Book: Essentials of Business Information Systems, 7E

Authors: Laudon & Laudon

Original Lecture Files by Barbara J. Ellestad

Topic: Business Information Systems

2.1 Introduction
Technology, to a large extent, has driven organizations to change the way they operate
and that includes the way they manage. We’re going to take an in-depth look at how
organizations work and how they’ve been transformed by technology.

2.1.1 Business Objectives of Information Systems

Businesses don’t spend millions of dollars each year on new technology just because it’s
popular. They do so out of necessity. Let’s take a look at the six major reasons for such
massive spending on information technology:

• Achieve operational excellence through higher levels of efficiency, quality, and

productivity
• Create new products, services, and business models
• Raise revenue and profits while lowering costs by increasing customer and
supplier intimacy
• Improve decision making for managers and employees
• Increase competitive advantages
• Insure survival caused by business environment changes

Business models continue to change as new technology is introduced. One of the best
examples is how the music industry’s business model has migrated from traditional
distribution of records and CDs in brick-and-mortar stores to instant online downloads of
single songs. The industry didn’t cause the change, consumers did. Other industries, such
as retailers and banks, have readily adapted their business models to take advantage of
new information technologies because of the six reasons outlined above.

The common thread throughout all of these objectives is the effective use of databases to
supply useful information to employees, managers, and executives throughout the firm.
As we’ll see later in this chapter, each functional area of an organization is impacted by
how well the information system transforms data, or raw facts, into information that helps
achieve the business objectives.

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Bottom Line: Business models in thousands of industries throughout the world are
being transformed by technology. Technology helps businesses improve operations,
increase profits, reduce costs, improve decision making, increase competitive
advantages, and insure a business’s survival.

2.1.2 Perspectives on Information Systems and Information Technology

As information technology becomes the glue that holds a business together, it’s
important that you understand exactly what is involved.
Bottom Line: Information technology (IT) infrastructures include hardware,
software, data management, telecommunications, and networking technologies.
Data are simply raw facts. Information is the compilation of data into a useful form
that serves a purpose. As a successful manager you must concentrate on all three
parts of the information systems triangle (hardware, software, and persware) and
integrate them into a single, cohesive system that serves the needs of the
organization, the wants of the customer, and the desires of the employees.

2.1.3 Dimensions of Information Systems

As Figure 2-1 shows, there are three basic dimensions of information systems.

Organizations
Business organizations have their major business processes, which need many kinds of
players with various talents, who are well-trained and well-informed, in order to succeed.

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The larger the organization, the more formal the management structure, including the
need for standardized business processes. Formal business processes help managers and
employees properly complete their tasks in a more efficient manner. Many companies
now integrate these business processes into their information systems to ensure
uniformity, consistency, and compliance.

People
A business organization requires different employees to help it succeed. Knowledge
workers help create new knowledge for the organization and data workers help process
the paperwork necessary to keep an organization functioning. Without production or
service workers, how would the company get its products and services to the customer?

Every good organization needs good managers. Take professional football managers.
They don’t actually play the game,, they don’t hit the home run, catch the fly ball for the
last out, or hang every decoration for the celebration party. They stay on the sidelines
during the game. Their real role is to develop the game plan by analyzing their team’s
strengths and weaknesses. But that’s not all; they also determine the competition’s
strengths and weaknesses. Every good manager has a game plan before the team even
comes out of the locker room. That plan may change as the game progresses, but
managers pretty much know what they’re going to do if they are losing or if they are
winning.

The same is true in workplace organizations. In every organization you’ll find senior
managers making long-range decisions, middle managers carrying out the plans and goals
set by senior managers, and operational managers handling the day-to-day operations of
the company. As we’ll see, information systems output must be geared to each of these
levels of management.

Technology
Do you own a high-definition television? Maybe not, since the technology has only been
on the market for a short time. How old is your car or truck? Manufacturers are
constantly offering us new vehicles, yet we tend to upgrade only every few years. Your
personal computer may be a year old or three years old. Do you have the latest gadgets?
Chances are you don’t. Face it, you just can’t keep up with all the new hardware. No
one can.

