files, install programs running in the background to monitor user actions, and potentially convert the smartphone to a robot in a botnet to send e-mail and text messages to anyone. With smartphones outselling PCs and increas- ingly used as payment devices, they are becoming a major avenue for malware.

According to IT security experts, mobile devices now pose the greatest secu- rity risks, outpacing those from larger computers. By the end of 2015, McAfee Labs had collected more than 6 million samples of mobile malware (Snell, 2016). Android, which is the world’s leading mobile operating system, is the 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 (see the Interactive Session on Technology in Section 8-4 ).

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. One malware scam in spring 2015 appeared to be a video link from a friend saying something like, “This is awesome.” If the recipient clicked the link. a pop-up window appeared and prompted that person to click an Adobe Flash Player update to continue. Instead of downloading the player, the mal- ware took over the user’s computer, looking for bank account numbers, medical records, and other personal data (Thompson, 2015).

Security risks are bound to increase from the mushrooming number of Internet-linked devices within companies and across the Internet. The Inter- net of Things (IoT) introduces a wide range of new security challenges to

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 e-mail 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.

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IoT devices themselves, their platforms and operating systems, their communi- cations, and even the systems to which they’re connected. Additional security tools will be required to protect IoT devices and platforms from both informa- tion 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 it had identified and neutralized more than 84 million new malware samples throughout 2015 and that it had detected 230,000 new malware samples each day. More than 27 percent of all malware samples ever recorded were created in that one year alone (Panda Security, 2016).

More than 51 percent of the infections Panda found were Trojan horses. A  Trojan horse is a software program that appears to be benign but then does something other than expected. 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. Once inside the city walls, Greek soldiers hidden in the horse revealed themselves and captured the city.

An example of a modern-day Trojan horse is the Zeus Trojan. It is often used to steal login credentials for banking by surreptitiously capturing people’s key- strokes as they use their computers. Zeus is spread mainly through drive-by downloads and phishing, and recent variants are hard for anti-malware tools to detect.

SQL injection attacks have become a major malware threat. SQL injec- tion attacks take advantage of 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 ordering 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. Large web applica- tions have hundreds of places for inputting user data, each of which creates an opportunity for an SQL injection attack.

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 or displaying annoying pop-up messages. One nasty example, Cryp- toLocker, encrypts an infected computer’s files, forcing users to pay hundreds of dollars to regain access. You can get ransomware from downloading an infected attachment, clicking a link inside an e-mail, 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 activity and serve up advertising. Thousands of forms of spyware have been documented.

Many users find such spyware annoying, and some critics worry about its infringement on computer users’ privacy. Some forms of spyware are espe- cially nefarious. Keyloggers record every keystroke made on a computer to steal serial numbers for software, to launch Internet attacks, to gain access to e-mail 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 keylogging. Other spyware programs reset web browser home pages, redirect search requests, or slow performance by tak- ing up too much memory.

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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, often taking advantage of various features of the Internet that make it an open system and easy to use. Hacker activities have broadened beyond mere system intrusion to include theft of goods and information as well as system damage and cybervandalism , the intentional disruption, deface- ment, or even destruction of a website or corporate information system.

Spoofing and Sniffing Hackers attempting to hide their true identities often spoof, or misrepresent, themselves by using fake e-mail 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 e-mail messages, company files, and confidential reports.

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 distrib- uted denial-of-service (DDoS) attack uses numerous computers to inundate 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 example, in November 2016 a large scale DDoS attack took down the servers of the Euro- pean Commission website. For a period of several hours the EC staff was unable to work. Service was restored the following day. Often DDoS attacks are used to divert attention from the operation of other malware. The EC reports that no files were corrupted or information stolen.

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

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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 e-mail.

Ninety percent of the world’s spam and 80 percent of the world’s malware are delivered by botnets. For example, a new version of the Pushdo spamming botnet was detected in spring 2015. Computers in more than 50 countries were infected. Pushdo has existed since 2007 despite numerous attempts to shut it down. The latest version has been pushing malware that steals login credentials and accesses online banking systems. At one time, Pushdo-infected computers sent as many as 7.7 billion spam messages per day (Kirk, 2015).

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 the computer crime problem—how many systems are invaded, how many people engage in the practice, or the total economic damage. According to the Ponemon Institute’s 2015 Annual Cost of Cyber Crime Study, the average annualized cost of cybercrime for U.S. compa- nies benchmarked was $15 million per year (Ponemon Institute, 2015). Many companies are reluctant to report computer crimes because the crimes may involve employees, or the company fears that publicizing its vulnerability will hurt its reputation. The most economically damaging kinds of computer crime are DoS attacks, activities of malicious insiders, and web-based attacks.

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 e-mail or messaging for threats or harassment

Intentionally attempting to intercept electronic communication

Illegally accessing stored electronic communications, including e-mail and voice mail

Transmitting or possessing child pornography by using a computer

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Identity Theft With the growth of the Internet and electronic commerce, identity theft has become especially troubling. Identity theft is a crime in which an imposter obtains 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 of the victim or to provide the thief with false credentials.

Identity theft has flourished on the Internet, with credit card files a major target of website hackers. According to the 2016 Identity Fraud Study by Javelin Strategy & Research, 13.1 million consumers lost $15 billion to identity fraud in 2015 (Javelin, 2016). E-commerce sites are wonderful sources of customer per- sonal information—name, address, and phone number. Armed with this infor- mation, criminals can assume new identities and establish new credit for their own purposes.

One increasingly popular tactic is a form of spoofing called phishing . Phish- ing involves setting up fake websites or sending e-mail messages that look like those of legitimate businesses to ask users for confidential personal data. The e-mail message instructs recipients to update or confirm records by pro- viding social security numbers, bank and credit card information, and other confidential data either by responding to the e-mail message, by entering the information at a bogus website, or by calling a telephone number. eBay, Pay- Pal, 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 the ISP companies have flawed software on their servers that allows the fraudsters to hack in and change those addresses.

According to the Ponemon Institute’s 2015 Cost of a Data Breach Study, the average cost of a breach to a company was $3.5 million (Ponemon, 2015). More- over, brand damage can be significant, albeit hard to quantify. In addition to the data breaches described in the opening and ending 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 system without authorization. Most states have similar laws, and nations in Europe have comparable legislation. For example, in July 2013 the European Parliament adopted a cybercrime Directive aimed at outlawing attacks against websites and networks, including the use of DDoS attacks, Botnets, illegal inter- ception of messages, and falsely obtaining passwords. 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 Espio- nage Act, Electronic Communications Privacy Act, CAN-SPAM Act, and Protect

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Act of 2003 (prohibiting child pornography), covers computer crimes involv- ing intercepting electronic communication, using electronic communication to defraud, stealing trade secrets, illegally accessing stored electronic communica- tions, using e-mail for threats or harassment, and transmitting or possessing child pornography.

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 fraudulently clicks an online ad without any intention of learning more about the advertiser or making a purchase. Click fraud has become a seri- ous 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.

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

TABLE 8. 3 MAJOR DATA BREACHES

DATA BREACH DESCRIPTION

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, e-mail, 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 e-mail addresses were stolen.

Target Malware surreptitiously installed on security and payment systems in late 2013 stole credit card numbers and identifying data for 40 million Target customers and e-mail addresses of 70 million customers.

eBay Cyberattack on eBay servers during February and March 2014 compromised database containing customer names, encrypted passwords, e-mail addresses, physical addresses, phone numbers, and birthdates; 145 million people were affected.

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now hosted in more than 200 countries and territories. The most popular sources of malware attacks include the United States, India, Germany, South Korea, China, Netherlands, United Kingdom, 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 sabotage and espionage. Cyberwarfare is a state-sponsored activity designed to cripple and defeat another state or nation by penetrating its computers or networks to cause damage and disruption. 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, financial systems, and communications networks can also be crippled. Non-state actors such as ter- rorists 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 tech- nologies developed by skilled hacker groups are openly for sale to interested governments.

Preparations for cyberwarfare attacks have become much more widespread, sophisticated, and potentially devastating. Between 2011 and 2015, foreign hack- ers 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 (Perlroth, 2015). Over the years, hackers have stolen plans for missile tracking systems, satellite navigation devices, surveillance drones, and leading- edge jet fighters.

A 2015 report documented 29 countries with formal military and intelligence units dedicated to offensive cyberwarfare. Their cyberarsenals include collec- tions of malware for penetrating industrial, military, and critical civilian infra- structure controllers, e-mail lists and text for phishing attacks on important targets, and algorithms for DoS attacks. U.S. cyberwarfare efforts are concen- trated 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 orga- nization. In fact, company insiders pose serious security problems. Employees have access to privileged information, and in the presence of sloppy internal security procedures, they are often able to roam throughout an organization’s systems without leaving a trace.

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. Malicious intruders seeking system access sometimes trick employees into revealing their passwords by pretending to be legitimate members of the company in need of information. This practice is called social engineering .

Both end users and information systems specialists are also a major source of errors introduced into information systems. End users introduce errors by entering faulty data or by not following the proper instructions for processing

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data and using computer equipment. Information systems specialists may cre- ate software errors as they design and develop new software or maintain exist- ing programs.

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 timely delivery to markets, have contributed to an increase in soft- ware flaws or vulnerabilities. On April 29, 2015, American Airlines had to delay 40 flights due to faulty software on iPads pilots use to look at airport maps and navigational documents. The problem was fixed by having the pilots delete the malfunctioning app and reinstall it (Bajaj, 2015).

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 soft- ware. A recent 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 encryption 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 time- consuming and costly. Malware is being created so rapidly that companies 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.

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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 weap- ons systems, intelligence operations, and military targets. These information assets have tremendous value, and the repercussions can be devastating if they are lost, destroyed, or placed in the wrong hands. Systems that are unable to function because of security breaches, disasters, or malfunctioning technology can have permanent impacts on a company’s financial health. Some experts believe that 40 percent of all businesses will not recover from application or data losses that are not repaired within three days.

Inadequate security and control may result in serious legal liability. Busi- nesses 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. A sound security and control framework that protects business information assets can thus produce a high return on investment. Strong security and control also increase employee productivity and lower operational costs.

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.

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 e-mail, 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

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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.

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 e-mail, instant messages, and e-commerce transactions over the Internet. E-mail is currently the most common type of electronic evidence.

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 required 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, e-mail, and other records are well organized, accessible, and nei- ther retained too long nor discarded too soon. It also reflects an awareness of how to preserve potential evidence for computer forensics. Computer foren- sics 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 following 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

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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 recovered 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 .

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 con- version, data editing, and error handling. Processing controls establish that data are complete and accurate during updating. Output controls ensure that the results of computer processing are accurate, complete, and properly distrib- uted. 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

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the system will perform under all possible conditions but also the behavior of organizations and people using the system. The Interactive Session on Organizations describes the importance of system controls in preventing mas- sive cybersecurity attacks such as the Stuxnet attack on industrial controllers.

Risk Assessment Before your company commits resources to security and information sys- tems 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 specialists should try to determine the value of information assets, points of vulnerability, 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 maximum 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. How- ever, 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. 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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In July 2010, reports surfaced about a Stuxnet worm that had been targeting Iran’s nuclear facilities. In November of that year, Iran’s President Mahmoud Ahmadinejad publicly acknowledged that mali- cious software had infected Iranian nuclear facilities and disrupted the nuclear program by disabling the facilities’ centrifuges. Stuxnet had earned its place in history as the first visible example of industrial cyberwarfare.

To date, Stuxnet is the most sophisticated cyberweapon ever deployed. Stuxnet’s mission was to activate only computers that ran Supervisory Control and Data Acquisition (SCADA) software used in Siemens centrifuges to enrich uranium. The Windows-based worm had a “dual warhead.” One part was designed to lay dormant for long periods, then speed up Iran’s nuclear centrifuges so that they spun wildly out of control. Another secretly recorded what normal operations at the nuclear plant looked like and then played those recordings back to plant operators so it would appear that the centrifuges were operating normally when they were actually tearing themselves apart.

The worm’s sophistication indicated the work of highly skilled professionals. Michael Assante, President and CEO at the National Board of Information Security Examiners, views Stuxnet as a weapons delivery system like the B-2 Bomber. The software program code was highly modular, so it could be easily changed to attack different systems. Stuxnet only became active when it encountered a specific configuration of controllers, running a set of processes limited to centrifuge plants.

Over 60 percent of Stuxet-infected computers are in Iran, and digital security company Kaspersky Labs speculates that the worm was launched with nation- state support (probably from Israel and the United States) with the intention of disabling some or all of Iran’s uranium enrichment program. Stuxnet wiped out about one-fifth of Iran’s nuclear centrifuges by causing them to spin at too high a velocity. The dam- age was irreparable and is believed to have delayed Iran’s ability to make nuclear arms by as much as five years. And no one is certain that the Stuxnet attacks are over. Some experts who examined the Stuxnet software code believe it contains the seeds for more versions and attacks.

According to a Tofino Security report, Stuxnet is capable of infecting even well-secured computer sys- tems that follow industry best practices. Companies’ needs for interconnectivity between control systems make it nearly impossible to defend against a well- constructed, multi-pronged attack such as Stuxnet. In 2015 Kapersky’s own systems were invaded by a Stuxnet derivative, which operated without detection for six months. The same malware was found on sys- tems of diplomats involved in the negotiations with Iran over its nuclear program.

And Stuxnet is not the only cyberweapon currently at work. The Flame virus, released about five years ago, has been infecting computers in Iran, Lebanon, Sudan, Saudi Arabia, Egypt, Syria, and Israel. While researchers are still analyzing the program, the attack’s main goal is espionage and information theft. Flame is able to grab images of users’ computer screens, record their instant messaging chats, col- lect passwords, remotely turn on their microphones to record audio conversations, scan disks for specific files, and monitor their keystrokes and network traf- fic. The software also records Skype conversations and can turn infected computers into Bluetooth bea- cons that attempt to download contact information from nearby Bluetooth-enabled devices. These data, along with locally stored documents, can be sent to one of several command and control servers that are scattered around the world. The program then awaits further instructions from these servers.

Many fear the real significance of Stuxnet was that it created the foundation for many derivative malware clones and that it enlarged the universe of machines that could be destroyed. For instance, researchers have used Stuxnet-like code to corrupt the computer systems in automobiles and turn off safety devices like airbags and engine alarms.

But the more pressing worry for security experts and government officials is an act of cyberwarfare against a critical resource, such as the electric grid, financial systems, or communications systems. (In April 2009, for example, cyberspies infiltrated the U.S. electrical grid, using weak points where comput- ers on the grid are connected to the Internet, and left behind software programs whose purpose is unclear, but which presumably could be used to disrupt the system.)

INTERACTIVE SESSION: ORGANIZATIONS

Stuxnet and the Changing Face of Cyberwarfare

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The United States has no clear strategy about how the country would respond to that level of cyberat- tack, and the effects of such an attack would likely be devastating. Mike McConnell, the former director of national intelligence, stated that if even a single large American bank were successfully attacked, it would have an order-of-magnitude greater impact on the global economy than the World Trade Center attacks, and that the ability to threaten the U.S. money supply is the financial equivalent of a nuclear weapon.

Many security experts believe that U.S. cybersecu- rity is not well-organized. Several different agencies, including the Pentagon and the National Security Agency (NSA), have their sights on being the leading agency in the ongoing efforts to combat cyberwarfare. The first headquarters designed to coordinate gov- ernment cybersecurity efforts, called Cybercom, was activated in May 2010 in the hope of resolving this organizational tangle. In May 2011 President Barack Obama signed executive orders weaving cyber capa- bilities into U.S. military strategy, but these capabili- ties are still evolving.

In 2014, a virus similar to Stuxnet called Energetic Bear was found to have attacked energy companies in the United States and Europe, lending credence to fears the the energy grid is vulnerable to these kinds of attacks. It’s one thing to develop a next-generation computer virus, but another one to develop methods of defending established computer systems from them. Will the United States and other nations be ready when the next Stuxnet appears?

Sources: “Hacking Cars in the Style of Stuxnet,” CrySys Blog, Octo- ber 28, 2015; Kim Zetter, “The U.S. Tried to Stuxnet North Korea’s Nuclear Program,” Wired Magazine, May 29, 2015; Michael Ken- ney, “Cyber-Terrorism in a Post-Stuxnet World,” Foreign Policy Research Institute, Orbis, Winter 2015; Michael B. Kelley, “A Stuxnet-Like Virus Has Infected Hundreds of U.S. and European Energy Companies,” Businessinsider.com, July 1, 2014; Brian Royer, “Stuxnet, the Nation’s Power Grid, and the Law of Unin- tended Consequences,” Dark Reading, March 12, 2012; Thomas Erd- brink, “Iran Confirms Attack by Virus That Collects Information,” New York Times, May 29, 2012; Nicole Perlroth, “Virus Infects Com- puters Across Middle East,” New York Times, May 28, 2012; Robert Leos, “Secure Best Practices No Proof Against Stuxnet,” CSO, March 3, 2011; Lolita C. Baldor, “Pentagon Gets Cyberwar Guidelines,” Associated Press, June 22, 2011; William J. Broad, John Markoff, and David E. Sanger, “Israel Tests on Worm Called Crucial in Iran Nuclear Delay,” New York Times, January 15, 2011.

3. What makes Stuxnet different from other cyber- warfare attacks? How serious a threat is this technology?

4. What solutions have been proposed for this prob- lem? Do you think they will be effective? Why or why not?

CASE STUDY QUESTIONS 1. Is cyberwarfare a serious problem? Why or why

not?

2. Assess the people, organization, and technology factors that have created this problem.

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.

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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.

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-year 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, wireless devices, telephones, and the Internet. A good AUP defines unacceptable and acceptable actions for every user and specifies consequences for noncompliance.

Security policy also includes provisions for identity management. Identity management consists of business processes and software tools for identifying the valid users of a system and controlling their access to system resources. It includes policies for identifying and authorizing different categories of system users, specifying what systems or portions of systems each user is allowed to access, and the processes and technologies for authenticating users and protect- ing their identities.

Figure 8. 3 is one example of how an identity management system might capture 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.

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

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

Chapter 8 Securing Information Systems 341

salary, 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 systems and your business from operating. Disaster recovery planning devises plans for the restoration of disrupted computing and communica- tions 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 maintenance 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 disaster recovery firms such as SunGard Availability Services and Acronis. These disaster recovery firms provide hot sites housing spare computers at loca- tions around the country where subscribing firms can run their critical applica- tions in an emergency. For example, Champion Technologies, which supplies

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.

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chemicals used in oil and gas operations, can switch its enterprise systems from Houston to a SunGard data center in Scottsdale, Arizona, in two hours.

Business continuity planning focuses on how the company can restore business operations after a disaster strikes. The business continuity plan identifies critical business processes and determines action plans for han- dling mission-critical functions if systems go down. For example, Deutsche Bank, which provides investment banking and asset management services in 74 countries, has a well-developed business continuity plan that it con- tinually updates and refines. It maintains full-time teams in Singapore, Hong Kong, Japan, India, and Australia to coordinate plans addressing loss of facili- ties, personnel, or critical systems so that the company can continue to oper- ate when a catastrophic event occurs. Deutsche Bank’s plan distinguishes between processes critical for business survival and those critical to crisis support and is coordinated with the company’s disaster recovery planning for its computer centers.

Business managers and information technology specialists need to work together 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.

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.

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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 automates the process of keeping track of all these users and their system privileges, 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 biomet- ric authentication, overcome some of these problems. A token is a physical device, 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

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, 2016

Notification to Management

Management responseReport date

5/10/16

5/10/16

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, 2016

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.

344 Part Two Information Technology Infrastructure

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 device 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, or retinal image, against a stored profile of these characteristics to determine any differences between these char- acteristics and the stored profile. If the two profiles match, access is granted. Fingerprint and facial recognition technologies are just beginning to be used for security applications, with many PC laptops (and some smartphones) equipped with fingerprint identification devices and several models with built-in web- cams and face recognition software.

The steady stream of incidents in which hackers have been able to access traditional passwords highlights the need for more secure means of authentication. 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 authenticating mechanisms. A common example of two-factor authen- tication is a bank card; the card itself is the physical item, and the PIN is the data that go with it.

This smartphone has a biometric fingerprint reader for fast yet secure access to files and networks. New models of PCs and smartphones are starting to use biometric identification to authenticate users.

