Lecture 3 2.

1 Key System Applications in the Organization

As we go through this chapter, we'll look at the six major types of Information Systems organizations use in their operations. To help distinguish between the type of function each one is designed to accomplish and to fit them all together, we're going to look at them in the context of manufacturing candy bars. Yep, candy bars. Everyone likes them and everyone has eaten one, so they will be easy to relate to. We'll call the company WorldWide Candy and we'll give the candy bar the timely name of Cybernuts. You'll see at the end of this discussion the integral role each type of system plays from determining which kind of candy bar to make, to how to make it, to how many people the company will need to make the candy bar, to how to sell it, to how this particular candy bar fits into the strategic success of the company.

FIGURE 2.2 The six major types of information systems.

As we move through this discussion, we'll dissect this figure and show you how the various systems fit together.

Transactional Processing System

FIGURE 2.2a

The operational level of the organization includes the various units listed in the figure and is responsible for daily operations. The information systems used in this level of the organization are transactional processing systems (TPS), so-called because they record the routine transactions that take place in everyday operations. TPS combine data in various ways to fulfill the hundreds of information needs a company requires to be successful. The data are very detailed at this level. For instance, a TPS will record how many pounds of sugar are used in making our Cybernuts candy bar. It also records the time it takes from beginning to end to make the candy bar. And it can record the number of people working on the assembly line when our candy bar is made and what functions they perform. People using Transaction Processing Systems usually need information to help them answer routine questions such as "How many Cybernuts candy bars did we produce yesterday?" or "How much sugar do we have on hand for today's production run?" Since there's more to making the Cybernuts candy bar than just running the assembly line, a TPS will record the sales and marketing actions surrounding the sale of the product. The system will record not just the number of dollars used in the marketing program, but also how many stores are actually stocking the candy bar and where the product is located inside the stores.

You have to remember that a lot of action is required to get the product from the manufacturing plant to the store shelves. How much did the company pay to package the product, store the product, and ship the candy bar to the stores? All that data can be recorded in a Transaction Processing System, right down to how many truck drivers were required to deliver the product to the local convenience store. As you see in the figure, the operational level of an organization also includes functions not directly associated with the actual production of the Cybernuts candy bar but vital in keeping the company running smoothly. The people in Accounting may not be pouring the chocolate over the nuts on the assembly line, but those workers that do appreciate the fact that they get a paycheck every two weeks. Production workers also like to know that the Human Resource division is keeping track of training programs that may help them advance within the company. Each of these divisions requires an information system that helps it keep track of the many, many details that make the production worker happy and productive. The best Transaction Processing System will be integrated throughout the organization to supply useful information to those who need it when they need it.

Bottom Line: The Transaction Processing System records the data from everyday operations throughout every division or department in the organization. Each division/department is tied together through the TPS to give a clear cut set of information to management levels throughout the company.

Knowledge Work and Office Automation Systems

FIGURE 2.2b

Lets first look at the Knowledge Work Systems and then we'll discuss Office Automation Systems. You may not think of a Knowledge Work System as an integral part of the overall Information System of an organization. Most of the other systems have been recognized for many years, while this one may be thought of as relatively new. Knowledge workers are those who promote the creation of new knowledge and integrate it into the organization. Research scientists may discover new methods of mixing sugar and cocoa beans and dairy products to make a better chocolate. Maybe a team of engineers will develop a new method of packaging the Cybernuts candy bar to make it easier to open. The legal knowledge workers may spend their time determining the copyright protections that could be afforded to the Cybernuts product name. The knowledge work system (KWS) may not be where the research takes place; that could happen in a separate system devoted to research methodology, such as a Computer Aided Design (CAD) system . The knowledge work system is that part of the overall company-wide system that incorporates the research findings into the Information Systems maintained by the company so that the other divisions may take advantage of the data. For instance, let's assume that the Production Research Scientists have developed a richer, smoother, creamier chocolate for the Cybernuts candy bar. This new recipe calls for alterations to the recipe Production has used for the last 20 years. Right away, you can understand why production workers need to have the information in the Knowledge Work System so they can alter the assembly line for the new product. But, stop for a minute and think about all the other areas of WorldWide Candy Company that need to know the new recipe - or at least parts of it. Procurement will need to know that instead of buying 1000 pounds of sugar for every 5000 candy bars produced, it now needs to order 1500 pounds of sugar. Instead of the 500 gallons of milk for the old recipe, the Cybernuts candy bar requires 750 gallons of milk. And so on. Product Packaging must be aware that instead of wrappers to fit a five-inch candy bar, it will need a wrapper to fit the 6-inch Cybernuts bar. But we can't stop there. This new product will require 25 fewer workers to make than the old candy bar. Human Resources must be able to help the excess workers find new positions either inside or outside the company. Perhaps they can be moved to other areas of the company and retrained for other jobs. Perhaps they will have to be furloughed. Accounting must know that the workers will be changing their jobs or leaving the company; Finance must also be aware of the new supply requirements and of the changing workforce. Now you can see how no part of the company will be unaffected by what may seem on the surface to be a simple change in the recipe for a new candy bar. An effective

