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Management Information Systems for The Information Age

Haag, S., & Cummings, M. (2013). Management information systems for the information age.

New York: McGraw-Hill.

1 MANAGEMENT INFORMATION

L?~STEMS FOR THE_l_NFORMATION AGE I

> > Ninth Edition G tephen HAAG I Maev~ ~UMMINGS J

he Information Age in Which You Live hanging the Face of Business

UTRAGEOUS INDUSTRY NSFORMATION: CELL PHONES

OOM PHONE REVENUES FOR HOTELS

ink about the title of this case. It's not the typi- ca l opening case study you've come to expect in

:extbooks. This is about the outrageous, yes, lit-

erally outrageous, transformations that are being cau sed by information technology. Newspaper su bscriptions are declining rapidly, as is revenue for

ri nt advertising in magazines; people are build- . g homes without land-based phone lines; movie

rentals largely happen online, not at a local video

store . The impact of technology is definitely pro-

ound, and it is transforming entire industries. Consider hotels. They rely on a number of sources

of revenue to make a profit. These sources include ro om rentals (the largest), restaurant food charges, t he use of banquet and conference facilities, park-

ing lot fees, and charges for the use of in-room

t elephones. But the latter is quickly going away. W ith the proliferation of personal cell phones, f ewer and fewer hotel guests are picking up the in-room hotel phone to make local and long dis- tance calls.

Take a look at the accompanying graph. In 2000, a typical hotel received $1,274 annually per

available room for in-room phone charges. So, for a hotel with 500 rooms, it could budget approxi-

mately $637,000 annually in phone revenue. Not anymore. In 2009, that annual revenue per room

for phone charges had dropped to $178. That's a decline of almost 86 percent. For a hotel with 500 rooms, $637,000 in revenue had dropped to $89,000 in a hurry.

This truly demonstrates the "outrageous" cor-

rective and transformative nature of technology. And it's happening in most every industry-travel,

newspapers and magazines, music, movies, the

local news, education, financial services. The list

goes on and on. As a future business leader, yo u' don't need

to focus on how cell phones work. Rather, you need to focus on how and why people use cell phones. The same is true for all the new tech-

nologies. You don't really need to "pop the

hood" and learn all about the engine of tech- nology. Rather, you need to focus on the per- sona I and business uses of technology. That's the knowledge you need to effectively build

bus iness strategy that incorporates technology.

And that's why we wrote this book. Welcome to the wonderful and outrageous world of

technology. 1•2

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'94 '99 ' 00 '04 '09

Questions

1. When was the last time you used a pay phone? How often have you used a pay phone in the

last year?

2. If you needed to use a pay phone, would you know immediately where one was located?

3. When was the last time you used your cell phone? How often have you used your cell

phone in the last day?

3

4 Chapter 1 • The Information Age in Which You Live

The Did You Know? video series on YouTube (www.youtube.com) is an exe ll ent resource for learning fasc inating fa cts about how technology is transforming our lives.

You Im

Introduction As you just read in the opening case study (appropriately titled "Outrageous Industry Transformation"), the way in which people use technology can and , in fact, does radi- cally change the competitive landscape of business. Hotels have traditionally relied on making roughly $1,200 per room per year in phone charges. That annual per room tele- phone revenue, because people use their cell phones instead of the in-room fee-b ased phone, is now less than $200 and may soon vanish altogether. In some way, this is an unintended consequence of technology. No one set out to invent the cell phone for the sole purpose of helping people lower their in-room hotel phone service charges. Indeed, the original architects of the cell phone never envisioned the extent to which cell ph ones (now more appropriately referred to as smartphones) would become such an inte part of our lives through delivering so much functionality.

You live in the " digital age." You live, work, learn, play, drive , net~ork, eat, and shop in a digital world. The influence of technology permeates everything you do. The a,·er- age American relies daily on more than 250 computers. Every part of your life dep ends on technology. Your TV, Kindle Fire, iPod, iPad, DVD player, car, and cell phone are a: technology enabled and- more important-not "able" without technology. Technolo~­ is so pervasive in your life it is often considered "invasive." Here's a wild sta tis tic: According to a worldwide survey conducted by Time magazine in 2005, 14 percem cell phone users stated they had stopped having sex to take a phone call.3 Hmmm .. .

Your generation, specifically the group of people born in the mid-to-late 1980s and eart- 1990s, was born into the dig,i.tal age. Society refers to you as dig;ital natives, while those of- -- born earlier are referred to as digital immigrants. In the early 1990s, few people had yet hear of the Internet, " surfing" was a term identified only as a water sport, and Microsoft was the dominant software publisher for word processing, spreadsheet, presentation, or Dm -- applications. Viruses were seen only under a microscope, worms were used for fis hing. "spam" was just a canned meat. Back then, teachers of grammar and spelling would corrected you for using the term "unfii.end." But all this changed in your first years on earr

As you moved through your early teens , e-commerce exploded and then qui imploded, transforming overnight Internet millionaires into overnight Internet paupers . Y are probably more than familiar with unique and interesting IT terms such as p odcasci!!= wiki, avatars , emoticons, spoofing, acorns , tweeting, retweeting, sexting, and phishing with a completely different kind of bait). Technology has been so much a part of your life - you may consider it more of a necessity than a convenience. Can you actually imagine your life would be like if you didn't have a cell phone? What would you do for a week wi

text messaging? What ifFacebook's Web site went down? [ s""h : 8"1WSe M< Often WOuld you Check tO See if it WaS Up and running again.')

Did You Know 3.0 (Official Video Edition) Not only that, the pace at which technology is chan=- - (and thus , transforming your life and the way busines s we~ vlbworks201 o 15 vi deos 1§ Subscribe

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is far faster now than for previous technologies and ge~E tions of people. Consider these statistics regarding they~ penetrate a market audience of 50 million people.

• Radio- 38 years • Television- 12 years • lnternet-4 years • iPod-3 years • Facebook- 2 years4

MIS Resource No. 1: Information 5

HntH

TECHNOLOGY.

THE SYNERGY

How people can use information-based technology tools to:

•Achieve a competitive advantage

• Do things cheaper and faster • Increase revenue • Innovate new processes

- -eres ting stuff, huh? This book and the course you're in are about the dynamic mix of ~ormation technology and how people use that technology, whether in their personal _ es , their careers in an organization, or perhaps for just making the world a better place - liYe. Specifically, this book is about management information systems. Formally, we

d ine management information systems as follows:

Management information systems (MIS) deals with the planning for, development, management, and use of information technology tools to help people perform all tasks related to information processing and management.

- . MIS deals with the coordination and use of three very important organizational . ources-information, people, and information technology. Stated another (and per- .::aps more simple) way, p eop le use information technology to work with information.

T hink of MIS as you would your other business courses. You take a course in finance, perhaps called financial management. The focus of that course isn't really the money itself

·hat it looks like, its color, etc.); rather it's about how organizations can use money as a _ ource. The same is true for a course in supply chain management. You won't spend the

rire course studying trains, planes, and trucks. You'll learn how to define and build effec- - ·e supply chain management systems-that include some combination of trains , planes, :md trucks- to meet the distribution, shipping, and warehousing needs of an organization.

T he same is true of MIS. While we explore numerous aspects of many different tech- ~ologies like databases and artificial intelligence, our real focu s is on how people can

e those technologies to work with and massage information to help an organization achieves its goals. So, there's a real synergy among the three resources of MIS, that is, :he people, the information, and the information technology (see Figure 1.1).

MIS Resource No. 1: Information ' Yhile we have called it the digital age, we are also in the information age, and what that means is knowledge is power. And information can take on many forms depending on :he context in which it is used. To shed some light on the often elusive term information .et's first define data and information and briefly look at business intelligence.

Figure 1.1 The Synergy among

the Three Resources

of MIS

I LEARNING OUTCOME 1

6 Chapter 1 • The Information Age in Which You Live

Figure 1.2 Data and Information

• Data are raw facts that describe a particular phenomenon such as the current temperature , the price of a movie rental, or your age. (Actually, the term data is plural; datum is singular.)

• Information is data that have a particular meaning within a specific context. The current temperature becomes information if you're deciding what to wear; in deciding what to wear, the data describing the price of a movie rental are not pertinent information (and therefore only data in that context).

Consider Figure 1.2. In the left is a single Excel workbook containing the number 21; let's assume that's your age. That is a piece of data, some sort of fact that describes the amount of time you have been alive. Now let's create a list of customers for a business that contains the age of each customer (the right portion of Figure 1.2). This is potential information since

In an Excel cell, you can store a single piece of data . Here, the cell contains the number 21, which we're assuming to be your age.

Data become information when they take on meaning . Here, information is a list of ages of all customers, which starts to provide insight into your customers.