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Firewalls, Intrusion Detection Systems, and Antivirus Software Without protection against malware and intruders, connecting to the Internet would be very dangerous. Firewalls, intrusion detection systems, and antivirus 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 before 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

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.

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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 attempting to establish a legitimate connection.

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 inter- nal rules identifying the people, applications, or addresses that are allowed or rejected. 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 generates an alarm if it finds a suspicious or anomalous event. Scanning software looks for patterns indicative of known methods of com- puter 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 unauthor- ized traffic.

Antivirus and Antispyware Software Defensive technology plans for both individuals and businesses must include anti-malware protection for every computer. Antivirus software prevents, detects, and removes malware, including computer viruses, computer worms, Trojan horses, spyware, and adware. However, most antivirus software is effec- tive only against malware already known when the software was written. To remain effective, the antivirus software must be continually updated. Even then it is not always effective because some malware can evade antivirus detec- tion. Organizations need to use additional malware detection tools for better protection.

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Unified Threat Management Systems To help businesses reduce costs and improve manageability, security vendors have combined into a single appliance various security tools, including fire- walls, 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 prod- ucts are available for all sizes of networks. Leading UTM vendors include Forti- nent, 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 Pri- vacy (WEP), is not very effective because its encryption keys are relatively easy to crack. WEP provides some margin of security, however, if users remember to enable it. Corporations can further improve Wi-Fi security by using it in con- junction with virtual private network (VPN) technology when accessing inter- nal 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 replaces 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.

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 activ- ities as they communicate with each other during a secure web session. Secure Hypertext Transfer Protocol (S-HTTP) is another protocol used for encrypt- ing data flowing over the Internet, but it is limited to individual messages, whereas SSL and TLS are designed to establish a secure connection between 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.

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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

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 the data when they are received. The sender locates the recipient’s public key in a directory 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.

FIGURE 8. 7 DIGITAL CERTIFICATES

Digital certificates help establish the identity of people or electronic assets. They protect online trans- actions by providing secure, encrypted, online communication.

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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. 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 information contained in the certificate. By using this information, the recipient can send an encrypted reply. The digital certificate system would enable, for example, 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. Pub- lic key infrastructure (PKI) , the use of public key cryptography working with a CA, is now widely used in e-commerce.

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 appli- cations are always available. Firms such as those in the airline and financial services industries with critical applications requiring online transaction pro- cessing have traditionally used fault-tolerant computer systems for many years to ensure 100 percent availability. In online transaction processing , transac- tions entered online are immediately processed by the computer. Multitudi- nous 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 con- tinuous, uninterrupted service. Fault-tolerant computers use special software routines or self-checking logic built into their circuitry to detect hardware fail- ures 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 download music or watch YouTube. Bandwith-consuming applications such as file-sharing programs, Internet phone service, and online video can clog and slow down corporate networks, degrading performance. For example, Ball State University in Muncie, Indiana, found its network had slowed because a small minority of students were using P2P file-sharing programs to download movies and music.

A technology called deep packet inspection (DPI) helps solve this prob- lem. DPI examines data files and sorts out low-priority online material while assigning higher priority to business-critical files. Based on the priorities estab- lished by a network’s operators, it decides whether a specific data packet can continue to its destination or should be blocked or delayed while more impor- tant traffic proceeds. Using a DPI system from Allot Communications, Ball State was able to cap the amount of file-sharing traffic and assign it a much lower priority. Ball State’s preferred network traffic sped up.

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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 provid- ers (MSSPs) that monitor network activity and perform vulnerability testing and intrusion detection. SecureWorks, AT&T, Verizon, IBM, Perimeter eSecu- rity, 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 security 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.

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.

The dispersed nature of cloud computing makes it difficult to track unauthor- ized activity. Virtually all cloud providers use encryption, such as SSL, 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. According to research from Alert Logic, there has been a 45 percent year-over-year increase in attacks on the cloud. DDoS attacks are especially harmful because they render cloud ser- vices 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.

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 should stipulate that the cloud provider store and process data in specific juris- dictions 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 providers will sub- mit to external audits and security certifications. These kinds of controls can be written into the service level agreement (SLA) before signing with a cloud pro- vider. The Cloud Security Alliance (CSA) has created industrywide standards for cloud security, specifying best practices to secure cloud computing.

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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, accidental loss, unauthorized access, and hacking attempts. The Interactive Session on Technology describes these mobile vulnerabilities in greater detail and their implications for both individuals and businesses.

Mobile devices accessing corporate systems and data require special protec- tion. Companies should make sure that their corporate security policy includes mobile devices, with additional details on how mobile devices should be sup- ported, protected, and used. They will need mobile device management tools to authorize all devices in use; to maintain accurate inventory records on all mobile 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 procedures 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 doc- uments and files to oneself by e-mail without encryption.

Companies should encrypt communication whenever possible. All mobile device users should be required to use the password feature found in every smartphone. Mobile security products are available from Kaspersky, Symantec, Trend Micro, and McAfee.

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.

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 objec- tives being tested. When developers start writing software programs, coding 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 13 . Our Learning Tracks also contain descriptions of methodologies for developing software programs that contribute to software quality.

352 Part Two Information Technology Infrastructure

Bring your own device has become a huge trend, with half of employees with mobile computing tools at workplaces worldwide using their own devices. This figure is expected to increase even more in the years to come. But while use of the iPhone, iPad, and other mobile computing devices in the workplace is growing, so are security problems. Quite a few security experts believe that smartphones and other mobile devices now pose one of the most serious security threats for organizations today.

Whether mobile devices are company-assigned or employee-owned, they are opening up new avenues for accessing corporate data that need to be closely monitored and protected. Sensitive data on mobile devices travel, both physically and electronically, from the office to home and possibly other off-site locations. According to a February 2016 Ponemon Institute study of 588 U.S. IT and security profession- als, 67 percent of those surveyed reported that it was certain or likely that an employee’s mobile access to confidential corporate data had resulted in a data breach. Unfortunately, only 41 percent of respon- dents said their companies had policies for accessing corporate data from mobile devices.

More than half of security breaches occur when devices are lost or stolen. That puts all of the per- sonal and corporate data stored on the device, as well as access to corporate data on remote servers, at risk. Physical access to mobile devices may be a greater threat than hacking into a network because less effort is required to gain entry. Experienced attack- ers can easily circumvent passwords or locks on mobile devices or access encrypted data. Moreover, many smartphone users leave their phones totally unprotected to begin with or fail to keep the security features of their devices up-to-date. In the Websense and the Ponemon Institute’s Global Study on Mobil- ity Risks, 59 percent of respondents reported that employees circumvented or disabled security fea- tures such as passwords and key locks.

Another worry today is large-scale data leakage caused by use of cloud computing services. Employ- ees are increasingly using public cloud services such as Google Drive or Dropbox for file sharing and col- laboration. Valiant Entertainment, Cenoric Projects, Vita Coco, and BCBGMAXAZRIAGROUP are among the companies allowing employees and freelance contractors to use Dropbox for Business to post and

INTERACTIVE SESSION: TECHNOLOGY

BYOD: A Security Nightmare?

share files. There are also many instances where employees are using Dropbox to store and exchange files without their employers’ approval. In early 2015 Dropbox had to patch a security flaw that allowed cyberattackers to steal new information uploaded to accounts through compromised third-party apps that work with Dropbox services on Android devices. There’s very little a company can do to prevent employees who are allowed to use their smartphones from downloading corporate data so they can work on those data remotely.

Text messaging and other mobile messaging tech- nologies are being used to deliver all kinds of scam campaigns, such as adult content and rogue phar- macy, phishing, and banking scams, and text mes- sages have been a propagation medium for Trojan horses and worms. A malicious source is now able to send a text message that will open in a mobile browser by default, which can be readily utilized to exploit the recipient.

To date, deliberate hacker attacks on mobile devices have been limited in scope and impact, but this situation is worsening. Android is now the world’s most popular operating system for mobile devices with 81 percent of the global market, and most mobile malware is targeted at the Android plat- form. When corporate and personal data are stored on the same device, mobile malware unknowingly installed by the user could find its way onto the cor- porate network.

Apple uses a closed “walled garden” model for managing its apps and reviews each one before releasing it on its App Store. Android applica- tion security has been weaker than that for Apple devices, but it is improving. Android application security uses sandboxing, which confines apps, mini- mizing their ability to affect one another or manipu- late device features without user permission. Google removes any apps that break its rules against mali- cious activity from Google Play, its digital distribu- tion platform that serves as the official app store for the Android operating system. Google also vets the backgrounds of developers. Recent Android security enhancements include assigning varying levels of trust to each app, dictating what kind of data an app can access inside its confined domain, and providing a more robust way to store cryptographic credentials used to access sensitive information and resources.

Chapter 8 Securing Information Systems 353

CASE STUDY QUESTIONS

Google Play now provides security scanning of all applications before they are available to download, ongoing security checks for as long as the appli- cation is available, and a Verify Apps service for mobile device protection for apps installed outside of Google Play. However, these Android improve- ments are largely only for people who use a phone or tablet running a newer version of Android and restrict their app downloads to Google’s own Play store.

Companies need to develop mobile security strat- egies that strike the right balance between improv- ing worker productivity and effective information security. Aetna’s Chief Security Officer (CSO) Jim Routh says there is a certain minimum level of mobile security he requires regardless of whether a device is company- or personally owned. Aetna has about 6,000 users equipped with mobile devices that are either personally owned or issued by the com- pany. Each device has mandatory protection that provides an encrypted channel to use in unsecured Wi-Fi networks and alerts the user and the company if a malicious app is about to be installed on the device.

Colin Minihan, director of security and best practices at VMWare AirWatch, believes that

understanding users and their needs helps a mobile security strategy progress further. VmAirWatch cate- gorizes similar groups of users and devises a specific plan of action for each group, choosing the right tools for the job.

According to Patrick Hevesi, Nordstrom’s former director of security, if users need access to criti- cal corporate data that must be protected, the firm should probably allow only fully managed, fully con- trolled, approved types of devices. Users who only want mobile tools for e-mail and contacts can more easily bring their own devices. The key questions to ask are called the “three Ws”: Who needs access? What do they need to access? What is the security posture of the device?

Sources: Michael Heller, “Mobile Security Strategy Matures with BYOD,” and Kathleen Richards, “CISOs Battle to Control Mobile Risk in the Workplace,” Information Security Magazine, June 1, 2016; Nathan Olivarez-Giles, “Android’s Security Improves—for the Few,” Wall Street Journal, April 21, 2016; Ponemon Institute, “The Economic Risk of Confidential Data on Mobile Devices in the Workplace,” February, 2016; McAfee Inc., “Mobile Threat Report: What’s on the Horizon for 2016,” 2016; Charlie Osborne, “Dropbox Patches Android Security Flaw,” Zero Day, March 11, 2015; Edel Creely, “5 BYOD Secu- rity Implications and How to Overcome Them,” Trilogy Technolo- gies, May 26, 2015; Tony Kontzer, “Most of Your Mobile Apps Have Been Hacked,” Baseline , January 16, 2015; and Ponemon Institute, Global Study on Mobility Risks (February 2012).

1. It has been said that a smartphone is a computer in your hand. Discuss the security implications of this statement.

2. What kinds of security problems do mobile com- puting devices pose?

3. What management, organizational, and technol- ogy issues must be addressed by smartphone security?

4. What steps can individuals and businesses take to make their smartphones more secure?

Review Summary

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 failures.

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 penetrate corporate networks, causing serious system disruptions. Wi-Fi networks can easily be penetrated by intruders using sniffer programs to obtain an address to access the resources of the network. Computer viruses and worms can disable systems and websites. The dispersed nature of cloud computing makes it dif- ficult to track unauthorized activity or to apply controls from afar. Software presents problems because software bugs may be impossible to eliminate and because software vulnerabilities can be exploited by hackers and malicious software. End users often introduce errors.

354 Part Two Information Technology Infrastructure

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 busi-

ness 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 management.

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

systems. A risk assessment evaluates information assets, identifies control points and control weak- nesses, 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 dis- ruption. The security policy includes policies for acceptable use and identity management. Compre- hensive 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. Antivirus software checks computer systems for infections by viruses and worms and often eliminates the malicious software; antispyware software combats intru- sive and harmful spyware programs. Encryption, the coding and scrambling of messages, is a widely used technology for securing electronic transmissions over unprotected networks. Digital certificates combined with public key encryption provide further protection of electronic transactions by authen- ticating 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.

Key Terms Acceptable use policy (AUP) , 341 Antivirus software , 347 Application controls , 337 Authentication , 344 Biometric authentication , 345 Botnet , 329 Bugs , 334 Business continuity planning , 343 Click fraud , 332 Computer crime , 330 Computer forensics , 336 Computer virus , 326 Controls , 323 Cybervandalism , 329 Cyberwarfare , 333 Deep packet inspection (DPI) , 350 Denial-of-service (DoS) attack , 329 Digital certificates , 349 Disaster recovery planning , 342 Distributed denial-of-service (DDoS) attack , 329 Downtime , 350 Drive-by download , 327

Encryption , 348 Evil twin , 331 Fault-tolerant computer systems , 350 Firewall , 346 General controls , 337 Gramm-Leach-Bliley Act , 336 Hacker , 329 HIPAA , 335 Identity management , 341 Identity theft , 331 Information systems audit , 343 Intrusion detection systems , 347 Keyloggers , 328 Malware , 326 Managed security service providers (MSSPs) , 351 Online transaction processing , 350 Password , 344 Patches , 334 Pharming , 331 Phishing , 331 Public key encryption , 348 Public key infrastructure (PKI) , 350

Chapter 8 Securing Information Systems 355

Ransomware , 328 Risk assessment , 338 Sarbanes-Oxley Act , 336 Secure Hypertext Transfer Protocol (S-HTTP) , 348 Secure Sockets Layer (SSL) , 348 Security , 323 Security policy , 341 Smart card , 345 Sniffer , 329 Social engineering , 333

Spoofing , 329 Spyware , 328 SQL injection attack , 328 Token , 344 Trojan horse , 328 Two-factor authentication , 345 Unified threat management (UTM) , 348 War driving , 325 Worms , 326 Zero-day vulnerabilities , 334

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

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 computer crime. Provide two exam- ples of crime in which computers are targets and two examples in which computers are used as instruments of crime.

• Define DoS and DDoS attacks and explain how they relate to botnets.

• Define identity theft and phishing and explain why identity theft is such a big prob- lem 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.

• Define and describe the techniques involved in 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 informa- tion systems.

• Define and describe the following: security policy, acceptable use policy, and identity management.

• Distinguish between disaster recovery plan- ning and business continuity planning.

• Explain how information systems auditing promotes security and control.

8- 4 What are the most important tools and technol- ogies for safeguarding information resources?

• Name and describe three authentication methods.

• Describe the roles of firewalls, intrusion detection systems, and antivirus software in promoting security.

• Explain how encryption protects information.

• Describe the role of encryption and digital certificates in a public key infrastructure.

• Describe techniques companies use to ensure system availability.

• Identify and describe the security problems cloud computing poses.

• Describe measures for improving software quality and reliability.

356 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?

MyLabMIS

MyLabMIS

8- 7 Suppose your business had an e-commerce website where it sold goods and accepted credit card payments. Discuss the major secu- rity threats to this website and their potential impact. What can be done to minimize these threats?

MyLabMIS

Hands-On MIS Projects The projects in this section give you hands-on experience analyzing security vulnerabilities, using spread- sheet software for risk analysis, and using web tools to research security outsourcing services. Visit MyLab MIS’s Multimedia Library to access this chapter’s Hands-On MIS Projects.

Management Decision Problems

8- 8 Reloaded Games is an online games platform that powers leading massively multiplayer online games. The Reloaded platform serves more than 30 million users. The games can accommodate millions of players at once and are played simultaneously by people all over the world. Prepare a security analysis for this Inter- net-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 infastructure 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 follow- ing questions:

• Calculate the total number of vulnerabilities for each platform. What is the potential impact of the secu- rity problems for each computing platform on the organization?

• 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 business operations. A security risk assessment that management requested identified a number of poten- tial exposures. 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.

Chapter 8 Securing Information Systems 357

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 out- sourcing 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 outsource 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.

• 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.

Information Security Threats and Policies in Europe

CASE STUDY

The IT sector is one of the key drivers of the European economy. It has been estimated that 60 percent of Europeans use the Internet regularly. Additionally, 87 percent own or have access to mobile phones. In 2015, the European broadband market was one of the largest in the world. These facts demonstrate the importance of ensuring the security and safe opera- tion of the Internet for the well-being of the European economy. However, the safety and security of the Internet have been threatened in recent years as Internet-based cyber attacks have become increas- ingly sophisticated.

In 2007, Estonia suffered a massive cyber attack that affected the government, the banking system, media, and other services. The attack was performed using a variety of techniques, ranging from simple indi- vidual ping commands and message flooding to more sophisticated distributed denial-of-service (DDoS) attacks. Hackers coordinated the attack by using a large number of compromised servers organized in

a botnet distributed around the world. A botnet is a network of autonomous malicious software agents that are under the control of a bot commander. The network is created by installing malware that exploits the vulnerabilities of Web servers, operating systems, or applications to take control of the infected comput- ers. Once a computer is infected it becomes part of a network of thousands of “zombies”; that is, machines that are commanded to carry out the attack.

The cyber attack on Estonia started in late April 2007 and lasted for almost 3 weeks. During this period, vital parts of the Estonian Internet network had to be closed from access from outside the coun- try, causing millions of dollars in economic losses.

At around the same time, Arsys, an important Spanish domain registration company, was also tar- geted by international hackers. Arsys reported that hackers had stolen codes that were then used to insert links to external servers containing malicious codes in the Web pages of some of its clients.

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 antivirus software, firewalls, or antispyware software. For each product, 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 brain- storm, organize, and develop a presentation of your findings for the class.

358 Part Two Information Technology Infrastructure

In 2009, an estimated 10 million computers were infected with the Conficker worm worldwide. France, the United Kingdom, and Germany were among the European countries that suffered the most infections. The French navy had to ground all military planes when it was discovered that its computer network was infected. In the United Kingdom, the worm infected computers in the Ministry of Defence, the city of Manchester’s city council and police IT network, some hospitals in the city of Sheffield, and other gov- ernment offices across the country. Computers in the network of the German army were also reported as infected. Once installed on a computer, Conficker is able to download and install other malware from con- trolled websites, and thus infected computers could be under full control of the hackers.

More recently, a sophisticated malware threat tar- geting industrial systems was detected in Germany, Norway, China, Iran, India, Indonesia, and other countries. The malware, known as Stuxnet, infected Windows PCs running the Supervisory Control and Data Acquisition (SCADA) control system from the German company Siemens. Stuxnet was propagated via USB devices. Experts estimated that up to 1,000 machines were infected on a daily basis at the peak of the infection. The malware, hidden in shortcuts to executable programs (files with extension .lnk), was executed automatically when the content of an infected USB drive was displayed. Employing this same technique, the worm was capable of installing other malware. Initially, security experts disclosed that Stuxnet was designed to steal industrial secrets from SIMATIC WinCC, a visualization and control software system from Siemens. However, data gath- ered later by other experts indicates that the worm was actually looking for some specific programmable logic controller (PLC) devices used in a specific indus- trial plant, a fact that points to the possibility that the malware was part of a well-planned act of sabotage. Even though none of the sites infected with Stuxnet suffered physical damage, the significance that such a sophisticated threat represents to the industrial resources in Europe and other parts of the world cannot be underestimated.

Europe has been the location of some large cyber- attacks and data breaches in 2015. Among the targets were TalkTalk (a large ISP in the United Kingdom), J.D.

Witherspoon (a pub chain), and CarphoneWarehouse. com (an online store). In each case hundreds of thou- sands of customers had their personal data compro- mised. Infrastructure is also a target in Europe. In April 2015 hackers vandalized TV5Monde in France, taking down 11 TV channels, parts of its Web site, and its social media site as well. The action was allegedly carried out by Middle Eastern terrorist groups.

To overcome the absence of cooperation among EU states, in 2004 the European Commission established the European Network and Information Security Agency (ENISA) with the goal of coordinating efforts to prevent and respond more effectively to poten- tially more harmful security threats. ENISA’s main objectives are to secure Europe’s information infra- structure, promote security standards, and educate the general public about security issues.

The European Commission has recently launched the Digital Agenda for Europe. The goal of this ini- tiative is to define the key role that information and communication technologies will play in 2020. The initiative calls for a single, open European digital market.