Knowledge Work System will help feed this information to those other parts of the company so that they can make any necessary changes. Even in this day of the promised paperless society, no job is completed until the paperwork is done. The Office Automation System (OAS) is dedicated mostly to data workers, who are no less important to the success of WorldWide Candy than any other worker. The new recipe discovered by the Knowledge Workers must be patented. An Office Automation System worker must complete the necessary paperwork to be filed with the U.S. Patent Office. The Office Automation System makes easy work of developing press releases that Sales and Marketing will use to announce the new and improved Cybernuts candy bar. The clerical workers in Human Resources will use their OAS to process the job changes the Production workers will need for their new positions. One of the newest forms of OAS is the Document Imaging Systems that have been incorporated into most effective systems in the last few years. Technological improvements now make the old file cabinet bulging with pieces of paper a relic that can be stored in the basement. Those pieces of paper can be optically stored on a small plastic platter (compact disc) and retrieved within minutes by software programs. No more human beings thumbing through piles and piles of paper.

Bottom Line: A Knowledge Work Information System aids knowledge workers such as engineers, scientists, and legal workers. The Knowledge Work System helps create or gather new knowledge useful to all parts of the organization. An Office Information System is used by data workers to fulfill the coordination and communication functions vital to a company.

Management Information Systems

FIGURE 2.2c

Think about the functions of managers that you may have learned in other classes: directing, controlling, communicating, planning, decision making. Each manager takes on these roles countless times in a day. Managers review endless amounts of data that hopefully make their job easier and them more efficient. Those using Management Information Systems (MIS) require information on a periodic basis instead of a daily, recurring basis like those using a Transaction Processing System. Managers also require information on an exception basis. That is, they need to know if production is higher or lower than the targeted rate or if they are over or under their budgets. They also need to know about trends instead of straight numbers. The questions they may ask of the system would be "How far behind in production are we for this quarter?" or "How many more workers would we need if we increased production by 10,000 candy bars per quarter?" In the old days the managers had to perform many functions without the aid of technology. If they wanted to know how many candy bars were produced in a month, they had to wait until that one piece of information was produced in a report published at the end of the quarter. If there was a problem getting a shipment out to the convenience store in Podunk, the shipping manager may not have known about it until a customer complained six months later. The Human Resources Department manager would likely not be able to find out about new job opportunities in a different part of the company until after the workers were laid off and had found other employment. Worse yet, Production might have to stop the assembly lines because Accounting hadn't purchased enough supplies to cover the increase in the number of candy bars rolling off the line. Before integrated systems, managers received periodic printed reports that gave them lots of data but often didn't supply information that they could utilize to make timely decisions. Planning was sometimes a wasted effort because the information the managers needed just wasn't there when they needed it. With the integration of information systems up and down the management levels, and throughout the corporation, managers can often get needed information in a real-time mode. The data are kept on line, the system can gather the precise information managers need to make a decision, and the information can be cross-integrated into all departments of the company. All divisions in the company can see what's going on throughout the corporation. Information can be passed from department to department so that they are all working "off the same page." The MIS will draw data from the Transaction Processing System to help managers answer structured questions such as "How much more sugar must we purchase if we increase production from 5000 Cybernuts candy bars to 7000 candy bars?" The Human Resources Department alone can place vast amounts of personnel information, including job opportunities within the organization, on an Intranet that workers can access when they find it convenient.

For the Cybernuts candy bar, with the improved Management Information Systems available, Accounting managers will know that they must increase their purchases of sugar and milk to support the new recipe. The Shipping manager will know in time to plan for the new size wrapper the Cybernuts candy bar will require. The Sales and Marketing manager can know almost instantaneously that the shipment to Podunk is going to be delayed and so can call the convenience store manager ahead of time to let her know. The greatest advantage of the new Management Information Systems is that managers no longer have to wait until a specific time of the month or quarter to receive information that they need to fulfill their daily functions.