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MIS Resource No. 1: Information 7

.;;siless can use it. Notice that you can create an average, find the ages of the youngest -sr customers, and build a frequency distribution of customers by age . . lo ok at Figure 1.3 . There you'll see an Excel workbook containing many

: of informa tion for each cus tomer. From these multiple sources of customer cion, we can start to derive business intelligence. Business intelligence (BI) is ·e information- about your customers, your competitors, your business part- ur competitive environment, and your own internal operations-that gives you ~cy to make effective, important, and often strategic decisions. Let's explore a

- examp les. ·ce coupon use by gender. Clearly, women use more coupons than men. That

· b us iness intelligence leads to some interesting questions. Can we encourage en co buy more by offe ring them more coupons? Does it even make sense to

ue to offer coupons to our male demographic? Take a loo k at total sales by p lan . Clearly, Plan A generates more revenue ($6,600) than Plan B ($2 ,650) . raises even more questions. Does your growth opportunity li e in hoping to d th e number of customers on Plan B? Or should you foc us your marketing - on getting more customers to spend even more money on Plan A, clearly the ~popular plan? - ·ce that data, information, and business intelligence all build on each other.

ation is a more complete picture of multiple data points; in our example, an age ingle piece of data while information was the collective ages of all customers.

ess intelligence extends that information to include gender behavior, the use of ns, preferred salespersons, and total purchases.

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AG E' GEHDER PLAN SALESPERSON TOTAL SALES NUM CO UPONS 21 M A S1 s 600 1 23 M 8 S2 $ 100 0 24 F A S2 $ 450 4 22 M A S2 $ 900 3 21 F B S3 s 200 2 23 F A S3 s 300 25 F B S1 500 21 M B S3 150 22 F A S1 750 24 F A S2 600 23 M B S3 s 250 22 F A S3 $ 450 23 M B S2 $ 100 21 F B S1 $ 250 25 M B S2 s 300 23 M A S2 $ 600 24 M B S1 $ 200 22 F A S1 $ 700 21 F B S3 $ 400 24 F A S2 $ 900 23 F B S1 $ 100 25 M A S3 $ 350 22 F B S3 $ 100

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Total sales for all customers on Plan A : $6,600

Total sales for all customers on Plan B: $2,650

Average age of customer preferring salesperson S3: 22.3

Average coupons women use: Average coupons men use:

'-.. - --- ----- -en y ou start to combine multiple sets ofinformation, you can generate a considerab le amount of business i nte ll igence.

~-"· ess i ntelligence helps you make effective strategic business decisions.

3.7 1:0

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8 Chapter 1 • The Information Age in Which You Live

A critical characteristic of data, information, and business intelligence is that of qua:- ity. Quality is another one of those often elusive terms that can mean different things i!! different contexts. (In our discussions of quality to follow, we'll be using the commo term information generically to refer to all intellectual assets-data, information, and business intelligence. We don't want you to forget the distinctions we've just described. but the fact is that the term information is used by business people and academics alih in a shorthand fashion in this way to cover all grades of intelligence.)

DEFINING INFORMATION QUALITY

Information exhibits high quality only if it is pertinent, relevant, and useful to you.. Unfortunately, in today's information age, information is not exactly at a premium; yo are bombarded daily with information, much of which is not really important to you ir: any way. Below are some information attributes that help define its quality.

• Timeliness-There are two aspects here. Do you have access to information when you need it? If you're preparing to make a stock trade, for example, you need access to the price of the stock right now. Second, does the information describe the time period or periods you're considering? A snapshot of sales today may be what is relevant. Or for some important decisions, you really need other information as well-sales yesterday, sales for the week, today's sale compared to the same day last week, today's sales compared to the same day las~ year, and so on.

• Location-Information is of no value to you if you can't access it. Ideally, your location or the information's location should not matter. IT can definitely create information quality here with technologies that support telecommuting, workplace-virtualization, mobile e-commerce, and so on, so you can access information at or from any location.

• Form-There are two aspects here also. Is the information in a form that is mo- - useful to or usable by you-audio, text, video, animation, graphical, or other? Depending on the situation, the quality of information is defined by its form and your ability to make use of it. Second, is the information free of errors? Think of information as you would a physical product. If you have a defective produ cL it lacks quality in that you cannot use it. Information is the same. This is the concept of garbage-in garbage-out (GIGO). If the information coming into yo decision-making process is in bad form (i.e., garbage-in), you'll more than likely make a poor decision (i.e. , garbage-out).

• Validity- Validity is closely related to the second aspect of form above. Validity addresses the credibility of information. Information is all over the Internet, bu does it come from a credible source? Much of the information on the Internet ~ not gone through any sort of quality control or verification process before beinc- published, so you have to question its validity.

CONSIDERING INFORMATION FROM AN ORGANIZATIONA L PERSPECTIVE

Organizations must treat information as any other resource or asset. It must be organize. managed, and disseminated effectively for the information to exhibit quality. Within organization, information flows in four basic directions (see Figure 1.4):

1. Upward. Upward information flows describe the current state of the organiza~ based on its daily transactions. When a sale occurs, for example, that informa ·

MIS Resource No. 1: Information 9

Current state ~= th e organization

Customers, suppliers, and other Coarse

granularity

UP DOWN

Strategies, goals, and directives

HORIZONTAL

Between functional business units and work teams

INFORMATION GRANULARITY

Fine granularity

originates at the lowest level of the organization and is passed upward through the various levels. Along the way, the information takes on a finer level of granularity. Information granularity refers to the extent of detail within the information. At lower organizational levels , information exhibits fine granularity because people need to work with information in great detail. At the upper organizational levels, information becomes coarser because it is summarized or aggregated in some way. That is, strategic managers need sales by year, for example, as opposed to knowing the detail of every single transaction.

2. Downward. Strategies, goals, and directives that originate at a higher level are passed to lower levels in downward information flows. The upper level of an organization develops strategies; the middle levels of an organization convert those strategies into tactics; and the lower levels of an organization deal with the operational details.

3. Horizontal. Information flows horizontally between functional business units and work teams. The goal here is to eliminate the old dilemma of"the right hand not knowing what the left hand is doing." All units of your organization need to inform other units of their processes and be informed by the other units regarding their processes. In general, everyone in a company needs to know everything relevant in a business sense (personal, sensitive data not included).

4. Outward/Inward. Information is communicated from and to customers, suppliers, distributors, and other partners for the purpose of doing business. These flows of information are really what electronic commerce is all about. Today, no organization is an island, and outward/inward flows can yield a competitive advantage.

Another organizational perspective on information regards what information describes. Information is internal or external, objective or subjective, and various combinations of these.

• Internal information describes specific operational aspects of an organization.

• External information describes the environment surrounding the organization.

• Objective information quantifiably describes something that is known.

• Subjective information attempts to describe something that is unknown.

Figure 1.4 An Organization, Its Information Flows, and Information Granularity

EMPLOYMENT INFORMATION HAS GONE SOCIAL

Social media tools and Web sites are all the rage.

Linkedln, Facebook, Twitter, and hundreds of other

social media sites get millions of visitors per day, many

of whom spend several hours perusing those sites, watching videos, catching up with friends, and creating

relationships.

And now, social media is quickly becoming the

preferred marketplace of employers and job seek-

ers. In 2009, UPS hired 29 employees using the latest

and greatest Web 2.0 technologies such as videos and

mobile-friendly Web content for those job seekers

using a smartphone to find and apply for a job. One

year later, UPS hired 955 employees using the same

techniques. That represents a 3200 percent increase.

Over 40 percent of surveyed employers stated they

would use different recruiting tactics to attract the best

Generation Y job seekers. Over 60 percent of those

employers identified social media sites as being the

preferred places to meet Generation Y job seekers.

Accord ing to Matt Lavery, Managing Director of

Corporate Talent Acquisition for UPS, "Our reason for

using social media is because that's where we think

the candidates are." And he's right. Almost 28 per-

cent of surveyed college students plan to use Linked ln

(www.linkedin.com ) to find a job. That's up from

5 percent the previous year. Linkedln is a professional

version of Facebook. At Linkedln, you develop "relation-

ships" for business. Only 7 percent of college graduates

planned to use Facebook for job searching .

Savvy graduating students are using social media

sites to gather valuable information about potential

employers. They read Facebook and Twitter updates

about potential companies. They read comments

posted by current and previous empl~yees of those same companies.

As you move forward through your studies and pre-

pare to enter the job market, you need to develop a

social media strategy-actually two strategies: The

first is in regard to using social media like Linkedln to

review potential employers and make contacts. Do you

have a Linked ln account? The second is in regard to

what information the Internet holds about you. Do you

want potential employers to see everything on your

Facebook wall? That's a good question to ponder. 5

Consider a bank that faces the decision about what interest rate to offer on a CD. That bank will use internal information (how many customers it has who can afford to buy a CD), external information (what rate other banks are offering), objective information (what is today's prime interest rate), and subjective information (what the prime interest rate is expected to be in the future). Actually, the rate other banks are offering is not only external information (it describes the environment surrounding the organization) but objective infor- mation (it is quantifiably known). Information usually has more than one aspect to it.

10

MIS Resource No. 2: People The single most important resource in any organization is its people. People set goals, carry out tasks, make decisions, serve customers, and, in the case of IT spe- cialists, provid e a stable and reliable technology environment so the organization can run smooth ly and gain a competitive advantage in the marketplace. So, this dis- cussion is all about you.

In business, your most valuable asset is not technology but rather your mind. IT is simply a set of tools that helps you work with and process information. Technology really is just a mind support tool set. Technology such as spreadsheet software can help you quickly create a high-quality and revealing graph. But it can't tell you whether you should build a bar or a pie graph, and it can't help you determine whether you should show sales by territory or sales by salesperson. Those are your tasks, and that's why your business curriculum includes classes in human resource management, accounting, finance, marketing, and perhaps production and operations management.

