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1Chapter

Managing the DigitalFirm

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OBJECTIVES

Management Information SystemsChapter 1 Managing the Digital Firm

Explain why information systems are soimportant today for business and management

Evaluate the role of information systems intodays competitive business environment

Assess the impact of the Internet and Internettechnology on business and government

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Define an information system from both atechnical and business perspective anddistinguish between computer literacy andinformation systems literacy

Identify the major management challenges tobuilding and using information systems

OBJECTIVES (Continued)


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Smart Systems and Smart Ways of Working Help Toyota Become Number One

Problem: Tough competition and demanding customers.

Solutions: Redesigned order and production processes

reduce costs, increase revenue, and improve customer

service. Oracle E-Business Suite makes it possible to build cars

to order and forecast demand and production

requirements more accurately.

Demonstrates ITs role in analyzing market trends andmonitoring quality, efficiency, and costs.

Illustrates the emerging digital firm landscape where

businesses can use tools to analyze critical data.


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DaimlerChrysler Case

Challenge: 104 plants, 37 countries, 14,000 suppliers

Solutions: Integrated Volume Planning System connects

demand side of business with suppliers, reducing inventories.

Powerway helps 3,400 suppliers track parts and quality,

reducing errors.

Demonstrates ITs role in operational excellence, better quality

products, and agilitytime to market

Illustrates the emerging digital firm landscape where

information can flow seamlessly among business partners to

create a superior customer experience

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How information systems are transforming business

Globalization opportunities

The emerging digital firm

Strategic business objectives of information systems

Operational excellence

New products, services, and business models

Customer and supplier intimacy Improved decision making

Competitive advantage

Survival

WHY INFORMATION SYSTEMS?


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Capital management

Foundation of doing business

Productivity

Strategic opportunity and advantage

Why Information Systems Matter

There are four reasons why IT makes a difference to thesuccess of a business:

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IT is the largest single component of capitalinvestment in the United States.

About $1.8 trillion is spent each year by Americanbusinesses.

Managers and business students need to know howto invest this capital wisely.

The success of your business in the future may welldepend on how you make IT investment decisions.

Capital Management:


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Information Technology Capital Investment

Information technology investment, defined as hardware, software, and communicationsequipment, grew from 34% to 50% between 1980 and 2004.Source: Based on data in U.S. Department of Commerce, Bureau of Economic Analysis, National Incomeand Product Accounts, 2006.

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Most businesses today could not operate withoutextensive use of information systems and

technologies.

IT can increase market share.

IT can help a business become a high-quality,low-cost producer.

IT is vital to the development of new products.

Foundation of doing business:


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The Interdependence Between Organizations andInformation Technology

There is a growing interdependence between a firms information systems and its business

capabilities. Changes in strategy, rules, and business processes increasingly requirechanges in hardware, software, databases, and telecommunications. Often, what theorganization would like to do depends on what its systems will permit it to do.

Figure 1-2



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IT is one of the most important tools managershave to increase productivity and efficiency ofbusinesses.

According to the Federal Reserve Bank, IT hasreduced the rate of inflation by 0.5 to 1% in thelast decade. For firms this means IT is a majorfactor in reducing costs.

It is estimated that IT has increased productivityin the economy by about 1% in the last decade.For firms this means IT is a major source of labor

and capital efficiency.


Productivity:

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Create competitive advantage: IT makes itpossible to develop competitive advantages.

New Business Models: Dell Computer has built itscompetitive advantage on an IT enabled build-to-order business model that other firms have not

been able to imitate.


Strategic Opportunity and Advantage:

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Create new services: eBay has developed thelargest auction trading platform for millions of

individuals and businesses. Competitors havenot been able to imitate its success.

Differentiate yourself from your competitors:

Amazon has become the largest book retailer inthe United States on the strength of its hugeonline inventory and recommender system. It hasno rivals in size and scope.


Strategic Opportunity and Advantage:

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Carr has written that whatever advantages firmsbuild using IT can be easily copied by

competitors.

This view is not supported by the evidence:Amazon, eBay, Dell, Wal-Mart and Apple's iTunes

are just a few firms that have built andmaintained technology-based advantages.

How Much Does IT Matter?


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Commoditization of technology is typically aspur to innovation and new business models,

products and services.

Competitive advantage derives not from thetechnology, but on how businesses use the

technology.

Innovations in business processes,management and organization are not easily

copied from one firm to another.

How Much Does IT Matter?


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Internet growth and technology convergence

Transformation of the business enterprise

Why IT Now? Digital Convergence and theChanging Business Environment

Growing impact of IT in business firms can be

assessed from the following five factors:


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Growth of a globally connected economy

Growth of knowledge and information-basedeconomies

Emergence of the digital firm


Why IT Now? Digital Convergence and theChanging Business Environment (Continued)

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Growth of the Internet: 120 million online in theUnited States, 500 million global users

The Internet is bringing about a convergence oftelecommunications and computing: VoIPtelephones.


The Internet and Technology Convergence:

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Growth in e-business, e-commerce, and e-government

Internet is bringing about rapid changes inmarkets and market structure: financial servicesand banking such as eTrade.com.

The Internet is making many traditionalbusiness models obsolete: the corner musicstore and video store.


