Management Information Systems MANAGING THE DIGITAL FIRM Chapter 1 Managing the Digital Firm Kenneth C. Laudon Jane P. Laudon 9th edition PEARSON Prentice Hall 2006 www. prenhall. com/laudon Chapter 1 Managing the Digital Firm Objectives: After reading this chapter, you will be able to: 1. Explain why information systems are so important today for business and management. 2. Evaluate the role of information systems in today’s competitive business environment. 3. Assess the impact of the Internet and Internet technology on business and government. 4.
Define an information system from both a technical and business perspective and distinguish between computer literacy and information systems literacy. 5. Identify the major management challenges to building and using information systems. Discussion Questions: 1. Why is it important to understand the difference between computer literacy and information literacy? 2. Discuss the three elements of an information system (hardware, software and persware) that managers must consider. Which of the three do you consider the most important? 3. What are some of the new roles information systems are playing in organizations? . Discuss the changes in the business environment brought about by technology in the last five years. Use Table 1-1 and your own personal experiences to formulate your answer. Chapter 1 Managing the Digital Firm Computers are changing every aspect of our lives from entertainment to shopping, from the work we do and where we do it, to how we communicate with friends and relatives. Even though we are still hearing negative news about the dot-com bubble from the late 1990s through 2001, the death of the Internet has been greatly exaggerated. Not only is it alive and well, but thriving.
The difference between then and now is that many of the companies went bust primarily because of poor business planning or simply because their product wasn’t viable to begin with. As you can see from the opening vignette in the text, many companies are remodeling their businesses and information systems with the Internet in mind. This chapter gives you an overview of many of the subjects we’ll touch on in this course. It will help you understand how information technology is being used by many businesses worldwide to increase efficiency, save money, and create better relationships between suppliers and customers. . 1 Why Information Systems? Ask managers to describe their most important resources and they’ll list money, equipment, materials, and people — not necessarily in that order. It’s very unusual for managers to consider information an important resource, and yet it is. As electronic business and electronic commerce grow in popularity and more firms digitize their operations, having useful information is becoming even more important to the global business community. This chapter will begin to explain why you need to manage your information resources as closely as any other in your organization.
Why Information Systems Matter While many managers are familiar with the reasons why managing their typical resources such as equipment and people are important, it is worthwhile to take a moment to examine four reasons why managing information systems and technology are just as important. Capital Management As the text states, “Investment in information technology has doubled as a percentage of total business investment since 1980, and now accounts for more than one-third of all capital invested in the United States…” That’s a lot of money that businesses are spending on a relatively new component of many organizations.
The business world has come a long way very rapidly in the last twenty years in terms of the amount of dollars spent on technology. Unfortunately, many companies haven’t made the same advances in learning how to properly manage all these new corporate assets. Foundation of Doing Business Take a look around you and see if you can find a business that does not depend on information technology in one form or another. The local restaurant probably manages their lunch-time crowds using hand-held devices that allow the waiter or waitress to communicate menu orders directly to the kitchen.
The rental car company uses information technology to track not only customer orders but may also use global positioning systems that relay the exact position of every car wherever it is. Your local drycleaners may also use information technology to keep track of all their chemical processes to ensure regulatory compliance. In short, there are very few businesses and organizations that do not currently use some form of information technology. Productivity Simply put, effectively managing your organization’s information technology and resources will increase the productivity and effectiveness of your company.
With the right technology workers can increase the amount of work they are able to accomplish in less time than ever before. Strategic Opportunity and Advantage Businesses and organizations simply can’t stick their heads in the sand and ignore all of the improvements and inventions that are available nowadays. If they choose to do so, chances are their competition won’t. It’s not just the improvements in current processes that are available but the opportunities for new products or services that businesses can take advantage of with information technology.
How Much Does IT Matter? For many years computer technology was relegated to the back rooms or basements of a corporation. Only the “techies” worried about it, and they were often the only ones who really knew how it all worked. Now computers are all over the organization — there’s one on every desk and, more times than not, in every pocket or purse. It’s not enough for you to know how to pound a keyboard or click a mouse. It’s not even enough for you to know how to surf the Web or send e-mail.
Every employee, including you, must know how to take advantage of information systems to improve your organization and to leverage the available information into a competitive advantage for your company. The article “IT Doesn’t Matter” by Nicholas Carr cited in the text certainly touched off a vigorous discussion as you can see on his Web site [http://www. nicholasgcarr. com/articles/matter. html#readings]. We strongly encourage you to access the site, digest the various viewpoints, and draw your own conclusions after studying the material in this text.