MIS Resource No. 2: People 11

_ -onetheless, technology is a very important set of tools for you. Technology can help you more efficient and can help you dissect and better understand problems and opportuni-

o, it's as important for you to learn how to use your technology tool set as it's impor- - that you understand the information to which you' re applying your technology tools .

... ECH NOLOGY LITERACY

• uchnolog;y-literate knowledge worker knows how and when to apply technology. e " how" aspect includes knowing which technology to purchase, how to exploit the y benefits of application software, and what technology infrastructure is required

qet businesses connected to each other, just to name a few. From your personal per- ctive, we've provided extended learning modules in this text to help you become a

cchnology-literate knowledge worker. \Ve encourage you to read all the extended learning modules, especially Extended

-~arning Module K (Careers in Business). That module covers career opportunities in -ariety of business disciplines including finance , marketing, accounting, management, d many others. Reading Extended Learning Module K will help prepare you for what-

- -er career you choose. You'll find a discussion there of key technologies for each busi- e s discipline that will help you succeed in your career.

A technology-literate knowledge worker also knows " when" to apply technology. :_-nfortunately, in many cases , people and organizations blindly decide to use technol-

,- in a desperate effort to solve a business problem. What you need to understand - that technology is not a panacea. You can' t simply apply technology to a given pro-

cess and expect that process instantly to become more efficient and effective. Look at it tllls way-if you apply technology to a process that doesn't work correctly, then you'll only be doing things wrong millions of times faster. There are cases when technology is

ot the solution. Being a technology-literate knowledge worker will help you determine '\\hen and when not to apply technology.

INF ORMATION LITERACY

_-\n information-literate knowledge worker

• Can define what information is needed.

• Knows how and where to obtain information.

• Understands the information once it is received (i.e., can transform the information into business intelligence).

• Can act appropriately based on the information to help the organization achieve the greatest advantage.

Consider a unique and real-life example of an information-literate knowledge worker. everal years ago, a manager of a retail store on the East Coast received some interest-

ing information: diaper sales on Friday evenings accounted for a large percentage of co tal sales of that item for the week. Most people learning this would have immediately j umped to the decision to ensure that diapers were always well stocked on Friday eve- nings or to run a special on diapers Friday evenings to increase sales even further, but not our information-literate knowledge worker. She first looked at the information and decided that she needed more information in order to create business intelligence. She imply needed to know more before she could act.

She decided the business intelligence she needed was why a rash of diaper sales (par- don the pun) occurred on Friday evenings and who was buying the diapers. That intel- ligence was not stored within the computer system, so she stationed an employee in the diaper aisle on Friday evening to record any information pertinent to the situation (i.e.,

1 2 Chapter 1 • The Information Age in Which You Live

she knew how and where to obtain the information). The store manager learned thac young businessmen purchased the most diapers on Friday evenings. Apparently, the~­ had been instructed to buy the weekend supply of diapers on their way home from work. The manager's response was to stock premium domestic and imported beer near the diapers. Since then, Friday evening has been a big sales time not only for diapers but also for premium domestic and imported beer.

There are a couple of important lessons you can learn from this story. First, as we\-e stated, technology is not a panacea. Although a computer system generated the initial report detailing the sales of diapers on Friday evenings, our retail store manager did noc make any further use of technology to design and implement her innovative and highly effective solution. Second, this story can help you distinguish between information and business intelligence. In this case, the information was the sales of diapers on Friday evening. The business intelligence, however, included:

• Who was making diaper purchases on Friday evening.

• Why those people were purchasing diapers on Friday evening. ,

• What complementary product( s) those people might also want or need. (This last point might also illustrate the manager's special knowledge.)

As a good mle of thumb, when you receive information and need to make a decision based on it, ask yourself questions that start with who, what, when, why, where, and how. Answer to those questions will help you create business intelligence and make better decisions.

YOUR ETHICAL RESPONSIBILITIES

Your roles as a technology-literate and information-literate knowledge worker extend far beyond using technology and business intelligence to gain a competitive advantage in the marketplace for your organization. You must also consider your social responsibili- ties: This is where ethics become important. Ethics are the principles and standards that guide our behavior toward other people. Your ethics have consequences for you just a laws do. But ethics are different from laws. Laws either clearly require or prohibit an action. Ethics are more subjective, more a matter of personal or cultural interpretation. Thus, ethical decision making can be complex. A decision or an action in some case might have-or be expected to have- an outcome that is actually right or wrong accord- ing to different people's ethics. Consider the following examples of actions:

1. Copying software you purchase, making copies for your friends, and charging them for the copies.

2. Making an extra backup of your software just in case both the copy you are using and the primary backup fail for some reason.

3. Giving out the phone numbers of your friends and family, without their permission, to a telecom provider of some sort of calling plan so you can receive a discount.

Each of these examples is either ethically (according to you or some people) or legally (accord- ing to the government) incorrect or both. In the second example, you might be ethically okay in making an extra backup copy (because you didn't share it with anyone), but according to some software licenses you're prohibited by law from making more than one backup copy. What do you think about the first and third examples? Illegal? Unethical? Both?

To help you better understand the relationship between ethical acts and legal acts. consider Figure 1.5. The graph is composed of four quadrants, and the complexity of ethical decisions about behavior is suggested by quadrant III (legal but unethical). Do any of the three examples above fall in quadrant III? Perhaps you can think of some other actions that although legal might still be unethical (how about gossiping?). You alway

MIS Resource No. 3: Information Technology 13

- ~-our actions to remain in quadrant I. If all your actions fall into that quadrant, you'll - be acting both legally and ethically and thus in a socially responsible way. Clearly,

- ology has further increased the complexity of ethics in our society because of the and casual ease with which people can access, distribute , and use

rmation. Being socially and ethically responsible in the information age involves - only the actions you initiate yourself but also what you do to protect

elf and your organization against the actions of others-that is, pro- Ethical u:ing yourself and your organization against cyber crimes. There are

y types of cyber crimes-such as promulgating viruses or worms , com- . g identity theft, and engaging in Web defacing-performed by a vari-

=-- of hackers such as black-hat hackers and cyberterrorists, and it is your Unethical

__,,-po nsibility to guard against them. It might even be considered an ethical -e not to do so. We cannot stress enough how important it is for you

- protect yourself and your organization's assets in cyberspace. We'll talk re about these issues in Chapter 8 (Protecting People and Information) and Extended

jarning Module H (Computer Crime and Forensics).

MIS Resource No. 3: Information Technology

-:-he third key resource for management information systems (MIS) is information chnology (IT) , any computer-based tool that people use to work with information and

support the information and information-processing needs of an organization. IT includes _cell phone or tablet PC that you use to obtain stock quotes , your home computer that ~ou use to write term papers, large networks that businesses use to connect to one another, :md the Internet that almost one in every six people in the world currently uses.

EY TECHNOLOGY CATEGORIES

0 ne simple-yet effective- way to categorize technology is as either hardware or soft- a:are (see Figure 1. 6 on the next page). Hardware is the physical devices that make up a co mputer. Software is the set of instructions that your hardware executes to carry out a specific task for you. So, your Blackberry is the actual hardware; and it contains software :hat you use to maintain your calendar, update your address book, check your e-mail, "°"tch videos, obtain stock market quotes, and so on.

All hardware technology falls into one of the following six basic categories:

I. An input device is a tool you use to enter information and commands. Input devices include such tools as keyboard, mouse, touch screen, game controller, and bar code reader.

2. An output device is a tool you use to see, hear, or otherwise recognize the results of your information-processing requests. Output devices include such tools as printer, monitor, and speakers.

3. A storage device is a tool you use to store information for use at a later time. Storage devices include such tools as thumb drive, flash memory card, and DVD.

4. The central processing unit (CPU) is the hardware that interprets and executes the system and application software instructions and coordinates the operation of all the hardware. RAM, or random access memory, is a temporary holding area

Figure 1.5 Acting Ethically and Legally6

Legal Illegal

14 Chapter 1 • The Information Age in Which You Live

Figure 1.6 Information Technology Hardware and Software

SOFTWARE

for the information you're working with as well as the system and application software instructions that the CPU currently needs.

5. A telecommunications device is a tool you use to send information to and receive it from another person or computer in a network. If you connect to the Internet using a modem, the modem is a telecommunications device.

6. Connecting devices include such things as a USB port into which you would connect a printer, connector cables to connect your printer to the USB port, and internal connecting devices on the motherboard.

There are two main types of software: application and system. Application software is the software that enables you to solve specific problems and perform specific tasks . Microsoft Word, for example, can help you write term papers. From an organizational point of view, payroll software, collaborative software, and inventory management soft- ware are all examples of application software.

System software handles tasks specific to technology management and coordinates the interaction of all technology devices. System software includes network operating

Financial Impact of IT: Break-Even Analysis 15

software, drivers for your printer and scanner, operating system software such as dows XP and Mac OS , and utility software such as anti-virus software, uninstaller

e, and file security software . .:.: chis is your first exposure to technology hardware and software, we suggest you

re E xtended Learning Module A (Computer Hardware and Software). we have seen, management information systems really is all about three key orga-

' onal resources-the people involved, the information they need, and the informa- rechnology that helps them. MIS is about getting the right technology and the right

rmation into the hands of the right people at the right time.

T'linancial Impact of IT: Break-Even Analysis

lien considering the use of any resource in an organization, you must ask questions - . "What sort of financial impact will this have on the organization? What's the return our investment (ROI)? Is this going to help reduce costs or increase revenue, or per-

p both?" All these questions address the financial impact of a resource . Technology - no different; you must be able to financially justify the use of technology.