Think about how hard, not to mention expensive, it is for an individual to acquire each
new software program introduced to the marketplace. Think how difficult it is
sometimes to learn how to use every feature of all those new products.

No matter how big your computer’s storage device seems to be, you’re constantly
running out of room to store all the new software programs and all the data you create.
Speaking of data, what kind of data management technology do you use to organize all
of your music, pictures, and word documents? As the products and services on the

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Internet expand everyday, your need for new telecommunications technology and better
networking links just seems to grow and grow.

Now put those thoughts into a much larger context of an organization’s information
technology (IT) infrastructure. Yes, it would be nice if your company could purchase
new computers every three months so you could have the fastest, best technology on the
market. But it can’t. Not only is it expensive to buy the hardware and the software, but
the costs of installing, maintaining, updating, integrating, and training must all be taken
into account. We’ll look at the hardware and software sides of the information systems
triangle in upcoming chapters, but it’s important that you understand now how difficult it
is for an organization, large or small, to take advantage of all the newest technology.

The fastest and biggest change in modern computing is the Internet. To say that the
Internet is transforming the way we live, work, and play is probably the greatest
understatement in years. Businesses can create new opportunities, but they can also lose
opportunities just as quickly. Now an organization has to design new systems, or
transform old ones, with not just the company in mind, but 100 million other users of the
Internet, extranets, and intranets. They have to decide how much or how little
information to provide, in what way, with what level of access, and how best to present it.
It’s a huge job!

The World Wide Web allows big companies to act “small,” and small companies to act
“big.” It has leveled the playing field so entrepreneurs can break into new markets
previously closed to them. A Web site, consisting of a few pages or hundreds of pages,
enables businesses to get close and stay close to their customers in new ways. It is truly a
revolution in our global economy.

Bottom Line: Information literacy is more than just clicking a mouse, pounding the
computer keyboard, or surfing the Web. It’s about integrating the various elements
of an organization, technical and non-technical, into a successful enterprise.
Organizations, technology, and people, are integral dimensions of information
systems. The Internet has led many businesses to restructure themselves and take
advantage of extranets, intranets, and the World Wide Web distribution channels.

2.2 Components of a Business

Both information systems and businesses require inputs and some sort of processing, both
have outputs, and both depend on feedback for successful completion of the loop.

Information systems use data as their main ingredient and businesses rely on people.
However, the similarities are remarkable. Both are a structured method of turning raw
products into useful entities.

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Organizing a Business: Basic Business Functions

Whether you are a one-person show or a huge conglomerate, your business still needs
four basic functions in order to be successful. Figure 2-2 shows you these functions.

Figure 2-2: The Four Major Functions of a Business

Business Processes

Business processes integrate functions throughout an organization. Processes that

deliver the best product for the lowest cost in the most efficient manner are imperative to
success.

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The way a business organizes its workflows, the method it uses to accomplish tasks, and
the way it coordinates its activities among employees, customers, and suppliers
determines its business processes.

Businesses, from the smallest one- or two-person group to the largest you can imagine,
must have orderly processes that all divisions can understand. No part of the
organization can work in isolation from any other part. That’s why a successful business
needs information integration.

2.3 Types of Business Information Systems

2.3.1 Systems from a Functional Perspective

Each management level has a special type of information system that best serves its
needs. Each functional area of a business requires specific pieces of information
according to their mission. Let’s begin by looking at the information system
requirements for the four functional areas.

Sales and Marketing Systems

As both of these functions have close or direct contact with customers, they usually work
hand-in-hand. The marketing mission is to identify customers and their wants and needs.
Sales’ mission is to put the product or service into the hands of the customer. As both are
so closely related, it stands to reason their information requirements are similar. That’s
why you’ll generally find combined sales and marketing information systems in
organizations.