Why IT Now? Digital Convergence and the Changing Business Environment The Internet and Technology Convergence Even though the Internet as a whole has existed since 1969, the World Wide Web didn’t exist until around 1993-1994. That’s fewer than 10 years ago. Now you can’t pick up a magazine or a newspaper, turn on the television or radio, even drive by a billboard, without some kind of reference to “dot-com. ” Businesses are rushing to the Internet in an effort to keep up with the competition or to create whole new businesses.
Now organizations struggle with such issues as how to design and develop a Web site or how to determine a fair e-mail policy for employees. Electronic market systems are allowing businesses to take advantage of technology to create new methods of buying and selling. For a while it seemed as though the middleman was going out of business because of the new direct connections between customers and merchants. While this is true in some industries, new opportunities are springing up for the middleman in other areas. We’ll look at this issue in more detail later.
Amazon. com, the largest retailer on the Internet selling books and CDs, lost millions of dollars a year and yet is one of the best success stories in electronic commerce. It’s fiercest rival, Barnes & Noble Books, has also spent millions of dollars converting its traditional retailing operations to the Internet. Unfortunately, Barnes & Noble’s efforts at e-commerce are considered somewhat of a failure. Why? Because Barnes & Noble hasn’t fully changed its core processes to accommodate the requirements of doing business on the Web.
It’s net-centered retailing efforts are still considered secondary to its traditional bricks-and-mortar operations. Please don’t think e-commerce and e-business are going away because of the stock market problems in late 2000 and early 2001. In fact, it’s just the opposite. When Jeff Bezos, CEO of Amazon. com was asked what he had learned from the dot-com crash he replied, “The company is not the stock. The clearest way I can describe it is that back in the year 1999, when the stock market was booming and Amazon stock prices were booming, we had about 14 million customers buy from us in that year.
In 2000, when the stock was busting, we had about 20 million customers buying from us. So if the stock is the company, somebody forgot to tell the customers. ” (BusinessWeek, April 30, 2001) One common mistake many organizations wanting to do business on the Internet make is thinking they can simply throw up a Web site, add an e-mail software program for customer communication, and voila they are ready to do business in cyberspace. They haven’t addressed any of their internal processes and the possible changes to the way they do business.
They’ve spent hundreds of thousands or millions of dollars and can’t get enough sales to support a day’s worth of expenses. There are many opportunities offered by the Internet, extranets, and intranets. Yet there are many problems associated with developing a company’s electronic commerce and electronic business. It is easy to put up a snazzy, colorful Web site that looks very pretty and may even be easy to use. It may be a site on the Internet, an intranet, or an extranet. You must consider though, how you’re going to incorporate that part of your business with your other, more established methods of doing business.
What internal processes must you change or adapt? What new processes must you establish? What training must you do with the people who will run the e-business, both technical and non-technical? You can’t keep doing your job the same old way. Lots of businesses have tried and lots of businesses have lost big bucks. “Changes in business processes, customer and supplier relationships, data access, data ownership, distribution strategy, and marketing tactics underpin most Web-commerce efforts. ” Information Week magazine, Dec 7, 1997, page 53. Transformation of the Business Enterprise
You can’t help but know about all the job cuts occurring in our country. It seems like every week we hear about thousands and thousands of people losing their jobs. Back in the 1980s most of the job losses were in the blue-collar sector. In the 1990s it seems many of the cuts were made in the white-collar, management jobs. Why? Think about it. 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.
Globalization Next time you purchase a product, any product, look at the fine print and see where it’s made. It could be China, or the Philippines, or a South American company, or even in the United States. You can disagree with the fact that many manufacturing jobs are being moved from the U. S. to foreign countries. But look at the vast number of jobs that are being created in this country. Maybe they aren’t the traditional factory jobs we’re used to. In fact, many of our new jobs are in the information industry.
Many of them service whole new markets that didn’t exist just a few years ago. There was no position called “Webmaster” in 1991. That’s because the Web didn’t exist. But now, that particular job category is one of the fastest growing in the U. S. and overseas. The global economy Laudon & Laudon talk about is being made possible by technology, and that’s why it’s so important that you understand how to use information systems technology instead of just computer technology. There’s a big difference between the two, and we’ll talk about it more.