A simple, and yet very powerful, tool for assessing the financial impact of a resource is ed " break-even analysis." In break-even analysis, you consider and chart the follow-

7 fin ancial information (see Figure 1. 7):

• Fixed cost-the total of all costs that you incur whether or not you sell anything. For example, rent for office or retail space is a fixed cost; even if you don' t sell a single thing, you still have to pay the monthly rent. Other fixed costs might include utilities, insurance, employee salaries, and so on.

• Variable cost-the amount it costs to acquire/produce one unit that you will eventually sell to your customers.

• Revenue-how much you sell that one unit for.

Revenue. This starts at zero and increases by $9 for each movie poster you sell.

Costs. This line is for total costs . So, it starts at the fixed cost line and increases by $6 for each movie poster you sell.

S1 ,500 !lllllliiiii-lml! .. .__,._ __________ .., Fixed costs. Regardless of how many units you sell, you will

111<--------L-----------....1.. always have these costs. 500

The break-even point, 500 units. You must sell 500 posters just to cover your fixed costs.

I LEARNING OUTCOME 2

Figure 1.7 Break-Even Analysis

1 6 Chapter 1 • The Information Age in Which You Live

Figure 1.8 Driving Fixed Costs to Zero

Break-even point of 250 posters

Let's assume that you've worked a deal with all the major movie studios to sell movie posters. You can buy each movie poster for $4 and sell it in your online store for $9. I· costs you $2 to ship a movie poster to a customer. Your online store, product catalog. credit card processing, domain name registration, and search engine placement are ar provided by GoDaddy (www.godaddy.com) at a cost of$1,500 per year. Your finan cial information then is this:

• Fixed costs-$1,500 per year for GoDaddy services. Whether you sell no posters or 10,000 posters, this cost remains fixed.

• Variable costs-$6, which represents $4 when you buy a movie poster from a studio and $2 when you ship that poster to a customer.

• Revenue-$9, or the price at which you sell a movie poster.

Using break-even analysis, you answer an important question, "How many movie pos r- ers do you have to sell to break even?" Graphically, it looks like Figure 1. 7 (on the previous page). The logic is simple: You make a net profit of $3 per poster ($9 sales price minus $6 variable cost). To cover your $1,500 of fixed costs, you have to sell•500 posters ($1 ,500 divided by $3). What happens in a given year if you sell less than 500 posters? Right, you lose money. So, 500 is the break-even point. And what's your net profit if you sell 700 posters in a year? The answer is $600, which is your net profit per poster ($3) times 20 0. We derive 200 by subtracting the break-even point of 500 from total units sold of 700.

Why is this important from a technology point of view? Because technology can help you and your organization do one or any combination of the following three: reduce fixed costs, reduce variable costs, and/or increase revenue.

REDUCING FIXED COSTS

One financial and operational goal of any organization is to have no fixed costs. Tha· is , in the business world you should strive to incur a cost only when you generate re,-- enue. \iVhy? Because when you have no fixed costs , your break-even point moves to zero (see Figure 1.8). So, you actually begin generating a profit with the very first unit you seI: because the only costs you have are variable costs.

Fixed costs of $750

~ Break-even point of 0 posters

Fixed costs of $0

In Figure 1.7, fixed costs were $1,500, making the break-even point 500 movie posters. Above on the left, we reduced fixed costs by 50 percent to $750, making the break-even point 250 movie posters. Above on the right, we reduced fixed costs to $0, making the break-even point 0 movie posters . In the latter case, you start making a profit on the very first poster you sell.

Financial Impact of IT: Break-Even Analysis 17

-::=-ximology can definitely play a part in helping you reduce fixed costs . Below are - examples.

Digital storefronts-Companies like Amazon and eBay that only have a presence !n the virtual world have significantly lower fixed costs in terms of retail space Lb.an companies that have to pay for retail space, like retail stores you would find in a mall.

• Telecommuting- This is a popular trend in most industries. If you can create a technology infrastructure that allows your employees to work from home (or anyw here for that matter, as long as it's not in the office) , you can reduce your ex.-penses related to office space, which would also include utilities , insurance, p arking, etc.

• \-o IP, or Voice over IP-Again, this is another one of those initiatives gaining in p opularity. VoIP allows you to use the Internet for making phone calls instead ofl easing traditional telephone lines from the phone company. A popular n riation on VoIP is Skype. (Here we go again-traditional phones are really o-etting hammered by technology. Remember the opening outrageous industry transformation.)

• Cloud computing- One of the hottest topics in the business world right now and one that we'll explore in great detail in Chapter 7. With cloud computing, you don't buy hardware infrastructure like servers or perhaps software site licenses. Instead, you rent them on an as-needed basis "in the cloud."

-:;:broughout this text, we'll alert you to IT-enabled opportunities for reducing ::d costs.

ED UCING VARIABLE COSTS

~le costs basically define your profit margin. That is , the smaller the variable cost : higher the profit margin (and vice versa). Your break-even point is smaller (moves to :: left) as you increase your profit margin by reducing variable costs (see Figure 1.9). ::-ouple of the really interesting IT-enabled variable cost reduction initiatives are listed ilie next page.

As you reduce variable costs, your break-even point occurs sooner, 400 movie posters

-------::;~•========--~ in this case .

Figure 1.9 Reducing Variable Costs

SPENDING MONEY TO SAVE CUSTOMERS

Sometimes, it's not about spending money to make

money. It may very well be about spending money to

keep your customers from jumping ship and going over

to the competition. When NetFlix exploded onto the

video rental market with its model of allowing you

to keep movies as long as you want with no late fee,

Blockbuster reluctantly responded by eliminating its

late fees. Unfortunately, Blockbuster waited too long

to undertake the initiative and is suffering dearly for it.

even going so far as to cancel their cable programming altogether.

In response in mid-2011, HBO introduced HBO Go.

HBO Go is a completely free service to HBO subscrib-

ers that allows you to watch HBO shows and movies

on your smartphone . Included in the HBO selection are

over 1,400 movie titles. In the first week of its release,

the HBO Go app (available for the Apple iPhone and

Google Android) was downloaded more than a million

times. That may very well be 1 million HBO customers

who won't jump ship and go to NetFlix.

Home Box Office (HBO) hopes to avoid sliding down

the same slippery slope as Blockbuster. HBO, just like

Blockbuster, is feeling "the pinch" of competing against

NetFlix. Using one of NetFlix's current models, for $8

per month you can connect your TV to the Internet and

download and watch as much NetFlix content as you

want. Many people are taking advantage of that, even

to the point of cancelling their HBO subscription and

And there's another reason fo r HBO's move to

mobile media. You can only use HBO Go if you're a

subscriber to HBO through traditional cable or satellite

programming. Non-HBO customers can't use it. HBO is

hoping that more people will subscribe to HBO just so

they can use HBO Go. 7

18

• Virtual goods-Virtual goods are as their name implies; they don't exist in the physical world. These are the best types of goods to sell in financial terms because you have no variable costs. Think about Farmville, Habbo Hotel, or even World of Warcraft. In any of those environments , you can buy virtual goods-a better tractor for farming, cool clothes for going dancing, or better weaponry. What you get is a virtual good that has no variable cost associated with it because it' s purely digital. So, the organization may have charged you $1 and that $1 was pure profit.

• Crowdsourcing-This is a great way to create value for free. Using crowdsourcing, you get non-paid non-employees to do your work. Think about eBay. eBay doesn't employ anyone to buy or sell in its marketplace. Instead, crowds of people (whom eBay doesn't have on the payroll) do all the work of listing items, taking photos, bidding, and even shipping goods and merchandise. Likewise, YouTube doesn't hire people to post videos. Instead, you do all the work to capture and upload a video, for free.

Virtual goods and crowdsourcing are two of the many IT-enabled methods for reducina variable costs. We'll cover more of them throughout the book.

INCREASING REVENUE

Finally, you can impact your break-even point by increasing revenue. That is to say, whell you increase revenue or price per unit, your break-even point comes earlier. In our movie poster example, if you increased the price from $9 to $11 for a poster, your break-eve point would be 300 units. Of course, if you raise prices too much, your competition wiL undercut you, and then you're in real trouble.

Technology can definitely help increase revenue. Below are a couple of ways.

• Recommendation engines-These engines make recommendations to you based on your likes , dislikes , and p ast purchases. You're very accustomed to

Industry Impact of IT: Porter's Five Forces Model 19

these. Apple's Genius tool for iTunes recommends additional music selections based on your purchases. Amazon uses a recommendation engine to offer you additional books based on the book(s) you're considering buying.

• Long-tail economics-Technology can help your organization overcome the 0/20 rule, which basically states that only 20 percent of the total available

p ro ducts are worth selling. These are the big hits that everyone wants and that all physical retail stores carry. But there is money to be made in niche products too. T hat's why iTunes offers millions of songs. (Compare that to the rather sparse inventory of a brick-and-mortar music store.) It' s also why Amazon has over I million book titles for sale and most brick-and-mortar book stores carry in the neighborhood of 25,000 to 50 ,000.