Prior to 2015, there was no common approach to digital network breaches, hacks, or vandalism. In 2016, the European Parliament adopted the NIS Directive on security of network and information systems. The Directive came into force in August 2016. Member states were given 21 months to trans- pose the Directive into their national laws and 6 months more to identify operators of essential services. The NIS Directive requires EU nations to develop a Computer Security Incident Response Team (CSIRT) and a national NIS authority to iden- tify essential services that could be imperiled by security breaches.

The new law also sets cybersecurity standards across a wide range of government agencies such as airports, transportation centers, and government offices. For the first time, Europe has developed a coordinated approach to cyber security .

Sources: European Commission, “The Directive on Security of Network and Information Systems,” ec.europa.eu, July 16, 2016; Bob Tarzey, “At Least 1 in 5 Europe Enterprises Lose Data Through Targeted Cyber Attacks,” Computer Weekly, December 18, 2015; “Europe Agrees Response to Cyber-attacks,” BBC News, 8 Decem- ber 2015; Gunther Oettinger, “New EU Rules Agreed on Cyber Security Breaches,” DW.com, December 8, 2015; Don Melvin,

Chapter 8 Securing Information Systems 359

“Cyberattack Disables 11 French TV Channels, Takes Over Social Media Sites,” Don Melvin, CNN, April 9, 2015; European Commis- sion, “Network and Information Security (NIS) Directive,” Digital Agenda For Europe, European Commission, March 16, 2015.

CASE STUDY QUESTIONS 8- 13 What is a botnet?

8- 14 Describe some of the main points of the Net- work and Information Security (NIS) Directive.

8- 15 Explain how a cyberattack can be carried out. 8- 16 Describe some of the weaknesses exploited by

malware.

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.

Case contributed by Daniel Ortiz- Arroyo, Aalborg University.

360 Part Two Information Technology Infrastructure

Chapter 8 References

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Key System Applications for the Digital Age

Chapter 9

Achieving Operational Excellence and Customer Intimacy: Enterprise Applications

Chapter 10

E-commerce: Digital Markets, Digital Goods

Chapter 11

Managing Knowledge

Chapter 12

Enhancing Decision Making

PART THREE examines the core information system applications businesses are using today

to improve operational excellence and decision making. These applications include enter-

prise systems; systems for supply chain management, customer relationship management,

and knowledge management; e-commerce applications; and business intelligence systems.

This part answers questions such as: How can enterprise applications improve business per-

formance? How do firms use e-commerce to extend the reach of their businesses? How can

systems improve decision making and help companies make better use of their knowledge

assets?

PART THREE

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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?

VIDEO CASES

Life Time Fitness Gets in Shape with Salesforce CRM Evolution Homecare Manages Patients with Microsoft Dynamics CRM Instructional Video: GSMS Protects Patients by Serializing Every Bottle of Drugs

CHAPTER CASES

Alimentation Couche-Tard Competes Using Enterprise Systems Unilever Unifies Globally with Enhanced ERP DP World Takes Port Management to the Next Level with RFID Customer Relationship Management Helps Celcom Become Number One

C H

A P

T E

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9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications

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When Alimentation Couche-Tard purchased Statoil Fuel and Retail (SFR) in April 2012, it was the Canadian convenience store giant’s most ambitious acquisition to date (€2.058 billion). SFR, a division of Statoil, the Norwegian State Oil Company, had been spun off from its parent in October 2010. The purchase added 2,300 retail fuel stations—most full-service with a convenience store—throughout North America and expanded Couche- Tard’s reach to eight European countries—Norway, Sweden, Denmark, Poland, Estonia, Latvia, Lithuania, and Russia. In 2016 the firm had 12,000 sites and employed over 105,000 people.

SFR operates in both the B2C (sales to consumers) and B2B (sales to other businesses) sectors. Fuel products including gasoline blends, diesel fuels, bio- fuels, and LPG (liquefied petroleum gas) generate 70 percent of its business. The full-service retail stations offer product lines that differ according to operator and location factors. Some prefer a product mix that concen- trates on auto supplies and services while others focus on food-related products, beverages, and even fast- food. SFR’s 12 terminals, 38 depots, and 400 road tankers provide bulk sales to com- mercial customers, includ- ing bus and car rental com- panies, road construction crews, and independent resellers.

Couche-Tard welcomed both the opportunities and the challenges of its acquisition. Immediate synergies between Couche-Tard and SFR could not completely cover the remaining expenses from SFR’s split from Statoil, rebranding efforts, and the replacement of an antiquated IT infra- structure and enterprise resource planning (ERP) system. The old system used different processes in each country and market, resulting in over 5,000 custom software objects for the IT department to manage in addition to mas- sive operational inefficiencies.

SFR needed to maximize supply chain efficiency for its three closely related value chains—the fuel value chain, the grocery value chain, and the lubri- cants value chain. All corporate functions that provided shared services to the

Alimentation Couche-Tard Competes Using Enterprise Systems

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value chains had to be standardized and workplace activities coordinated for its 18,500 employees. Finally, SFR managers wanted an advanced pricing method for fuel sales to maximize profits in its core low-margin business.

Oracle’s JD Edwards EnterpriseOne enterprise resource planning system was chosen as the basic platform, and a Web services interface was developed within the ERP system to convert all data into a single format. This common source of master data now drives all transactions throughout the supply chains as well as financial and other reports generated by the Oracle Business Intelligence Suite. Stock availability and average sales at each service station feed a real- time planning program that projects expected demand and feeds the data to a third-party distribution planning system. Onboard computers convey product types and quantities to tanker drivers at terminals and delivery locations. Fuel restocking, delivery, and confirmation occur automatically.

To coordinate workplace activities, Oracle Fusion Middleware integrates data management and communication across social, mobile, and cloud technolo- gies and among multiple systems and regions. Called the “Connect Project,” the software coordinates dozens of interfaces throughout the supply chain, imple- ments a consistent fuel pricing structure, and manages multiple complicated excise taxes and regulations.

In 2014 Statoil began a migration from Oracle database software to SAP’s Business Planning and Consolidation Application. As a result, in 2015 Statoil achieved financial consolidation six times faster than before, data processing speeds increased fifteen times, and opening and closing periods for work status is now eight times faster than before.

In 2015 Couche-Tard re-branded its SFR retail stores to Circle K stores. Today it’s one of the largest global players in the convenience store market space with over 12,000 sites in Canada, the U.S., Asia, and Europe, and employs more than 100,000 people. In 2016 the company announced it’s largest ever acquisition of Texas-based CST Brands, which will bring it an additional 2,000 locations in the south and southwest U.S. states. The firm’s prior investments in enterprise systems enable it to manage a sprawling global network of convenience stores. The company’s executives promise to double the size of the firm once more in the next five years. Not bad for a company that started in 1980 with a single store in Quebec.

Sources: “Alimentation Couche Tard Inc. Is Severely Undervalued,” by Joey Frenette, The Motley Fool, Fool.com, March 1, 2017; “Couche-Tard’s Alain Bouchard Has a Bold Vision: ‘We Will Double the Size of This Company Again’”, by Karl Moore, businessfinancialpost.com, December 8, 2016; “After Shareholder Rebuff Last Year, Couche-Tard Gets Its Focus Back with Largest-Ever Acquisition,” by Barry Crutchley, businessfinancialpost.com, August 22, 2016; “Annual Report 2016,” Alimentation Couche-Tard Inc., http://corpo.couche-tard.com; Alyn Bailey, “Statoil Fuel & Retail the World’s First SAP to Oracle JD Edwards Migration,” http:// www.pcubed.com/bulletins, accessed January 2, 2016; “Statoil: Accelerating Planning and Financial Close Cycles with SAP® EPM powered by SAP HANA® and SAP MaxAtten- tionTM,” dam.sap.com/28274_Statoil_BTS.htm, accessed January 2, 2016; Jade Vachon, “Statoil Switches from an Oracle DB to the SAP HANA Platform with SAP MaxAttention,” SAP.com, February 21, 2014.

Couche-Tard and Statoil’s efforts to standardize and integrate corporate func-tions into the supply chain and coordinate workplace activity illustrate the impact of ERP systems on supply chain management (SCM). Couche-Tard

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did not have a single source of business data nor uniform methods for han- dling many critical SCM functions. Inventory holding costs were unnecessarily high, the IT department was strained, and lack of coordination was negatively impacting workplace productivity.

The chapter-opening diagram calls attention to important points raised by this case and this chapter. All transactions throughout Couche-Tard’s supply chains are now in a common and consistent format that feeds directly into its reporting software. The integrated ERP environment enables real-time plan- ning based on stock availability and average sales at each service station, and a real-time fuel value chain can now accommodate variable demand from both consumer and business customers.

Benchmarks against which to assess future results by country, terminal, or market are being developed using the advanced pricing method developed by the Connect team. On the B2B side, managers will be able to quickly assess the effects of pricing structures and even sales reps will be able to evaluate the effects of purchasing terms.

Here are some questions to think about: How did Couche-Tard’s lack of stan- dardized processes affect its business operations? How were Couche-Tard’s employees and supply chain management affected by the adoption of stan- dardized interfaces? Why did Couche-Tard retain its legacy systems instead of replacing them entirely?

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

Management

Organization

Technology

Business Challenges

Information System

Business Solutions

• Plan production • Establish inventory requirements • Select new forecasting technology

• Reduce costs • Increase sales • Increase customer satisfaction

• Receive customer orders • Replenish inventory • Revise supply chain processes

• Deploy SAP Business Objects Web Intelligence • Deploy SAP Business objects dashboards • Integrate with SAP APO

• Volatile demand • Long production lead times • Manual planning processes

• Forecast demand more accurately • Reduce forecast time

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 367

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.

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 ).

FIGURE 9. 1 HOW ENTERPRISE SYSTEMS WORK

Enterprise systems feature a set of integrated software modules and a central database by which busi- ness processes and functional areas throughout the enterprise can share data.

368 Part Three Key System Applications for the Digital Age

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 information 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 was 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 business processes in the software. (One of our Learning Tracks shows how SAP enterprise software handles the procurement process for a new piece of equipment.) Configuration tables provided by the software man- ufacturer 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 revenue 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, compromis- ing the information and process integration that are the main benefits of the system. 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 identi- fied its existing business processes and then translated them into the busi- ness processes built into the SAP ERP software it had selected. To ensure that it obtained the maximum benefits from the enterprise software, Tasty Baking Company deliberately planned for customizing less than 5 percent

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, quotations, contracts, product configuration, pricing, billing, credit checking, incentive and commission management, and sales planning

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 369

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 standard, companywide business processes prevented the company from using its world- wide buying power to obtain lower prices for raw materials and from reacting rapidly to market changes. Crocs used ERP for similar purposes , as described in the Chapter 15 ending case study .

Enterprise systems help firms respond rapidly to customer requests for information 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 industry. (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 generating receipts for payment. Alcoa’s accounts payable transaction process- ing dropped 89 percent. Alcoa was able to centralize financial and procurement activities, 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 systems allow senior management to find out easily at any moment how a

370 Part Three Key System Applications for the Digital Age

particular 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 training and quality, measures the companywide costs of delivering services to employees, and measures the effectiveness of employee recruit- ment, compensation, and training.

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 hundreds 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.

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 customers 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.

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

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 371

distributors, retailers, and customers. Nike’s contract manufacturers are its pri- mary 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 finished sneakers, socks, and athletic clothing, each with its own set of suppli- ers. 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, manufacturers

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.

372 Part Three Key System Applications for the Digital Age

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, manufacturers, suppliers, secondary suppliers (suppliers’ suppliers), and ter- tiary suppliers (suppliers’ suppliers’ suppliers)—to stockpile inventory so each has enough just in case. These changes ripple throughout the supply chain, magnifying 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.

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

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 373

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. Sup- ply chain planning software makes the necessary adjustments to production and 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 plan- ning , which determines how much product a business needs to make to satisfy all its customers’ demands. JDA Software, SAP, and Oracle all offer supply 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 of a supply chain execution system is the delivery execution system used by Nestlé’s National Pri- mary Transport, an integrated transport service for Nestlé operating divisions

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.

374 Part Three Key System Applications for the Digital Age

in the UK and Ireland. The operation covers seven distribution centers and 12 factories, making around 3,500 deliveries per week to over 500 locations. The system takes data feeds from Nestlé UK’s transport planning, vehicle schedul- ing, and yard management systems and uses them to compare actual progress of a delivery against the plan in the vehicle schedule. It then prioritizes and flags loads that need attention.

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 manu- facturing 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 operations to third-party logistics providers, such as UPS Supply Chain Solu- tions 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 effi- cient 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 .)

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 375

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 ).

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 (see the Interactive Session on Management).

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.”

376 Part Three Key System Applications for the Digital Age

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 increase 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 customer comes first.” Today these words ring truer than ever. Because com- petitive 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 has switched from who sells the most products and ser- vices 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 customers are, how to contact them, whether they are costly to service and sell to,

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 net- works of supply chain partners can immediately adjust inventories, orders, and capacities.

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 377

Unilever is the third largest consumer goods com- pany in the world behind Proctor & Gamble and Nestlé. This Anglo-Dutch multinational boasts more than 400 brands, sells its products in more than 190 countries, and employs more than 175,000 people worldwide. Unilever has operating companies and factories on every continent and subsidiaries in almost 100 countries. Twelve Unilever brands— including such recognized names as Knorr, Hellman’s, Lipton, and Dove—generate revenues of more than 1 billion Euros (US $1.15 billion) each year.

Unilever is organized as two separate holding companies: Unilever PLC (public limited company), headquartered in London, United Kingdom, and Uni- lever N.V., headquartered in Rotterdam, The Neth- erlands. The two legal divisions operate as nearly as possible as a single economic entity—the Unilever Group.

To grow its business in developing and emerging markets, Unilever needed to unify its core business processes. Standardized processes were essential to manage volatile prices and changing commodity sup- plies effectively. However, prior to 2007, ambitious companywide goal setting such as this was not fea- sible. At that point, almost every business in each of the more than 190 countries in which Unilever oper- ated functioned as an independent division.

Every transaction for each order Unilever receives, material it produces, item it ships, and invoice it issues runs through ERP systems. Ten years ago, there were 250 different ERP systems try- ing to do this work, and this was too complicated for running a global business that was doubling its transaction volume. Unilever has been trying to con- solidate and simplify its technology platform so that it would support the company operating as a single global entity. Unilever transitioned to running its worldwide business on only four instances of SAP ERP, with the ultimate goal of managing these land- scapes as one global platform by 2015.

With transactions slated to reach 60,000 per min- ute worldwide, Unilever sought additional tools to increase transaction processing speed. At the end of 2012, the company started to use SAP HANA in- memory computing tools for some key SAP ERP applications. SAP HANA is very well suited for per- forming real-time analytics and processing extremely

large numbers of transactions very rapidly (see Chapter 6 ).

Using HANA reduced the number of days to pro- duce the month-end close from three to just one. HANA also made it easier for Unilever to input raw material costs and quickly calculate product price. Understanding its margins—the percent profit after all costs have been deducted—helped Unilever ana- lyze ways to improve them.

Unilever’s enterprise data warehouse (EDW) sys- tem extracts, transforms, and integrates ERP transac- tion data with external data for use in reporting and data analysis. A profitability analysis accelerator ana- lyzes reams of financial data and outputs valuable statistics about cost and profit drivers. By mid-2013, the SAP CO-PA (Controlling Profitability Analysis) HANA Accelerator had been added to all four Uni- lever regional ERP centers. Profitability Analysis (CO-PA) is a module of SAP ERP software that allows users to report sales and profit data by using differ- ent customized characteristics (such as customer, country, product) and key figures (such as number of units, price, and cost). The HANA Accelerator works with a firm’s existing SAP CO-PA system. Transac- tions remain in the ERP system, but queries are pro- cessed using HANA. SAP CO-PA Accelerator makes is possible for firms to perform real-time profitability reporting on large data volumes; conduct instant analysis of profitability data at any level of granular- ity, aggregation, and dimension; and run cost alloca- tions at significantly faster processing times.

Cost Center assessment time was reduced 39 per- cent, pushing this data into CO-PA in 6.7 hours rather than 11 hours and speeding profitability reporting. Overall, controlling and profitability reports were produced ten times more quickly. The Material Ledger Accelerator reduced run time for period-end closing reports by 66 percent, and cost reduction opportunities were identified by the Overall Equip- ment Effectiveness (OEE) Management platform. Four and a half billion records for General Ledger line items and more than 400 million controlling and profitability analysis records are now run through the CO-PA Accelerator.

Next, SAP Cash Forecasting was added to SAP ERP Financials to maximize the use of working capital and cash. Product Cost Planning was incorporated to help Unilever plan the costs for materials inde- pendently from orders; set prices for materials,

INTERACTIVE SESSION: MANAGEMENT

Unilever Unifies Globally with Enhanced ERP

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operations, production lines, and processes; analyze the costs of manufactured materials; and assess prod- uct profitability. The time to analyze the approxi- mately 150 million records produced each month was halved, and product cost forecasts could be gen- erated in 30 seconds, down from seven minutes.

Unilever wanted to maximize product availability on store shelves during new product launches and promotional campaigns. Since trade promotion pro- cesses drive a significant portion of its sales, Global ERP Vice President Marc Béchet wanted to enhance the speed and efficiency with which they could be planned, budgeted, and executed and in how stock was allocated. Previously, Unilever used a process through which stock was sequentially assigned to orders as they were received. There was no mecha- nism for assigning limited stock between customers running a promotion and those who were not. Using HANA-accelerated trade promotion management tools, different inventory matching scenarios are instantly available. Allocation options can be com- pared and the most profitable chosen. Inventory shortfalls can be handled while safeguarding current promotions to the maximum extent possible. Plans are now underway to add in-memory technology to the rest of the SAP Business Suite.

By significantly cutting the time it takes to calcu- late product costs, the HANA in-memory database

3. How effective was the solution the company chose?

4. How did Unilever’s new systems improve opera- tions and management decision making? Give two examples.

accelerators fast-track raw material sourcing deci- sions and pricing analysis. Unilever estimates that time spent tracking raw materials has declined by 80 percent. Without the ERP enhancements Unilever devised and implemented, the company would have had a difficult time tracking the 10,000 home and personal care products that use the 2,000 chemicals that must be reduced to meet the European Union’s REACH (Registration, Evaluation, Authorization and Restriction of Chemicals) regulations and its own more stringent sustainability goals. Consolidation of its ERP platforms and the transaction and pro- cessing speed of the HANA platform are the keys to improved performance, reporting, and scalabil- ity that will enable Unilever to fulfill its ambitious growth, social impact, and environmental goals.

Sources: “Unilever: Implementing SAP HANA to Achieve Rapid Global Innovation,” www.accenture.com, accessed May 1, 2017; “Unilever Puts SAP at the Captain’s Table,” ComputerWeekly.com, accessed May 1, 2017; “Unilever: Upgrading European SAP Platform,” www.accenture.com, accessed May 1, 2017; “Doing Things Differ- ently to Make a Big Difference in the World,” SAP.com, accessed January 19, 2015; “Unilever: SAP HANA,” www. accenture.com, accessed January 19, 2015; “Our Compass Strategy,” www.unilever. com , accessed January 20, 2015; and Ken Murphy, “Unilever Goes Global with a Transformative SAP HANA Project,” SAP insiderPRO- FILES , July 1, 2013.

CASE STUDY QUESTIONS

1. Identify the problem facing Unilever in this case. What management, organization, and technology factors were responsible for this problem?

2. How is enterprise resource planning related to Unilever’s business strategy? How did consolidat- ing ERP systems support Unilever’s business strategy?

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

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 379

that customers interact with the firm (over the web, the phone, e-mail, 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 essen- tial customer information. Some information on a specific customer might be stored and organized in terms of that person’s account with the company. Other pieces of information about the same customer might be organized by products that were purchased. In this traditional business environment, there is no con- venient 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, e-mail, 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 profit- able customers? What do these profitable customers want to buy? Firms use the answers to these questions to acquire new customers, provide better service and support to existing customers, customize their offerings more precisely to customer preferences, and provide ongoing value to retain profitable customers.

FIGURE 9. 6 CUSTOMER RELATIONSHIP MANAGEMENT (CRM)

CRM systems examine customers from a multifaceted perspective. These systems use a set of inte- grated applications to address all aspects of the customer relationship, including customer service, sales, and marketing.