Rise of the Information Economy In a knowledge- and information-based economy, knowledge and information are key ingredients in creating wealth. Think back to the early 1900s when the horse and buggy were the main form of transportation. Along came a guy named Ford who built a whole new industry around the automobile. Many jobs, such as horse groomers, horse shoers, and buggy manufacturers, were lost forever. Now think about all the new jobs that were created — not just in the factories, but all the other businesses associated with the car.
The people in the horse and buggy industry adapted, retrained for the new jobs, and the whole country changed. The same thing is happening now with the information industry. Many of the new jobs that are being created have better working conditions, better pay, and more advantages than the old jobs had. You just have to be equipped to take advantage of the situation. You have to take advantage of retraining opportunities. You have to gain the skills necessary for the transformation of the industries that have been a mainstay of this country. It’s not that hard — it just takes a lot of hard work.
We often think of industries such as manufacturing and financial institutions as producing and using knowledge- and information-intense products and services. But even farmers and ranchers in this country are learning information-based skills so that they can become more efficient and cut costs. They are taking advantage of the technological explosion by using computers and Global Positioning Systems on their farms and ranches to increase crop yields or reduce workloads. They’re catching on to the idea that information systems are a key to success.
Emergence of the Digital Firm When a firm goes digital, it’s not about just adding a computer system to the mix. Throwing a computer system at outdated business processes is exactly the wrong thing to do. A truly digital firm has several characteristics that distinguish it from most of the firms claiming to be digitized: • Significant business relationships are digitally enabled and mediated • Core business processes are accomplished through digital networks and span the entire organization • Key corporate assets are managed digitally Internal and external environments are quickly recognized and dealt with And the number one reason digital firms experience greater opportunities for success and profits is because they view information technology as the “core of the business and the primary management tool. ” |The Window on Organizations: Cemex: A Digital Firm in the Making, (see p. 14 of the textbook) discusses how a 98-year-old company | |is taking advantage of information technologies to create new opportunities for gaining customers and improving services to | |existing customers. | Bottom Line: Information systems do matter because of the increased need for capital management, the increased productivity that | |arises from their use, the strategic opportunities and advantages they offer, and because they are becoming the foundation of | |doing business around the world. | Chapter 1 Managing the Digital Firm 1. 2 Perspectives on Information Systems What Is an Information System? Too often you hear someone say, “Oh yeah, I know how to use a computer. I can surf the Web with the best of them and I can play Solitaire for hours. I’m really good at computers. Okay. So that person can pound a keyboard, use a mouse at lightning speed, and has a list of favorite Web sites a mile long. But the real question is: “Is that person information literate? ” Just because you can pound the keyboard doesn’t necessarily mean you can leverage the technology to your advantage or to the advantage of your organization. An organization can gather and keep all the data on its customers that a hard drive can hold. You can get all the output reports that one desk can physically hold. You can have the fastest Internet connection created to date.
But if the organization doesn’t take advantage of customer data to create new opportunities, then all it has is useless information. If the output report doesn’t tell management that it has a serious problem on the factory floor, then all that’s been accomplished is to kill a few more trees. If you don’t know how to analyze the information from a Web site to take advantage of new sales leads, then what have you really done for yourself today? Most of us think only of hardware and software when we think of an information system. There is another component of the triangle that should be considered, and that’s the people side or “persware”.
Think of it this way: [pic] In this section of the text, Laudon & Laudon discuss the components of an information system. They talk about the input, processing, output, and feedback processes. Most important is the feedback process; unfortunately, it’s the one most often overlooked. The hardware (input and output) and the software (processing) receive the most attention. With those two alone, you have computer literacy. But if you don’t use the “persware” side of the triangle to complete the feedback loop, you don’t accomplish much. Add the “persware” angle with good feedback and you have the beginnings of information literacy.
You also create formal systems structured to collect, store, process, disseminate, and use data in well-designed and well-built computer-based information systems (CBIS). |The Window on Technology: UPS Comptes Globally With Information Technology (see p. 17 of the textbook) describes how UPS is | |using information technology to compete in a global economy. Analyze the four components of UPS’s information system: input, | |output, processing, and feedback. | It Isn’t Just Technology: A Business Perspective on Information Systems Using feedback completes the information processing loop.
To be a good information systems manager, however, you must bring into that loop far more than just computer data. For instance, your information system reports that you produced 100,000 widgets last week with a “throwback” rate of 10 percent. The feedback loop tells you that the throwback rate has fallen 2 percent in the last month. Wow, you say, that’s a pretty good improvement. So far, so good. But if you put that information into the broader context of the organization, you’re still costing the organization a huge sum of money because each percentage point on the throwback rate averages $10,000.