:ndustry Impact of IT: Porter's Five ~orces Model ply put, business strategy drives technology decisions, not the reverse. In your personal

-. ~-ou may choose to buy the latest piece of technology because it's cool. Not so in the ~ess world. Businesses carefully scrutinize their technology purchases , seeking to

and justify a competitive advantage. A competitive advantage is providing a product service in a way that customers value more than what your competition is able to do. To assess technology and the competitive advantage it can yield, many people choose -e Michael Porter's Five Forces Model. 8 The Five Forces Model helps business peo-

~ und erstand the relative attractiveness of an industry and the industry' s competitive -- ures in terms of the following five forces (see Figure 1.10):

I. Buyer power

2 . Supplier power

.3 . Threat of substitute products or services

4. Threat of new entrants

3. Rivalry among existing competitors

YER POWER

_ er power in the Fi ve Forces Model is high when buyers have many choices from m to buy, and low when their choices are few. Providers of products and services in

Rivalry among Existing Competitors

= LEARNING OUTCOME 3

Figure 1.10 Michael Porter's Five Forces Model

20 Chapter 1 • The Information Age in Which You Live

a particular industry wish to reduce buyer power. They create a competitive advanta~ by making it more attractive for customers to buy from them than from their compec- tion. Below are a few of the many companies using IT-enabled processes to reduce buye- power.

• NetFlix-Set up your movie list. After you watch a movie and return it, NetFlix will send you the next movie on your list. You can also rent videos through the mail, stream them to your computer, or stream them to your TV.

• United Airlines (or almost any airline for that matter)-Enroll in the Mileage PlWi program. As you travel using United (or perhaps make purchases using your United credit card), you accumulate miles for free air travel, upgrades , and hotel stays. Programs like this one, which reward customers based on the amount of business they do with a particular organization, are called loyalty programs.

• Apple iTunes-Create an iTunes account and buy and download whatever music you want. Then, you can organize and manage your music, riove it to your iPo d , and burn CDs. You can also store all your music (and photos and much more) in Apple's iCloud.

• Dell Computer-Completely customize your computer purchase. It will be delivered to your doorstep within a few business days.

What' s interesting about each of these examples (as well as all the others you can think of) is that the competitors in those industries have responded by creating similar programs. This simply means that no competitive advantage is ever permanent. NetFli-..: was the first to offer movie rentals (with a profitable business model) using the Internee as the primary platform. Therefore, it had.first-mover advantage, a significant impac~ on gaining market share by being the first to market with a competitive advantage. Ever:- major airline has a loyalty program similar to that of United Airlines. There are man~­ places on the Internet where you can buy and download music. Almost every maj or computer vendor allows you to customize your computer purchase. The lesson learned here-and for all strategies that result in a competitive advantage-is that a competitiYe advantage is only temporary and your organization must constantly innovate to find new competitive advantages.

SUPPLIER POWER

Supplier power in the Five Forces Model is high when buyers have few choices fro m whom to buy, and low when their choices are many. Supplier power is the opposite or buyer power: As a supplier organization in an industry, you want buyer power to be low and your supplier power to be high.

In a typical supply chain (see Figure 1.11 ), your organization will probably be bo th a supplier (to customer organizations) and a buyer, or customer (of other supplie! organizations). As a customer of other supplier organizations , you want to increase your buyer power. As a supplier to other organizations, you want to increase your supplier power, thus reducing your customer's buyer power.

In the quest for increasing supplier power, organizations use many tools at their di:.- posal, not just IT. Companies obtain patents and trademarks to minimize the exten- to which products and services can be duplicated and offered by other organizations. The De Beers Group for many years has fought fiercely to tightly control the supply and distribution of diamonds. OPEC (the Organization of the Petroleum Exporting Countries) has organized 11 oil-producing nations to better control the distributio n o- the world's most popular energy resource (supposedly to ensure the stabilization of oi. prices).

Industry Impact of IT: Porter's Five Forces Model 21

..... I I

Your Organization .......

I I I I

I I

You want supplier power to be low here.

You want buyer power to be high here.

You want supplier power to be high here.

You want buyer power to be low here.

EAT OF SUBSTITUTE PRODUCTS OR SERVICES

real of substitute products or services in the Five Forces Model is high when e many alternatives to a product or service, and low when there are few alterna- m which to choose. Ideally, your organization would like to be a supplier orga-

n in a market in which there are few substitutes for the products and services you Of course, that's seldom possible in any market today, but you can still create a -ri tive advantage by increasing switching costs. Switching costs are costs that make

ers reluctant to switch to another product or service supplier. What you need to -c: · that a switching cost does not necessarily have to be an actual monetary cost. - you buy products at Amazon.com over time , for example, Amazon develops a e p rofile of your shopping and purchasing habits through such techniques as col- \-e filtering. When you visit Amazon, products are offered to you that have been tai-

o your profile. This is only possible through the use of sophisticated technologies. choose to do your shopping elsewhere, there is a switching cost of sorts because

ew site you visit will not have a profile of you or a record of your past purchases. - is an effective variant of a loyalty program.) So, Amazon has reduced the threat

titute products and services, in a market in which there are many substitutes, by ring offerings to you, by creating a "cost" to you to switch to another online retailer.

- -:i tching costs can of course he real monetary costs too. You've probably been intro- ed to a switching cost when you signed up for the services of a cell phone provider. - e options and plans sound really great. But there is a serious switching cost in that

.o: cell phone providers require you to sign a long-term contract (as long as two years) rder to receive a free phone or unlimited night and weekend calling minutes. The

- uc cessful substitute to this is disposable cell phones that you buy and which con- a certain numheli of minutes for your use .

_,REAT OF NEW ENTRANTS

~ threat of new entrants in the Five Forces Model is high when it is easy for new com- -·ors to enter a market, and low when there are significant entry harriers to entering

ket. An entry barrier is a product or service feature that customers have come to t from organizations in a particular industry and that must he offered by an enter-

- rganization to compete and survive. Such harriers are erected, and overcome, and - new ones are created again. This is that vicious business cycle of build a competi- - advantage, enjoy first-mover advantage, and then watch your competition develop

initiatives thereby nullifying your competitive advantage. fo r example, if you're thinking of starting a hank, you must offer your customers an .- ofIT-enah led services, including ATM use , online hill paying and account moni-

-.no-, and the like. These are significant IT-based entry harriers to entering the banking -et because you must offer them for free (or a very small fee). If you consider our

:erious example of cell phone providers, a significant entry harrier in the past had to

Figure 1.11 Evaluating Buyer and Supplier Power for Your Organization

VALENTINE'S DAY GOES VIRTUAL

The average person was expected to spend $116 for

merchandise for Valentine's Day in 2011. Total spend-

ing was expected to exceed $15 billion.

choose to include in a card. Women even had the

option of including a photo of a gift they wanted fro m

Victoria's Secret.

To capture a portion of that money, and perhaps

even more than previously, many companies went vir-

tual in 2011 with Valentine's Day stories, messages,

flowers, and even food (although the food is real).

Rovio Mobile, the creator of the ultra-popular Ang ry

Birds game, created a Valentine's Day version of the

game. Of course, you had to pay 99 cents to download

it, but 99 cents is nothing to the millions of fanatic fa ns

of Angry Birds. Mattel ," the toy giant, created a campaign to ask

people if Barbie should reunite with Ken. (Ken and

Barbie split on Valentine's Day 2004.) Mattel used

Facebook and Twitter to have Ken post his love and

affection for Barbie. The purpose was to create

"social" noise so that Ken and Barbie lovers would

log on to BarbieandKen.com and vote one way or the

other. Of course, the site included a link to Barbie's

Facebook page, where people could buy Barbie and

Ken merchandise.

Mulberry, a British apparel maker, created virtua

flower seeds you could send via e-mail. When t he

recipient clicked on the seeds, Valeptine's Day flowe rs

bloomed right before their eyes.

Even Lenny's Sub Shop got into the social med ia

game for Valentine's Day. It gave away subs (you had to

send them to someone as a Valentine's Day gift) on its

Facebook page . According to George Alvord, Lenn y's

CEO, "The quickest way to win someone's heart is

through their stomach." Victoria's Secret created sexy e-valentine cards that

people could send through a social network. Victoria's

Secret posted photos and messages which people could

The lesson learned: Each of these gave some co rr-

pany a competitive advantage, if only for a day. 9

22

do with your phone number. Previously, if you wanted to change cell phone provide~ you couldn't take your telephone number with you (i.e., you had to get a new cell phon~ number). This created a significant entry barrier because new cell phone provider:: entering the industry were mainly limited to obtaining new customers who did not cur- rently have a cell phone. But that has all changed with LNP, Local Number Portabili _ your ability to take your cell phone number with you to a new provider.

RIVALRY AMONG EXISTING COMPETITORS

The rivalry among existing competitors in the Five Forces Model is high when co ,,·- petition is fierce in a market, and low when competition is more complacent. Simply p competition is more intense in some industries than in others, although the overall tre is toward increased competition in just about every industry. Rarely can you identi~­ industry that exhibits complacent competition. (One example might be mortician burial services. Solely because of the nature of the services offered, you don't see mo, cian and burial service organizations actively advertising on TV, offering reduced ra'~ and so on.)

The retail grocery industry is intensely competitive. While Target and Walmart in - United States compete in many different ways, essentially they try to beat or match - competition on price. Since margins are quite low in the grocery retail market, groc build efficiencies into their supply chains, connecting with their suppliers in IT-enah ~ information partnerships. Communicating with suppliers over telecommunicati networks rather than using paper-based systems makes the procurement process m faster, cheaper, and more accurate. That equates to lower prices for customers- increased rivalry among existing competitors.