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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 cus- tomers, analyze them with sophisticated reporting tools, and link to other major enterprise applications, such as supply chain management and enter- prise systems. The more comprehensive CRM packages contain modules for partner relationship management (PRM) and employee relationship management (ERM) .

PRM uses many of the same data, tools, and systems as customer rela- tionship 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 cus- tomers directly. It provides a company and its selling partners with the ability to trade information and distribute leads and data about customers, integrat- ing lead generation, pricing, promotions, order configurations, and availabil- ity. 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 custom- ers, those who are good candidates for sales and services. SFA modules provide sales prospect and contact information, product information, product configu- ration capabilities, and sales quote generation capabilities. Such software can assemble information about a particular customer’s past purchases to help the salesperson make personalized recommendations. SFA modules enable sales, marketing, and shipping departments to share customer and prospect informa- tion 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 capabilities for sales forecasting, territory management, and team selling.

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 representa- tive 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

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 381

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 information, for qualifying leads for targeted marketing, and for scheduling and tracking direct-marketing mailings or e-mail (see Figure 9. 7 ). Marketing mod- ules also include tools for analyzing marketing and customer data, identifying profitable and unprofitable customers, designing products and services to sat- isfy 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 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.

Responses by Channel for January 2017 Promotional Campaign

6.7%

29.2%

30.8%

16.0%

17.3% Direct Mail

Telephone

Web

E-mail

Social Media

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 e-mail, direct mail, telephone, the web, and social media.

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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 service 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.

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 automation, 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.

FIGURE 9. 8 CRM SOFTWARE CAPABILITIES

The major CRM software products support business processes in sales, service, and marketing, inte- grating customer information from many sources. Included is support for both the operational and analytical aspects of CRM.

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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 processing (OLAP), data mining, and other data analysis techniques (see Chapter 6 ) . Cus- tomer 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 ).

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.

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.

384 Part Three Key System Applications for the Digital Age

DP (Dubai Ports) World has reason to be proud to have become one of the leading terminal opera- tors in the world. Today, DP World has 65 terminals across 6 continents, and 11 new terminals are under development. The firm moved 60 million containers in 2014 (about 9 percent of global container trade), and generated $3.4 billion in revenues, an 11 percent increase over 2013. The firm employs an interna- tional professional team of more than 36,000 people to serve customers in some of the most dynamic economies in the world.

DP World has adopted a customer-centric approach to enhancing its customers’ supply chains by providing quality, innovative services to effec- tively manage container, bulk, and other terminal cargo. The firm invests heavily in terminal infra- structures, technologies, and people to best serve its customers.

Like other global port and terminal operators, DP World helps shippers around the world address the often complex and costly challenges of manag- ing the supply chain. One of the typical problems encountered in container terminal operations is traf- fic congestion at port entry points. This congestion is often due to delays introduced by lengthy procedures and paper-based logistics. In response, DP World has introduced many IT-based solutions to enhance ter- minal capacity utilization. These solutions include the electronic custom release of cargo, electronic data interchange (EDI) reporting, two-way digital radio communications, and the “e-token” advanced booking system.

DP World management wanted to take things a step further and decided to make the loading and unloading of containers operate on “just in time” principles to improve container turnaround. It found that radio frequency identification (RFID) technol- ogy was an effective way of increasing the efficiency of truck movements through port access gates. Today, DP World uses RFID-enabled automatic gate systems at the port terminals it operates in Dubai and Australia. According to Mohammed Al Muallem, Managing Director of DP World UAE, the introduc- tion of an automated gate system would not only eliminate traffic congestion but would also help to eliminate a number of lengthy procedures, increas- ing productivity at the ports and improving customer

satisfaction. This will in turn increase the turn- around of shipping goods.

Prior to the RFID deployment, DP World spent several months performing proof-of-concept trials involving several competing RFID suppliers. Because of the rugged environmental conditions at the ports, DP World required that 99.5 percent of all tags be read successfully, which was a key challenge for many vendors. After extensive testing and evalua- tion, DP World selected Identec Solutions, a global leader in active wireless tracking solutions, as its RFID supplier.

How does the RFID tracking system work? Trucks that visit a port terminal are equipped with active RFID tags supplied by Identec Solutions that are fixed on the rear chassis. As a truck moves towards the gate, its unique tag ID number is read by an RFID reader, which is integrated with an automated gate system. At the gate, an optical character rec- ognition (OCR) system determines if the truck is loaded with a container, identifies the ID number of the truck’s container, and reads the truck license plate number as a backup identification. The system uses the supplied information to automatically issue a ticket to the driver specifying the lane the truck should proceed to in order to load or unload the con- tainer. The system can also automatically determine if the truck is on time, which is essential information for the efficient pickup and drop off of containers. As the truck leaves the gate, the RFID tag is read once again, and the driver receives a receipt for the com- pleted transaction.

RFID has enabled DP World to increase the pro- ductivity of container handoffs, speed the entry and exit of trucks through terminal gates, and increase fuel efficiency. Victoria Rose, Regional Office Proj- ect Coordinator at DP World Sydney, maintained that RFID would improve gate efficiency through improved truck management, reducing queues and congestion around gates, and removing the num- ber of trucks from public roads by streamlining procedures.

Identec’s RFID-based solution has also enabled DP World to improve customer satisfaction by enhancing the efficiency of customers’ supply chains through smoother, faster, and more effective delivery of their containers at terminal gates. The elimination of lengthy paper transactions and manual inspections

INTERACTIVE SESSION: ORGANIZATIONS

DP World Takes Port Management to the Next Level With RFID

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 385

at gates and the reduction in manual data input errors demonstrate DP World’s customer-centric approach to delivering a superior level of service. The technology also allows transport companies to save time, increase revenues, and reduce costs.

DP World’s use of RFID has also helped it to tighten security by providing better accuracy on inbound and outbound truck movements through the terminals. For instance, the system can automatically check whether a truck has a booking and whether it is authorized to enter the port.

As a next step, DP World will consider expanding its use of RFID-enabled scanning and tracking tech- nology to further optimize supply chain flow. In the future, Rose hopes DP World will focus on investigat- ing its use within the yard, and how data captured can be used.

In 2014, DP World was still going strong, acquir- ing Economic Zones World for $2.6 billion in cash. Their main goal was to acquire the Jebel Ali Free Zone, a 22-square mile plot of land near DP World’s Dubai container port. DP World’s RFID technologies will be essential to optimizing the use of this new acquisition.

The slowdown in world trade in 2015 is forcing DP World and others in the supply chain (includ- ing ports) to use information and communications technology (ICT) to drive further improvements in efficiency. In 2016 DP World had begun replacing humans with robots in warehouses and yard opera- tions, and is considering investing in autonomous vehicles, simulation and virtual reality tools, the Internet of Things and Big Data, and advanced cyber- security tools. With the return of growth to the world economy, DP World reported 3.2 percent growth in volume for 2016, with especially strong growth of 6 percent in the 4th quarter of the year.

Sources: DP World, “Annual Report 2015,” April 25, 2016; “DP World: Enhancing Commerce Through the Supply Chain,” http:// industry-me.com/features, accessed January 2, 2016; The Econo- mist Intelligence Unit, ”A Turning Point: The Potential Role of ICT Innovations in Ports and Logistics,” DP World Report, November 2015; Simeon Kerr, “DP World to Buy Jebel Ali for $2.6bn from Dubai World,” Financial Times, November 13, 2014; Dave Friedlos, “RFID Boosts DP World’s Productivity in Australia,” RFID Journal, July 27, 2009, www.rfidjournal.com/article/view/5086, accessed October 20, 2010; Rhea Wessel, “DP World Ramps Up Its Dubai Deployment,” RFID Journal, August 13, 2009, www.rfidjournal. com/article/view/5130, accessed October 20, 2010.

3. How does the concept of supply chain execution relate to this interactive session?

4. What managerial, organizational, and technologi- cal challenges might DP World have faced in the early stages of the RFID project’s deployment?

CASE STUDY QUESTIONS

1. How did Identec Solutions’ RFID-based technology help DP World increase the efficiency and effec- tiveness of its customers’ supply chains?

2. Describe two improvements that resulted from implementing the Identec RFID-based solution.

Another important output of analytical CRM is the customer’s lifetime value to the firm. Customer lifetime value (CLTV) is based on the relationship between 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.

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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 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 mak- ing. But precisely because they are so powerful in changing the way the orga- nization 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 expensive to purchase and implement. It might take a large Fortune 500 com- pany several years to complete a large-scale implementation of an enterprise system or a system for SCM or CRM. According to a 2015 survey of 562 com- panies conducted by Panorama Consulting Solutions, the average cost of an ERP project was $6.1 million. Projects took an average of 15.7 months to com- plete, and 53 percent of the projects delivered 50 percent or less of the expected benefits. Approximately 58 percent of these projects exceeded their planned budgets, and 65 percent experienced schedule overruns ( Panorama Consulting Solutions, 2015 ). Changes in project scope and additional customization 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.

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 387

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 get- ting 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 products. Overstock.com ’s order tracking system went down for a full week when the company replaced a homegrown system with an Oracle enterprise system. The company rushed to implement the software and did not properly synchronize the Oracle software’s process for recording customer refunds with its accounts receivable system. The chapter- ending case shows how rushed implementation of enterprise applications contributed to Target Canada’s busi- ness failure.

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, had spent $10 million over 13 years maintaining an ERP system with more than 6,400 customizations. The com- pany replaced it with a plain-vanilla, uncustomized version of SAP enterprise software and changed its business processes to conform to the software.

Next-Generation Enterprise Applications Today, enterprise application vendors are delivering more value by becoming more flexible, web-enabled, mobile, and capable of integration with other sys- tems. Stand-alone enterprise systems, customer relationship management sys- tems, and SCM systems are becoming a thing of the past. The major enterprise software vendors have created what they call enterprise solutions, enterprise 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. SAP Business Suite, Oracle E-Business Suite, and Microsoft Dynamics Suite (aimed at midsized companies) are examples, and they now use web services and ser- vice-oriented architecture (SOA) (see Chapter 5 ).

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SAP’s next-generation enterprise applications incorporate SOA standards and can link SAP’s own applications and web services developed by independent software vendors. Oracle also has included SOA and business process manage- ment capabilities in its Fusion middleware products. Businesses can use these tools to create platforms for new or improved business processes that integrate information from multiple applications.

Next-generation enterprise applications also include open source and cloud solutions as well as more functionality available on mobile platforms. Open source products such as Compiere, Apache Open for Business (OFBiz), and Openbravo do not offer as many capabilities as large commercial enterprise software but are attractive to companies such as small manufacturers because of their low cost.

For small- and medium-sized businesses, SAP offers cloud-based versions of its Business One and Business ByDesign enterprise software solutions (see the chapter- opening case study). Cloud-based enterprise systems are also offered by smaller vendors such as NetSuite and Plex Systems, but they are not as popular as cloud-based CRM products. The undisputed global market leader in cloud-based CRM systems is Salesforce.com , with more than 100,000 custom- ers. Salesforce.com delivers its service through Internet-connected computers or mobile devices, and it is widely used by small, medium, and large enter- prises. As cloud-based products mature, more companies will be choosing to run all or part of their enterprise applications in the cloud on an as-needed basis. Several Fortune 500 firms are planning to move most of their enterprise software to cloud based platforms in the next five years where they will not incur the costs of maintaining their own hardware, and the software will be charged on a metered basis.

Social CRM and Business Intelligence 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 engage 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 relationships from social networking sites to CRM processes. The leading CRM vendors now offer such tools to link data from social networks into their CRM software. SAP, Salesforce.com and Oracle CRM products now feature technol- ogy to monitor, track, and analyze social media activity in Facebook, LinkedIn, Twitter, YouTube, and other sites. Business intelligence and analytics software vendors such as SAS also have capabilities for social media analytics (with sev- eral 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.

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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. 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, and data visualization. Rather than requiring users to leave an applica- tion and launch separate reporting and analytics tools, the vendors are starting to embed analytics within the context of the application itself. They are also offering complementary analytics products such as SAP BusinessObjects and Oracle Business Intelligence Enterprise Edition.

The major enterprise application vendors offer portions of their products that work on mobile handhelds. You can find out more about this topic in our Learning Track on Wireless Applications for Customer Relationship Manage- ment, Supply Chain Management, and Healthcare.

Review Summary

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 uncer- tainty 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.

390 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?

Enterprise applications are difficult to implement. They require extensive organizational change, large new software investments, and careful assessment of how these systems will enhance organiza- tional performance. 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 have open source and on-demand versions and can run in cloud infrastructures or on mobile platforms. CRM software has added social networking capabilities to enhance internal collaboration, deepen interactions with cus- tomers, and use data from social networking sites. Open source, mobile, and cloud versions of some of these products are becoming available.

Key Terms Analytical CRM , 383 Bullwhip effect , 373 Churn rate , 387 Cross-selling , 382 Customer lifetime value (CLTV) , 386 Demand planning , 374 Employee relationship management (ERM) , 381 Enterprise software , 369 Just-in-time strategy , 373 Operational CRM , 383

Partner relationship management (PRM) , 381

Pull-based model , 376 Push-based model , 376 Sales force automation (SFA) , 381 Social CRM , 389 Supply chain , 371 Supply chain execution systems , 374 Supply chain planning systems , 373 Touch point , 380

MyLab MIS To complete the problems with the 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 systems 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 supply 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).

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 391

• Describe the tools and capabilities of cus- tomer relationship management software for sales, marketing, and customer service.

• Explain how sales force automation mod- ules help increase productivity.

• Distinguish between operational and ana- lytical CRM.

• Define churn rate and explain its importance.

9- 4 What are the challenges that enterprise applica- tions 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 SOA, cloud computing, and open source software.

• 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 man-

aging the physical movement of goods and more about managing information. Discuss the implications of this statement.

9- 6 Why do more than half of enterprise applica- tion projects exceed budgets, deliver less than expected benefits, or experience overruns?

MyLabMIS

MyLabMIS

9- 7 Which enterprise application should a busi- ness install first: ERP, SCM, or CRM? Explain your answer.

MyLabMIS

Hands-On MIS Projects The projects in this section give you hands-on experience analyzing business process integration, suggest- ing supply chain management and customer relationship management applications, using database soft- ware to manage customer service requests, and evaluating supply chain management business services. Visit MyLab MIS’s Multimedia Library to access this chapter’s Hands-On MIS Projects.

Management Decision Problems

9- 8 Mercedes-Benz Retail Group UK Ltd., with a network of 18 retail sites, nine used car sites, and seven smart centers across London, Birmingham, and Manchester, wanted to learn more about its customers. 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 internation- ally. 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 fore- casting 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 discuss 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 busi- nesses of all sizes. Customers with service needs call into its customer service department with requests

392 Part Three Key System Applications for the Digital Age

for repairing heating ducts, broken windows, leaky roofs, broken water pipes, and other problems. The company assigns each request a number 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 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 representa- tives 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 interest 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 Logistics and Schneider Logistics, 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 ven- dors 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.

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 393

Customer Relationship Management Helps Celcom Become Number One

CASE STUDY

Celcom Axiata Berhad (Celcom) is the oldest mobile telecommunications company in Malaysia and also its largest, with an unrivaled reputation for quality and reliability. Nevertheless, maintaining its com- petitive edge has been a struggle. In 2006 Celcom dropped to third place among Malaysian cellular pro- viders. Since then, management has worked fever- ishly to turn the company around, and Celcom has regained the top spot in its market. This turnaround required new technology and business processes for managing the customer experience.

To become number one in the Malaysian mar- ket again, Celcom’s senior management knew that the company had to build better networks and market more aggressively. But the real key to suc- cess lay in improving the customer experience. According to Suresh Sidhu, Celcom’s chief corpo- rate and operations officer, there will always be a competitor who can beat you on price or even out- innovate you. But it’s much harder for a competi- tor to disrupt a strong, positive relationship with customers. Celcom believes it’s the market’s best differentiator.

The Malaysia telecommunications market is quite mature, with few opportunities to acquire new cus- tomers. Customer retention is essential, as is luring customers away from competitors. Malaysia’s cus- tomer base of 14 million is large and diverse, which requires multiple approaches to interacting with them. Older customers prefer in-person service from Celcom dealers or retail outlets, while sophisticated young urban users prefer to do business online. All want reliable mobile service.

Celcom was saddled with a siloed information technology architecture and business processes that could not provide a complete view of customers. For instance, customer data from one system such as billing were not easily available to other systems such as inventory. This is a common problem for mobile providers because carriers have traditionally counted customers by looking at SIM (subscriber identity modules in mobile phones) IDs. However, many customers have multiple devices and SIMs for personal and work uses. Celcom needed systems that could identify and serve each customer rather than that person’s SIMs. Otherwise, Celcom service representatives would waste valuable company and customer time making sense of a customer’s

multiple SIM IDs scattered among various records in the system. The company wanted to be able to see a customer as a specific person, not a SIM or a number.

Celcom’s solution involved changes to the compa- ny’s technology, processes, and people. At the core is an Oracle-based business support system (BSS) that consolidated customer records, centralized inven- tory management, and sped up business processes. This system consolidates customer information into a single view of the customer to improve customer service across online, call center, and retail channels. The Oracle implementation included new customer portal sites and retail stores as well as an Oracle Siebel call center system and Oracle inventory man- agement and Communications Order and Service Management applications.

The BSS project team asked approximately 700 Celcom employees in customer service, retail, marketing, and other divisions to list the top 10 experiences that users and dealers wanted, such as fast activation, less paperwork, and always having the most popular phones in stock. The BSS trans- formation team then developed technical and busi- ness process requirements based on these top 10 lists and compared offerings from several vendors.

Celcom chose Oracle as the primary technology provider for the new customer experience manage- ment system. The company wanted the most com- plete suite of customer relationship management (CRM) tools that would support multichannel and cross-channel marketing efforts. Oracle seemed the best fit and had the most functionality built in without requiring additional modifications.

Celcom’s transformation plan entailed retaining some of Celcom’s existing systems, and the Celcom team liked Oracle Communications’ modularity and interoperability as well as its cross-channel capabili- ties. Oracle Communications is a cross-channel prod- uct suite that provides a variety of services, including broadband data, wireless data, and mobile voice services. It helps communications services providers such as Celcom manage and integrate customer inter- actions across multiple channels to improve customer support, reduce problem resolution time, customize marketing to narrow market segments, and expe- dite time-to-market for new products and services. Celcom understood the importance of cross-channel

394 Part Three Key System Applications for the Digital Age

customer experiences and wanted to make this differ- entiate the company among its competitors. Celcom’s systems solution enables customer interactions to seamlessly traverse its retail shop, online shop, call center, and partner/dealer channels.

The BSS provides a single customer record, regardless of how many services (mobile, landline, and data) and devices a customer purchases; it is populated with data from various touchpoints. By consolidating customer data into a unified customer record, Celcom can offer tailored promotions offers in real time that fit a customer’s individual history. Celcom’s holistic view of a customer includes fam- ily relationships, which has special significance when marketing in Asia. The company is able to see every aspect of service each customer uses, which makes cross-marketing and up-selling more efficient.

Celcom completed the BSS implementation in just 18 months, replacing 17 separate systems with one seven-module Oracle system.

Celcom officials explicitly tried to get employees invested in the new system to ensure it aligned with the business. The company enlisted project directors from both business and IT departments. Represen- tatives from sales and marketing chaired the tech- nology selection committees to ensure that people outside of IT were making the case for the project. Top management, including sales and marketing department heads and Celcom’s CEO, are part of a steering committee for customer experience man- agement that meets every two weeks.

Celcom’s integrated systems make it possible for call center representatives to respond much more rapidly to customer queries. In the past, cus- tomer agents needed to toggle between two to five screens to do their work. Now they work with just a single screen, which increases efficiency. Using fewer screens cuts average call-handling time by 15 to 20 percent. BSS includes a new tablet-based app for Celcom dealers that makes signing a customer up for a new mobile phone completely paperless.

New phone activation time has been cut from two hours to two minutes. Fewer activations require manual follow-up. Celcom dealers and customers are happier.