Bottom Line: A Management Information System is used by managers throughout the organization to help them in directing, planning, coordinating, communicating, and decision making. The MIS will help answer structured questions on a periodic basis.

Decision Support Systems

FIGURE 2.2d

Decision Support systems (DSS) also serve the management level of an organization but in a somewhat different way than an MIS. An MIS uses internal data to supply useful information. A DSS uses internal data also but combines it with external data to help analyze various decisions management must make. Analyzing complex, interactive decisions is the primary reason for a company to use a DSS. The Sales and Marketing management of WorldWide Candy would use a DSS to answer a semistructured question such as "What price should we charge for the Cybernuts candy bar so that we can maximize our profits and minimize our costs?" Using a DSS the

manager in charge of the Manufacturing Division could determine the best answer to the semistructured question, "How does the change in the size and packaging of the Cybernuts candy bar affect the other products we produce, not just in shipping, but also on the display shelf at the convenience store?" You'll notice we describe decisions at this level as semistructured. Not all decisions required for an organization to function smoothly are cut and dried. There are a lot of gray areas in successfully managing an organization, and the larger the company, the more diverse the decision-making process becomes. Since a company is affected not by what goes on within the company but also by external forces not under its control, Decision Support Systems can help upper-level management. What happens to the pricing structure and availability of the raw materials for the Cybernuts candy bar if civil war breaks out in the sugar-producing countries of Central America? The price of oil can greatly affect the profit and loss of the Cybernuts candy bar because of shipping costs. All these external events can be put into context in a Decision Support System so that WorldWide's management can make effective decisions. Decision Support Systems also help those functions of an organization that may not be directly related to manufacturing products. Remember the workers who were no longer required in manufacturing the Cybernuts candy bar? What is the best way for the Human Resources Department to handle this situation? Perhaps there is a planned increase in production coming up in the next quarter that will require these workers. The Human Resources Manager could use a Decision Support System to determine if it is better to keep them on the payroll even if they won't be fully utilized for the next three months because the unemployment rate is so low the company will have difficulty hiring new workers when it needs them. Or perhaps the workers have specialized skills that aren't easy to find, so the company will actually save money in the long run by keeping these employees on the books.

Bottom line: Decision Support Systems are used for complex "what-if" questions that require internal and external data. Decisions at this management level are mostly semistructured, so the Information System must respond to the unique requirements of the executives.

Executive Support Systems

FIGURE 2.2e

Executive Support Systems (ESS) are used at the very upper echelons of management. At the strategic level, the typical decision is very unstructured. Often there is no specific question but rather a series of undefined situations executives may face. These executives require summarized, historical information gleaned from all other levels of the organization, coupled with large amounts of external data gathered from many sources. Let's assume that the Cybernuts candy bar is the most successful, most popular candy bar ever made. (You could say it's success is due to the effective use of the previous five information systems!) The Universal Food Products Corporation just can't create a product that comes close to the success of Cybernuts (its information systems aren't as good) and is very envious of WorldWide Candy. So Universal Food Products offers to buy the Cybernuts product from WorldWide for what seems to be an astronomical amount of money. WorldWide executives can use their Executive Support System to determine if this offer is in the best interest of all. They can analyze the information gathered from all of the internal information systems and couple that with external data to help them make the decision. By using an Executive Support System, company executives can analyze internal and external data and make their decision based on information, not on emotion. Since executives haven't been using computers that long or don't have time to fiddle around learning how to type, Executive Support Systems must be easy to use and the information must be easily manipulated. The ESS must be able to readily incorporate external information with internal data to offer concise, complete information dealing with the imprecise and incomplete scenarios executives face. And most important, the systems must have a fast response time.

Bottom Line: An Executive Support System helps managers make strategic decisions affecting the entire company. The systems use internal and external data to give executives the information they need to determine the proper course of action in unstructured situations.

Relationships of Systems to One Another: Integration

FIGURE 2.10 Interrelationships among systems.

The key element for all these systems is integration. The Cybernuts candy bar wouldn't be near the success it is if all systems didn't work together and help each other. If the information from the Transaction Processing System didn't feed into the Management Information System which incorporated information from the Knowledge Work System which fed into the Office Automation System which helped the Decision Support System which then worked with the Executive Support System, then the Cybernuts candy bar would just be another junk food.