Strategy Impact of IT: Porter (Again) and RGT 23

- ~ou can see, Porter's Five Forces Model is extremely useful in helping you better d the positioning of your organization within its industry and in helping you

anderstand the competitive forces affecting your organization. With this knowl- - !Il mind , your organization now needs to develop specific business strategies to

competitive and profitable .

.J rategy Impact of IT: Porter gain) and RGT

eYelopment of business strategies is a vast and wide discipline. There are literally ds of methodologies and approaches to the development of business strategy. are even more books on the subject. (One such hook with a particularly innova-

3.pp ro ach is Blue Ocean Strategy by Kim and Mauborgne. Be sure to put it on your - list of business books to read.) Here, we'll focus on Michael Porter's three generic

::.:ecies and two other approaches. _ lichael Porter identified three approaches or strategies to beating the competition in industry (see Figure 1.12). They are

Overall cost leadership

:t Differentiation 3 . Fo cus

ERALL COST LEADERSHIP

erall cost leadership is defined by Porter as offering the same or better quality product service at a price that is less than what any of the competition is able to do. Examples organizations focusing on overall cost leadership are numerous and change almost · _-, with the most well-known example being Walmart. Walmart's slogans of "Always

_ ,- Prices!" and "Every Day Low Prices" accurately describe the strategy of overall cost

Narrow mark'et scope

Broad market scope

Unique competency

Low-cost competency

I LEA~NING OUTCOME 4

Figure 1.12 Michael Porter's Three Generic Strategies

24 Chapter 1 • The Information Age in Which You Live

leadership. For everything from women's lingerie to car batteries, Walmart's focus is on offering the same products as the competition but at a lower price. Walmart relies on an IT-enabled tight supply chain management system to squeeze every penny possible out of the procurement, distribution, and warehousing of its products. It uses sophisticated business intelligence systems to predict what customers will want and when.

Dell Computer works in similar fashion. Its famous sell-source-ship model of custom- izing computer purchases is the envy of the industry. Automobile makers Hyundai and Kia similarly attempt to sell reliable low-cost vehicles to a wide audience, in contrast to Hummer and Mercedes -Benz which have no overall cost leadership strategy.

IT can be a particularly effective tool if your organization chooses an overall cost lead- ership strategy. IT can tighten supply chain systems, help you capture and assimilate customer information to better understand buying patterns in an effort to better pre- dict product inventory and shelf placement, and make it easy (efficient) for customers to order your products through Web-enabled e-commerce systems.

DIFFERENTIATION

Differentiation is defined by Porter as offering a product or service that is perceived a being "unique" in the marketplace. Hummer is an excellent example. Its differentiation strategy is reinforced by the unique design and eye-appeal of its Hl , H2, and H3 vehicle lines. Even its slogan-"Like Nothing Else"-clearly attempts to differentiate Hummer vehicles from anything on the road. Another example is Lunds & Byerly's (usually j u referred to as Byerly's) in the grocery retail industry. While other competitors comp ete mainly on price, Byerly's focuses on the shopping experience for differentiation. All o~ the Byerly's stores offer cooking classes and in-store restaurants for lunch and dinner. Many Byerly' s stores have carpeted floors instead of tile and some even have chandeliers instead of fluorescent lighting.

Apple Computer also focuses on differentiation as a business strategy. Not only d Apple computers look different, they have a different screen interface and focus more on nontextual information processing such as photos, music, and videos than any of the competition. Both Audi and Michelin have successfully created a differentiation strateg based on safety. To be sure, differentiation is not about being different based on lower price-that' s the strategy of overall cost leadership-hut the two are interrelated. Wh.Le many people are willing to pay extra for grocery products at Byerly' s, they are not willic= to pay too much extra. Organizations focusing on differentiation must still he concern about price in relation to the competition.

FOCUS

Focus as a strategy is usually defined as focusing on offering products and sen -i-- (1) to a particular market segment or buyer group , (2) within a segment of a p ro dG line, and/ or (3) to a specific geographic market. Focus is the opposite of attempting~ be "all things to all people." Many restaurants focus on only a certain type of fo od- Mediterranean, Mexican, Chinese, and so forth. Stores such as the Vitamin Co.-= Natural Foods Market sell only natural and organic food and nutrition supplements (a: form of focus on products within a product line) to a specific buyer group (another fo of focus on a particular market segment). Many doctors focus on only a particular .• of medical help- oncology, pediatrics, and so on; similarly, many law offices focu s oc: particular legal venue-workman's compensation, living trusts, patents and trademai

As with the other generic strategies defined by Porter, focus cannot be practiced isolation. If your organization chooses a particular buyer group on which to foc uJ.

OVATE, OR GO HOME

=.:: ·ef history of technology has moved through four

- = cycles, with society now squarely in the fourth. = =rst occurred in the 1950s and 1960s as the birth :_ mercial technology automated routine tasks like

II and basic inventory management. The second

__ 'Ted in the early 1980s with the advent of the PC,

==- g computing power and capability on the desk- = Th e third occurred in the late 1990s with the explo- -- of t he Internet. It connected all of us together.

at's the fourth? You're in it-mobile. With pow-

- ~ , yet inexpensive, devices such as smartphones and

=.: et PCs you can carry the Internet with you wher- = =T you go. And that means it's time for companies to

-ovate in how they use technology. Consider these

- -mpl es.

• Auto Insurance-With the proliferation of sen-

sors that communicate wirelessly, auto insurers

w ill gather driving information in real-time and

can adjust insurance rates in the same real-time.

Already, insurers like Allstate and Progressive

have implemented versions of pay-as-you-go

insurance. These prog rams are designed to

reward safe drivers, who agree to have their

driving monitored, with cheaper insurance

rates . Some insurers are toying with the idea of

sending a text message to Mom and Dad when

a son or daughter is driving too fast or in an

unsafe area.

• Retail Stores-Red Laser and other bar-code

reading apps have created the necessity of trans-

parency. It used to be that, if you could get a

customer into your store through ~dvertising via newspaper, magazine, of TV, you could be

fairly wel l assured of a sale. Not so today. Smart

shoppers are using smartphones and bar-code

reading apps to compare prices. Many are opt-

ing to go to a different store fo r a cheape r price.

Still others are approaching store emp loyees and

asking for a price match (or they will go to that

other store). There may even come a time when

Amazon could offer a 5 percent discount to

shoppers browsing its site while in a Wa l mart.

• Utilities-"Smart" meters are now being installed

in residential homes. These meters can adjust the

price of the util ity in real time based on peak-

period usage. The meter may even notify the

home owners, giving them the opportunity to

turn off appliances to avo id higher prices.

Sma rt companies innovate; the others . .. well, you

know. 10

um b et that other competitors will d o so as well, so you 'll also have to comp ete on p rice verall cos t leader~hip) and/o r differentiation too.

~UN-GROW-TRANSFORM FRAMEWORK A h elpful concep tual framework for view- g the bigger organizational p icture and determining the use of IT in it is the run-g;row- ansform (RGT) framework , an approach in which you allocate in terms of p ercentages ow you will spend your IT dollars on various types of business strategies. For example, if

""Uu're only interes ted in " business-as-usual" but cheap er and faster than the competition , -ou would fo cus a great p ercentage of your IT dollars on a " run" strategy. If you wanted to :ransform your business in some way, you would allocate a certain percentage of your IT dollars to a " transformation" strategy. The following are the aspects of the RGT framework:

• Run-optimize the execution of activities and processes already in place. Seek organizational growth through offering p roducts and services faster and ch eap er than the competitio n.

• Grow-increase market reach , p roduct and service offe rings , exp and market share, and so on. Seek organizational growth by taking market share from the competition (i. e., get a bigger p iece of the pie) .

25

I

26 Chapter 1 • The Information Age in Which You Live

Figure 1.13 Hi st o rica l Spending in Run, Grow, and Transform 11

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Grow t 1 Tra nsform

• Transform- innovate business processes and/or products and services in a completely new way, move into seemingly different markets , and so on. Seek organizational growth through new and different means .

As you can see, the RGT framework is similar in many ways to Porter's three generic strategi

• Run = overall cost leadership

• Grow = focus and differentiation

• Transform= (new) differentiation

The application of the RGT framework occurs in almost all industries. In Figure 1.: you can see RGT data gathered by The Gartner Group over a seven-year period. Note • general trend toward allocating more IT dollars to run initiatives and less to transform ; .. - tiatives. Is this good or bad? It's hard to say with absolute certainty, but it's not a favo trend . All organizations must focus to some extent on the transformation aspect. In -- business world, as is often said, if you're standing still, you' re falling behind. It' s a sim fact-your competition is always trying to do something better than you are. Therefo._ your organization must constantly seek to evolve and, in most cases , to transform its el£

Many times , your organization can take a proactive approach to using technolog:· transform itself. Apple is perhaps the most widely discussed organization that is stantly in a state of transformation. Apple, a personal computer company, launched ir.s- into the music business with Apple iTunes in early 2001 . Since then, Apple has ad - games, books, music videos, and movies to iTunes. Apple has successfully held its mover advantage in the music space because of its continuing focus on transformatio

SUMMARY: STUDENT LEARNING OUTCOMES REVISITED

I. Define management information systems (MIS) and describe the three important organizational resources within it-people, information, and information technology. Managemen t information systems (MIS) deals wi - the planning for, development, management, and use of information technolocr- tools to help people perform all tasks related to information processing and management. People, as an organizational resource within MIS, are the most

Closing Case Study One 27

important of the three. To be successful in their use of technology, people must be bo th information-literate and technology-literate. Information in various forms go es by many names such as data, business intelligence, and knowledge. All are intellectual assets but exhibit subtle differences. Information is data that has meaning within a specific context. Information technology (IT) is any computer- based tool that people use to work with information and support the information and information-processing needs of an organization.