Inventory of mobile handsets at Celcom facili- ties and dealer stores is now centralized and man- aged using BSS. Dealers can see what Celcom has in stock, and Celcom inventory managers can monitor the stock on dealer shelves. More detailed inventory control helps Celcom move more products because it can ship fast-selling units to dealers before shortages occur or have marketers target promotions in regions where the company wants to move specific products. This would have been impossible before. Salespeople are beginning to use big data collected in BSS to bet- ter manage sales by region.

Celcom is now much closer to achieving its brand vision: pleasing its customers and exceeding their expectations.

Sources: Jessica Sirkin, “Oracle Implementation at Celcom Brings IT, Business Together,” searchoracle.techtarget.com , accessed January 17, 2016; www.celcom.com , accessed January 18, 2016; Fred Sandsmark, “Customers First,” Profit Magazine , May 2014; and Oracle Corporation, “Celcom Transforms Its Customer Expe- rience with Industry Leading Oracle Communications Suite,” March 31, 2014.

CASE STUDY QUESTIONS 9- 13 What was the problem at Celcom described in

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

9- 14 What was Celcom’s business strategy, and what was the role of customer relationship manage- ment in that strategy?

9- 15 Describe Celcom’s solution to its problem. What management, organization, and technol- ogy issues had to be addressed by the solution?

9- 16 How effective was this solution? How did it affect the way Celcom ran its business and its business performance?

Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 395

MyLab MIS Go to the Assignments section of your 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 analytical CRM systems.

396 Part Three Key System Applications for the Digital Age

Chapter 9 References

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D’Avanzo, Robert, Hans von Lewinski, and Luk N. Van Wassenhove. “The Link Between Supply Chain and Financial Performance.” Supply Chain Management Review (November 1, 2003).

Davenport, Thomas H. Mission Critical: Realizing the Promise of Enterprise Systems. (Boston: Harvard Business School Press, 2000.)

Davenport, Thomas H., Leandro Dalle Mule, and John Lucke. “Know What Your Customers Want Before They Do.” Harvard Business Review (December 2011).

Essex, David. “Tomorrow’s ERP Raises New Hopes, Fears.” Business Information (February 2014).

Hitt, Lorin, D. J. Wu, and Xiaoge Zhou. “Investment in Enterprise Resource Planning: Business Impact and Productivity Measures.” 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).

Kanaracus, Chris. “ERP Software Project Woes Continue to Mount, Survey Says.” IT World (February 20, 2013).

Kimberling, Eric. “5 Lessons from Successful CRM Implementations.” Panorama-consulting.com (January 28, 2015).

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 Systems 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, Nilesh Sharaf, Quing Hu, and Yajiong Xue. “Assimilation of Enterprise Systems: The Effect of Institutional Pressures and the Mediating Role of Top Management.” MIS Quarterly 31, No. 1 (March 2007).

Liang, Huigang, Zeyu Peng, Yajiong Xue, Xitong Guo, and Nengmin 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 Supply Chain of the Future.” McKinsey Quarterly (January 2011).

Mehta, Krishna. “Best Practices for Developing a Customer Lifetime Value Program.” Information Management (July 28, 2011).

Morrison, Tod. “Custom ERP No Longer in Vogue.” Business Information (February 2014).

Maurno, Dann Anthony. “The New Word on ERP.” CFO Magazine (July 25, 2014).

Oracle Corporation. “Alcoa Implements Oracle Solution 20% Below Projected Cost, Eliminates 43 Legacy Systems.” www.oracle.com , accessed August 21, 2005.

Panorama Consulting Solutions. “2015 ERP Report.” (2015). 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).

Rai, Arun, Ravi Patnayakuni, and Nainika Seth. “Firm Performance Impacts of Digitally Enabled Supply Chain Integration Capabilities.” MIS Quarterly 30, No. 2 (June 2006).

Ranganathan, C., and Carol V. Brown. “ERP Investments and the Market Value of Firms: Toward an Understanding of Influential 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).

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).

SupplyChainBrain. “Trends in Enterprise Resource Planning Cloud Technology.” ( February 25, 2015).

Sussin, Jenny. “Top Use Cases and Benefits of Social for CRM in 2015.” Gartner, Inc. (February 12, 2015).

Sykes, Tracy Ann, Viswanath Venkatesh, and Jonathan L. Johnson. “Enterprise System Implementation and Employee Job 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).

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“Top 5 Reasons ERP Implementations Fail and What You Can Do About It.” Ziff Davis (2013).

“Trends in Enterprise Resource Planning Cloud Technology.” SupplyChainBrain (February 25, 2015).

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Chapter 9 Achieving Operational Excellence and Customer Intimacy: Enterprise Applications 397

398

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?

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

CHAPTER CASES

Uber Storms Europe: Europe Strikes Back Getting Social with Customers Can Instacart Deliver? Walmart and Amazon Duke It Out for E-commerce Supremacy

C H

A P

T E

R

10 E-commerce: Digital Markets, Digital Goods

MyLab MIS™ Visit mymislab.com for simulations, tutorials, and end-of-chapter problems.

399

Uber, the so-called “ride hailing service” (otherwise known as a taxi ser-vice) is headquartered in San Francisco and was founded in 2009 by Travis Kalanick and Garrett Camp. Uber is the posterchild (along with Airbnb) for the on-demand economy, a place where independent contractors respond to online requests for service. Uber’s various services for transporting people rely on a smartphone app to hail a ride provided by an independent contractor (a driver) who is not an employee of the company. Drivers are self- employed and not under the direct control of Uber as employees would be. They may or may not be licensed or trained. The drivers supply their own car, pay for the gas, maintenance, insurance, and even their own cell phones. They take a cut of the fare, which used to be 20 percent or less, but in 2016 is moving to 25 percent. Voila: a taxi company with no taxis or employees, and an Internet platform for hooking up cars with people looking for a ride. One more thing: Uber provides rides for 30 to 50 percent less than regulated taxis and also changes its fares depending on demand. It’s called “surge pricing.”

By 2016, Uber had more than 162,000 drivers working in 200 cities and 55 coun- tries generating revenue of $10 billion and earnings (after paying its drivers) of $2 bil- lion. More than 100,000 people use Uber on a regular basis. However, Uber’s over- the-top success has created its own set of challenges.

Uber has taken many American cities by storm and largely succeeded. Not that there hasn’t been plenty of opposition from local taxi businesses who have paid hundreds of thousands of dollars in many cities for official medallions licensing them to pick up and transport passengers. Local governments have also resisted Uber, fearing the loss of tax revenue and threats to public safety and health posed by unskilled and uninsured drivers whose cars may not pass inspection. Nevertheless, in most cases, Uber has prevailed over local opposition, based in part on public support for an expanded and higher-quality taxi service using mobile technology, and support from Uber drivers who see the company as providing opportunity for a decent living. Uber has been very successful in using social media and online marketing campaigns to organize opposition to local politicians who oppose it. The result is that Uber has not been banned from any U.S. city, although in some cities like New York Uber is required

Uber Storms Europe: Europe Strikes Back

© FocusTechnology/Alamy Stock Photo

to obtain a license to operate, and drivers and cars need to be certified by the city. In 2016, there were 60,000 Uber drivers in New York City and 30,000 taxi drivers. The price of an official taxi medallion has fallen from $1.3 million in 2013 to $640,000 in 2016, down 50 percent in a few years. The largest taxi cab owner in the United States, with thousands of cars and drivers working for him, declared that “Uber was the nastiest, most morally corrupt company ever.”

In Europe Uber has generated much stronger opposition, including some outright bans in certain cities. In 2014 a Berlin court banned some of Uber’s services following complaints from the Berlin Taxi Association that the service did not comply with local licensing rules. A court in Brussels outlawed Uber because it did not have the correct approvals. The EU commissioner in charge of Europe’s Digital Agenda criticized such moves as anti-technology and simply protecting a taxi cartel from competition. In November 2015 courts in Frankfurt re-instated one of the most severe legal restrictions on Uber in the world for its failure to train drivers and insure cars. Uber’s pricing is one unspoken cause of resistance to its services: Uber’s fares are typically 30 percent less than local taxis. The company withdrew its UberPop service in Frankfurt but is allowed to operate its UberBlack and UberTaxi services because they use licensed drivers.

Meanwhile, in 2015, investigators raided Uber’s offices in Paris as part of an investigation into the legality of Uber services in France. In 2014 France passed legislation that requires all drivers carrying paying passengers to have a license and insurance. Most UberPop drivers in Europe have neither. Uber has also pulled out of Hamburg, Dusseldorf, and Amsterdam. In Paris and Madrid opposition has often been violent. London is considering changes in its regula- tions that would disrupt Uber. Uber has run up against a different culture than it faces in the United States. As one taxi driver in Germany explained, “It’s not part of our German culture to flaunt the laws and regulations and not treat Uber drivers like employees but rather as contractors with no rights .

Sources: Mark Scottman, “Uber’s No-Holds-Barred Expansion Strategy Fizzles in Ger- many,” New York Times, January 3, 2016; Simon Van Zuylen-Wood, “The Struggles of New York City’s Taxi King,” Bloomberg.com, August 27, 2015; Melissa Eddymarch, “An Uber Service Is Banned in Germany Again,” New York Times, March 18, 2015; Mark Scott, “Uber Faces Rebukes in Europe,” New York Times, April 17, 2014.

Uber exemplifies two major trends in e-commerce today. This e-commerce business is powered by the near-ubiquitous use of mobile smartphones, and it is one of so-called on-demand companies such as Lyft (Uber’s primary competitor), Airbnb (rooms for rent), Handy and Homejoy (both part- time household helpers), Instacart (grocery shoppers), and Washio (clothes washing). These on-demand firms don’t sell goods; instead, they have built a platform by which people who want a service—such as a taxi—can find a pro- vider to fill the demand. On-demand firms are currently considered the hottest business model in e-commerce, and they are disrupting major industries.

The chapter -opening diagram calls attention to important points this case and this chapter raise. The business challenge facing Uber is how to create a

400 Part Three Key System Applications for the Digital Age

profitable company based on a new, on-demand business model. Uber’s man- agement decided to base its business on the use of wireless smartphones and apps that link buyers and sellers of taxi transportation services. The business earns revenue by charging users’ credit cards for fares and giving a percent- age of each fare to the driver, and it can charge prices that vary dynamically with demand. Uber has a lower cost structure than traditional cab companies because it does not have to pay employee wages or benefits, auto insurance, fuel, and licensing fees. Participating drivers pay for their own cars, fuel, and insurance. Under certain conditions, if demand is high, Uber can be more expensive than taxis, but it has disrupted the taxi industry because it offers a reliable, fast, convenient alternative to traditional taxi companies that book rides using the telephone, a central dispatcher using antiquated radio com- munications, or potential customers standing on street corners trying to hail a cab. Uber’s growth is skyrocketing, but the company has to contend with many competitors and political and regulatory opposition from workers and the industries it is disrupting. It is still too early to tell whether Uber and other on-demand businesses will succeed.

Here are some questions to think about: Do you think Uber’s business model is viable? Why or why not? How do you feel about using Uber compared with a regulated taxi?

10- 1 What are the unique features of e-commerce, digital markets, and digital goods?

In 2017, purchasing goods and services online by using smartphones, tablets, and desktop computers will be ubiquitous. In 2017, an estimated 217 million Ameri- cans will shop online, and 185 million will purchase something online, as did

On-Demand Service Platform

• Opportunities presented by new technology • Political and regulatory hurdles

• Redesign taxi ride assignment process • Redesign payment process

• Link drivers to customers • Predict ride demand • Calculate fares

• Increase profits

• Smartphones • Driver and rider apps • Demand prediction software

• Design new business model

Technology

Management

Organization

Business Challenges

Information System

Business Solutions

Chapter 10 E-commerce: Digital Markets, Digital Goods 401

millions of others worldwide. Although most purchases still take place through traditional channels, e-commerce continues to grow rapidly and to transform the way many companies do business. In 2017, e-commerce consumer sales of goods, services, travel, and online content, about 12 percent of total retail sales of $5.6 trillion, are growing at 15 percent annually (compared with 3 percent for traditional retailers) (eMarketer, 2016a). E-commerce has expanded from the desktop and home computer to mobile devices, from an isolated activity to a new social commerce, and from a Fortune 1000 commerce with a national 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 shop- pers arrive from their smartphones, although most continue to purchase using a PC or tablet. The key words for understanding this new e-commerce in 2017 will be “social, mobile, local.”

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 refers to transactions that occur over the Internet and the web. Commercial transac- tions involve the exchange of value (e.g., money) across organizational or indi- vidual 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 popularized 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 exponential 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 ), not bad con- sidering that traditional retail sales were shrinking by 5 percent annually. Since then, offline retail sales have increased only a few percentage points a year, whereas online e-commerce has been a stellar success.

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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 2016, e-commerce revenues grew at an estimated 15 percent annually. Sources: Based on data from eMarketer, “US Retail Ecommerce Sales, 2014–2020,” 2016; eMarketer, “US Digital Travel Sales, 2014–2020,” 2016; and eMarketer chart, “US Mobile Downloads and In-App Revenues, 2013–2016,” 2016.

402 Part Three Key System Applications for the Digital Age

The very rapid growth in e-commerce in the early years created a market bubble in e-commerce stocks. Like all bubbles, the dot-com bubble burst (in March 2001). A large number of e-commerce companies failed during this pro- cess. Yet for many others, such as Amazon, eBay, Expedia, and Google, the results have been more positive: soaring revenues, fine-tuned business mod- els 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 will grow to an estimated $669 billion in 2017, an increase of more than 15 percent over 2016 (including travel services and digital downloads), with 185 million people purchasing online and an addi- tional 217 million shopping and gathering information but not purchasing (eMarketer, 2016a). The Internet influences more than $1.3 trillion in retail commerce that takes places in physical stores.

• The number of individuals of all ages online in the United States is expected to grow to 270 million in 2017, up from 147 million in 2004. In the world, more than 3.3 billion people are now connected to the Internet. Growth in the overall Internet population has spurred growth in e-commerce (Internet World Stats, 2016).

• Approximately 96 million households will have broadband access to the Internet in 2017, representing about 78 percent of all households.

• About 223 million Americans will access the Internet by using a smartphone. 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 $170 billion in 2017, 25 percent of all e-commerce, and about 50 percent of all retail e-commerce. In a few years, mobile phones and tablets will be the most common Internet access device. Currently, more than 80 percent of all mobile phone users access the Internet by using their phones (eMarketer, 2016b).

• B2B e-commerce (use of the Internet for business-to-business commerce and collaboration among business partners) expanded to more than $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 ad words on Google, and sending e-mail messages. The workhorse of online marketing 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 tele- vision ads, where brand messages were flashed before millions of users who were not expected to respond immediately, ask questions, 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 marketing 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 Apple iPhone, and the growing interest in local marketing. What’s different about the new

Chapter 10 E-commerce: Digital Markets, Digital Goods 403

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, whereas traditional retail brands, such as Walmart, Sears, JCPenney, L.L.Bean, and Macy’s, use e-commerce to retain their dominant retail positions. Walmart, the world’s largest retailer, has decided to get serious about e-commerce and take on Amazon with a more than $1 billion investment in its e-commerce efforts (see the chapter- ending case study).

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 $170 billion in 2017.

TECHNOLOGY FOUNDATIONS

Wireless Internet connections (Wi-Fi, WiMax, and 4G smartphones) grow rapidly.

Powerful smartphones and tablet computers provide access to music, web surfing, and entertainment as well as voice communication. Podcasting and streaming take off as media 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 transmission 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 1.65 billion users worldwide and 222 million in the United States (Facebook, 2016). One hundred ninety million Americans use social networks, about 70 percent of the Internet user population.

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 2017, social networking will account for an estimated 28 percent of online time. Social sites have become the primary gateway to the Internet in news, music, and, increasingly, products.

The traditional advertising industry is disrupted as online advertising grows twice as fast as TV and print advertising; Google, Yahoo, and Facebook display nearly 1 trillion ads a year.

On-demand service e-commerce sites such as Uber and Airbnb extend the market creator business model to new areas of 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 adopts a paywall for its online edition and succeeds in capturing over 1 million subscribers, growing at 15 percent annually. Book publishing thrives 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.

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world of social-mobile-local e-commerce are 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 customers, and even critics. Your brand is being talked about on the web and social media (that’s the conversation part), and marketing your firm, build- ing, and restoring your brands requires 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 sim- ply a new ad channel but a collection of technology-based tools for communi- cating with shoppers. The leading social commerce platforms are Facebook, Instagram, 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 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, e-mail, and games) still constitutes the majority (63 percent) of all online marketing ($77 billion), but it’s growing much more slowly than social-mobile- local marketing. The marketing dollars are following customers and shoppers from the PC to mobile devices.

Social, mobile, and local e-commerce are connected. As mobile devices become 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 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 smartphones. 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 for you to spend time or money traveling to a market, and much less mental effort is required to make a purchase.

Chapter 10 E-commerce: Digital Markets, Digital Goods 405

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.

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.

406 Part Three Key System Applications for the Digital Age

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. Tradi- tional markets, national sales forces, and small retail stores have great richness; they can provide personal, face-to-face service, using aural and visual 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 audience 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 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 vaca- tion. 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

Chapter 10 E-commerce: Digital Markets, Digital Goods 407

based on a user’s preferences or prior behavior. Given the interactive nature of e-commerce technology, much information about the consumer can be gathered in the marketplace at the moment of purchase. With the increase in information density, a great deal of information about the consumer’s past purchases 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 gives 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 in modern history, including the printing press, use a broadcast model (one-to-many) in which content is created in a central location by experts (professional writers, editors, directors, and producers), and audiences are concentrated in huge numbers to consume a standardized prod- uct. The new Internet and e-commerce empower users to create and distrib- ute content on a large scale and permit users to program their own content consumption. The Internet provides 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 con- sumers to shop around for the best price. Auto dealers’ profit margins depended 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 businesses reduce information asymmetries and locate better prices and terms.

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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 customer or the supply situation of the seller. For instance, online retailers from Amazon to Walmart change prices on many 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 tar- geting 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, with higher prices set for poor sections of a community. 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, depending 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).

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 reduc- ing the number of intermediaries, companies can raise profits while charging lower prices. The removal of organizations or business process layers responsi- ble for intermediary steps in a value chain is called disintermediation . E-com- merce 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.

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.

Chapter 10 E-commerce: Digital Markets, Digital Goods 409

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, Holly- wood movies, software, newspapers, magazines, and books can all be expressed, stored, delivered, and sold as purely digital products. For the most part, digi- tal goods are intellectual property, which is defined as “works of the mind.” Intellectual property 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 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. Newspapers and magazines subscriptions to hard copies are declining, while online readership and subscriptions are expanding.

Total record label industry revenues have fallen 50 percent from $14 billion in 1999 to about $6.9 billion in 2016, due almost entirely to the rapid decline in CD album sales and the growth of digital music services (both legal and

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

410 Part Three Key System Applications for the Digital Age

illegal music piracy). On the plus side, the Apple iTunes Store has sold more than 35 billion songs for 99 cents each since opening in 2003, providing the industry with a digital distribution model that has restored some of the reve- nues lost to digital music channels. Since iTunes, illegal downloading has been cut in half, and legitimate online music sales (both downloads and streaming) are estimated to be approximately $4.5 billion in 2016. As cloud streaming services expand, illegal downloading will decline further. Digital music sales account for more than 70 percent of all music revenues. Yet the music labels make only about 32 cents from a single track download and only 0.5 cents for a streamed track (with the hope that sales of downloaded tracks or CDs will result). 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.

Hollywood has not been similarly disrupted by digital distribution platforms, in part because it is more difficult to download high-quality, pirated copies of full-length movies and because of the availability of low-cost, high-quality legal movies. To avoid the fate of the music industry, 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 televi- sion series. These arrangements are not enough to compensate entirely for the loss in DVD sales, which fell 50 percent from 2006 to 2015, although this is changing rapidly as online distributors such as Netflix pay millions for high- quality Hollywood content. In 2017, for the first time, consumers will view more and pay more for web-based movie downloads, rentals, and streams than for DVDs or related physical products. As with television series, the demand for feature-length Hollywood movies appears to be expanding in part because of the growth of smartphones and tablets, making it easier to watch movies in more locations. In addition, the surprising resurgence of music videos, led by the VEVO website, is attracting millions of younger viewers on smartphones and tablets.