Table 2.1 shows some sample sales and marketing systems and the organizational levels
they serve. Keep in mind that some of the information used in these systems can greatly
affect other functional areas. Sales and marketing must also gather information from
other areas of the organization. For instance, while pricing analysis may primarily be a
task for sales and marketing, they must gather information from manufacturing and
production to ensure that the cost of making the product or providing the service is
covered.

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Manufacturing and Production Systems

After sales and marketing actually sell a product or service, someone has to make it.
That’s where manufacturing and production information systems come into the
picture. And there is more to these systems than just the assembly line. Someone has to
decide where the manufacturing plants will be located. Someone else has to decide how
many raw materials will be needed and then order those materials. Finally, someone will
have to make sure the product gets produced on a daily basis.

Many companies collect massive amounts of data about their products and manufacturing
processes. In the past much of that data went unused or wasn’t put into its proper context.
Newer information systems take advantage of all the collected data by producing useful
information managers need to make intelligent decisions about the manufacturing and
production systems.

Table 2.2 shows examples of manufacturing and production information systems needed
to make products for the organization.

Finance and Accounting Systems

Pity the company without adequate finance and accounting systems. How will they
know how much money will be available for future expansion or even for next week’s
payroll? Who makes sure the financial assets of the organization are put to the best use?
When your paycheck is short $100, who will fix the error?

Table 2.3 shows the types of systems this function uses at each organizational level.

Integration of information throughout the business is most apparent in the finance and
accounting systems. They must gather data from all areas of the company. These data

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are processed through the various information systems and then disseminated back out to
all the other organizational functions.

Human Resources Systems

Somebody has to hire employees with the right skills and experience and then make sure
those employees are utilized to the full benefit of themselves and the organization. How
will production even know how many employees are necessary or how many the
organization can afford to hire? What is the best ratio of managers to workers for the
organization? How can the organization find the employees to begin with? All of these
information needs can be fulfilled with human resources information systems.

Table 2.4 shows the systems used at each organizational level in this functional area.

Human Resources information requirements are greatly impacted by external

environmental forces. The government requires extensive record keeping for many
different programs such as Equal Employment Opportunity, retirement programs, and tax
collection. Without effective information systems, much of this information would be
too costly to provide.

2.3.2 Systems from a Constituency Perspective

As we saw in the tables in the last section, each functional area has three distinct
management levels: senior, middle, and operational. Each level has different information
requirements. There are four different types of systems to help out. There are transaction
processing systems (TPS), management information systems (MIS), decision-support
systems (DSS), and executive support systems (ESS).

Types of Decisions

There are generally three classifications of decisions:

• Unstructured: requires judgment, evaluation, and insight into non-routine situations.

Usually made at senior levels of management
• Structured: repetitive, routine, with definite (clear-cut) procedures for making the
decision. Usually made at the lowest organizational levels
• Semistructured: A combination of the two. Usually made by middle managers.

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Transaction Processing Systems
The operational level of the organization is responsible for daily operations. The
information systems used in this level of the organization are transaction 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.
Characteristics of TPS
1. Record the routine transactions that take place in everyday operations.
2. Very rich with data and the data is very detailed.
3. Typically helps with structured decisions.
4. Relies heavily on Data Management Technology (database technology).

You have to remember that a lot of work 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 TPS, right down to how many truck drivers were required to deliver the
product to the local convenience store.

The operational level of an organization also includes functions not directly associated
with the actual production, 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 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.

Note on Data Management:

A typical component of a TPS is the database which represents the repository of the data
collected by the TPS. Databases are usually managed by a type of software that is
referred to as database management system (DBMS). A DMBS will control the how data
is inserted, modified, and deleted from the database. It also provides capabilities like
making sure that users can only access that data that they have access to (access control).
It also insures that many users can access the database at the same time (concurrent
access). Moreover, a DBMS will typically insure required properties of transactions such
as atomicity (either completing he whole transaction or canceling all of it) among many
other things.

Management Information Systems and Decision-Support Systems

Think about the functions of managers that you may have learned about in other classes:
directing, controlling, communicating, planning, and decision-making. Each manager

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takes on these roles countless times a day. Managers review endless amounts of data
hoping to make their jobs easier and more efficient.