2. Describe how to use break-even analysis to assess the financial impact of information technology. Break-even analysis considers and charts three pieces of financial information: fixed costs, variable costs, and revenue. You can use break-even analysis to determine the financial impact of information technology by assessing (1) how technology can help reduce fixed costs, (2) how technology can help reduce variable costs, and (3) how technology can help increase revenue. Each of those ultimately focuses on how technology can be used to impact the break-even point, the point at which an organization has covered its fixed costs and begins to make a profit.

3. Describe how to use Porter's Five Forces Model to evaluate the relative attractiveness of and competitive pressures in an industry. Porter' s Five Forces Model focuses on industry analysis according to five forces: (1) buyerpower- high when buyers have many choices and low when choices are few; (2) supplier power-high when buyers have few choices and low when choices are many; (3 ) threat of substitute products and services-high when many alternative are available and low when alternatives are few; ( 4) threat of new entrants-high when it is easy to get into a market and low when it is difficult to get into a market; and (5) rivalry among existing competitors-high when competition is fierce and low when competition is more complacent.

4 . Compare and contrast Porter's three generic strategies and the run- grow-transform framework as approaches to the development of business strategy. Porter's three generic strategies are: ( 1) overall cost leadership-the same or better quality products at a price less than that of the competition; (2) differentiation-a product or service that is perceived as being " unique;" and (3) focus - products or services for a particular buyer group, within a segment of a product line, and/or a specific geographic market. The RGT framework requires that you allocate in terms of percentages how you will spend your IT dollars among running the organization, growing the organization, and transforming the

' organization.

_.e Social Media Megaphone: Transparent Life Intensified

s a st ory that's been told before. Twenty-Five-year-old :-:cy Snyder was in her last semester of teacher-in-

= ·ni ng at Millersville University School of Education. : her MySpace page, she posted a photo of herself at

~-arty with a pirate hat and a cup in her hand. The cap-

read, "Drunken Pirate." Her school decided that

--;: ph oto promoted drinking to her underage students

at Conestoga Valley High School and denied her teach-

ing degree. She sued citing her first amendment rights,

and a federal district court judge dismissed her suit

because she was a public employee and therefore her

public speech (i.e., "Drunken Pirate") was not protected.

You may believe that Stacy's story is an unfortunate

one, but the Internet, specifically social media tools

28 Chapter 1 • The Information Age in Which You Live

and sites, has made it far too easy to share all types of

information . If you're not careful, your use of social media

may expose your life in the most transparent of ways to

literally millions and millions of people . According to

one survey, 75 percent of recruiters and HR profession-

als in the United States stated that their organizations

required them to research applicants online. Some of the

most commonly visited places for that research included

search engines, social networking sites, photo and video-

ing sharing sites, personal Web sites, biogs, Twitter, and

gaming sites. In the same survey, over 70 percent of the

recruiters s1ated that they had rejected applicants based

on the information they found online.

Of course, all the examples of life transparency on the

Internet are not necessarily "bad." Some have a good

ending, and others are simply interesting to consider.

WEBCASTING FUN ERALS

According to John Reed, past president of the National

Funeral Directors Association and current owner of

two Virginia-based funeral homes, 20 to 30 percent

of all funeral homes in the U.S. now provide webcast-

ing funeral services. "I can honestly say that in the past

three years we've gone from absolute zero to the point

where we now do 50% of our funerals on the Web,"

stated Reed . For Cliff Reedy, whose son tragically died

in a car accident, the webcast service was essential in

reaching out to all friends and family. His son's funeral

was webcast across the U.S . and in 10 countries. The

webcast fune ral had more than 700 views.

MILITARY BAGS FLY FREE AFTER VIDEO GOES VIRAL

Army Staff Sergeants Robert O'Hair and Fred Hilliker

were upset that airl ines were charging baggage fees to

military se rvice personnel returning from Afghanistan .

The two made a video in which they stated that 36 mili- •

tary personnel from Oklahoma were charged more than

$2,800 for excess baggage fees. The two sergeants posted

the video on YouTube, and many people commented to

express their outrage . Even congressman Bruce Baley

from Iowa demanded that the airline reimburse the sol-

diers for the fees. Now, all airlines allow military person-

nel to check more bags of greater weight for free.

MAN RETRIEVES STOLEN LAPTOP AFTER TWEETING PHOTOS

Joshua Kaufman had his laptop stolen from his apart-

ment. Fortunately, he had activated his theft-tracking

software wh ich sent to Kaufman's e-mail periodic photos

of the person using it taken from the computer's Web

cam and screen shots of the laptop while in use. He

posted the photos through Twitter and instantly began

receiving retweets of support and leads of who the

person might be in the photos. One of the screen shots

included the name of the business for which the suspect

worked. Within days, the police had arrested the suspect

and returned Kaufman's laptop.

RASHARD MEND ENHALL FIRED BECAUSE O F OSAMA BIN LAD EN T W EE TS

Rashard Mendenhall, Pittsburgh Steelers' running bac k,

had a lucrative endorsement contract with Champion.

But Champion fired Rashard over tweets he sent

regarding the death of Osama Bin Laden . In his tweets, \

Rashard questioned why people would celebrate th e

death of Bin Laden. In other tweets, Rashard also ques-

tioned the September 11th attacks. He tweeted that he

had " a hard time believing a plane could take a sky-

scraper down demolition style."

POLICE STANDOFF LIVE ON FACEBOOK

Jason Valdez took a woman hostage at a motel in a

16-hour standoff with SWAT teams. During the ordea l,

he constantly updated his Facebook page, lettin g

friends and family know of his situation. Valdez eve n

posted two photos of himself and the hostage with th e

caption, "Got a cute 'Hostage' huh." Family and frien ds

responded with over 100 comments to his Facebo ok

page. One friend even posted a comment regard-

ing the location of SWAT personnel stating, "gunn er

in the bushes stay low." Valdez thanked him for the info rmation .1 2.13. 14, 1s. 16, 11

Questions

1. What do you think of Stacy Snyder's story ?

Should she be denied a degree for publicly

endorsing drinking to her underage students?

To what extent do you believe that potential

employers should explore social networking

sites to validate the "goodness" of potentia l

employees? Is there anything on your Faceb oo

page that might turn off potential employe rs ?

If so, are you going to take any action?

2. The webcasting of funerals is an interesting

example of the flatness of the world. Is this

an invasion of privacy or do next-of-kin have

the right to make such a decision? What oth er

signi fi cant events in a person's life might

b e suitable for webcasting? Identify at least

th ree such events and then do some research

t o determine if webcasting of those events is

alr eady taking place.

3. Osama Bin Laden represents a very dark

image for most Americans. His participation

in the planning of the September 11th

attacks will forever mark him as evil. Should

people, like Rashard Mendenhall, who make

positive or perhaps even neutral comments

about terrorists like Bin Laden be fired

from endorsement contracts? Can making

such comments be considered grounds for

t ermination of employment? Maybe dismissal

from your school as a student?

Closing Case Study Two 29

4. Very few people would question the service and

commitment of military personnel to our country.

The two sergeants who created the YouTube

video openly criticized Delta Airlines for its

charging of baggage fees to military personnel. Is

this open form of criticism of businesses and their

practices acceptable? Will it help businesses be

more accountable to customers?

5. The use of Facebook (or any other social

networking site) can truly make a person 's life

transparent, available for the whole wo rld

to see. Should there be leg islation regulating

the openness of you r life on the Internet? Can

we expect society somehow to regulate this

without any laws?

ogle and Apple Know Where You Are, Maybe

- .:...p ril 2011, some interesting discoveries were made

::-;;ard ing location tracking by Apple iPhones and iPads

--:: Google Android smartphones. Pete Warden and

- =sdair Allan, British researchers, discovered a file on

- an's iPhone that provided a detailed list of places Allan

-~vis ited in the U.S. and United Kingdom over a 300-day

=~ ·od . The file included a time stamp of each location .

Sim ilarly, Duke and Penn State student research-

=_ w ith the help of Intel, found that 15 of 30 popu- =- A ndroid apps systematically communicated loca - - :: information to a variety of ad networks. Those

: 0 archers found that some of the apps transmitted

::ati o n data only when displaying specific ads, while

:-: er s did so even while the app was not running.

- so me Android smartphones, the location data was

· =.ns mitted as often as every 30 seconds.

Wel l, as you can imagine, this sent the public into

;;,- uproar. Google and Apple (if you're using one their

-art phones) are tracking my every movement? Those

:-gan izations know exactly where I was and when I

=s t here? The outcry was unbelievable.

pple and Google went silent on the subject for sev-

=""3 1 days, with neither returning phone calls or e-mails

: oost ing any information on their Web sites or biogs.