Online movies began a growth spurt in 2010 as broadband services spread throughout the country. In 2017, about 126 million Internet users are expected to view movies, about one-half of the adult Internet audience. Although this rapid growth will not continue forever, there is little doubt that the Internet is becoming a movie distribution and television channel that rivals cable televi- sion, and someday may replace cable television entirely. Table 10. 4 describes digital goods and how they differ from traditional physical goods.

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

Chapter 10 E-commerce: Digital Markets, Digital Goods 411

10- 2 What are the principal e-commerce business and revenue models?

E-commerce has grown from a few advertisements on early web portals in 1995 to more than 12 percent of all retail sales in 2017 (an estimated $669 billion), surpassing the mail-order catalog business. E-commerce is a fascinating combi- nation of business models and new information 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 products and services to individual shoppers. Amazon, Walmart, and iTunes are examples of B2C commerce. BarnesandNoble.com , which sells books, software, 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, 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 most widely used platform 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-com- merce transactions took place using a desktop PC connected to the Internet over a wired network. Several wireless mobile alternatives have such as smart- phones and tablet computers. The use of handheld wireless devices for pur- chasing 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 business models that have emerged. All, in one way or another, use the Inter- net (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 Google and Bing even if few make these sites their home page. Portals

412 Part Three Key System Applications for the Digital Age

such as Yahoo, Facebook, MSN, and AOL offer powerful web search tools as well as an integrated package of content and services such as news, e-mail, instant messaging, maps, calendars, shopping, music downloads, video stream- ing, and more all in one place. The portal business model now provides a desti- nation site where users start their web searching and linger to read news, find entertainment, meet other people, and, of course, be exposed to advertising, which provides the revenues to support the portal. Facebook is a very different kind of portal based on social networking. Portals generate revenue primarily by attracting very large audiences, charging advertisers for display ad place- ment (similar to traditional newspapers), collecting referral fees for steering customers to other sites, and charging for premium services. In 2017, portals (not including Google or Bing) will generate an estimated $37 billion in display ad revenues. Although there are hundreds of portal/search engine sites, the top four portals (Yahoo, Facebook, MSN, and AOL) gather more than 95 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 2015 revenues of more than $107 billion, to tiny local stores that have web- sites. An e-tailer is similar to the typical bricks-and-mortar storefront, except 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)

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

Games.com

Community provider Provides an online meeting place where people with similar interests can communicate and find useful information.

Facebook

Google+

Twitter

Portal Provides initial point of entry to the web along with specialized content and other services.

Yahoo

Bing

Google

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 Apps

Photobucket.com

Dropbox

Chapter 10 E-commerce: Digital Markets, Digital Goods 413

will generate about $457 billion in revenues in 2017. The value proposition of e-tailers is to provide convenient, low-cost shopping 24/7; large selections; and consumer 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. Amazon, BlueNile.com , and Drugstore. 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 Although e-commerce began as a retail product channel, it has increasingly become a global content channel. Content is defined 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 pro- viders 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 the iTunes Store, and Apple’s Internet- connected devices such as the iPhone, iPod, and iPad, have 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 comput- ers, smartphones, tablets, 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 without being stored locally on the device.

Estimates vary, but total online content will generate about around $24 billion in 2017, 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 and travel packages in a single location. Online stock brokers 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

414 Part Three Key System Applications for the Digital Age

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 consumers. The so-called on-demand economy (mistakenly referred to often as the shar- ing economy), exemplified by Uber (described in the chapter- opening case) and Airbnb, is based on the idea of a market creator building a digital platform where supply meets demand; for instance, spare auto or room rental capac- ity finds individuals who want transportation or lodging. Crowdsource funding markets such as Kickstarter.com and Mosaic Inc. bring together private equity investors and entrepreneurs in a funding marketplace. Both are examples of B2B financial market places.

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 pro- vider 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 Google Apps, Google Sites, Gmail, and online data storage services. Salesforce.com is a major pro- vider 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, videos; communicate with like-minded people; receive interest-related information; and even play out fantasies by adopting online personalities called avatars . Social networking sites Facebook, Google+, Tumblr, Instagram, LinkedIn, and Twitter and hundreds of other smaller, niche sites such as Sportsvite all offer users community-building tools and services. Social net- working sites have been the fastest-growing websites in recent years, often dou- bling their audience size in a year.

E-commerce Revenue Models A firm’s revenue model describes how the firm will earn revenue, generate profits, and produce a superior return on investment. Although many e-com- merce revenue models have been developed, most companies rely on one, or some combination, of the following six revenue models: advertising, sales, sub- scription, free/freemium, transaction fee, and affiliate.

Advertising Revenue Model In the advertising revenue model , a website generates revenue by attract- ing a large audience of visitors who can then be exposed to advertisements. The advertising model is the most widely used revenue model in e-commerce, and arguably, without advertising revenues, the web would be a vastly differ- ent experience from what it is now because people would be asked to pay for access to content. Content on the web—everything from news to videos and opinions—is free to visitors because advertisers pay the production and dis- tribution costs in return for the right to expose visitors to ads. Companies will spend an estimated $77.3 billion on online advertising in 2017 (in the form of a paid message on a website, paid search listing, video, app, game, or other online medium, such as instant messaging). About $53 billion of this will be for

Chapter 10 E-commerce: Digital Markets, Digital Goods 415

mobile ads. Mobile ads will account for 68 percent of all digital advertising. In the past five years, advertisers have increased online spending and cut outlays on traditional channels such as radio and newspapers. In 2017, online advertis- ing will grow at 15 percent and constitute about 38 percent of all advertising in the United States (eMarketer, 2016d).

Websites with the largest viewership or that attract a highly specialized, differ- entiated viewership and are able to retain user attention (stickiness) can charge higher advertising rates. Yahoo, for instance, derives nearly all its revenue from display ads (banner ads), video ads, and, to less extent, search engine text ads. Ninety-five percent of Google’s revenue derives from advertising, including selling keywords (AdWord), selling ad spaces (AdSense), and selling display ad spaces to advertisers (DoubleClick). Facebook displayed one-third of the trillion display ads shown on all sites in 2016. Facebook’s users spend an average of over 6 hours a week on the site, far longer than any of the other portal sites. In contrast, Americans spend an average of five hours watching television each day (eMarketer, 2016e).

Sales Revenue Model In the sales revenue model , companies derive revenue by selling goods, infor- mation, or services to customers. Companies such as Amazon (which sells books, music, and other products), LLBean.com , and Gap.com all have sales revenue models. Content providers make money by charging for downloads of entire files such as music tracks (iTunes Store) or books or for download- ing music and/or video streams ( Hulu.com TV shows). Apple has pioneered and strengthened the acceptance of micropayments. Micropayment systems provide content providers with a cost-effective method for processing high volumes of very small monetary transactions (anywhere from 25 cents to $5.00 per transaction). The largest micropayment system on the web is Apple’s iTunes Store, which has more than 800 million customers worldwide who pur- chase individual music tracks for 99 cents and feature length movies for various prices. A Learning Track is available with more detail on micropayment and other e-commerce payment systems, including Bitcoin.

Subscription Revenue Model In the subscription revenue model , a website offering content or services charges a subscription fee for access to some or all of its offerings on an ongo- ing basis. Content providers often use this revenue model. For instance, the online version of Consumer Reports provides access to premium content, such as detailed ratings, reviews, and recommendations, only to subscribers, who have a choice of paying a $7.99 to 12.99 monthly subscription fee or a $30.00 annual fee. Netflix is one of the most successful subscriber sites with more that 75 mil- lion customers worldwide in 2016. The New York Times had about 1.3 million online paid subscribers, and the Wall Street Journal about 1 million in 2016. To be successful, the subscription model requires the content to be perceived as differ- entiated, having high added value, and not readily available elsewhere or easily replicated. Companies successfully offering content or services online on a sub- scription basis include Match.com and eHarmony (dating services), Ancestry. com and Genealogy.com (genealogy research), and Microsoft Xbox Live.

Free/Freemium Revenue Model In the free/freemium revenue model , firms offer basic services or content for free and charge a premium for advanced or special features. For example, Google offers free applications but charges for premium services. Pandora,

416 Part Three Key System Applications for the Digital Age

the subscription radio service, offers a free service with limited play time and advertising and a premium service with unlimited play. Spotify music service also uses a freemium business model. The idea is to attract very large audiences with free services and then convert some of this audience to pay a subscrip- tion for premium services. One problem with this model is converting people from being free loaders into paying customers. “Free” can be a powerful model for losing money. None of the freemium music streaming sites have earned a profit to date. Nevertheless, they are finding that free service with ad revenue is more profitable than the paid subscriber part of their business.

Transaction Fee Revenue Model In the transaction fee revenue model , a company receives a fee for enabling or executing a transaction. For example, eBay provides an online auction mar- ketplace and receives a small transaction fee from a seller if the seller is suc- cessful in selling an item. E*Trade, an online stockbroker, receives transaction fees each time it executes a stock transaction on behalf of a customer. The transaction revenue model enjoys wide acceptance in part because the true cost of using the platform is not immediately apparent to the user.

Affiliate Revenue Model In the affiliate revenue model , websites (called affiliate websites ) send visitors to other websites in return for a referral fee or percentage of the revenue from any resulting sales. Referral fees are also referred to as lead generation fees. For example, MyPoints makes money by connecting companies to potential customers by offering special deals to its members. When members take advan- tage of an offer and make a purchase, they earn points they can redeem for free products and services, and MyPoints receives a referral fee. Community feedback sites such as Epinions and Yelp receive much of their revenue from steering potential customers to websites where they make a purchase. Amazon uses affiliates that steer business to the Amazon website by placing the Amazon logo on their blogs. Personal blogs often contain display ads as part of affiliate programs. Some bloggers are paid directly by manufacturers, or receive free products, for speaking highly of products and providing links to sales channels.

10- 3 How has e-commerce transformed marketing? Although e-commerce and the Internet have changed entire industries and enabled new business models, no industry has been more affected than mar- keting and marketing communications.

The Internet provides marketers with new ways of identifying and commu- nicating with millions of potential customers at costs far lower than traditional media, including search engine marketing, data mining, recommender sys- tems, and targeted e-mail. The Internet enables long tail marketing . Before the Internet, reaching a large audience was very expensive, and marketers had to focus on attracting the largest number of consumers with popular hit prod- ucts, whether music, Hollywood movies, books, or cars. In contrast, the Inter- net allows marketers to find potential customers inexpensively for products where demand is very low. For instance, the Internet makes it possible to sell independent music profitably to very small audiences. There’s always some demand for almost any product. Put a string of such long tail sales together and you have a profitable business.

Chapter 10 E-commerce: Digital Markets, Digital Goods 417

The Internet also provides new ways—often instantaneous and spontaneous— to gather information from customers, adjust product offerings, and increase customer value. Table 10. 6 describes the leading marketing and advertising formats used in e-commerce.

Behavioral Targeting Many e-commerce marketing firms use behavioral targeting techniques to increase the effectiveness of banners, rich media, and video ads. Behavioral tar- geting refers to tracking the clickstreams (history of clicking behavior) of indi- viduals on thousands of websites to understand their interests and intentions and expose them to advertisements that are uniquely suited to their online behavior. Marketers and most researchers believe this more precise understand- ing of the customer leads to more efficient marketing (the firm pays for ads only to those shoppers who are most interested in their products) and larger sales and revenues. Unfortunately, behavioral targeting of millions of web users also leads to the invasion of personal privacy without user consent. When con- sumers lose trust in their web experience, they tend not to purchase anything. Backlash is growing against the aggressive uses of personal information as con- sumers seek out safer havens for purchasing and messaging. Snapchat offers disappearing messages, and even Facebook has retreated by making its default for new posts “for friends only.”

Popular websites have hundreds of beacon programs on their home pages, which collect data about visitors’ behavior and report that behavior to their databases. There the information is often sold to data brokers, firms that collect billions of data elements on every U.S. consumer and household, frequently combining online with offline purchase information. The data brokers in turn

TABLE 10. 6 ONLINE MARKETING AND ADVERTISING FORMATS (BILLIONS)

MARKETING FORMAT 2015 REVENUE DESCRIPTION

Search engine $30 Text ads targeted at precisely what the customer is looking for at the moment of shopping and purchasing. Sales oriented.

Display ads $33 Banner ads (pop-ups and leave-behinds) with interactive features; increasingly behaviorally targeted to individual web activity. Brand development and sales. Includes social media and blog display ads.

Video $9.8 Fastest-growing format, engaging and entertaining; behaviorally targeted, interactive. Branding and sales.

Classified $3.1 Job, real estate, and services ads; interactive, rich media, and personalized to user searches. Sales and branding.

Rich media $7.6 Animations, games, and puzzles. Interactive, targeted, and entertaining. Branding orientation.

Lead generation $2.1 Marketing firms that gather sales and marketing leads online and then sell them to online marketers for a variety of campaign types. Sales or branding orientation.

Sponsorships $1.8 Online games, puzzles, contests, and coupon sites sponsored by firms to promote products. Sales orientation.

E-mail $.3 Effective, targeted marketing tool with interactive and rich media potential. Sales oriented.

418 Part Three Key System Applications for the Digital Age

sell this information to advertisers who want to place ads on web pages. A recent Federal Trade Commission report about nine data brokers found that one data broker’s database had information on 1.4 billion consumer transac- tions and more than 700 billion aggregated data elements. Another data bro- ker had 3,000 data measures for nearly every consumer in the United States (FTC, 2014).

Behavioral targeting takes place at two levels: at individual websites or from within apps and on various advertising networks that track users across thou- sands of websites. All websites collect data on visitor browser activity and store it in a database. They have tools to record the site that users visited prior to coming to the website, where these users go when they leave that site, the type of operating system they use, browser information, and even some location data. They also record the specific pages visited on the particular site, the time spent on each page of the site, the types of pages visited, and what the visitors purchased (see Figure 10. 3 ). Firms analyze this information about customer interests and behavior to develop precise profiles of existing and potential cus- tomers. In addition, most major websites have hundreds of tracking programs on their home pages, which track your clickstream behavior across the web by following you from site to site and re-target ads to you by showing you the same ads on different sites. The leading online advertising networks are Google’s DoubleClick, Yahoo’s RightMedia, and AOL’s Ad Network. Ad networks repre- sent publishers who have space to sell and advertisers who want to market online. The lubricant of this trade is information about millions of web shop- pers, which helps advertisers target their ads to precisely the groups and indi- viduals they desire.

This information enables firms to understand how well their website is working, create unique personalized web pages that display content or ads

Click 1

Click 6

Click 2

Click 3

Click 4

Click 5

The shopper clicks on the home page. The store can tell that the shopper arrived from the Yahoo! portal at 2:30 PM (which might help determine staffing for customer service centers) and how long she lingered on the home page (which might indicate trouble navigating the site). Tracking beacons load cookies on the shopper's browser to follow her across the web.

The shopper clicks on blouses, clicks to select a woman’s white blouse, then clicks to view the same item in pink. The shopper clicks to select this item in a size 10 in pink and clicks to place it in her shopping cart. This information can help the store determine which sizes and colors are most popular. If the visitor moves to a different site, ads for pink blouses will appear from the same or different vendor.

From the shopping cart page, the shopper clicks to close the browser to leave the Website without purchasing the blouse. This action could indicate the shopper changed her mind or that she had a problem with the website’s checkout and payment process. Such behavior might signal that the website was not well designed.

FIGURE 10. 3 WEBSITE VISITOR TRACKING

E-commerce websites and advertising platforms like Google’s DoubleClick have tools to track a shopper’s every step through an online store and then across the web as shoppers move from site to site. Close examination of customer behavior at a website selling women’s clothing shows what the store might learn at each step and what actions it could take to increase sales.

Chapter 10 E-commerce: Digital Markets, Digital Goods 419

for products or services of special interest to each user, improve the cus- tomer’s experience, and create additional value through a better understand- ing of the shopper (see Figure 10. 4 ). By using personalization technology to modify the web pages presented to each customer, marketers achieve some of the benefits of using individual salespeople at dramatically lower costs. For instance, General Motors will show a Chevrolet banner ad to women emphasizing safety and utility, whereas men will receive ads emphasizing power and ruggedness.

It’s a short step from ad networks to programmatic ad buying. Ad networks create real-time bidding platforms (RTB) where marketers bid in an automated environment for highly targeted slots available from web publishers. Here, ad platforms can predict how many targeted individuals will view the ads, and ad buyers can estimate how much this exposure is worth to them.

What if you are a large national advertising company with many clients trying to reach millions of consumers? What if you were a large global manufacturer trying to reach potential consumers for your products? With mil- lions of websites, working with each one would be impractical. Advertising networks solve this problem by creating a network of several thousand of the most popular websites millions of people visit, tracking the behavior of these users across the entire network, building profiles of each user, and then selling these profiles to advertisers in a real-time bidding environment. Popular web- sites download dozens of web tracking cookies, bugs, and beacons, which report user online behavior to remote servers without the users’ knowledge. Look- ing for young, single consumers with college degrees, living in the Northeast,

User Website

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some recommendations.

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Sarah, Here are the items you want to bid on:Halogen reading lamp

Portable reading lamp LED book reading lamp

FIGURE 10. 4 WEBSITE PERSONALIZATION

Firms can create unique personalized web pages that display content or ads for products or services of special interest to individual users, improving the customer experience and creating additional value.

420 Part Three Key System Applications for the Digital Age

in the 18- to 34-age range who are interested in purchasing a European car? Not a problem. Advertising networks can identify and deliver thousands of people who fit this profile and expose them to ads for European cars as they move from one website to another. Estimates vary, but behaviorally targeted ads are generally 10 times more likely to produce a consumer response than a randomly chosen banner or video ad (see Figure 10. 5 ). So-called advertis- ing exchanges use this same technology to auction access to people with very specific profiles to advertisers in a few milliseconds. In 2016, about 50 percent of online display ads are targeted ads developed by programmatic ad buys, and the rest depend on the context of the pages shoppers visit—the estimated demographics of visitors, or so-called blast-and-scatter advertising—which is placed randomly on any available page with minimal targeting, such as time of day or season.

It’s another short step to native advertising . Native advertising involves placing ads in social network newsfeeds or within traditional editorial content, such as a newspaper article. This is also referred to as organic advertising, where content and advertising are in very close proximity or integrated together.

Two-thirds (68 percent) of Internet users disapprove of search engines and websites tracking their online behavior to aim targeted ads at them. Twenty- eight percent of those surveyed approve of behavioral targeting because they believe it produces more relevant ads and information. A majority of Americans want a Do Not Track option in browsers that will stop websites from collecting information about their online behavior. More than 50 percent are very con- cerned about the wealth of personal data online; 86 percent have taken steps to mask their online behavior; 25 percent of web users use ad-blocking soft- ware. Next to hackers, Americans try to avoid advertisers pursuing them while online, and 64 percent block cookies to make tracking more difficult (Rainie and Duggan, 2016).

FIGURE 10. 5 HOW AN ADVERTISING NETWORK SUCH AS DOUBLECLICK WORKS

Advertising networks and their use of tracking programs have become controversial among privacy advocates because of their ability to track individual consumers across the Internet.

Chapter 10 E-commerce: Digital Markets, Digital Goods 421

Social E-Commerce and Social Network Marketing Social e-commerce is commerce based on the idea of the digital social graph , a mapping of all significant online social relationships. The social graph is synon- ymous with the idea of a social network used to describe offline relationships. You can map your own social graph (network) by drawing lines from yourself to the 10 closest people you know. If they know one another, draw lines between these people. If you are ambitious, ask these 10 friends to list and draw in the names of the 10 people closest to them. What emerges from this exercise is a preliminary map of your social network. Now imagine if everyone on the Inter- net did the same and posted the results to a very large database with a website. Ultimately, you would end up with Facebook or a site like it. The collection of all these personal social networks is called the social graph .

According to small world theory, you are only six links away from any other person on earth. If you entered your personal address book, which has, say, 100 names in it, in a list and sent it to your friends, and they in turn entered 50 new names of their friends, and so on, five times, the social network created would encompass 31 billion people! The social graph is therefore a collection of millions of personal social graphs (and all the people in them). So, it’s a small world indeed, and we are all more closely linked than we ever thought.

If you understand the interconnectedness of people, you will see just how important this concept is to e-commerce: The products and services you buy will influence the decisions of your friends, and their decisions will in turn influence you. If you are a marketer trying to build and strengthen a brand, the implication is clear: Take advantage of the fact that people are enmeshed in social networks, share interests and values, and communicate and influence one another. As a marketer, your target audience is not a million isolated peo- ple watching a TV show but the social network of people who watch the show and the viewers’ personal networks. Table 10. 7 describes the features of social commerce that are driving its growth.