And when you bring in available external environmental information, your company is 5 percent above the industry norm. Now that’s information you can use — to your advantage or disadvantage! There is a distinct difference between possessing information systems literacy and simple computer literacy. If you, as a manager, can combine information from internal sources and external environments, if you can be part of the solution and not part of the problem, you can consider yourself “information literate. ” Dimensions of Information Systems As Figure 1-8 shows, there are three basic dimensions of information systems. pic] Organizations Organizations are funny things. Each one tends to have its own individual personality and yet share many things in common with other organizations. Look at some of the organizations you may be associated with — softball team, fraternity/sorority, health club, or a child’s soccer team. See, organizations exist everywhere, and each has its own structure, just as workplace organizations have structures and personalities to fit their needs, or in some cases, their old habits. A baseball team needs talented, well-trained players at different positions.
Sometimes, the success of the team depends on a good, well-informed coach or manager. So too with the workplace organization. Business organizations have their major business functions, which need many kinds of players with various talents, who are well-trained and well-informed, in order to succeed. The larger the organization, the more formal the management structure, including the need for standard operating procedures (SOPs). SOPs can help streamline standard business processes so that managers and employees can 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. As we’ll see in upcoming chapters, many companies are even incorporating the informal work processes into their information systems in an effort to capture as much corporate knowledge as possible. Just as every baseball team needs good players at different positions, 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? Management Every good organization needs good managers. Pretty simple, pretty reasonable. Take professional baseball 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? Probably not, since it’s 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 storage technology device seems to be, you’re constantly running out of room to store all the new software programs and all the data you create. As the products and services on the Internet expand everyday, your need for new communications technology and better network 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. Complementary Assets and Organizational Capital At the end of the twentieth century there was widespread fear of the havoc the Y2K bug would wreak on computer systems throughout the world.
Billions of dollars and millions of hours were spent fixing the problem. As a result of the preparation, very few problems arose. One of the biggest benefits was serving as a “wake-up” call to senior managers throughout corporate America about the increasing role information systems play in the success of their organizations. They discovered that managers can’t ignore technology any more and pass it off to secretaries or clerical workers or the information technology department. Information systems are critical to the success of an organization at all levels. Once technology was considered “too technical” for the rest of us to understand.
Computers were relegated to the back room with a few technicians running around in white coats. No one else understood what these people did or how they did it. It was a whole different world and actually seemed disconnected from the mainstream operations of the company. Technology and its associated information systems are now integrated throughout the organization. Everyone is concerned about its role and impact on their work activities. End users take on greater responsibility for the success of the information systems and are actually doing a lot of the work that belonged to the techies.
Even the executive levels of an organization can no longer ignore the technology as they realize the importance of managing their organizational and management capital. As a firm becomes more digital, its information system continues to extend beyond the traditional role of serving the employees. Developing the complementary assets associated with the information systems such as developing new business processes, emphasizing employee training in technology, and creating new partnerships with suppliers, customers, and even competitors, is proving to be a daunting task.
But the plain fact is that organizations, especially larger ones, just can’t change as fast as the technology. Companies make huge investments not just in hardware, but in software and persware. Training people, building new operating procedures around technology, and changing work processes take far longer than the technological pace will allow. The introduction of new technology can severely disrupt organizations. Productivity naturally slips, at least in the beginning. Learning curves cost time and money. Most system installations or changes used to mainly affect data workers or production workers.
Now they affect every level of the organization, even the management and strategic levels. Every part of the organization is involved in the introduction or change of technology, and everyone plays a part in its success. |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. 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. The more complex the system, the harder to manage, but the greater the payoff. | Chapter 1 Managing the Digital Firm 1. 3 Contemporary Approaches to Information Systems There are several different approaches to information systems: technical, behavioral, and sociotechnical. Think of this analogy: A “techie” looks at most things associated with computing as a series of zeroes or ones.
After all, everything in a computer is ultimately reduced to a zero or a one. So using the technical approach, you could say that 2 + 2 = 4. The behavioral approach, on the other hand, takes into account the very nature of human beings. Nothing is totally black and white. Therefore the behavioral approach to the same equation would be “2 + 2 = maybe 4 or perhaps 3. 5 to 5. 5, but we’ll have to put it before the committee and see what the last quarter’s figures say. ” Neither approach is better than the other, depending on the situation. Neither approach is more right than the other, depending on the situation.