Those using management information systems (MIS) require information on a periodic

basis instead of on 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?”
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 5,000 bars to 7,000?”

Figure 2-3: How Management Information Systems Obtain Their Data from the
Organization’s TPS.

Before integrated systems, managers received periodic printed reports that gave them lots
of data, but often didn’t supply information that they could use to make timely decisions.
Planning was sometimes a wasted effort because the information the managers needed
just wasn’t there when they needed it. 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. 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.

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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 online, 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 “on the same page.”

Characteristics of MIS
1. Answers structured questions
2. Produces routine reports. The term routine refers to: (1) scheduled (e.g., monthly
or quarterly, but not daily like TPS), and (2) has predefined contents and format.
3. Helps middle managers in monitoring and controlling their units. Monitoring
refers to the ability to see information about the performance of their units and
controlling refers to the manager ability to correct problems by making decisions
based on the comparing the actual performance and the desired performance.
4. MIS works typically by summarizing and aggregating the data collected by TPS.
5. MIS, compared to DSS, is more general in terms of type of problems and scope of
the organization.

Decision-support systems (DSS) also serve the management level of an organization,

but in a somewhat different way from an MIS. An MIS uses internal data to supply
useful information. A DSS uses internal data but also 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.

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.

As a company is affected not only by what goes on solely 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
if civil war breaks out in the sugar producing countries of Central America? Fluctuating
gasoline prices affect the profit margins by increasing or decreasing the distribution costs
of the product. All these external events can be put into context in a decision-support
system so that management can make effective decisions.

Characteristics of DSS
1. Helps managers in semi-structured decisions
2. Produces ad-hoc reports (ad hoc is Latin for “to this”, in other words for a specific
purpose)
3. Interactive. That is, there is a dialog between the manager and the DSS

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 4. A DSS has analytical capabilities. For instance, it provide what-if analysis and
goal seeking analysis. An advanced DSS might even utilize data mining or
artificial intelligence.
5. Relies on management science models (e.g., formulas) to help in solving the
structured part of the problem.
6. Typically, the output of a DSS is graphical. A class of DSS referred to as
Geographical Information Systems (GIS) utilizes maps in producing output.
7. Usually relies on external data
8. Specific. DSS usually is designed to address domain-specific problems. That is,
the problems in a specific field.

Executive Support Systems

Executive support systems (ESS) are used at the very upper echelons of management.
At the strategic level, the typical decision is very much unstructured. Often there is no
specific question, but rather a series of undefined situations executives may face. There
are no easy, definable answers. 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.

Figure 2-4: Model of an Executive Support System.

As 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

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must be easily manipulated. The ESS must be able to incorporate external information
with internal data to offer concise, complete information for the imprecise and
incomplete scenarios executives face. And most importantly, the systems must have a
fast response time.

Characteristics of ESS
1. Helps top managers with unstructured problems
2. Typically the interface is dashboard that is imbedded in a personalized web portal.
3. Relies heavily on data from outside the organization along with current and
historical data from within the organizations.

2.3.4 Relationship of Systems to One Another

Figure 2.5 Interrelationships Among Systems.

Bottom Line: Each functional area of an organization has unique information

system needs at each level of management. A well-designed, well-constructed
information system will serve each functional area according to its needs. All four
system types must be integrated so that data in one system feeds all the others. No
more islands of information.

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2.4 Systems That Span the Enterprise

How do you manage all the information needs from different functional areas serving
different managerial requirements? Let’s find out.