In 2017, one of the fastest-growing media for branding and marketing is social media. Companies will spend an estimated $16.5 billion in 2017 using social net- works such as Facebook to reach millions of consumers who spend hours a day on the Facebook site. Facebook accounts for 74 percent of all social marketing in the United States. Expenditures for social media marketing are much smaller than for television, magazines, and even newspapers, but this will change in the future. Social networks in the offline world are collections of people who volun- tarily communicate with one another over an extended period of time. Online social networks, such as Facebook, LinkedIn, Twitter, Tumblr, and Google+, along with other sites with social components, are websites that enable users to communicate with one another, form group and individual relationships, and share interests, values, and ideas. Individuals establish online profiles with text and photos, creating an online profile of how they want others to see them, and then invite their friends to link to their profile. The network grows by word of mouth and through e-mail links. Facebook, with 258 million U.S. monthly visi- tors, receives most of the public attention given to social networking, but the other top four social sites are also growing, though at slower rates than in the past. Facebook user growth has slowed in the United States. LinkedIn growth slowed in 2015 to 40 percent, and it had 119 million visitors a month in 2016. Twitter grew to reach 118 million active users, with stronger offshore growth than in the United States. Pinterest hit the top 50 websites with 63 million. According to ComScore, about 28 percent of the total time spent online in the United States was spent on social network sites, and it is the most common

422 Part Three Key System Applications for the Digital Age

online activity (ComScore, 2016). The fastest-growing smartphone applications are social network apps; nearly half of smartphone users visit social sites daily. More than 60 percent of all visits to Facebook in 2016 came from smartphones.

At social shopping sites such as Pinterest and Kaboodle, you can swap shop- ping ideas with friends. Facebook offers the Like button and Google the +1 but- ton to let your friends know you admire a product, service, or content and, in some cases, purchase something online. Facebook processes around 4.5 billion Likes a day. Online communities are also ideal venues to employ viral market- ing techniques. Online viral marketing is like traditional word-of-mouth market- ing except that the word can spread across an online community at the speed of light and go much further geographically than a small network of friends.

The Wisdom of Crowds Creating sites where thousands, even millions, of people can interact offers busi- ness firms new ways to market and advertise and to discover who likes (or hates) their products. In a phenomenon called the wisdom of crowds , some argue that large numbers of people can make better decisions about a wide range of topics or products than a single person or even a small committee of experts.

Obviously, this is not always the case, but it can happen in interesting ways. In marketing, the wisdom of crowds concept suggests that firms should consult with thousands of their customers first as a way of establishing a relationship with them and, second, to understand better how their products and services are used and appreciated (or rejected). Actively soliciting the comments of your customers builds trust and sends the message to your customers that you care what they are thinking and that you need their advice.

TABLE 10. 7 FEATURES OF SOCIAL COMMERCE

SOCIAL COMMERCE FEATURE DESCRIPTION

Newsfeed A stream of notifications from friends and advertisers that social users find on their home pages.

Timelines A stream of photos and events in the past that create a personal history for users, one that can be shared with friends.

Social sign-on Websites allow users to sign into their sites through their social network pages on Facebook or another social site. This allows websites to receive valuable social profile information from Facebook and use it in their own marketing efforts.

Collaborative shopping An environment where consumers can share their shopping experiences with one another by viewing products, chatting, or texting. Friends can chat online about brands, products, and services.

Network notification An environment where consumers can share their approval (or disapproval) of products, services, or content or share their geolocation, perhaps a restaurant or club, with friends. Facebook’s ubiquitous Like button is an example, as are Twitter’s tweets and followers.

Social search (recommendations) An environment where consumers can ask their friends for advice on purchases of products, services, and content. Although Google can help you find things, social search can help you evaluate the quality of things by listening to the evaluations of your friends or their friends. For instance, Amazon’s social recommender system can use your Facebook social profile to recommend products.

Chapter 10 E-commerce: Digital Markets, Digital Goods 423

Businesses of all sizes are finding Facebook, Twit- ter, and other social media to be powerful tools for engaging customers, amplifying product messages, discovering trends and influencers, building brand awareness, and taking action on customer requests and recommendations. Half of all Twitter users rec- ommend products in their tweets.

About 1.6 billion people use Facebook, and more than 30 million businesses have active brand pages, enabling users to interact with the brand through blogs, comment pages, contests, and offerings on the brand page. The “like” button gives users a chance to share with their social network their feelings about content and other objects they are viewing and web- sites they are visiting. With like buttons on millions of websites, Facebook can track user behavior on other sites and then sell this information to market- ers. Facebook also sells display ads to firms that show up in the right column of users’ home pages and most other pages in the Facebook interface such as photos and apps.

Twitter has developed many new offerings to interest advertisers, like “promoted tweets” and “pro- moted trends.” These features give advertisers the ability to have their tweets displayed more promi- nently when Twitter users search for certain key- words. Many big advertisers are using Twitter’s Vine service, which allows users to share short, repeating videos with a mobile-phone app or post them on other platforms such as Facebook.

Lowe’s is using Facebook mobile video and Snap- chat image messaging to help first-time millennial home buyers learn home improvement skills. The home improvement retailer launched a new series of social videos in April 2016 to showcase spring clean- ing and do-it-yourself projects. Lowe’s believes this is a more immediate and interactive way to reach younger consumers who are increasingly spending time on visual-driven social media platforms.

Lowe’s “FlipSide” videos are short, two-sided live action videos that show simultaneously what can happen if a homeowner doesn’t clean the gutters and air filters or prune overgrown shrubs compared with the results of proper spring cleaning. These videos take advantage of the flip video application in Face- book’s mobile feed that enables users to change the orientation of the video, and the videos link back to the Lowes.com website.

INTERACTIVE SESSION: TECHNOLOGY

Getting Social with Customers

Lowe’s “In-a-Snap” Snapchat series tries to inspire young homeowners and renters to undertake sim- ple home improvement projects such as installing shelves to build a study nook. During the Lowe’s Snapchat story, users can tap on the screen to put a nail in a wall or chisel off an old tile. Lowe’s is working on another series of video tutorials on Face- book and Instagram called “Home School” that uses drawings from chalk artists to animate maintenance projects.

Lowe’s social media activities have helped increase brand engagement. Although the company’s social campaigns are designed to teach first-time homeowners or young renters about home improve- ment, the company is also hoping they will encour- age consumers to think differently about the brand beyond its products and services. Management believes millennials who are becoming first-time homeowners want to know the deeper meaning of what a company is trying to stand for, not just the products and services it offers.

An estimated 90 percent of customers are influ- enced by online reviews, and nearly half of U.S. social media users actively seek customer service through social media. As a result, marketing is now placing much more emphasis on customer satisfac- tion and customer service. Social media monitoring helps marketers and business owners understand more about likes, dislikes, and complaints concern- ing products, additional products or product modifi- cations customers want, and how people are talking about a brand (positive or negative sentiment).

General Motors (GM) has 26 full-time social media customer care advisers for North America alone, covering more than 150 company social channels from GM, Chevrolet, Buick, GMC, and Cadillac, and approximately 85 sites such as automotive enthusiast forums. These advisers are available to assist custom- ers seven days a week, 16 operational hours per day. GM believes that the processes for identifying and resolving quality concerns are very important.

GM recognized early on that there was a wealth of information in online vehicle owner forums that should be utilized in product development. GM social media advisers actively monitor vehicle owner forums and other social media platforms to identify potential issues and provide real-time customer feed- back to the company’s brand quality and engineering

424 Part Three Key System Applications for the Digital Age

CASE STUDY QUESTIONS

leaders. In some cases, GM social media advisers were able to identify issues much earlier than tradi- tional surveying or dealer feedback.

For example, GM’s social media team identified a faulty climate-control part when a customer posted the issue on a product-owner blog. The complaint received dozens of replies and thousands of views, prompting GM that it needed to investigate further. Once GM specialists determined the root cause of the issue, the company released a technical service bulletin to all dealerships to replace the affected HVAC control modules on vehicles already built. GM fixed the original customer’s vehicle within 10 days and adjusted production to ensure no additional cus- tomers would be affected.

Still, the results of a social presence can be unpre- dictable and not always beneficial, as a number of companies have learned. In October 2014, Microsoft CEO Satya Nadella triggered negative reaction on Twitter after he spoke about women not needing to ask for pay raises at work and how they should trust the employment system. Nadella later tweeted an apology. Social media provided a platform for angry backlash against Starbucks in March 2015 for its “Race Together” campaign. Starbucks has taken on sensitive social issues before, and it launched the campaign to encourage conversation with its custom- ers about race relations. Critics hammered Starbucks on social media for trying to capitalize on racial ten- sions in the United States.

Companies everywhere have rushed to create Facebook pages and Twitter accounts, but many still don’t understand how to make effective use of these social media tools. While large companies have learned how to stand out on social networks and get lots of help from sites like Facebook and Twitter, most local business owners remain stumped by social marketing. This is true in the auto industry. Car manufacturers including Hyundai and Ford Motor have embraced social media and spend tens of millions of dollars on sophisticated marketing campaigns. Yet many of their local dealers barely maintain a Facebook page, and those that do report little or no gains in sales from going social.

Traditional marketing is all about creating and deliv- ering a message using communication that is primarily one-way. Social media marketing is all about two-way communication and interaction. It enables businesses to receive an immediate response to a message—and to react and change the message, if necessary. Many companies still don’t understand that difference.

Sources: Claudia Kubowicz Malhotra, and Arvind Malhotra, “How CEOs Can Leverage Twitter,” MIT Sloan Management Review , Win- ter 2016; Daniel Matthews, “Social Customer Service Metrics: 3 Case Studies,” Ducttapemarketing.com , accessed July 1, 2016; Nathalie Tadena, “Lowe’s Enlists Snapchat, Facebook Mobile Video in New Push to Reach Millennials,” Wall Street Journal , April 25, 2016; Vindu Goel, “The Gap Between Auto Dealers and Social Media,” New York Times , April 9, 2015; and Ben DiPetro, “The Morning Risk Report: Takeaways from Starbucks’ Race Relations Gambit,” Wall Street Jour- nal , March 24, 2015.

1. Assess the management, organization, and tech- nology issues for using social media technology to engage with customers.

2. What are the advantages and disadvantages of using social media for advertising, brand building, market research, and customer service?

3. Give an example of a business decision in this case study that was facilitated by using social media to interact with customers.

4. Should all companies use social media technology for customer service and marketing? Why or why not? What kinds of companies are best suited to use these platforms?

Beyond merely soliciting advice, firms can be actively helped in solving some business problems by using crowdsourcing . For instance, BMW launched a crowdsourcing project to enlist the aid of customers in designing an urban vehicle for 2025. Kickstarter.com is arguably one of the most famous e-commerce crowd- funding sites where visitors invest in start-up companies. Other examples include Caterpillar working with customers to design better machinery, IKEA for design- ing furniture, and Pepsico using Super Bowl viewers to build an online video.

Marketing through social media is still in its early stages, and companies are experimenting in hopes of finding a winning formula. Social interactions and

Chapter 10 E-commerce: Digital Markets, Digital Goods 425

customer sentiment are not always easy to manage, presenting new challenges for companies eager to protect their brands. The Interactive Session on Technology provides specific examples of companies’ social marketing efforts using Facebook and Twitter.

10- 4 How has e-commerce affected business-to- business transactions?

The trade between business firms (business-to-business commerce, or B2B) represents a huge marketplace. The total amount of B2B trade in the United States in 2015 was estimated to be about $14.6 trillion, with B2B e-commerce (online B2B) contributing about $6.2 trillion of that amount (U.S. Bureau of the Census, 2015; authors’ estimates). By 2019, B2B e-commerce is expected to grow to about $8.6 trillion in the United States. The process of conducting trade among business firms is complex and requires significant human intervention; therefore, it consumes significant resources. Some firms estimate that each corporate purchase order for support products costs them, on average, at least $100 in administrative overhead. Administrative overhead includes processing paper, approving purchase decisions, spending time using the telephone and fax machines to search for products and arrange for purchases, arranging for shipping, and receiving the goods. Across the economy, this adds up to trillions of dollars annually spent for procurement processes that could be automated. If even just a portion of inter-firm trade were automated, and parts of the entire procurement process were assisted by the Internet, literally trillions of dollars might be released for more productive uses, consumer prices potentially would fall, productivity would increase, and the economic wealth of the nation would expand. This is the promise of B2B e-commerce. The challenge of B2B e-com- merce is changing existing patterns and systems of procurement and designing and implementing new Internet-based B2B solutions.

Electronic Data Interchange (EDI) B2B e-commerce refers to the commercial transactions that occur among busi- ness firms. Increasingly, these transactions are flowing through a variety of Internet-enabled mechanisms. About 80 percent of online B2B e-commerce is still based on proprietary systems for Electronic Data Interchange (EDI) . EDI enables the computer-to-computer exchange between two organizations of stan- dard transactions such as invoices, bills of lading, shipment schedules, or pur- chase orders. Transactions are automatically transmitted from one information system to another through a network, eliminating the printing and handling of paper at one end and the inputting of data at the other. Each major industry in the United States and much of the rest of the world has EDI standards that define the structure and information fields of electronic documents for that industry.

EDI originally automated the exchange of documents such as purchase orders, invoices, and shipping notices. Although many companies still use EDI for document automation, firms engaged in just-in-time inventory replenish- ment and continuous production use EDI as a system for continuous replenish- ment. Suppliers have online access to selected parts of the purchasing firm’s production and delivery schedules and automatically ship materials and goods to meet prespecified targets without intervention by firm purchasing agents (see Figure 10. 6 ).

426 Part Three Key System Applications for the Digital Age

Although many organizations still use private networks for EDI, they are increasingly web-enabled because Internet technology provides a much more flexible and low-cost platform for linking to other firms. Businesses can extend digital technology to a wider range of activities and broaden their circle of trad- ing partners.

Procurement, for example, involves not only purchasing goods and materi- als but also sourcing, negotiating with suppliers, paying for goods, and mak- ing delivery arrangements. Businesses can now use the Internet to locate the lowest-cost supplier, search online catalogs of supplier products, negotiate with suppliers, place orders, make payments, and arrange transportation. They are not limited to partners linked by traditional EDI networks.

New Ways of B2B Buying and Selling The Internet and web technology enable businesses to create electronic store- fronts for selling to other businesses using the same techniques as used for B2C commerce. Alternatively, businesses can use Internet technology to create extranets or electronic marketplaces for linking to other businesses for pur- chase and sale transactions.

Private industrial networks typically consist of a large firm using a secure website to link to its suppliers and other key business partners (see Figure  10. 7 ). The buyer owns the network, and it permits the firm and designated sup- pliers, distributors, and other business partners to share product design and development, marketing, production scheduling, inventory management, and unstructured communication, including graphics and e-mail. Another term for a private industrial network is a private exchange .

An example is VW Group Supply, which links the Volkswagen Group and its suppliers. VW Group Supply handles 90 percent of all global purchasing for Volkswagen, including all automotive and parts components.

Net marketplaces , which are sometimes called e-hubs, provide a single, dig- ital marketplace based on Internet technology for many buyers and sellers (see Figure 10. 8 ). They are industry-owned or operate as independent intermediar- ies between buyers and sellers. Net marketplaces generate revenue from pur- chase and sale transactions and other services provided to clients. Participants in Net marketplaces can establish prices through online negotiations, auctions, or requests for quotations, or they can use fixed prices.

There are many types of Net marketplaces and ways of classifying them. Some sell direct goods and some sell indirect goods. Direct goods are goods

FIGURE 10. 6 ELECTRONIC DATA INTERCHANGE (EDI)

Companies use EDI to automate transactions for B2B e-commerce and continuous inventory replen- ishment. Suppliers can automatically send data about shipments to purchasing firms. The purchasing firms can use EDI to provide production and inventory requirements and payment data to suppliers.

Chapter 10 E-commerce: Digital Markets, Digital Goods 427

used in a production process, such as sheet steel for auto body production. Indirect goods are all other goods not directly involved in the production process, such as office supplies or products for maintenance and repair. Some Net marketplaces support contractual purchasing based on long-term relation- ships with designated suppliers, and others support short-term spot purchas- ing, where goods are purchased based on immediate needs, often from many suppliers.

FIGURE 10. 7 A PRIVATE INDUSTRIAL NETWORK

A private industrial network, also known as a private exchange, links a firm to its suppliers, distribu- tors, and other key business partners for efficient supply chain management and other collaborative commerce activities.

FIGURE 10. 8 A NET MARKETPLACE

Net marketplaces are online marketplaces where multiple buyers can purchase from multiple sellers.

428 Part Three Key System Applications for the Digital Age

Some Net marketplaces serve vertical markets for specific industries, such as automobiles, telecommunications, or machine tools, whereas others serve horizontal markets for goods and services that can be found in many industries, such as office equipment or transportation.

Exostar is an example of an industry-owned Net marketplace, focusing on long-term contract purchasing relationships and on providing common net- works and computing platforms for reducing supply chain inefficiencies. This aerospace and defense industry-sponsored Net marketplace was founded jointly by BAE Systems, Boeing, Lockheed Martin, Raytheon, and Rolls-Royce plc to connect these companies to their suppliers and facilitate collaboration. More than 100,000 trading partners in the commercial, military, and govern- ment sectors use Exostar’s sourcing, e-procurement, and collaboration tools for both direct and indirect goods.

Exchanges are independently owned third-party Net marketplaces that con- nect thousands of suppliers and buyers for spot purchasing. Many exchanges provide vertical markets for a single industry, such as food, electronics, or industrial equipment, and they primarily deal with direct inputs. For example, Go2Paper enables a spot market for paper, board, and craft among buyers and sellers in the paper industries from more than 75 countries.

Exchanges proliferated during the early years of e-commerce, but many have failed. Suppliers were reluctant to participate because the exchanges encour- aged competitive bidding that drove prices down and did not offer any long- term relationships with buyers or services to make lowering prices worthwhile. Many essential direct purchases are not conducted on a spot basis because they require contracts and consideration of issues such as delivery timing, custom- ization, and quality of products.

10- 5 What is the role of m-commerce in business, and what are the most important m-commerce applications?

Walk down the street in any major metropolitan area and count how many people are pecking away at their iPhones, Samsungs, or BlackBerrys. Ride the trains or fly the planes, and you’ll see your fellow travelers reading an online newspaper, watching a video on their phone, or reading a novel on their Kin- dle. In five years, the majority of Internet users in the United States will rely on mobile devices as their primary device for accessing the Internet. As the mobile audience expands in leaps and bounds, mobile advertising and m-com- merce have taken off.

In 2017, m-commerce constituted about 37 percent of all e-commerce, with about $170 billion in annual revenues generated by retail goods and services, apps, advertising, music, videos, ring tones, movies, television, and location- based services such as local restaurant locators and traffic updates. However, m-commerce is the fastest-growing form of e-commerce, expanding at a rate of 50 percent or more per year, and is estimated to grow to $300 billion by 2020 (see Figure 10. 9 ) (eMarketer, 2016c)

The main areas of growth in mobile e-commerce are mass market retailing such as Amazon ($16.8 billion) and Apple (about $14 billion); sales of digital content such as music, TV shows, movies, and e-books (about $6 billion); and in-app sales to mobile devices (about $7 billion) (eMarketer, 2016d). These esti- mates do not include mobile advertising or location-based services. On-demand

Chapter 10 E-commerce: Digital Markets, Digital Goods 429

firms such as Uber (described in the chapter- opening case) and Airbnb are loca- tion-based services, but they are certainly examples of mobile commerce as well.

Location-Based Services and Applications Location-based services include geosocial, geoadvertising, and geoinforma- tion services. Seventy-four percent of smartphone owners use location-based services. What ties these activities together and is the foundation for mobile commerce is the global positioning system (GPS)–enabled map services avail- able on smartphones. A geosocial service can tell you where your friends are meeting. Geoadvertising services can tell you where to find the nearest Italian restaurant, and geoinformation services can tell you the price of a house you are looking at or about special exhibits at a museum you are passing. In 2017, the fastest-growing and most popular location-based services are on-demand economy firms such as Uber, Lyft, Airbnb, Instacart (see the Interactive Session on Organizations), and hundreds more that provide services to users in local areas and are based on the user’s location (or, in the case of Airbnb, the user’s intended travel location).