An organization can’t afford to view its information resources as belonging to either the techies (technical approach) or the non-techies (behavioral approach). Responsibility for information belongs to everyone in the organization. This is the sociotechnical approach — a combination of the two approaches. Everyone has to work together to ensure that information systems serve the entire organization. To help you understand the importance of viewing management information systems using the sociotechnical approach, look at what the current trade journals are saying.
David Haskin, writing in the April 1999 issue of Windows Magazine, quotes Steve Roberts, vice president of information technology for Mind Spring Enterprises, an Atlanta-based Internet service provider: “The gap in understanding between technical and nontechnical people is the biggest challenge I’ve seen. ” Haskin goes on to say, “Because technology is the bedrock on which successful businesses are built, the stakes in making this relationship work are high. Failing to use the correct technology can put you at a competitive disadvantage, and glitches in existing technologies can bring a business to a grinding halt. |Bottom Line: Information systems and the use of technology belong to everyone in an organization. This concept is best carried out| |through a sociotechnical approach to viewing information systems, which allows both the technical and behavioral approaches to be | |combined for the good of the organization. | Chapter 1 Managing the Digital Firm 1. 4 Learning to Use Information Systems: New Opportunities with Technology Is this new technology worth the headaches and heartaches associated with all the problems that can, and will, arise? Yes. The opportunities for success are endless.
The new technologies do offer solutions to age-old problems. Improvements are possible in the way you operate and do business. The rest of the book and this course will give you tools you can use to be successful with the current and future management information systems. The Challenge of Information Systems: Key Management Issues 1. The Information Systems Investment Challenge: Too often managers look at their technological investments in terms of the cost of new hardware or software. They overlook the costs associated with the non-technical side of technology.
Is productivity up or down? What is the cost of lost sales opportunities and lost customer confidence from a poorly managed e-commerce or e-business Web site? How do you determine if your management information system is worth it? Many brick-and-mortar companies have seriously struggled with e-commerce Web sites because of the drain on corporate resources for which they weren’t prepared. As successful as Wal-Mart is in the traditional retailing sense, their Web site, Walmart. com has at times resembled a yo-yo more than a successful e-commerce venture.
The site has been reinvented, reworked, and reintroduced more times than a second-rate rock band. Information systems should be part of the solution and not part of the problem. 2. The Strategic Business Challenge: Companies spend thousands of dollars on hardware and software only to find that most of the technology actually goes unused. “How can that be? ” you ask. Usually because they didn’t pay attention to developing the complementary asset associated with the full integration of the technology into the organization.
Merely buying the technology without exploiting the new opportunities it offers for doing business smarter and better doesn’t make you a digital firm. Think and rethink everything you do, and figure out how you can do it better. Information must be managed just as you would any other resource. 3. The Globalization Challenge: The world becomes smaller every day. Competition increases among countries as well as companies. A good management information system meets both domestic and foreign opportunities and challenges. How does DaimlerChrysler integrate its organizations and cultures into one — or almost one? 4.
The Information Technology Infrastructure Challenge: You have to decide what business you are in, what your core competencies are, and what the organization’s goals are. Those decisions drive the technology, instead of the technology driving the rest of the company. Purchasing new hardware involves more than taking the machine out of the box and setting it on someone’s desk. Remember the triangle of hardware, software, and persware; take care of the people and they will take care of the rest! Information architecture is the description of how technology is incorporated into the mainstream processes in which the business is involved.
How will the new information system support getting the product produced and shipped? How will the information system help the Advertising and Marketing department know when to launch ad campaigns? How will Accounting know when to expect payment using the information system? 5. The Responsibility and Control Challenge: Remember, humans should drive the technology, not the other way around. Too often we find it easier to blame the computer for messing up than to realize it’s only doing what a human being told it to do. Your goal should be to integrate the technology into the world of people.
Humans do control the technology, and as a manager, you shouldn’t lose sight of that fact. Many pundits, experts, and technology companies sometimes gloss over the negative impacts of new technology in an attempt to win over converts. Unfortunately, we’ve learned a lot of our ethical and security lessons the hard way. By educating yourself on the positive and negative issues, you, as a manager, can make more informed decisions. |Bottom Line: Management’s focus must continually change to take advantage of new opportunities. Any changes should take place |