The Internet and Technology Convergence:

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Flattening

Decentralization

Flexibility


Transformation of the Business Enterprise:

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Location independence

Low transaction and coordination costs

Empowerment

Collaborative work and teamwork


Transformation of the Business Enterprise (Continued):

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Management and control in a global marketplace

Competition in world markets

Global workgroups

Global delivery systems


Globalization:

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Knowledge and information-based economies

New products and services

Knowledge as a central productive and strategicasset


Rise of the Information Economy:

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Time-based competition

Shorter product life

Turbulent environment

Limited employee knowledge base


Rise of the Information Economy (Continued):

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The Growth of the Information Economy

Figure 1-3


Source: U.S. Department of Commerce, Bureau of theCensus, Statistical Abstract of the United States, 2003,

Table 615; and Historical Statistics of the United States,Colonial Times to 1970, Vol. 1, Series D, pp. 182-232.

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Digitally enabled relationships with customers,suppliers, and employees

Core business processes accomplished usingdigital networks

Digital management of key corporate assets


Emergence of the Digital Firm:

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Agile sensing and responding to environmentalchanges

Seamless flow of information within the firm, andwith strategic partners


Emergence of the Digital Firm (Continued):

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The Emerging Digital Firm

Figure 1-4


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PERSPECTIVES ON INFORMATION SYSTEMS


What Is an Information System?

Technology perspective: A set of interrelated

components that collect (or retrieve), process, store,

and distribute information to support decision

making and control in an organization

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What is an Information System? (Continued)

Data: Streams of raw facts representing events

such as business transactions

Information: Clusters of facts meaningful and usefulto human beings in the processes such as making

decisions

M I f i S

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Raw data from a supermarket checkout counter can be processed and organized to producemeaningful information, such as the total unit sales of dish detergent or the total salesrevenue from dish detergent for a specific store or sales territory.

Data and Information

M I f i S

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Functions of an Information System

Figure 1-6

M t I f ti S t

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Rely on computer hardware and software

Processing and disseminating information

Fixed definitions of data and procedures

Collecting, storing, and using information


Computer-Based Information System (CBIS)

M t I f ti S t

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Information systems are an organizational andmanagement solution to business challenges that

arise from the business environment.


Information systems are more than just technology.Businesses invest in IS in order to create value and

increase profitability.

A Business Perspective on Information Systems

M t I f ti S t

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Based on information technology but also require

significant investment in organizational andmanagement changes and innovations

IS create value primarily by changing businessprocesses and management decision making.


A Business Perspective on Information Systems(Continued)

Management Information S stems

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The Business Information Value Chain

Figure 1-7

Management Information Systems

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Using information systems effectively requires an understanding of the organization,management, and information technology shaping the systems. An information systemcreates value for the firm as an organizational and management solution to challenges posedby the environment.

Information Systems Are More Than Computers


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Information systems literacy: Broad-basedunderstanding of information systems that includesbehavioral knowledge about organizations,

management and individuals using informationsystems as well as technical knowledge aboutcomputers

Computer literacy: Knowledge about informationtechnology, focusing on understanding howcomputer technologies work



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Sales and marketing

Manufacturing

Finance

Accounting

Human resources


Major Business Functions Rely on Information Systems


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Three Important Dimensions of Information Systems

Organizations

Management

Technology


You will need to understand and balance thesedimensions of information systems in order to createbusiness value.

Dimensions of Information Systems


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People

Structure Business processes

Culture

Politics


The Organizational Dimension of Information Systems


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Managers are:

Sense makers

Decision makers

Planners

Innovators of new processes

Leaders: set agendas


The Management Dimension of Information Systems


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The Management Dimension of Information Systems(Continued)

Managers who can understand the role of

information systems in creating business value arethe key ingredient to success with systems, andcannot easily be replicated by your competitors.


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Hardware: Physical equipment

Software: Detailed preprogrammed instructions

Storage: Physical media for storing data and thesoftware


Information technology is one of the tools managersuse to cope with change:

The Technology Dimension of Information Systems


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Communications technology: Transfers datafrom one physical location to another

Networks: Links computers to share data orresources


The Technology Dimension of Information Systems(Continued)

Managers need to know enough about informationtechnology to make intelligent decisions about how touse it for creating business value.


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Complementary assets:

New business processes

Management behavior

Organizational culture

Training


Complementary Assets and Organizational Capital


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Supportive business culture that values efficiencyand effectiveness

Efficient business processes, decentralization ofauthority

Highly distributed decision rights

A strong information system (IS) developmentteam


Organizational capital:


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Variation in Returns on Information Technology Investment

Figure 1-9

Source: Based on Erik Brynjolfsson and Lorin M.Hitt, Beyond Computation: Information Technology,

Organizational Transformation and BusinessPerformance. Journal of Economic Perspectives14,

no. 4 (Fall 2000). Used with permission of theAmerican Economic Association.


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Technical approach

Behavioral approach

Approach of this text: Sociotechnicalsystems

CONTEMPORARY APPROACHES TO INFORMATION SYSTEMS


FIGURE 1-9 CONTEMPORARY APPROACHES

TO INFORMATION SYSTEMS

The study of information systems deals with issues andinsights contributed from technical and behavioraldisciplines.


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Sociotechnical Systems

Optimize systems performance:

Technology and organization

Organizations mutually adjust to one another

until fit is satisfactory


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A Sociotechnical Perspective on Information Systems

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