Waze is an example of a popular, social geoinformation service. Waze is a GPS-based map and navigational app for smartphones, now owned by Google. Waze locates the user’s car on a digital map using GPS and, like other navigation programs, collects information on the user’s speed and direction continuously. What makes Waze different is that it collects traffic information from users who submit accident reports, speed traps, landmarks, street fairs, protests, and even addresses. Waze uses this information to come up with suggested alternative routes, travel times, and warnings and can even make recommendations for gas stations along the way. The Waze app is used extensively by Uber and Lyft drivers and more than 25 million other drivers in the United States.

Foursquare and new offerings by Facebook and Google are examples of geosocial services. Geosocial services help you find friends, or your friends to

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FIGURE 10. 9 MOBILE RETAIL COMMERCE REVENUES

Mobile e-commerce is the fastest-growing type of B2C e-commerce and represented about 33 percent of all e-commerce in 2016. Sources: Data from e-Marketer chart, “US Retail Mcommerce Sales, 2013-2019,” May 2015.

430 Part Three Key System Applications for the Digital Age

The online grocery store Webvan was perhaps the most well-known flop of the dot-com boom. Its 2001 failure led many pundits and investors to con- clude that the online grocery business model was untenable.

However, Webvan’s downfall was due mainly to pursuing a first-mover advantage strategy. It paid more than $1 billion to build huge distribution ware- houses, bought fleets of delivery trucks, and invested heavily in marketing. Then it offered free deliveries on any size order, at virtually any hour, at prices that trumped its brick-and-mortar competitors. This was not a formula for generating profits.

In recent years other companies are testing the waters again for online grocery sales. FreshDirect in New York City has succeeded by combining fresh local produce, organic and kosher items, and custom- prepared meals with standard grocery store fare. Established brick-and-mortar firms including Albert- son’s, Safeway and Peapod.com (the online entity for both Stop & Shop and Giant) took over as pure play online firms perished.

The newest entrant, Instacart bypasses the expenses of warehousing and transportation alto- gether by using a legion of independent contractors and local food retailers. These personal shoppers receive orders via the Instacart smartphone app, fill them from grocery store aisles, and use their own vehicles to deliver them to customers’ doors. Like fellow “sharing economy” firm Uber, Instacart minimizes labor costs by requiring its personal shoppers to pay for their own auto and health insur- ance and Social Security contributions. Purport- edly paid between $15 and $20 an hour, depending on how quickly they can fill and deliver an order, most Instacart shoppers work part-time on flexible schedules.

Instacart co-founder and CEO Apoorva Mehta believes Instacart’s competitive advantage is two- fold. First, customers are not limited to a single vendor and can combine items from multiple stores on one order, so product selection is truly custom- ized. (Instacart uses special software that can track inventory across multiple supermarkets.) And since personal shoppers are on call around the clock, cus- tomers have to neither order many hours in advance of delivery nor wait for a delivery window. In fact, customers can have their grocery list filled and deliv- ered in less than an hour!

Instacart’s app provides a detailed map of each local establishment including store aisle contents. The customer’s grocery list, compiled using exten- sive drop-down menus either on the website or in the app, is organized by merchant and aisle to provide maximum order fulfillment efficiency. Inventory is tracked for all of Instacart-affiliated merchants. As a personal shopper skims an aisle, bedecked in a bright green T-shirt flaunting the Insta- cart logo, items can be selected for different orders placed at different times. The software can also plan delivery routes and predict future customer orders.

iPhone users can connect to the Instacart app from Yummly, the largest recipe search engine in the world, and have the ingredients delivered in time for dinner. Visitors to Food Network websites, with more than half a million recipes, can browse recipes online and then click a button to add ingredients they need to their Instacart shopping cart. The Instacart app is integrated with Google Now cards so that Android users can place orders for either delivery or pickup using a token generated within the app.

Instacart’s core competencies thus dictate its tar- get market: the price-insensitive, convenience shop- per. At first, item prices were marked up (20 percent in one sampling) and a $3.99 delivery fee charged. An Amazon Prime–like service called Instacart Express requires a certain volume of business and a $99 yearly fee in exchange for free delivery. One of Webvan’s big mistakes was pursuing a mass-market strategy. It was never going to be able to turn a profit by providing quality and selection at rock-bottom prices—with free delivery to boot. Instacart is instead catering to shoppers who are willing to pay a pre- mium to have both quality and selection.

By mid-2015 Instacart had 200 employees and 4,000 personal shoppers in New York, Los Angeles, San Francisco, San Jose, Washington, DC, Chicago, Boston, Austin, Seattle, Philadelphia, Atlanta, Boul- der, Denver, Houston, and Portland, Oregon. It con- tinues to grow. Grocery purveyors, from large chains such as Costco, BJ’s Wholesale Club, Safeway, Kroger, Super Fresh, Trader Joe’s, and Whole Foods to local specialty shops such as Erewhon Organic Grocer & Café in LA, Marczyk Fine Foods in Denver, and Green Zebra in Portland are now welcoming Insta- cart as a way to expand their customer bases ahead of the full national rollout of Amazon subsidiary Amazon Fresh.

INTERACTIVE SESSION: ORGANIZATIONS

Can Instacart Deliver?

Chapter 10 E-commerce: Digital Markets, Digital Goods 431

layering labor on top of the existing grocery infra- structure is still unproven. According to a Wall Street Journal analysis, an order of 15 common items such as frozen peas, milk, cereal, and fresh fruit costing about $68 from a San Francisco Safeway store would produce a profit of only $1.50 for Instacart. If the order were smaller by one 28- ounce jar of peanut butter, Instacart would break even, and a smaller order could push it into the red. Without price con- cessions from participating merchants, can Insta- cart attract enough customers? And maintain a pay scale that ensures the topnotch customer service demanded by its target market? And still make a profit? And can retailers’ sales gains from Instacart be sustained? Instacart may be a great idea, but it’s a very big bet.

Sources: Sarah Perez, “Instacart Becomes the Default Ingredients- Buying App for Food Network’s Websites,” TechCrunch.com , June 2, 2016; Megan Rose Dickey, “Instacart Cutting Wages for Shoppers Starting March 14,” TechCrunch.com , March 11, 2016; Brad Stone, “Instacart Rings Up $220 Million More for its Grocery Delivery Ser- vice,” Bloomberg Business , January 13, 2015; Carmel DeAmicis, “On the Way to $220M in Funding, Instacart Quietly Changed Its Busi- ness Model,” gigaom.com , January 14, 2015; Farhad Manjoo, “Insta- cart’s Bet on Online Grocery Shopping, New York Times , April 29, 2015 and “Grocery Deliveries in the Sharing Economy,” New York Times , May 21, 2014.

3. What is the role of information technology in Instacart’s business model?

4. Is Instacart’s model for selling online groceries viable? Why or why not?

CASE STUDY QUESTIONS

1. Analyze Instacart using the value chain and com- petitive forces models. What competitive forces does the company have to deal with? What is its value proposition?

2. Explain how Instacart’s business model works. How does the company generate revenue?

While many analysts predict that matching the bargain basement prices of Amazon and Walmart is unavoidable, Instacart is instead modifying its business model. Partnerships with Petco and Tom- linson’s Pet Supplies in Austin, Texas, hint of addi- tional product areas on the horizon, while Mehta speculates that expansion into general logistics is conceivable.

Many of Instacart’s grocery store partners now set their own prices, paying Instacart a cut of each order. This has freed Instacart of the burden of mark- ups, protected it from the vagaries of variable food prices, and provided a more stable profit structure. Retailers have been willing to pay Instacart in the hope of gaining more business because Instacart enables a single store to serve people across a larger geographic area. Affiliated retailers are reporting gains, although the numbers are small. Nilam Ganen- thiran, head of Business Development and Strategy, maintains that different types of agreements have been reached, declining to specify whether partners are outsourcing their e-commerce to Instacart for a monthly fee or are charged per item purchased, per order placed, or per customer serviced.

With national chains achieving just 1 to 2 percent margins on grocery delivery, the Instacart model of

find you, by checking in to the service, announcing your presence in a res- taurant or other place. Your friends are instantly notified. About 20 percent of smartphone owners use geosocial services.

Foursquare provides a location-based social networking service to 60 million registered individual users, who may connect with friends, update their loca- tion, and provide reviews and tips for enjoying a location. Points are awarded for checking in at designated venues. Users choose to post their check-ins on their accounts on Twitter, Facebook, or both. Users also earn badges by check- ing in at locations with certain tags, for check-in frequency, or for the time of check-in. More than 500,000 local merchants worldwide use the merchant plat- form for marketing.

Connecting people to local merchants in the form of geoadvertising is the economic foundation for mobile commerce. Geoadvertising sends ads to users

432 Part Three Key System Applications for the Digital Age

based on their GPS locations. Smartphones report their locations back to Google and Apple. Merchants buy access to these consumers when they come within range of a merchant. For instance, Kiehl Stores, a cosmetics retailer, sent special offers and announcements to customers who came within 100 yards of their store.

Other Mobile Commerce Services Banks and credit card companies have developed services that let customers manage their accounts from their mobile devices. JPMorgan Chase and Bank of America customers can use their cell phones to check account balances, trans- fer funds, and pay bills. Apple Pay for the iPhone 6 and Apple Watch, along with other Android and Windows smartphone models, allows users to charge items to their credit card accounts with a swipe of their phone. (See our Learning Track on mobile payment systems.)

The mobile advertising market is the fastest-growing online ad platform, rack- ing up $52 billion in ad revenue in 2017 and growing at 21 percent annually. Ads eventually move to where the eyeballs are, and increasingly that means mobile phones and, to less extent, tablets. Google is the largest mobile advertising mar- ket, posting about $10 billion in mobile ads, with Facebook number two with $4.9 billion. Yahoo displays ads on its mobile home page for companies such as Pep- sico, Procter & Gamble, Hilton, Nissan, and Intel. Google is displaying ads linked to cell phone searches by users of the mobile version of its search engine; Micro- soft offers banner and text advertising on its MSN Mobile portal in the United States. Ads are embedded in games, videos, and other mobile applications.

Shopkick is a mobile application that enables retailers such as Best Buy, Sports Authority, and Macy’s to offer coupons to people when they walk into their stores. The Shopkick app automatically recognizes when the user has entered a partner retail store and offers a new virtual currency called kick- bucks, which can be redeemed for Facebook credits, iTunes gift cards, travel vouchers, DVDs, or immediate cashback rewards at any of the partner stores.

Fifty-five percent of online retailers now have m-commerce websites—sim- plified versions of their websites that enable shoppers to use cell phones to shop and place orders. Clothing retailers Lilly Pulitzer and Armani Exchange, Home Depot, Amazon, Walmart, and 1-800-Flowers are among those compa- nies with apps for m-commerce sales. In 2016, more than half of m-commerce sales occurred within apps rather than mobile web browsers.

10- 6 What issues must be addressed when building an e-commerce presence?

Building a successful e-commerce presence requires a keen understanding of business, technology, and social issues as well as a systematic approach. Today, an e-commerce presence is not just a corporate website but also includes a social network site on Facebook, a Twitter feed, and smartphone apps where customers can access your services. Developing and coordinating all these cus- tomer venues can be difficult. A complete treatment of the topic is beyond the scope of this text, and students should consult books devoted to just this topic (Laudon and Traver, 2016). The two most important management challenges in building a successful e-commerce presence are (1) developing a clear under- standing of your business objectives and (2) knowing how to choose the right technology to achieve those objectives.

Chapter 10 E-commerce: Digital Markets, Digital Goods 433

Develop an E-Commerce Presence Map E-commerce has moved from being a PC-centric activity on the web to a mobile and tablet-based activity. Currently, a majority of Internet users in the United States use smartphones and tablets to shop for goods and ser- vices, look up prices, enjoy entertainment, and access social sites, less so to make purchases. Your potential customers use these various devices at different times during the day and involve themselves in different conversa- tions, depending what they are doing—touching base with friends, tweeting, or reading a blog. Each of these is a touch point where you can meet the customer, and you have to think about how you develop a presence in these different virtual places. Figure 10. 10 provides a roadmap to the platforms and related activities you will need to think about when developing your e-commerce presence.

Figure 10. 10 illustrates four kinds of e-commerce presence: websites, e-mail, social media, and offline media. You must address different plat- forms for each of these types. For instance, in the case of website presence, there are three platforms: traditional desktop, tablets, and smartphones, each with different capabilities. Moreover, for each type of e-commerce pres- ence, there are related activities you will need to consider. For instance, in the case of websites, you will want to engage in search engine marketing, display ads, affiliate programs, and sponsorships. Offline media, the fourth type of e-commerce presence, is included here because many firms use mul- tiplatform or integrated marketing by which print ads refer customers to websites.

Type of Presence Platform Activity

Search Display Apps

Affiliates Sponsorships

Websites

Traditional

Mobile

Tablet

Facebook Conversation Engagement

Sharing Advice

Twitter

Blogs

Social media

Education Exposure Branding

Print

TV & radio Offline media

Newsletters Updates

Sales E-mail

Internal lists

Purchased lists

FIGURE 10. 10 E-COMMERCE PRESENCE MAP

An e-commerce presence requires firms to consider the four types of presence, with specific platforms and activities associated with each.

434 Part Three Key System Applications for the Digital Age

Develop a Timeline: Milestones Where would you like to be a year from now? It’s very helpful for you to have a rough idea of the time frame for developing your e-commerce presence when you begin. You should break your project down into a small number of phases that could be completed within a specified time. Table 10. 8 illustrates a one- year timeline for the development of an e-commerce presence for a start-up company devoted to fashions for teenagers. You can also find more detail about developing an e-commerce website in the Learning Tracks for this chapter.

TABLE 10. 8 E-COMMERCE PRESENCE TIMELINE

PHASE ACTIVITY MILESTONE

Phase 1: Planning Envision web presence; determine personnel.

Web mission statement

Phase 2: Website development

Acquire content; develop a site design; arrange for hosting the site.

Website plan

Phase 3: Web Implementation

Develop keywords and metatags; focus on search engine optimization; identify potential sponsors.

A functional website

Phase 4: Social media plan Identify appropriate social platforms and content for your products and services.

A social media plan

Phase 5: Social media implementation

Develop Facebook, Twitter, and Pinterest presence.

Functioning social media presence

Phase 6: Mobile plan Develop a mobile plan; consider options for porting your website to smartphones.

A mobile media plan

Review Summary

10- 1 What are the unique features of e-commerce, digital markets, and digital goods? E-commerce involves digitally enabled commercial transactions between and among organizations

and individuals. Unique features of e-commerce technology include ubiquity, global reach, universal technology standards, richness, interactivity, information density, capabilities for personalization and customization, and social technology. E-commerce is becoming increasingly social, mobile, and local.

Digital markets are said to be more transparent than traditional markets, with reduced informa- tion asymmetry, search costs, transaction costs, and menu costs along with the ability to change prices dynamically based on market conditions. Digital goods, such as music, video, software, and books, can be delivered over a digital network. Once a digital product has been produced, the cost of delivering that product digitally is extremely low.

10- 2 What are the principal e-commerce business and revenue models? E-commerce business models are e-tailers, transaction brokers, market creators, content provid-

ers, community providers, service providers, and portals. The principal e-commerce revenue mod- els are advertising, sales, subscription, free/freemium, transaction fee, and affiliate.

10- 3 How has e-commerce transformed marketing? The Internet provides marketers with new ways of identifying and communicating with millions of

potential customers at costs far lower than traditional media. Crowdsourcing using the wisdom of crowds helps companies learn from customers to improve product offerings and increase customer value. Behavioral targeting techniques increase the effectiveness of banner, rich media, and video ads. Social commerce uses social networks and social network sites to improve targeting of products and services.

Chapter 10 E-commerce: Digital Markets, Digital Goods 435

10- 4 How has e-commerce affected business-to-business transactions? B2B e-commerce generates efficiencies by enabling companies to locate suppliers, solicit bids,

place orders, and track shipments in transit electronically. Net marketplaces provide a single, digi- tal marketplace for many buyers and sellers. Private industrial networks link a firm with its suppli- ers and other strategic business partners to develop highly efficient and responsive supply chains.

10- 5 What is the role of m-commerce in business, and what are the most important m-commerce applications?

M-commerce is especially well suited for location-based applications such as finding local hotels and restaurants, monitoring local traffic and weather, and providing personalized location-based marketing. Mobile phones and handhelds are being used for mobile bill payment, banking, securi- ties trading, transportation schedule updates, and downloads of digital content such as music, games, and video clips. M-commerce requires wireless portals and special digital payment systems that can handle micropayments. The GPS capabilities of smartphones make geoadvertising, geoso- cial, and geoinformation services possible.

10- 6 What issues must be addressed when building an e-commerce presence? Building a successful e-commerce presence requires a clear understanding of the business objec-

tives to be achieved and selection of the right platforms, activities, and timeline to achieve those objectives. An e-commerce presence includes not only a corporate website but also a presence on Facebook, Twitter, and other social networking sites and smartphone apps.

Key Terms Advertising revenue model , 415 Affiliate revenue model , 417 Behavioral targeting , 418 Business-to-business (B30B) , 412 Business-to-consumer (B30C) , 412 Community providers , 415 Consumer-to-consumer (C30C) , 412 Cost transparency , 407 Crowdsourcing , 425 Customization , 407 Digital goods , 410 Direct goods , 427 Disintermediation , 409 Dynamic pricing , 409 Electronic Data Interchange (EDI) , 426 E-tailer , 413 Exchanges , 429 Free/freemium revenue model , 416 Geoadvertising services , 430 Geoinformation services , 430 Geosocial services , 430 Indirect goods , 428 Information asymmetry , 408 Information density , 407 Intellectual property , 414 Location-based services , 430

Long tail marketing , 417 Market creator , 414 Market entry costs , 407 Marketspace , 405 Menu costs , 409 Micropayment systems , 416 Mobile commerce (m-commerce) , 412 Native advertising , 421 Net marketplaces , 427 Personalization , 407 Podcasting , 414 Price discrimination , 407 Price transparency , 407 Private exchange , 427 Private industrial networks , 427 Revenue model , 415 Richness , 407 Sales revenue model , 416 Search costs , 407 Social graph , 422 Social shopping , 423 Streaming , 414 Subscription revenue model , 416 Transaction costs , 405 Transaction fee revenue model , 417 Wisdom of crowds , 423

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

436 Part Three Key System Applications for the Digital Age

Review Questions 10- 1 What are the unique features of e-commerce,

digital markets, and digital goods?

• Name and describe four business trends and three technology trends shaping e-commerce today.

• List and describe the eight unique features of e-commerce.

• Define a digital market and digital goods and describe their distinguishing features.

10- 2 What are the principal e-commerce business and revenue models?

• Name and describe the three types of e-commerce.

• Name and describe the principal e-com- merce business models.

• Name and describe the e-commerce reve- nue models.

10- 3 How has e-commerce transformed marketing? • Explain how social networking and the wis-

dom of crowds help companies improve their marketing.

• Define behavioral targeting and explain how it works at individual websites and on adver- tising networks.

• Define the social graph and explain how it is used in e-commerce marketing.

10- 4 How has e-commerce affected business-to-busi- ness transactions?

• Explain how Internet technology supports business-to-business electronic commerce.

• Define and describe Net marketplaces and explain how they differ from private industrial networks (private exchanges).

10- 5 What is the role of m-commerce in business, and what are the most important m-commerce applications?

• Explain why m-commerce is the fastest- growing type of B2C e-commerce.

• Describe the different types of location- based services and applications.

10- 6 What issues must be addressed when building an e-commerce presence?

• List and describe the four types of e-com- merce presence.

Discussion Questions 10- 7 How does the Internet change consumer and

supplier relationships?

10- 8 The Internet may not make corporations obsolete, but the corporations will have to change their business models. Do you agree? Why or why not?

MyLabMIS

MyLabMIS

10- 9 How have social technologies changed e-com- merce? MyLabMIS

Hands-On MIS Projects The projects in this section give you hands-on experience developing e-commerce strategies for businesses, using spreadsheet software to research the profitability of an e-commerce company, and using web tools to research and evaluate e-commerce hosting services. Visit MyLab MIS’s Multimedia Library to access this chapter’s Hands-On MIS Projects.

Management Decision Problems