Enterprise Applications

No business can afford disjointed information systems that don’t work together to
produce a coherent picture of the entire organization. All the functions of a business
must be integrated across traditional lines of demarcation. Islands of information can be
devastating to a company if data cannot be shared throughout the company. Even worse,
the islands of information can create problems if each faction of an enterprise has
differing information that conflicts with other islands of information. These kinds of
problems are what gave rise to enterprise applications that share the same data
anywhere it’s needed in an organization as Figure 2-6 shows. Enterprise applications
easily combine internal and external information to present a complete picture of the
business. As networks of all kinds take hold, from the Internet to intranets to extranets,
Web-based enterprise applications are increasingly widespread.
The following section is an overview of four major enterprise applications: enterprise,
supply chain management, customer relationship management, and knowledge
management systems. We’ll also study each of these systems in depth in future chapters.

Enterprise Systems

It’s not unusual to find an organization in which systems don’t exchange information
very well, if at all. Accounting and finance may have a system that serves their needs
very well, but they can’t collect information from the system used by manufacturing and
production. Sales and marketing is doing its own thing with its system and losing
valuable information from the other systems, which could help it do a better job. These
situations violate the basic business objectives of operational excellence and improved
decision making.

Enterprise systems aim to correct the problem. Also known as enterprise resource
planning (ERP) systems, their main goal is to bridge the communication gap between all
departments and all users of information within a company. If production enters
information about its processes, the data are available to accounting, sales, and human
resources. If sales and marketing is planning a new advertising campaign, anyone
anywhere within the organization will have access to that information. Enterprise
systems truly allow a company to use information as a vital resource and enhance the
bottom line.

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Figure 2-6: Enterprise Application Architecture

Supply Chain Management Systems

Supply chain management systems offer new opportunities for companies to address
the business objective of supplier intimacy by integrating information systems with
suppliers and customers and lowering costs for everyone. Supply chain management
system, a form of interorganizational systems (IOS), create a cohesive network for
buying the raw materials, creating the candy bars, and getting the packaged goods to the
retail outlets.

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Table 2-5 lists the benefits of using a supply chain management system to get the right
product in the correct quantity to the right place with the least cost

While supply chain management systems have drastically improved over the last few
years, there are still some problems associated with them. It is very difficult to integrate
systems with outside suppliers who probably have other companies to service. Some
businesses may have dozens of suppliers with which to connect. It is very expensive and
time consuming to build and implement supply chain management systems, therefore
some suppliers will shy away from doing so.

Customer Relationship Management Systems

Do you wait for the customer to complain about your poor service before you take a
critical look at your business processes? Do you spend more time and money acquiring
new customers than you do in keeping your existing ones? Does each functional area of
your organization have a completely different and separate viewpoint of your customers?
Does your sales and marketing department make promises to your customers that
manufacturing and production can’t possibly keep? If you answered yes to one or more
of these questions you’re in serious need of a good Customer Relationship
Management system.

CRM technology isn’t just a nice looking Web site for customers to click through or
more reports dumped on manager’s desks that they don’t have time to review. CRM
systems involve business processes in all the functional areas and every management
level of a firm. The ideal CRM system provides end-to-end customer care from receipt
of order through product delivery and addresses the business objective of customer
intimacy.

CRM also helps a firm cut the costs of keeping good customers by supplying the entire
organization with a consolidated view of the customers’ needs. Unprofitable customers
are more easily identified with a CRM system, and the time and energy spent can be
retargeted to more profitable customers.

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Knowledge Management Systems

Most of the other systems we’ve discussed have been recognized for many years, but
knowledge management systems may be thought of as relatively new. KMS systems
help a business meet the objectives of new products and services and improved decision
making. In some cases a KMS may even help a business to survive.

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 to make it easier to open. The legal
knowledge workers may spend their time determining the copyright protections that
could be afforded to the product name.

A key distinction made by the majority of knowledge management practitioners is

Nonaka's reformulation of Polanyi's distinction between tacit and explicit knowledge.
The former is often subconscious, internalized, and the individual may or may not be
aware of what he or she knows and how he or she accomplishes particular results. At the
opposite end of the spectrum is conscious or explicit knowledge -- knowledge that the
individual holds explicitly and consciously in mental focus, and may communicate to
others. In the popular form of the distinction tacit knowledge is what is in our heads, and
explicit knowledge is what we have codified.

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