2.2 Information Systems and Business Strategy

Did you ever play a game you intentionally wanted to lose before you started? Usually the answer to this question is no. It's very unusual for businesses to want to fail. Companies have every intention of beating their competition by using Strategic Information Systems. Keep in mind that when we discuss the strategic role of information systems in this section we aren't talking about strategic level information systems. The strategic level system discussed earlier involved a decision such as "Should we accept Universal Food Products' offer to purchase the Cybernuts candy bar line?" Information Systems can play a strategic role in an organization if they are used effectively throughout the company. Two ways to do that are through beating the competition and adding value to products or services. We can use Information Systems throughout WorldWide Candy to make Cybernuts better than any other candy bar, at perhaps a lower price, and to make consumption of the Cybernuts candy bar the "hip" thing to do.

Business-Level Strategy and the Value Chain Model

You have to decide where you want your business to fit in the marketplace. Are you going to: 1. Become the low-cost producer 2. Differentiate your product or service 3. Change the scope of competition

Leveraging Technology in the Value Chain

Be better than the competition. That's the mantra of most companies that are serious about winning the game. Areas of the organization most affected by leveraging technology are producing the product, getting it to the stores, and making the customer happy. Think of all the activities that go into getting the Cybernuts candy bar made, from procuring raw materials to actual production. Then consider how the candy bar gets from the factory to the store shelves. And what about all those product commercials? These are primary activities. Just as important are support activities: Human Resources, Accounting, Finance. These functions support the primary functions of Production, Shipping, and Sales and Marketing. The value chain model that Laudon and Laudon discuss in the text will help an organization focus on these activities and determine which are critical to its success.

Information System Products and Services

Cybernuts uses a better recipe for making chocolate than any other candy bar. We know that from our Knowledge Worker System. Sales and Marketing can use that information in promotional campaigns to advertise how much better and different Cybernuts is than any candy bar the consumer has ever eaten. Since our Office Automation System is topnotch and the clerical workers processed the patent information so quickly, our competition can't duplicate the recipe. They are left with the old, icky, bad-tasting chocolate everyone is tired of. Product differentiation allows you to bury the competition by making your product and service so different that your competitors can't match them.

Systems to Focus on Market Niche

Through the use of datamining, WorldWide's Product Research Department determined that most moms wanted a candy bar that didn't melt so fast and mess up kids clothes or the furniture. Since our Information Systems are integrated throughout the company, our Knowledge Workers were able to alter the recipe for Cybernuts to keep the chocolate in a more solid state. Now we can use focused differentiation in our promotional advertising by telling potential customers that the chocolate won't melt so fast. We also have useful information from our integrated Information Systems that tells us consumers want a bigger candy bar for the same or a lower price. We can now differentiate Cybernuts as being bigger than the competition's candy bars, therefore better, while the price is the same as the competitor's smaller candy bar.

Supply Chain Management and Efficient Customer Response Systems

Because of the tight link WorldWide has developed with SugarSweet Refiners, WorldWide has significantly reduced the cost of its product. Because of the integration of Information Systems throughout the organization, it can reduce costs and price Cybernuts well below the competition's candy bar. And because of the Information System WorldWide has developed with the convenience stores, the stores never have to worry about running out of Cybernuts because WorldWide will know to ship more product when the stock falls to a preset level. Supply chain management offers new opportunities for companies to integrate with suppliers and customers and lower costs for everyone. Since WorldWide Candy doesn't grow its own sugar cane, it must purchase the refined sugar from a supplier, SugarSweet Refiners. WorldWide buys a lot of sugar, as you can imagine. If it develops some kind of link with SugarSweet that is mutually beneficial to both sides, then each one can reduce costs but also develop a pricing policy that gives WorldWide significant cost savings. So WorldWide and SugarSweet decide they will use an integrated Information System that replaces the old-style purchasing paperwork with electronic billing and shipping.