Sen ator Al Franken, Democrat from Minnesota ,

~ · ck l y scheduled a hearing of the Judiciary Panel's

subcommittee on privacy for May 10, 201 1. According

to Franken, " People have the right to know who is get-

ting their information and how (it) is shared and used .

Federal laws do far too little to protect this informa-

tion .... No one wants to stop Apple or Google from

producing their products, but Congress must find a bal -

ance between all of those wonderful benefits (from

devices) and the public's right to pr ivacy." After get-

ting little or no response from either Apple or Google,

Franken went on to say, "I have serious doubts those

rights are being respected in law or in practice ."

At the time, Steve Jobs, CEO of Apple , was on

medical leave, and he came back from medical

leave to defend Apple's location tracking technol-

ogy. According to Jobs's right-hand executive Guy

Tribble, Apple vice president of software technology,

Apple iPhones and iPads only gather location data

about nearby cell towers and Wi-Fi hot spots. As he

explained, "[Apple] does not share personally identifi-

able information with third parties for their market-

ing purposes without customers' explicit consent . . .

[and] Apple does not track users' locations . Apple has

never done so and has no plans to ever do so ." Apple

intends to continue sending nearby cell tower and

Wi-Fi hot spot location data but will only store that

data for 7 days .

30 Chapter 1 • The Information Age in Which You Live

Google's long-awaited explanation was similar,

with a few twists. Google did admit that Android

devices do harvest location data for marketing

campaigns . But Google stated that the location-

tracking information is not traceable to individual

users . Google went on to defend its action in stat-

ing that Google does ask Android device owners if

they want to turn off the location-tracking feature.

According to Alan Davidson, Google's director of pub-

lic policy for the Americas, "If they opt in, all data is

made anonymous." 18• 19• 20

Questions

1. Location-based tracking is common to all smartphones, for good reason or bad . The

popular location-based service company

Foursquare has an app so you can check in

at various locations to receive discounts,

become Mayor, and see who else might be

there. DealLeak, which aggregates deals from

the likes of Groupon and Living Social, needs

your location in order to offer local discounts

on products and services to you. How many

location-based service apps do you have on

your smartphone? How often do you use them

and why?

- ---· KEY TERMS AND CONCEPTS Application software, 14 Business intelligence (Bl), 7 Buyer power, 19 Central processing unit (CPU), 13 Competit~ve advantage, 19 Data, 6 Differentiation, 24 Entry barrier, 21 Ethics, 12 External information, 9 First-mover advantage, 20 Five Forces Model , 19 Focus, 24 Garbage-in garbage-out (GIGO), 8 Hardware, 13 Information, 6 Information granularity, 9 Information-literate knowledge worker, 11 Information technology (IT), 13 Input device, 13

2. Apple and Google defended their processes by

stating that their privacy policies very clearly

stated what information would be gathered, how

that information would be used, and how and

with whom that information might be shared.

When was the last time you read the privacy

policy of any technology tool, such as a Web

browser or app? Do you think very many people

actually read these? Do the disclaimers in these

privacy policies give the offering organization th e

right to do anything with your information?

3. What about location-based tracking in car

systems like GM's OnStar? Those systems know

the car's location to give you driving directions

and perhaps identify local ~estaurants or other

venues. Are you comfortable with this? When

was the last time you bought a paper map?

How much do you rely on your car's GPS system?

4. What about smartphone tracking for parents

who want to know where their children are an d

where they've been? Minors under the age of 18

have very few privacy rights, especially when it

comes to parents' knowledge of where they are.

Are parents going too far in wanting to know where their children are? What are the benefits

of such systems for parents? For the children?

What does the term "helicopter parent" refer t o .

Internal information, 9 Loyalty program, 20 Management information systems (MIS), 5 Objective information, 9 Output device, 13 Overall cost leadership, 23 RAM (random access memory), 13 Rivalry among existing competitors, 22 Run-grow-transform (RGT) framework, 25 Software, 13 Storage device, 13 Subjective information, 9 Supplier power, 20 Switching cost, 21 System software, 14 Technology-literate knowledge worker, 11 Telecommunications device, 14 Threat of new entrants, 21 Threat of substitute products or

services, 21

ORT-ANSWER QUESTIONS

1. What is the relationship between management information systems (MIS) and information

technology (IT)?

2. What are some relationships among data, information, business intelligence (Bl),

and knowledge?

3. How does the granularity of information change as it moves from lower to upper

organizational levels?

4. What is the difference between a technology-

literate knowledge worker and an information-

literate knowledge worker?

SSIGNMENTS AND EXERCISES

1. USING PORTER TO EVALUATE THE MOVIE

RENTAL INDUSTRY One hotly contested

and highly competitive industry is the movie

rental business. You can rent videos from local

video rental stores, you can order pay-per-view

from the comfort of your own home, and you

can rent videos from the Web at such sites

as NetFlix. Using Porter's Five Forces Model,

evaluate the relative attractiveness of entering

the movie rental business. Is buyer power low

or high? Is ~upplier power low or high? Which

substitute products and services are perceived

as threats? Can new entrants easily enter

the market? What are the barriers to entry?

What is the level of rivalry among existing

competitors? What is your overall view of '

the movie rental industry? Is it a good or bad

industry to enter?

2. REVIEWING THE 100 BEST COMPANIES

TO WORK FOR Each year Fortune magazine

devotes an issue to the top 100 best companies

to work for. Find the most recent issue

of Fortune that does this. First, develop

a numerical summary that describes the

100 companies in terms of their respective

industries. Which industries are the most

dominant? Pick one of the more dominant

industries (preferably one in which you would

like to work) and choose a specific highlighted

company. Prepare a short class presentation

on why that company is among the 100 best

to work for.

Assignments and Exercises 31

5. How do ethics differ from laws? 6. What are the three financial elements

of break-even analysis?

7. What role does the Five Forces Model play

in decision making?

8. Why are competitive advantages never

permanent?

9. What are the three generic strategies according to Michael Porter?

10. How are Porter's three generic strategies

and the RGT framework similar?

3. BREAK-EVEN ANALYSIS Perform a break-even

analysis for the following scenario. Assume

you sell widgets. You have total fixed costs

of $12,000. Your manufacturing and shipping

of widgets costs $7 per widget. You sell each

widget for $22. What is your break-even point?

How many widgets do you have to sell to

realize a net profit of $15,000?

4. BUSINESS STRATEGY FOR ENTERING

THE CELL PHONE SERVICE INDUSTRY Assume

that you run a start-up and have decided to

enter the cell phone service industry. Which of

the three generic strategies would you choose

as your primary business strategy-overall cost

leadership, differentiation, or focus? Explain

your choice by elaborating on the product

and service features you would offer to lure

customers from the competition.

5. RESEARCHING YOUR CAREER

AND INFORMATION TECHNOLOGY To position

yourself in the best possible way to succeed

in the business world, you need to start

researching your career right now. Here, we

would like you to focus on the IT skills your

career requires. First, consider what career you

want to have. Second, visit Monster.com (www.

monster.com) and search for jobs that relate

to your career. Read through several of the job

postings and determine what IT skills you need

to acquire.

32 Chapter 1 • The Information Age in Which You Live

- --· DISCUSSION QUESTIONS

1. The three key resources in management

information systems (MIS) are information,

information technology, and people. Which of

these three resources is the most important?

Why? The least important? Why?

2. We often say that hardware is the physical

interface to a technology system while

software is the intellectual interface. How

is your hardware your physical interface to

you r. computer? How is your software your

intellectual interface to your computer? Do

you see technology progressing to the point

that we may no longer distinguish between

hardware and software and thus no longer

perceive differing physical and intellectual

interfaces?

3. In a group of three to four students, consider

eBay in the context of Porter's Five Forces

Model. How does eBay reduce the threat of

new entrants? If necessary, you may want

to explore eBay's site (www.ebay.com) and

...

- --· CHAPTER PROJECTS

GR O U P PRO JE CTS

• Assessing the Value of Customer Rela-

tionship Management: Trevor Toy Auto

Mechanics (p. 286)

• Analyzing the Value of Information:

Affordable Homes Real Estate (p . 287)

• Making the Case with Presentation Soft-

ware: Information Technology Ethics

(p. 496)

• Analyzing Strategic and Competitive

Advantage: Determining Operating Lever-

age (p. 303)

determine the role of buyer and seller ratings,

its integration with PayPal, and how it helps

buyers and sellers resolve disputes.

4. In this chapter, we discussed the use of loyalty

programs in the travel industry as a mechanism

for reducing buyer power. What is another

industry that also uses loyalty programs to

reduce buyer power? How does that industry

use loyalty programs to do so?

5. As an information-literate knowledge worker

for a local distributor of imported foods

and spices, you 've been asked to prepare

a customer mailing list that will be sold to

international cuisine restaura'nts in your area.

If you do so, will you be acting ethically?

Suppose you don't consider the proposal

ethical. What will you do if your boss threaten s

to fire you if you don't prepare the list?

Do you believe you would have any legal

recourse if you didn 't prepare the list and we re

subsequently fired?

E- COMMERCE PROJECTS

• Interviewing and Negotiating Tips (p . 311 )

• Ethical Computing Guidelines (p. 314)

• Financial Aid Resources (p. 315)

• Global Statistics and Resources (p . 316)

• Protecting Your Computer (p. 317)

• Searching Job Databases (p. 321)