WorldWide Candy now places sugar orders via an electronic system that is tied directly to SugarSweet's electronic shipping system. Neither company has to process paperwork for orders or deliveries. Look at all the time and money both sides are saving, not to mention the reduction in errors that are inherent in any manual system. However, by tying into this method of ordering and delivering, it will be very expensive for WorldWide to find another sugar supplier. It will also be a significant loss to SugarSweet if it loses WorldWide as a customer because now it will have to find another company and set up the same system. So both sides are locked into this mutual system. On the flip side, WorldWide knows that it costs five times as much money to get a new customer as it does to keep an old customer. It decides to lock in its customers (in this case convenience stores that stock Cybernuts candy bars) by making it more expensive for that customer to switch to the competition. WorldWide offers to keep all the sales statistics for products on its Information System and to give that information to customers when it's convenient and in the format they require. That way the store doesn't have to track data and spend the money to process them into useful information. Through WorldWide's information system it, and not the convenience store, can keep track of stock levels and know when more products are needed. Through this agreement, WorldWide develops a link to customers that the customer finds extremely useful. You see, switching costs, as described in this section, works both ways: between suppliers and companies, and from companies to customers.

Firm-Level Strategy and Information Technology

Think of a picture puzzle with all its separate pieces scattered on the table. Separately, the pieces don't make a very pretty picture. But if you fit them together, they make quite a beautiful piece of art. So too for businesses. Separately, the various units of a business don't function well and certainly aren't successful on their own. But if you fit them all together, so they work in conjunction, you can create a successful business. Information technology can help you do this. What does a business do better than anyone else? Does it make the best jeans in the world? Do they produce the best movies? Does it deliver flowers faster and fresher than any of the competition? Whatever its main product or service is, that's its core competency. Successful companies can use information technology to improve their core competencies by sharing information across business units. They can also use technology to expand their core competencies by using knowledge stored in their information systems.

Industry-Level Strategy and Information Systems: Competitive Forces and Network Economics

Look at the relationship between America OnLine and Microsoft. On one hand, they are fierce competitors, going head to head in attracting Web users to their respective Web sites. On the other hand, they work together to supply Web users with desktop icons for accessing the Web. How is it that they can compete so vigorously in one area and yet cooperate so well in another? Because both make sense and make money for each company.

Information Partnerships
Many times it's more productive and cheaper to share information with other companies than to create it yourself. Information partnerships between companies, even competitors, can enhance a company's products by aligning them with an industry-wide standard. Vehicle tire manufacturers form information partnerships to share information about standard widths and sizes of tires. Can you imagine how difficult it would be for consumers and other businesses if each tire maker built tires differently? Other companies form information partnerships to add extra elements to their products which they couldn't offer on their own. Lots of companies offer credit cards with their logo and company information. They then share customer information with the credit card companies. Both companies win because they can offer extra services and products not available if they had to act alone.

The Competitive Forces Model

One way you can help your company compete is to have more information in a better form than the competition does. If WorldWide happens to know that the price of sugar usually falls in mid-summer, it can plan ahead and get a better price for the ingredient. Simply put, good information in a timely manner can help you win the game.

Figu Figure 2.1 The competitive forces model.

Figure 2.14 shows the competitive forces model. The text describes five external threats and opportunities:

Threat of new entrants into its market. The upstarts can give you fits when you least expect it - Amazon.com is a good example. Pressure from substitute products or services. Even if they aren't better than your product, substitutes may be cheaper and customers will be enticed by the lower price. Bargaining power of customers. The Internet offers customers a unique opportunity to quickly and easily compare prices. Bargaining power of suppliers. New technology offers suppliers the chance to integrate information systems that tie them closer to their customers. Positioning of traditional industry competitors. Efficient business processes can give companies the edge they need to place themselves in the lead.

Network Economics
You decide to throw a big party and invite a hundred of your closest friends. You buy tons of food and beverages-lots more than you really need. At the last minute, Sam calls and asks if he can bring his brother who unexpectedly dropped by. You agree since you won't have to purchase more food. The marginal cost of one more guest at your party is zero. That's how network economics work. If you build a network for a thousand users, adding one more probably won't cost you anything. However, if you add the second thousand users, you'll incur the cost of adding those extra users. The more users you add, the more your community is enriched. Allowing Sam's brother to attend your party enriched the experience for all, since he is a very popular rock star who plays excellent guitar! Many companies doing business on the Internet are realizing the value of network economics. They build Web sites to attract customers and then keep them coming back by providing chat rooms and other services for the customers. It doesn't cost much more to add these extra features, since theyve already built the Web site and have the hardware available. However, the additional customer information they gather from the chat rooms and information forums is invaluable.

Bottom Line: Using Information Systems can help a company beat the competition through differentiation and providing services that are valuable to both customers and suppliers. Companies can also use Information Systems to reduce costs below those of the competition and to improve core competencies.